Overview of changes already in force
New top marginal tax rate
From 1 April 2021, the new top marginal tax rate has increased to 39% for individuals earning more than $180,000. No doubt this change will lead to a higher tax cost for high earning individuals.
Another flow on effect is that the top rate for fringe benefit tax (“FBT”) has also increased to 63.93%. If you haven’t done so in the past year, now would be a good time to undertake structuring reviews in terms of remuneration packages for employees as well as a FBT health check to identify efficiencies in relation to the business’ FBT liabilities. Given the current tight labour market and increasing wage and salary pressure, we have been assisting our clients to develop effective employee packages to ensure that employers are given options to reward employees by other means instead of just PAYE remuneration.
Depreciation on commercial buildings reinstated
From 2012, the depreciation rate for commercial buildings was reduced to 0%. As part of the COVID-19 response, new depreciation rules were introduced that meant commercial building owners can claim a depreciation loss at either 2% diminishing value or 1.5% straight-line value from 1 April 2020, provided the owners did not make an irrevocable election to treat the building as not being depreciable property in the past.
Reporting requirements for domestic trusts looming
Inland Revenue has released several consultation documents on the new disclosure rules for domestic trusts as trustees will have to prepare financial statements and provide a wide range of information with their income tax returns starting from the tax year ending 31 March 2022. In addition, the Commissioner may also require the trustees to provide specific information in respect of any previous income years beginning on or after 1 April 2014. It has been estimated that the new disclosure requirements will impact up to 180,000 domestic trusts.
Interest deductibility limitations
In March 2021, the Government announced that deductions for interest expenses on rental properties will be restricted from 1 October 2021 and the draft legislation was released in September 2021. The proposed interest deducibility policy means deductions on existing properties bought after 27 March 2021 would not be allowed, while deductions for existing properties purchased before that date would be phased out in stages between 1 October 2021 and 31 March 2025. These interest deductibility changes have wide reaching impacts for property owners, and potentially their ability to fund those properties. We would advise any property owner where interest deductibility is an issue to contact their tax advisor, or ourselves to assist with understanding the implication of these rules, and to develop strategies if possible, to mitigate the impact of these changes.
Changes to the bright-line rule
Along with the proposals to limit interest deductions for residential property income, the Government also proposed 3 changes to the bright-line property rule:
- The new build 5-year bright-line property rule – If a new build is acquired on or after 27 March 2021, then a new 5 year-bright-line rule will apply.
- Changes to the main home exclusion – Under the current rules, if less than half of a land is used as a main home, then any gain on sale during the bright-line period will be taxed as the main home exemption can’t be applied. The Government proposed to change this treatment to allow an apportionment treatment for the gain on sale and to ensure that the main home portion of the land will be non-taxable.
- Rollover relief for change of ownership of land – The proposed rollover relief will allow taxpayers to change the ownership structure of a property without triggering the bright-line rules. For example, there will be relief for certain property transfers to a family trust and for transfers to or from look-through companies and partnerships.
Inland Revenue 2021 annual report
In June 2021, Inland Revenue has released its annual report. After a complete IT system overhaul, Inland Revenue has been carrying out exponentially more checks as their compliance team have been using digital analytic tools to look deeper into the economy and identify errors or wrongdoings. The following are some interesting observations, as identified by Inland Revenue and mentioned in their 2021 annual report:
- During the 2021-year, Inland Revenue prevented over $5m incorrect claims for expenses related to residential rental returns and ring-fencing of losses.
- Inland Revenue has improved the stress of an audit by reducing the time taken to complete a pre-audit review and an audit by an average of 14 days. Inland Revenue has continued to review taxpayers with complex structures or tax interpretation issues. These reviews resulted in tax position difference of $377 million.
- In 2021, Inland Revenue stopped $300m in GST refunds from returns that were wrong or potentially fraudulent.
- Inland Revenue identified donation tax credit claims worth $16.7m that were wrong or potentially fraudulent. Of this, claims totaling $2.5m went to the audit teams to investigate.
- In 2021, Inland Revenue remitted $117.7m in penalties and interest for customers who were impacted by COVID-19, but still complying with instalment arrangements.
If there is one thing that is important to know about year-end planning, it’s to be proactive right now. At Bellingham Wallace we have been assisting many businesses to restructure and expand as new opportunities arise. We would be happy to guide you and ensure that you have the right structure in place and that your tax liabilities are being managed correctly and efficiently.
Author - Serjit Singh (Senior Associate)