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Leased apartments & GST | Reporting PIE income for 2021 | Coupla QB’s finalised | Annual CPI adjustments released

By May 21, 2021 No Comments
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Leased apartments & GST

IR has published a new leaflet on its website for download, titled “Thinking of selling your leased apartment?” (IR498). The document is to highlight to the unsuspecting (a number of whom I have bumped into over the years unfortunately), the potential GST exposures in relation to an apartment they may have acquired with a managed lease in place, which had the consequence that they did not have to pay any GST to the vendor (usually a developer) upon purchase – what a bonus!

What the poor unsuspecting investor did not appreciate however, was that the vendor was simply passing on their GST obligations with respect to the apartment sale, to the purchaser. The investor was now effectively locked into the managed lease scenario, and they were potentially exposed to having a rather large tax bill due to IR, which could be triggered by the happening of a number of events:

  • If the investor wanted to terminate the management lease and live in the apartment themselves;
  • If the investor wanted to take over the management of the apartment themselves and lease the apartment to longer term tenants (short-stay accommodation would usually be deemed the making of taxable supplies and therefore not trigger any change of use/cessation adjustment);
  • If the management company lease expires (or more likely the management company itself expires) and the investor has not entered into a new lease at the time of sale; or,
  • If the investor can’t find a purchaser willing to register for GST and/or take over the management lease.

Where the apartment leasing is the only GST taxable activity being carried on by the investor (a common scenario), the first two triggers would often have the consequence that the investor was required to de-register for GST, resulting in a GST output tax amount equivalent to 3/23rds of the apartments market value now being payable to IR. Problem is (and a rather serious one to have I would suggest) that there is no disposal of the asset to provide the necessary funds to pay the GST output tax – so the investor has to find the necessary cash elsewhere (and we are not talking loose change here).

So, if you or your clients are looking to buy an apartment, and the sales pitch by your friendly real estate agent is that you can save 15% by simply being GST registered and signing a simple management lease (which will provide you with a ‘guaranteed’ income stream), then remember the age-old phrase of ‘buyer beware’ – paying an extra 15% upfront may in fact be the cheaper option.

Reporting PIE income for 2021

A reminder from IR that from the 2021 income tax year, Portfolio Investment Entity (PIE) income must be included in all IR3 individual income tax returns.

Returns filed in myIR or the Return service in software will not contain all the PIE information until after IR has received the PIE reconciliation files due on 17th May 2021. It is recommended therefore, that unless you are confident that your client is not a KiwiSaver member and does not have any other PIE income, you should wait to file IR3 returns until post the 17th.

Coupla QB’s finalised

Previous AWIR editions have highlighted the release by IR for public consultation of draft Questions We’ve Been Asked on the topics of “Whether ‘negative interest’ payments are subject to withholding taxes” and “Charities business exemption – business carried on in partnership”.

These two documents have now been finalised.

  • QB 21/02 is the reference for – “Whether ‘negative interest’ payments are subject to withholding taxes.” It is an eight page document (so just long enough to read during your pre-bedtime cuppa and biscuits) with the basic conclusion that there are no withholding tax deduction requirements because ‘negative interest’ cannot be said to be a payment made for money lent – it’s not a payment from the borrower to the lender.
  • QB 21/03 is the reference for – “Charities business exemption – business carried on in partnership”. It’s shorter at five pages (so perhaps for the cuppa without the accompanying biscuits) and explores the question of whether income derived by a charitable entity from a business can be exempt under section CW 42 if the business is carried on by a charitable entity in partnership with a non-charitable entity? IR’s conclusion is yes, the income can be exempt if other requirements (such as the control (you can’t take the money for yourself and run) and territorial restrictions (charitable purposes carried on in NZ) are satisfied.

Annual CPI adjustments released

IR has released a number of CPI adjustments which have application to the March 2021 income year:

  • CPI adjustment for household boarding service providers – updates DET 19/01, “Standard-cost household service for private boarding service providers” shows the annual adjustment for the weekly standard-cost for each boarder as $194.00.
  • CPI adjustment for short-stay accommodation – updates DET 19/02, “Standard-cost household service for short-stay accommodation providers” shows the annual adjustment to the standard-cost household service for short-stay accommodation to a daily standard-cost for each guest for an owned dwelling of $52.00, and to a daily standard-cost for each guest for a rented dwelling of $47.00.

CPI adjustment for childcare providers – updates DET 09/02, “Standard-cost household service for childcare providers” shows the annual adjustment to the standard-cost household service for childcare providers to an hourly standard cost of $3.75 per hour per child, and to an annual fixed administration and record-keeping fixed standard-cost component of $367 pa for a full 52 weeks of childcare services provided.

This article from the ‘A Week in Review’ newsletter was originally published Monday 17th May 2021. 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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