3/3/2020
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On top of the much publicised re-write of the Trust Act, Inland Revenue (IRD) has issued a recent classification in relation to whom is classified as "settlor" of a trust. Section HC 27 of the Income tax act 2007 states a settlor is a person who "transfers value to the trust, for the benefit of the trust or on terms of the trust".

However, IRD have recently provided definite clarification on this matter. A legislative amendment to HC 27 has been made and a "Commissioner's Operational Position" has been issued. 

According to s HC 27(2), a beneficiary who has taken possession and enters into a contract to lend money back to the trust may be deemed a settlor if he or she:

• Contracts to be paid nil or below market-rate interest, or
• Contracts to receive interest but does not make demand for such interest or defers demand, or
• Does not demand repayment of capital.

However, a beneficiary will not become settlor if either:

• The amount owing to them from the trust at the end of the income year is $25,000 or less; or
• The trust pays interest to the beneficiary at a rate equal to or greater than the prescribed IRD interest rate. 

This new rule becomes effective from 1 April 2020 and does not have retrospective effect.

If a person becomes a settlor it can lead to unintended tax consequence. The tax position of a trust is based on the tax residency of the settlor.

The Act received royal assent on 31 July 2019. The new Act will come into force on 30 January 2021, the new Act will evolve more in favour of the beneficiary.

The new Act divides trustees duties into two types:

• Mandatory duties that you cannot contract out of;
• Default duties that apply unless stated otherwise in the trust deed

 ​Mandatory Duties of Trustees

• Understand the terms of the trust deed 
• Act in the best interests of beneficiaries
• Act honestly and in good faith
• Exercise powers for proper purpose
• Account to the beneficiaries
• Cannot contract out of personal liability as a trustee

Default Duties of Trustees

• Impartiality - treat all beneficiaries of the same class even-handedly 
• Unanimity of Trustees 
• Not to profit from the Trust (trustees are to hold the assets on trust for the benefit of the beneficiaries, not for themselves)
• Invest prudently
• Retain core documents
• Act for no reward - If you want to pay your trustees, your trust deed to specifically state this, otherwise they cannot be remunerated. 

Importance of Record-Keeping

• If a beneficiary challenges something the trustees have done, the records will be needed to defend it
• Retain documents for the life of the trust 
• Trustee meetings is crucial - so you can show you have carried out your duties as a trustee properly

Investing Prudently

• section 30 of the new Act 
• very high onus on trustees to invest prudently (i.e. having a wide investment portfolio) as if investing property for someone else. If a lawyer or accountant, the trustee must act as if they are investment advisors.
• Example: Allowing settlors to live in trust property rent free is not a prudent investment 
• You can contract out of this in the trust deed

Rights of Beneficiaries 

• Obligation on trustees to let beneficiaries know they are beneficiaries
• You can contract out of this but need specific wording in the trust deed.
• Beneficiaries need to know who the trustees are so they can hold them to account and obtain information from them 
• Important to consider the class of beneficiaries and narrow this if need be
• I.e. distant family members as beneficiaries who you do not want obtaining information about the trust.

What Information Can a Beneficiary Get?

• Copy of trust deed and any amendments (i.e. deeds of variation)
• Assets and liabilities 
• Income and expenditure (trust financials)
• Information regarding the administration of the trust 
• But not trustee reasons
• Best not to put trustees' reasons for a decision in writing as it could be challenged by a beneficiary 

What Do Trustees Need to Consider?

• Wishes of the settlors
• effect of giving information
• Practicality of giving information
• Other relevant considerations
• Make it clear in the trust deed what information you are prepared to provide to beneficiaries and what you are not.

The Life of Trust 
Trust could last for a maximum of 80 years previously, but now the trust can last for 125 years.

Incapacity and Trusts 
​The new Act makes it compulsory to remove incapacitated trustees and enduring powers of attorney are not relevant to trusts.

The new rules mean greater transparency of trustee activity and increased trust compliance requirements because trustee duties are now formalised in legislation. 

