Special report on new legislation re-released
Early in April, ‘A Week in Review’ covered the release by IR of a special report on the new
legislation stemming from the passing of the Taxation (Annual Rates for 2020–21, Feasibility
Expenditure, and Remedial Matters) Act 2021.
Within a few days of its release however, IR acknowledged the report contained a number of
errors, and advised a corrected version would be out soon. Well, after many sleepless nights
(hmmm), the wait is over and the new 107-page version (previously 105 pages) is now available.
For those of you who missed my previous update, coverage in the report includes amongst other
things (slightly amended):
- Extending the bright-line test period from five to ten years – in this regard, note that when
considering whether the five- or ten-year period now applies to you, firstly determine when
you acquired your first interest in the residential land (entered into binding agreement) –
was this date pre (five years) or post (ten years) 27th March 2021. Once you have
determined which rule you are subject to, then your general rule for calculating the
applicable bright-line period is date of title transfer through to date you enter into binding
agreement to sell. Also note the change to the main home exclusion rule for land acquired
post 27th March 2021 (existing rule still applies to land subject to five year bright-line
period), and the clarification that short-stay accommodation (not provided in the owners
main home) is subject to both bright-line (previously arguable ‘business premises exclusion’
may have applied) and residential rental deduction ring fencing rules.
- Feasibility expenditure – now potentially deductible over a five-year spreading period,
where the expenditure related to completing, creating or acquiring property (business
assets) that is later unsuccessful or abandoned. Immediate deductions are also available
for such expenditure that in total is $10,000 or less in an income year. Together, the
changes are intended to set out the circumstances when expenditure can be deducted for
property that but for abandonment would have been depreciable property or revenue
account property. Note the word of caution that the general permission must still be
satisfied so pre-business commencement expenditure or that relating to a new business
which does not have sufficient nexus to the existing business, is likely to remain non-deductible.
- Purchase price allocation rules – requiring parties to a sale of business assets (post 1st July
2021 agreements entered into) with different tax treatments to adopt the same allocation of
the total purchase price to the various classes of assets for tax purposes.
- Amendment to definition of eligible R&D expenditure – to clarify that expenditure must be
closely connected with conducting an R&D activity to be eligible for the R&D tax credit. To
ensure that expenditure claimed has sufficient nexus with the eligible R&D being
conducted, the amendment clarifies that expenditure is only eligible if it is directly related to,
required for, and integral to the R&D taking place; and
- A slight amendment to the temporary loss carry-back rules, in relation to group companies
(66% common ownership). The prior rules required the company in the group to have a net
loss in either the 2020- or 2021-income year, and to have taxable income in the income
year immediately preceding the loss year. This meant that a company having losses in both
the profit and loss years could not utilise the rules, even if other group member companies
had taxable income in the profit year against which the losses could be offset. This drafting
was contrary to policy intent and has been amended to permit the loss offsets with other
group members to proceed.
Now you may recall that my previous editions, AWIR comments on the bright-line changes alluded
to no mention of the ‘new build’ carve-out, which was mentioned in IR’s fact sheet published in
March 2021 – new builds acquired post 27th March 2021 were supposed to remain subject to the
five year bright-line period. I had assumed therefore (incorrectly dare I say) that the updated
version would have included such reference, however just like my kids on Christmas when Santa
hasn’t left ‘exactly’ everything that they asked for, I am too left feeling disappointed by the latest
COV 21/02 released
If you do not have clients who form imputation groups to allow a company with a debit ICA balance
to use the credits of a related company to reduce the debit balance, then read no further.
IR has released COV 21/02, ‘Variation to section FN 7(5) of the Income Tax Act 2007’.
Section FN 7(5) basically sets the effective date of any notice provided to IR under the legislative
provision, being the start of the tax year in which the Commissioner receives the notice.
COV 21/02 permits a notice given during the period 28th April 2021 to 30th September 2021 to still
apply from the start of the tax year ending 31st March 2020. The variation is to recognise that some
customers who did not take steps to address a debit balance in their imputation credit account
before 31 March 2020 could have used a tax pool or other option to reduce the balance
subsequently but the impact of COVID-19 on their profits has been such that these options will
adversely affect their cashflow.
Cryptoassets QWBA’s released for consultation
Finally, saving the best for last, because I know how you all love trying to get your heads around
the income tax issues associated with cryptoasset transactions (I have one client who consistently
requests 7.30am discussions on the topic!), IR has released 2 draft QWBA’s (although both with
the same reference number) for review and comment.
Number one PUB00405’s focus is on the income tax treatment of cryptoassets received from an
airdrop – a 12-page document which comments on both the initial receipt of airdropped
cryptoassets, and the subsequent disposal of the same.
With respect to the former, the receipt is likely to be taxable where either the person has a
cryptoasset business, they acquired the cryptoassets as part of a profit-making undertaking or
scheme, they provided services to receive the airdrop (and the cryptoassets are payment for the
services provided), or they receive airdrops on a regular basis, and the receipt has hallmarks of
income. If your client does not tick any of these boxes, then likely that the receipt is not taxable.
Turning next to the subsequent disposal of the airdropped cryptoasset, likely to be taxable where
the person has a cryptoasset business, where they disposed of the cryptoassets as part of a profitmaking undertaking or scheme, where they provided services to receive the airdrop, or where they
acquired the cryptoassets for the purpose of disposing of them.
Number two PUB00405 then looks at the income tax treatment of cryptoassets received from a
hard fork – a 13-page document this time, which again considers both the initial receipt and the
The conclusions reached are similar in vein to those for airdropped cryptoassets.
The receipt of cryptoassets from a hard fork is taxable where a person either has a cryptoasset
business or they acquired the cryptoassets as part of a profit-making undertaking or scheme. In
other cases, the receipt is not taxable.
The subsequent disposal of cryptoassets that were received from a hard fork is taxable where a
person has a cryptoasset business, where they disposed of the cryptoassets as part of a profitmaking undertaking or scheme, where they acquired the cryptoassets for the purpose of disposing
of them, or where they acquired the original cryptoassets for the purpose of disposing of them
(where the person receives the new cryptoassets through an exchange). IR expects in most cases
that the disposal will be taxable.
25th May 2021 is the due date for any feedback for both QWBA’s.
This article from the ‘A Week in Review’ newsletter was originally published Monday 10th May 2021. If you have any questions or would like a second opinion on any national or international tax issues, please contact me firstname.lastname@example.org.
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