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Building depreciation | Employee versus independent contractors | Charitable and other donee organisations – Fringe Benefit Tax (FBT)

By April 1, 2022 No Comments

Building depreciation

If you’ve been in the game as long as I have (and therefore have as much grey hair as I do from dealing with the various tax changes made by the Government of the day), you would have experienced the myriad of changes over the years with building depreciation.

There was a time when depreciation could be claimed on both residential and non-residential buildings, then from the 2012 income year, rates were reduced to 0%, and then due to the Covid pandemic, from the 2021 income year you could commence claims for non-residential buildings again.

With all these changes in play, the recently released draft interpretation statement by Inland Revenue (IR) titled ‘Claiming depreciation on buildings’ is certainly a useful read.

The reference is PUB00395, and the document commences with a brief discussion on the meaning of depreciable property and making elections not to depreciate (a topic covered itself recently by QB 21/11), before jumping into the more meaty topics of exactly what is considered to be a non-residential building (one that is not a residential building going by the s.YA 1 definition), and due to the bracketed definition, what is considered to be a residential building.

There is also some talk around what is considered to be part of the building proper and what are potentially separate assets like plant (with their own depreciation rates), how to calculate ATV (average transaction value) at the commencement of the 2021 income year (particularly if you’ve been claiming a commercial fit-out pool), and what are the implications of having a dwelling located inside your non-residential building.

The commentary contains ten examples to help explain some of the key concepts.
One key lesson/reminder coming out of PUB00395, is for those of you with clients who have short-stay accommodation facilities and may think they should be able to treat the structures as non-residential buildings due to the more commercial flavour of the activities (and that these supplies are often considered taxable supplies for GST purposes), they won’t qualify for depreciation deductions unless there is four or more separate accommodation units on the single title. If there are less than four separate units, the building will be deemed to be a residential building with a 0% depreciation rate.

If you’d like to have your say on PUB00395, the closing date for submissions is 2nd May 2022.

Employee versus independent contractors

While lacking in detail (each only being around seven pages in length), IR has published three product rulings that were issued to Reach Media NZ Limited in relation to drivers, distributors and supervisors contracted by the company. The rulings address the age-old question of what is the correct taxation status of those parties is engaged by the company, employee or self-employed contractors?

IR has ruled that for each of the three scenarios, payments to the respective parties:

  • Will not be ‘salary or wages or ‘extra pay’ or a ‘schedular payment’ within the meaning of those terms as defined in ss.RD 5, RD 7 and RD 8 of the ITA 2007,
  • Will not be ‘income from employment’ for the purpose of s.DA 2(4) of the ITA2007; and,
  • The provision of services by a driver, distributor or supervisor will not be excluded from the definition of ‘taxable activity’ in s.6 of the GSTA1985.

As I said at the beginning, the published rulings are absent to the detailed analysis, but do give you a flavour of the various arrangements between the parties, which may be useful if you have your own employee versus contractor query from a client, purely from a comparison perspective on the terms of the arrangement itself.

Charitable and other donee organisations – Fringe Benefit Tax (FBT)

IR has issued a draft Public Ruling on the topic of ‘Fringe benefit tax – charitable and other donee organisations and fringe benefit tax.’ The reference is PUB00420, and the Public Ruling considers when benefits provided by charitable organisations to their employees may be excluded from being treated as fringe benefits.

It’s a 28-page read (so probably over your lunchbreak as opposed to before bed), and the main focus is on section CX 25 of the ITA2007, which is the exclusion from FBT for benefits provided by charitable organisations.

Now if you have better things to do over lunch (eat for example) than reading IR draft Public Rulings, then you can cheat by a quick flick to page seven to establish whether your client is a qualifying organisation (if they’re not then forget about CX 25), and then to page 19, where there’s a flow chart which should give you a reasonable appreciation of your answer relatively quickly.

However, the nuts and bolts of the situation are:

  • Essentially, the FBT exclusion in s.CX 25 applies where a qualifying organisation provides a benefit to an employee mainly in connection with their employment, in an activity carried on within the organisation’s specified purposes.
  • The exclusion does not apply where a qualifying organisation provides a benefit to an employee mainly in connection with their employment, to the extent the benefit is provided in a business activity carried on outside the qualifying organisation’s specified purposes.
  • The exclusion also does not apply to benefits provided by a qualifying organisation to an employee by way of short-term charge facilities (i.e., credit or charge cards), if the value of those benefits in a tax year exceeds the lesser of 5% of the employee’s salary or wages for the tax year or $1,200.

Any submissions you wish to make on the content should be with IR no later than the 6th of May.

This article from the ‘A Week in Review’ newsletter was originally published Monday 28th March 2022. If you have any questions or would like a second opinion on any national or international tax issues, please contact me richard@gilshep.co.nz. 

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