The Taxation (Annual Rates for 2018-19, Modernising tax Administration, and Remedial Matters) Bill, was introduced into Parliament on 28 June 2018. The revenue system will be modernised to make the tax easier for individual, and the rules and processes will be simpler. 

New year - end tax obligations for individuals
The Bill proposes a number of amendments for the end of year income tax obligations of individuals and some of the processes that will be undertaken by Inland Revenue (IR). In summary, the proposed changes are:

• IR will make a pre-populated account available to each individual containing the income information that IR holds for the individual.
• IR will calculate the refund of tax to pay without the individual needing to provide any additional information. 
• Individuals will be required to provide any income information other than reportable income to IR subject to some de minimis rules.
• Individuals will be able to provide other relevant information such as deductible expenses and tax credit information to IR.
• Individuals will be required to provide or correct reportable income where they know or have reason to know that the reportable income information provided to IR is incorrect.
• And individual's tax assessment will occur when they have confirmed the tax information is complete, when IR is reasonably satisfied that the information is complete, or when IR is not satisfied that the information is complete and issues a default assessment.
• Individuals and IR will be able to make corrections to the information held where they become aware that it is incorrect or incomplete and there will be error correction processes for adjustments made before and after an assessment has occurred.
• The end of year income tax process will replace the current personal tax summary and will replace the IR3 tax return processes over time as the paper IR 3 is phased out.

The end of year income tax process changes will mean that IR provides as much information about an individual's income and tax credits as it can to form a basis for the calculation of the individual's tax position (refund or tax to pay).

Individuals will be required to provide information on their other income (income other than their reportable income) and will be able to provide information on deductions and tax credits. This additional information will be added to the individual's pre-populated account (now their adjusted account) and will become the individual's self-assessment. 

Changes for refunds and amounts of tax to pay 
The Bill also proposed a number of amendments to improve the process for issuing refunds and advising individuals that they have tax to pay or are due a refund. In summary, the proposed changes are:

• IR will calculate whether people who are not expected to be required to provide information to IR are entitled to a refund or have tax to pay
• Refunds will be paid out without individuals having to request them.
• IR will issue income tax refunds by direct credit, unless that will result in undue hardship or is not practicable.
• Amounts of tax to pay arising from withholding tax regimes where tax was withheld in accordance with the PAYE rules, or where tax was withheld at the rate corresponding to the individual's marginal tax rate, will not have to be paid.
• Amounts of tax to pay arsing from a withholding tax regime where less than $200 of income was taxed incorrectly will not have to be paid.

All of the proposed amendments are intended to come into force 1 April 2019 and to apply for the tax year-end processes for the tax year ended 31 March 2019. 

The release of an official's issues - paper entitled "Ring-fencing rental losses" was issued in march 2018. and introduced into Parliament on 5 December 2018 as a part of the taxation (Annual Rates for 2019-20, GST Offshore Supplier Registration, and remedial Matters) Bill. According to this proposal, speculators and investors will no longer be able to offset tax losses from the residential properties against their other income but can be used in future years to reduce the tax when the properties make profits or the sale of land.

Property subject to the rules (ss DB 18 AC to DB 18 AK)
The provisions of "Ring-fencing rental losses" will apply to "residential rental property", which is defined as "residential land'. However, the following are excluded from "residential rental property".

• a person's main home
• land that is subject to the mixed-used assets rules
• land that is owned by a widely-held company
• land that is identified to Inland Revenue (IR) as being taxable on sale (see below), and 
• accommodation provided to employees or other workers where it is necessary to provide the accommodation due to the nature or remoteness of the business carried on.  

