Holiday houses - income tax treatment

June, 2009

The Inland Revenue has recently issued a statement in relation to the income tax treatment of holiday houses when they are rented out from time to time.

Any rental income received is taxable and should be returned in the owner’s tax return.

Whether, and to what extent, expenses are deductible, depends on the connection with the income earned.

In the case of a holiday house rented out for only some of the income year, the ability to deduct expenses such as interest, insurance, depreciation and rates depends on the specific circumstances and whether there is sufficient connection with the earning of rental income.

If a holiday house is essentially available to the owner, their family and friends, which means it is only available to rent to third parties on a limited basis, the Inland Revenue will apply the following principles:

• the owner is not entitled to claim a deduction for expenses incurred for the periods the holiday house is not rented.

• if the holiday house is rented out on an arm’s length basis, an owner can claim a proportion of the expenses incurred equal to the time the holiday house was actually rented. If one or more parts of the holiday house are not available to be used by the person renting the holiday house (eg, a room is used to store the owner’s personal possessions and it is locked so only the owner can access it), then a deduction is available only for the proportion of the holiday house available for use by the person renting the holiday house.

• in cases where a holiday house is used by friends or family who are not charged rent, but instead make a minor contribution towards the owner’s expenses, this payment will generally not be rental income. Consequently, the owner will not be required to return the amount received, but nor will any deductions be allowed for the corresponding period.

Evidence of a holiday house being available for rent generally needs to be more than a mere statement of its availability, sporadic or limited advertising, or advertising that is of a nature unlikely to attract many customers. Rather, there must be evidence of active and regular marketing of the holiday house at market rates and of the availability of the holiday house at times and for periods that demonstrate the holiday house is earning rental income or is genuinely available to earn rental income. Therefore any expenditure incurred which is potentially deductible is not denied because it is private.

If the holiday house has mixed uses, the ability to deduct expenditure comes down to a case-by-case assessment weighing all the evidence. Objective evidence is required of the holiday house being genuinely available for rent and having a real prospect of occupancy and rental income being earned. This needs to be considered separately in relation to each year.

Gilmore Brown Limited services update

June, 2009

Trustee services 

We provide assistance with setting up and operating both family trusts and trading trusts.

We will advise on financial structuring to ensure asset protection and tax minimisation and if required we can provide you with ongoing trustee services in the form of our trustee company.

Company share transfers

June, 2009

A recent company law case highlighted the need for the transfer of shares to be recorded on the share register of the company to confirm legal title of the shares had been transferred.

The signing of an agreement for the sale and purchase and the delivery of the share transfer to the registered office were not sufficient to pass legal title.

Often lawyers will complete these documents for you but not always advise us immediately. As we are the registered office for a number of companies, it is important our office is advised of any changes of shareholding and provided with copies of the documents as soon as they occur so we can update our records.

There may also be tax implications as a result of shareholder changes.

Changing GST periods

June, 2009

A reminder, it is vital you advise our office of any changes in your GST return periods as it will affect your provisional tax payment dates.

An example being, you may decide to change your GST to six monthly if your turnover is between $250,000 and $500,000 and you currently file your GST two monthly, as the turnover threshold for filing GST two monthly, increased from $250,000 to $500,000 from 1 April 2009.

The IRD do not inform us of any changes requested by taxpayers therefore we rely on you to advise us. This will ensure our systems are updated and we advise you of the correct provisional tax payments when they are due. If we are not informed and payments are made late, penalties may be imposed by the IRD.

Voluntary student loan repayment bonus

June, 2009

To encourage borrowers to repay their student loans sooner, the Government has introduced a 10% bonus for those who make voluntary repayments, over and above compulsory repayments, on their student loan.

From 1 April 2009, voluntary repayments made to the Inland Revenue totaling $500.00 or more in a tax year will get a bonus 10% of the amount repaid credited to their student loan account. For example, a person who makes voluntary repayments totaling $1,000.00 in a tax year will reduce their loan by $1,100.00.

The bonus will be credited after the end of the tax year. For anyone who repays their student loan in full, the bonus will be credited at the time of the final payment.

Non payment of PAYE

June, 2009

PAYE is different from other tax in terms of penalties. The law treats PAYE as the employee’s money, not the employer’s debt to the IRD. Non payment by an employer can result in a jail sentence.

In a new development, IRD liquidators are insisting directors of any company they have put into liquidation are personally liable for unpaid PAYE. They consider unpaid PAYE is evidence of trading while insolvent. A company director or a manager with responsibility for expenditure can be prosecuted if PAYE is not paid.

The IRD has recently changed its penalties for unpaid PAYE. It can impose a monthly penalty of 10% on unpaid PAYE. Therefore in 10 months the liability doubles and keeps going up until it reaches a maximum penalty of 150% on top of the original tax and interest owed.

