Excusing estates from income tax filing obligations
You may be aware that section 43B of the Tax Administration Act 1994, can be used by trustees of a non-active trust, to obtain an income tax filing exemption, similar in the way in which non-active companies can obtain the same.
It is not unreasonable to think of the estate of the deceased which is under the control of executors and administrators as being similar to a trust, and consequently should be entitled to the section 43B exemption. However, at common law this is not the case, and the Commissioner has now issued Operational Statement OS 21/03 to clarify when she considers that the executors/administrators of an estate have transitioned from holding the property in the estate “in the right of the deceased” to now holding that property “on trust”.
Some of the confusion, actually I expect it’s the core reason, is created by the fact that an estate file an IR6 income tax return, which you will all be aware is the income tax return for a trust. However, this is purely for administrative convenience, and not because the Commissioner considered an estate was automatically a trust.
So, when exactly would an estate become entitled to the section 43B filing exemption? Well initially the executors/administrators have duties to collect the deceased’s property, to use it to meet any expenses, debts and legacies, and then to distribute what is left according to the directions in a will or the law of intestacy. A trust will only arise when executors/administrators have completed their duties to the point that they stand ready to “distribute” the remaining property – aka the “assent” phase. If at this point, rather than distributing the remainder assets to other trustees, the executor/administrator continue to hold the assets in a trustee capacity and no longer in the capacity as executor/administrator, then a trust has now arisen for the purpose of section 43B. Note that when this occurs, the estate does not need to apply for a new IRD number to recognise that it has now transitioned to being a trust.
Using the right RWT rate
Unsure of the correct RWT rate to provide to payers of interest and dividends? Well let me share with you IR’s published guidance. If you’re an individual, you can elect 10.5%, 17.5%, 30%, 33% and 39% (although the payer has until October 1st to make the 39% deduction rate available to you). Now if you have provided your IRD number to the payer but forgot to advise them an RWT rate, then for existing accounts they should deduct at 17.5% and for new accounts, 33%. Be aware however, that if you haven’t provided your IRD number, then you’ll be stung 45%.
If it’s a company (not acting in a trustee capacity), the elective rates are 28% or 33%. Forget to elect, but an IRD number has been provided, then it’s a set 28%, otherwise again you’ll be stung 45%.
If it’s a trust or any other taxpayer, elective rates of 17.5%, 30% and 33% (although a testamentary trust can also elect 10.5%), and the same rate exposures as an individual, where no election made and an IRD number either has or has not been provided to the payer.
The trickier scenarios are in relation to joint accounts, where only one RWT rate can be elected. Usually, IR expects the income from a joint account to be split equally between the account holders (there is the ability to elect otherwise by notifying IR), so it will be a case of selecting an RWT rate appropriate to the likely end of year taxable incomes of the account holders. Note that where the account holders are a mix of resident/non-residents, RWT must be deducted (not NRWT) and if this results in the non-resident being over-taxed, then they should either file an IR3NR or IR386 form to recover the excess.
The RWT rate for dividend payments is a flat 33%, although the rate will be reduced to the extent that imputation credits are attached to the dividend, to a minimum 5%.
Hotel, motel, boarding house on-site living expenses QWBA
IR has now finalised its QWBA QB 21/10 titled, “If I run a hotel, motel or boarding house and live on site, what expenditure can I claim?”
I would suggest that the take-outs from the commentary are not rocket science – all costs solely related to the running of the business are fully deductible (the general permission – subject to any general limitation, primarily the capital limitation), those solely related to the proprietors private quarters or family life are non-deductible being private or domestic in nature (the private limitation), and those expenses that relate to both aspects (say the rates for the property) are deducible to the extent that they relate to the running of the business.
If you have an on-site manager or other employee living on the premises, then the costs relating to their accommodation will also be 100% deductible (subject to any of the general limitations applying).
When calculating the deductible proportion of any mixed-use expenses, most commonly a space and time calculation methodology will be appropriate – however you are quite entitled to use another method, if that calculation would be easier or more accurate for your particular circumstances. QB 21/10 is a 15-page document and around eight of those pages are filled with examples.
Employee working from home payments
The latest lockdown and the potential for future lockdowns (at least until the population is substantially vaccinated) due to the Delta variant, with the consequent scenarios of employees working from home where they are able to, and employer payments being made to compensate for increased cost exposures in this regard, has seen IR issue Determination EE003, hot on the heels of previous versions EE001, EE002, EE002A and EE002B.
Partly the release is due to the fact that Determination EE0002B only applied to payments made to employees up to 30th September 2021, so the issue of Determination EE003 facilitates the extension of the payment period, plus enables IR to amalgamate all the information from the previous four documents into the one determination.
Determination EE003 is titled “Payments provided to employees that work from home; employee use of telecommunications tools and usage plans in their employment” and applies to payments made by employers for the period from 1 October 2021 to 31 March 2023. For the determination to apply:
an employer must make a payment to an employee
• the payment must be for expenditure/loss incurred (or likely to be incurred) by the employee
• the expenditure or loss must be incurred by the employee in deriving their employment income and not be private or capital in nature (the capital limitation does not apply to an amount of depreciation loss)
• the payment must be made because the employee is doing their job and the employee must be deriving employment income from performing their job
• the expenditure or loss must be necessary in the performance of the employee’s job; and,
• where an employee is partly working from home and partly outside of their home, the home-based work must be more than minor. (For example, the determination can apply to an employee who works at the employer’s premises on alternate days).
Rather than trying to set out all the rates and specifics of Determination EE003 here, it is recommended that you refer to the determination directly (which can be accessed directly from IR’s website), but in essence the set exempt income rates are $15 per week (works from home but no use of employees own telecommunication tools and/or usage plans), $20 per week (where employee works from home and does use their own telecommunication tools and/or usage plans) and $5 per week (where employee does not work from home but does use their own telecommunication tools and/or usage plans). There is also a single $400 per employee amount to reimburse the employee for the costs incurred in acquiring new furniture and equipment to enable them to work from home.
It should be noted that Determination EE003 is not binding on employer or employees, and following the principles of section CW 17, an employer could make alternative payments to the employee as exempt income.
This article from the ‘A Week in Review’ newsletter was originally published Monday 30th August 2021. If you have any questions or would like a second opinion on any national or international tax issues, please contact me email@example.com.
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