Land taxable on sale
The proposed rules will not apply if the land is identified to IR as being taxable on sale. This would include land held in dealing, development, subdivision, and building businesses, and land that was bought with the intention of resale. 

the exclusion for land that will be taxable on sale will be available if either:

• the taxpayer is notifying the Commissioner of their rental income and expenditure for that property on a property-by-property basis, or
• they are notifying the Commissioner of their rental income and expenditure on a portfolio basis and all of the properties within the portfolio are on revenue account

Portfolio basis by default with property-by-property application by election
The proposed default position is that the loss ring-fencing rules will apply on a portfolio basis, which means the investors are able to offset deductions for one rental property against income from other rental properties.

Use of ring-fenced deductions

Portfolio basis
if the portfolio basis is used, ring-fenced residential property deductions will be able to be offset against: 

• residential rental income from future years (from any property)
• income on the taxable sale of any residential land, to the extent of reducing the taxable gain on the sale to nil. 

property-by-property basis
If the property-by -property basis is used, ring-fenced deductions relating to the property will be able to be offset against:

• residential rental income from future years (from that property)
• income on the taxable sale of that property, to the extent of reducing the taxable gain on the sale to nil. 

Unused deductions
Generally, any remaining unused deductions will continue to be ring-fenced and carried forward to be used against any future residential rental income or income from other residential land sales
However, it is proposed that ring-fenced deductions will be released in certain situations. 

Transfer between companies in wholly-owned group
Ring-fenced deductions are allowed to be transferred between companies in a wholly-owned group according to proposed s DB 18AI. And any remaining deductions will be carried forward and will remain ring-fenced. The transferred deductions will remain ring-fenced until offset against residential rental income or residential land sale income. 

Interposed entities -residential land-rich entities
The interposed entity rules will apply for interest on borrowings to acquire an interest in an entity if, for a particular income year, the entity is a "residential land -rich entity" - which will be where over 50% of the entity's assets are residential properties. 

where the land - rich threshold is met, part or all of the interest on the borrowings will be treated as residential rental property expenditure, and deductions will be ring-fenced. 

The proposed new rules are intended to apply from 1 April 2019 for the 19/20 and later income years. They will not apply to a deduction a person is allowed for a prior income year.












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​Recent changes to the Taxation Act 2017 mean that owners of closely held companies (five or less shareholders) now have the option to apportion expenditure on motor vehicles that are provided to shareholder employees between business and personal by using actual records, a percentage based on a logbook or in accordance with the IRD’s mileage rates. This avoids the need to pay FBT on these vehicles.
 
This election may only be made when the vehicle is first acquired or first used for business purposes from the start of the 2017/2018 tax year or later. This apportionment rule only applies to shareholder employee vehicles, therefore FBT will still apply to motor vehicles which are used by employees who are not shareholders. 

The government has announced extending the bright-line test on residential property from two to five years. This change will come into effect once the Bill receives the Royal assent expected to be sometime in March 2018. Residential properties purchased before the new Bill is enacted will still be subject to the two year bright-line test.

The effect of the change is that gains from the disposal of residential land acquired and disposed of within five years will be taxable, subject to some exceptions.

The bright-line test only applies to residential land. This includes land that has a dwelling on it, land where the owner has an arrangement to build a dwelling on it, and bare land that could have a dwelling erected on it under the relevant district plan. It does not include commercial premises or farmland.

​There are exclusions to the bright-line test for a person’s main home, relationship property in certain circumstances and inheritances. A person may only have one main home and a person may not use the exclusion if they are deemed to habitually sell their main home.

The purpose of these changes is to ensure speculators pay tax on gains from property speculation as well as improve affordability for owner-occupiers by reducing demand from speculators.

On 14 December 2017, the Government introduced the Families package (Income Tax and Benefits) Bill.

The Families Package will:

• repeal the tax threshold changes, reinstate the independent earner tax credit, and repeal Working for Family tax credit changes legislated as part of the Budget 2017 Family Incomes Package
• boost incomes for low-and middle-income families by increasing payments of family tax credit, and raising the Working for Families tax credit abatement threshold.
• increase financial assistance provided to caregivers receiving Orphan's Benefit and Unsupported Child's Benefit
• introduce a Best Start tax credit to help families with costs in a child's early years 
• introduce a Winter Energy Payment to help older New Zealanders and those in receipt of a main benefit to heat their homes over winter, and 
• implement changes to Accommodation Supplement

The entire Families Package is paid for by reversing the previous Government's tax cuts.

