FAQ's

Normally the $120k gain would be taxable as the unit was sold within 2 years and had never actually been used as Marj’s main home.

Luckily the bright-line rules have a specific carve-out for the sale of assets on death (section CB 6A(5)).  When Marj died her assets are transmitted to the executors under her will.  The executors merely liquidate the assets in carrying out their functions under the will, and the gain on sale of the unit is expressly excluded from the bright-line tax liability.

Unfortunately this is a scenario where the 2-year bright-line rule works like a true capital gains tax.  The $80k gain is taxable as the land is residential land and it was sold within 2 years from the date of purchase.

The bright-line rules do not consider a person’s intention.  As they did not get around to building their home and living in it the sale is not exempt under the main home exemption and they will simply just have to pay the tax.  They will of course be able to claim deductions for expenses and holdings costs, eg. legal fees, commission, rates, interest.

There is a good case that the Manuka trees and “non-listed horticultural plant” in subpart DO and schedule 20.

Dave can amortise the Manuka plants at 10% per annum, ie. $10,000 per year.

If Dave can show that some Manuka plants were planted for the purpose of preventing or combating erosion of the land (eg. maybe along gullies and steep ridges) he may be able to get an immediate write-off for these plants.

Dave should seek advice to ensure the best tax treatment is reached.

Bees and honey (apiculture) is a thriving industry in NZ.  Interestingly there is very little written on the tax treatment of bees and hives.

The starting point is that Dave has purchased “livestock”.  The courts have said the reference in the statute to “livestock” would include all fowls, bees, fish, silkworms and anything else which can be described as livestock and which are assets of a business.  The purchase of livestock is a deductible cost, just like any trading stock item.  Queen bees have a lifespan of approx. 3-4 years while worker bees are around 15-38 days, maybe a bit longer in winter.

Under the Income Tax Act the bees are included as “non-specified livestock” in subpart EC.  In dealing with the value of bees which are on hand at the end of the year, there is no standard valuation method for bees.  Because worker bees expire very quickly they simply can’t be treated as stock on hand.  More akin to annual crops which are expensed on an annual basis.

Dave has a good case to deduct the cost of his $160k bee purchases.  At the end of the year he can record $15k as Queen bees on hand, and nothing for the workers as they have expired and been used up.

ABA Ltd and ZZ Ltd are not a wholly owned group of companies.  If we stopped here the answer would be that ABA Ltd should charge interest at the FBT prescribed rate to avoid deemed dividend problems.

However this is an example where a specific “downstream” dividend exemption (section CD 27(3)) can apply.  The transfer of value (the interest free loan) is a downwards transfer of value – the opposite direction from a normal dividend flow – and an exemption is able to apply in the right situation.
In this case ABA Ltd is relieved from having to charge interest.

An interest free loan between associated companies can cause potential deemed dividend issues if interest isn’t charged.  Companies which are 100% wholly owned have a specific dividend exemption (section CW 10) which avoids the need to charge interest.

ABC Ltd and XYZ Ltd are not quite 100% commonly owned.  The lowest common percentage for the shareholders is 99.01%.  Although close it is not close enough to be 100% common.  ABC Ltd is required to charge interest at the FBT prescribed rate to avoid a deemed dividend problem.
It would make sense to restructure ABC Ltd so that Sue holds 10 shares and her trust 990.  The companies would then be 100% commonly owned.

Interest which is sourced in NZ but payable to a non-resident is subject to NRWT.  Jess is liable to pay NRWT on the interest payments to her father.  The AIL regime is not an option for associated parties, therefore she can’t use the 2% levy rate in this situation.

NRWT can be a minimum tax or a final tax.  For interest between associated persons it is a minimum tax.  The “minimum” amount requires it to be the higher of NRWT or the normal tax to be paid based on the recipient’s (father’s) tax liability and marginal rate.

NRWT rate for interest is 15% reducible under some DTAs.  The Fijian DTA, similar with most other DTAs reduces the rate to 10%.  However there is an exception in the Fijian DTA for associates which disallows the 10% rate from applying.  Therefore the normal tax rate calculations are required for the interest the father receives from Jess.

Jess would deduct 15% NRWT at source, but as it is not a final tax the father’s marginal rate of 33% means that he is liable for tax of $3,300 (less a credit for the NRWT deducted).

It is important to watch associated person transactions when borrowing funds offshore as well as applying the relevant DTA.