IRD mileage rates

June, 2009

The Commissioner of the IRD must, from time to time, set and publish a mileage rate for expenditure incurred for the business use of a private motor vehicle.

Previously, the IRD mileage rates were:

Banded rate 1 to 3,000 km	62 cents per km
3,001 km and over	19 cents for each km over

 

Field Day winners

June, 2009

Congratulations to the winners of our daily draw:

Thursday 26 February

 

C R Roadley Limited

A J Hilton

Friday 27 February

 

E C and K W Dugmore

R G and M C R Stevenson

Thank you to the clients who visited our site. It is always good to see you.

New look Gilmore Brown Limited website

June, 2009

You can now request appointments on-line, send us an enquiry on-line and subscribe to receive this publication by email.

Send us your feedback and let us know what else you would like to see on our website.

Budget 2009 tax measures

June, 2009

The 2009 budget included:

 

·             the delay in the personal tax cuts due to take effect on 1 April 2010 and 1 April 2011, however the tax cuts that came into effect on 1 April 2009 remain

·             the closure of the KiwiSaver mortgage diversion facility to new applicants from 1 June 2009, but the facility will remain available to existing participants.

 

The Minister of Finance, the Honorable Bill English, stated the Government’s medium term goal remains to align and reduce the top rate of personal tax, trust and company tax rates at a maximum rate of 30%.

New Employment Law – Trial Period

February 24, 2009

From 1 March 2009, the Employment Relations Act 2000 will provide for a 90 day trial period. This only applies to organisations that employ no more than 19 people and only applies to those employed on or after 1 March 2009.

The trial period means an employer and an employee can enter into an agreement for a specified trial period of up to, but no more than 90 days. During this trial period the employer can dismiss the employee without the employee being able to take a personal grievance on the grounds of unfair dismissal. The trial period is voluntary and needs to be entered into in good faith and the employer and the employee need to agree to the trial period in writing.

An employee under the trial period can still bring a personal grievance or legal proceedings if unacceptable behaviour exists such as sexual or racial harassment or discrimination.

All employers are still able to have a trial period regardless of the number of employees and the trial period can be for more or less than 90 days.

However, if you have more than 19 employees and an employee is dismissed during the trial period they maybe entitled to bring a personal grievance claim in respect of the dismissal

Minimum family tax credit increase

February 24, 2009

The minimum family tax credit is a payment that guarantees a family’s after-tax income. From 1 April 2009 the annual after-tax income increases from $18,460 to $20,540. This ensures these families will have a minimum income of $395 per week after tax.

Families can receive the minimum family tax credit where 30 hours each week are worked as a couple, or 20 hours each week as a sole parent and family support is received.

Minimum wages rate

February 24, 2009

From 1 April 2009 the minimum wage rate will increase from $12.00 an hour to $12.50 an hour.

The trainee and new entrants’ minimum wages will increase from $9.60 an hour to $10.00 an hour.

Business tax relief package

February 24, 2009

The Government recently announced a business tax relief package aimed at assisting small and medium sized businesses. The initiatives are expected to make it easier for these businesses to manage their cash flows and to meet their tax obligations. Some of the initiatives will also benefit larger businesses.

Changes include:

• removing the 5% provisional tax uplift rates for the 2008/09 and 2009/10 years. This will reduce the amount of provisional tax payments businesses will need to make
• increasing the GST payments basis threshold from $1.3 to $2 million
• increasing the GST 2 monthly filing threshold from $250,000 to $500,000
• increasing the compulsory GST registration threshold from $40,000 to $60,000
• increasing the threshold for PAYE once-a-month filing from $100,000 to $500,000

The changes will come into effect from 1 April 2009.

FBT rate changed

February 24, 2009

The rate to calculate fringe benefit tax on low interest, employment related loans will decrease from 10.9% to 8.05% from 1 January 2009.

Use of money interest rates

February 24, 2009

Inland Revenue Department use of money interest rates for unpaid and overpaid tax will decrease from 1 March 2009. The rate for unpaid tax will decrease from 14.24% to 9.73% and the rate for overpaid tax will decrease from 6.66% to 4.23%.

ACC - topping up employees' weekly compensation

February 24, 2009

When an employee receives weekly compensation from ACC, for tax purposes, this becomes their main source of income. Therefore, if an employer is paying the 20% top-up, this should be taxed at the secondary tax rate. This is important, otherwise employees may be subject to a surprise tax bill at the end of their financial year.

ACC - earners' account levy

February 24, 2009

This levy is paid by all employees and self-employed to cover their non-work and non-motor vehicle injuries. From 1 April 2009 this levy will increase from $1.40 to $1.70 (GST inclusive) per $100 of liable earnings. For an employee on an average salary of $47,000, this equates to an increase of $141 per annum, from $658 to $799.

Our people

February 24, 2009

We are pleased to advise Daryl Small has recently been promoted to manager, joining the other members of our management team.