Carl gets asked a wide variety of questions and here’s a selection of some quick questions currently being asked:
Bright-line land transactions
Jack and Jill bought 35 acres 4 years ago in their company. The land had a cottage which was rented out, and they grazed some sheep on the land. In April 2016 they separated and Jack purchased the property from the company for $2m, based on its market value. In January 2018 Jack got an unsolicited offer for $3m and he decided to sell.
Now he comes to you and asks whether he is liable to pay tax on the gain?
The 35-acre block is residential land as it is “land that has a dwelling on it”. However the definition of residential land has an exclusion for “farmland” (as defined). Farmland means land that is being worked in the farming or agricultural business of the land’s owner, or because of its area and nature, is capable of being worked as a farming or agricultural business.
The problem for Jack is that if the 35 acres is not a farming or agricultural business (unlikely to be a business on these facts), then strange as it seems it would be residential land as it is simply “land that has a dwelling on it” (and which is not farmland).
Jack has sold the land within 2 years so he is caught. If he had sought advice first a couple of options may have been:
- Do not enter into an Agreement for sale until after April 2018 when 2 years has expired.
- Consider transferring the land out of the company to Jack under a relationship property agreement, thereby Jack takes over the company’s purchase date and is now well outside 2 years.
Marj has owned their family home with her husband Don for 30 years. Don has had to be moved into full-time care at a rest home. Marj put their family home on the market and bought a smaller unit closer to the rest home in July 2017. Marj had started to move some furniture into the unit but before she had time to move in Marj got sick and had to go to hospital. Unfortunately Marj’s health deteriorated and she died in hospital. The executors of her will sold the unit in January 2018 and a capital gain of $120,000 was made.
Is the sale of Marj’s unit taxable under a genuine situation like this?
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.
In January 2017 Sam and Sally bought a section in Papamoa to build their first home. This is the first property they have ever purchased. Eight months later Sam was forced to relocate to Auckland for his job and now Sally is pregnant with their first child. They realise they can no longer afford to build a home on the section, and with the cost of renting so high in Auckland they decided in March 2018 that the section had to be sold. They sold it for a gain of $80,000.
Are Sam and Sally liable for tax? It was intended as their main home and it is only due to unforeseen circumstances that they’ve been forced to sell.
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.
Bees and tax issues
Dave has also bought a block of land and has spent $100k in purchasing 50,000 young Manuka trees and planting them.
Can he claim anything for tax?
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.
Ted is a budding beekeeper and wants to buy Dave’s 300 hives and business. The proposed sale price is $360,000 based on $1,000 per hive plus $60k for unused supers, frames and extra equipment.
Dave has worked out that the value of the bee colonies would be $160,000 made up of 300 Queen bees at $50 each ($15k) and $145k for the colonies of worker bees. He asks whether he can claim a deduction for the cost of his bees.
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.
John owns 100% of ABA Ltd. ABA Ltd owns 80% of the shares in ZZ Ltd and 20% are held by John’s father.
ABA Ltd has lent ZZ Ltd $1,000,000 to fund its start-up business and development costs.
John asks whether ABA Ltd is required to charge interest on the loan?
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.
ABC Ltd has 1000 shares, Sue owns 1 share and her trust owns 999. XYZ Ltd has 100 shares, Sue owns 1 share and her trust owns 99.
ABC Ltd has lent XYZ Ltd $500,000. Sue asks whether interest should be charged on the loan. She doesn’t think so as the companies are wholly owned by her and her trust.
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.
NRWT on interest paid to a non-resident
Jess is a NZ resident and operates a business in NZ as a sole trader. Jess borrows money from her father who lives in Fiji and is tax resident there. Jess is paying interest to her father of circa $10,000 p.a.
Her father has other income in NZ of $100,000 p.a.
Jess asks whether she is required to deduct NRWT or preferably Approved Issuer Levy at 2%?
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.