Further Details
The legislation will come into force on the date on which it receives the Royal assent except as follows:

Income Tax Act 2007

• The Best Start tax credit comes into force on 1 July 2018.
• The Taxation (Budget Measures: Family Incomes Package) Act 2017 is repealed effective 29 May 2017 to remove the personal tax cuts in that Act, and to re-instate the independent earner tax credit (IETC)
• alteration to family tax credits, for the 2018/19 tax year will be effective 1 April 2018
• alteration to family tax credits, for the 2019/20 tax year and later will be  effective 1 April 2019

Social Security Act 1964

• The winter energy payment (WEP) comes into force on 1 July 2018. In future years the WEP will be paid from May to September. The WEP is intended to support those in receipt of a main benefit, New Zealand Superannuation or a Veteran's Pension to heat their homes in winter by increasing the amount of money available to them over the winter months. the WEP is a payment of $450 a year for single people, and $700 for couples or those with dependent children. Main benefits include Jobseeker Support, Supported Living Payment, Sole Payment Support, Youth Payment, and Young Parent Payment. Recipients can choose to opt out.

On 14/12/17 the (BPS) Budget Policy Statement was released.
Following are some of the stated policies: 

• Student allowances and living cost loans will increase by $50 a week from 1 January 2018. 
• Separate legislation has been passed to increase Paid Parental Leave, to take effect from 1 July 2018.
• Legislation will soon be introduced to ban overseas speculators from buying existing houses, and a directive has been issued to tighten criteria on purchases of rural land-Overseas Investment Amendment Bill Introduced on 14 December 2017.
• Work has begun on establishing a Housing Commission and starting the KiwiBuild programme.
• Legislation will soon be introduced to make medicinal cannabis available for people with terminal illnesses or in chronic pain.
• Contributions to the New Zealand Superannuation Fund will resume on 15 December 2017 to help safeguard the provision of universal superannuation at age 65.
• The minimum wage will increase to $16.5 an hour, to take effect from 1 April 2018, and legislation will be introduced to improve fairness in the workplace.

Fiscal strategy 
Reduce the level of net core crown debt to 20% of GDP within five years of taking office.

​With the rise in popularity of sites like AirBnB more and more people are exploring the possibilities of Bed & Breakfasts to make a bit of extra money. However they can also have serious GST and tax implications.
 
GST
A Bed and Breakfast establishment is regarded as a commercial dwelling in the eyes of the IRD; this means it falls outside the GST exemptions for residential rental properties. Therefore if it generates income in excess of $60,000 in a 12 month period the business would be required to register for GST and charge GST on its services. GST is charged at 15% for the 1st 4 weeks of accommodation and at 9% thereafter (60% of the full rate). Meals, drinks, laundry and other services provided are taxed at the full rate.

Potential Pitfall - "Watch Out"
A potential pitfall regarding GST for Bed & Breakfasts is that if the B & B breaches the $60,000 income limit and is required to register for GST. When the home is later sold that sale may also be subject to GST.  By using a company or trading trust you may be able to get around this. The property ownership must be different from the person making the taxable supply thus insulating the property and the business.
 
Tax
When calculating the income and expenditure relating to the running of a Bed & Breakfast, it is important to correctly apportion expenses between the business and personal use. A variety of factors are used in this calculation:  The number of people living in the property, area used exclusively for renting, shared area (guests & hosts), total area of the property, and the number of days the property was rented out. Expenses to be apportioned include rates, insurance, power, phone/internet, Sky TV, repairs & maintenance, and the interest portion of any mortgage payments.
 
Other expenses which can be claimed against Bed & Breakfast income include marketing and advertising, food, drinks and other consumables provided for guests.