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Tax Bill reported back | Covid-19 variations | Cash basis persons under the financial arrangements rules

By March 6, 2022 No Comments

Tax Bill reported back

The Federal Election Commission (FEC) have finally reported back on the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill, which if you can’t quite remember (since it was issued late in 2021), contains lots of goodies like the new residential interest deduction limitation rules, various GST amendments (mostly positive) and some changes to the residential land bright-line rules.

Once the Bill is passed, which should occur within the next couple of weeks I would expect, then I’ll dedicate an AWIR edition to summarise all of the key components of the new legislation for you.

Unfortunately, the FEC did not recommend any major changes to the Bill as introduced, particularly dropping the proposed interest deduction limitations (although clearly this was never going to happen). The amendments they did make include:

  • Drafting changes to ensure the input tax deduction cap, which is to apply to property developers upon a disposal of land that has been used for both taxable and non-taxable purposes, only applies to those where the disposal is of land “that the person uses in the course or furtherance of a taxable activity of developing land or dividing land into lots”. There was concern that the previous drafting could mistakenly capture those taxpayers who were not property developers.
  • An amendment to the definition of ‘new build land’ to include that where remediation of an existing dwelling prevents it from falling out of available housing supply. The two specific situations will be where a dwelling has been on the earthquake-prone buildings register, but remediated and removed from the register on or after 27 March 2020, and a leaky home has been substantially (at least 75%) re-clad.
  • An amendment to the development exemption (non-business developments usually captured by s.CB 12/CB 13) to ensure that interest remains deductible post the land being disposed of for a loss. The original drafting proposed that the interest deductibility would cease at the time the land was disposed of, however, the FEC felt this limitation would discourage people from taking development risks, which may negatively affect new housing supply.
  • Drafting changes to the wording in the ‘main home exclusion’ which covers scenarios where a person is constructing their main home and as a consequence the land may be unoccupied for more than 12 months and includes in counted ‘main home days’. Days where the period of construction is a ‘reasonable time’ as opposed to the original drafting being the person is making a ‘reasonable effort’.
  • An amendment to ensure that a purchaser of a ‘new’ new build (vendor’s land qualified as new build land when acquired and they then added another new build to the land) still obtained a five year bright-line period if they acquired the land within 12 months of the CCC for the ‘new’ new build being issued.
  • An amendment to the bright-line rollover relief provisions to include a scenario where the residential land is transferred from a family trust back to the settlor of the trust (must satisfy the same connectivity rules as for transfers from a person to a family trust).
  • A deferral of the proposed GST information modernisation rules until taxable periods commencing post 1st April 2023 – it being the view that the proposed implementation date of 1st April 2022 was too soon for taxpayers to be able to get their head around the new rules.

Covid-19 variations

We are fast approaching the end of yet another income year, and coupled with the 31st of March being your standard income year end, it is also the date by which a number of elections must be filed.

 

Inland Revenue (IR) has acknowledged that the present Omicron outbreak may certainly have had an impact on taxpayers to attend to their compliance obligations and consequently a number of variations are slowly starting to be issued:

  • Firstly, there is Determination COV 22/01, ‘Variation to section EI 1 of the Income Tax Act 2007’, which extends the deadline for making an application to the Commissioner under s.EI 1 to spread back income from timber to previous income years. The deadline under s.EI 1 is one year from the end of a person’s income year. This variation extends this deadline to 31 July 2022.
  • Secondly, there is Determination COV 22/02, ‘Variation to section HB 13(3)(b) of the Income Tax Act 2007’. The variation applies to all companies who wished to elect to be a look-through company (LTC) and have not previously been required to file a return of income. It recognises that the impact of Covid may have adversely affected some companies’ ability to file their LTC election on time, and this will mean they are unable to be treated as an LTC for the year in question. So, in respect of the 2021 income year, where a company makes an election to be a look-through company and s.HB 13(3)(b) applies, the deadline by which that election must be received by the Commissioner is extended to include an election received by the Commissioner on or before 30 June 2022.
  • Finally, there is determination COV 22/03, ‘Variation in relation to s DB 31 of the Income Tax Act 2007 to extend time for writing off bad debts’. The variation applies to a person who wishes to claim a deduction in the 2022 income year for a bad debt. The variation recognises that the impact of Covid means that some taxpayers may not have been able to write off debts as ‘bad’ during their 2022 income year, and extends the time for writing off debts as ‘bad’ to 30 June 2022. However, the variation is subject to the conditions that the taxpayer did not write off the debt by the end of the 2022 income year as a result of the impact of Covid, and the taxpayer takes into account only information that was relevant as at the end of their 2022 income year.

Cash basis persons under the financial arrangements rules

IR has issued a draft interpretation statement, PUB00396, titled ‘Cash basis persons under the financial arrangements rules’. It’s a 30-page document that explains when a person can account for income and expenditure from financial arrangements on a cash basis instead of an accrual basis. It also sets out the adjustment that must be made when a person ceases to be a cash basis person and must account for their financial arrangements using the accrual basis.

I’d suggest the primary point to note if you are checking your client’s cash basis status, is that they only have to be below one of the two absolute numbers thresholds (<$100k income/expenditure or <$1m financial arrangements) to be entitled to use the cash basis regime, but you must not forget to check the $40k deferral threshold as well – which if exceeded will throw your client back into reporting on an accrual basis.

There are numerous examples throughout the document, to assist in explaining the concepts.

If you would like to make a comment on the exposure draft, the closing date for submissions is 14th April.

This article from the ‘A Week in Review’ newsletter was originally published Monday 7th 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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