Residential property acquired after 27 March 2021 is subject to a 10-year bright-line period, or 5 years if the property qualifies as a ‘new build’. The extension to 10 years has increased the likelihood that a property transfer will be caught. In an attempt to alleviate the risk that related party transfers would be unfairly taxed, some rollover relief was enacted on 30 March 2022 as part of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 and applies to disposals of land occurring on or after 1 April 2022. The legislation is complex and attempts to cater for numerous factual situations, but at a high level, the rollover relief provisions allow residential property to be transferred at cost, rather than deemed market value, resulting in no taxable gain on the transfer. Further, such a transfer does not restart the “bright-line clock” – the acquisition date under the bright-line provisions for the recipient would be the original acquisition date of the related transferor. Where residential property is transferred to a family trust, rollover relief will apply in the following circumstances: each transferor of the land is also a beneficiary of the trust and at least one of the transferors of the land is also a principal settlor of the trust, and each beneficiary who is not a principal settlor is one of the following: within four degrees of blood relationship with, or married to, or in a civil union or de facto relationship with, a beneficiary who is a principal settlor, a company where a 50% voting interest is owned by a family member beneficiary, a trustee of another trust that has a beneficiary who is also a family member beneficiary of the test trust, or a charity. Rollover relief will likely only apply to transfers of residential property from a family trust (where the beneficiaries are as outlined above) to a principal settlor of the trust. Given that the rollover relief is intended to apply where the economic ownership of the property has not materially changed, transfers of residential land to or from LTC’s and partnerships may also qualify for rollover relief. However, this only applies where each person transferring the land has the same economic interest before and after the transfer. Rollover relief will also apply where transfers of residential land take place within a wholly-owned tax consolidated group of companies. Given that the ‘Bank of Mum and Dad’ is now NZ’s 5th largest home loan lender, these concessions do not go far to help the many who have their property partly or wholly held by their parents or a family Trust. Where a family trust wishes to transfer ownership of its property to a ‘child’ beneficiary, rollover relief will only apply if the child is also a principal settlor of the Trust – a scenario which would be few and far between. For parents who own a house directly 50/50 with a child, the parent’s transfer of their 50% to the child would not be eligible for rollover relief at all, and hence it would be a case of waiting out the bright-line period to avoid any inadvertent and potentially material tax bills.

Inland Revenue has started publishing Technical Decision Summaries (TDS’) from mid-2021. A TDS is an abridgment of either an adjudication or private ruling decision made by Inland Revenue’s Tax Counsel Office (TCO). TDS’ will be published within three months of a technical decision being finalised. They are not binding and are for information use only, and will be archived after five years of publication. A TDS contains four sections: facts, issues, decisions, and reasons for decisions. Not all private rulings and adjudication decisions will be published, but the aim is to make Inland Revenue decisions and processes clearer and more transparent, to aid taxpayer compliance and support the integrity of the tax system. With Inland Revenue’s apparent heightened activity on the GST treatment of land sales and purchases, a recent topical TDS is 22/10 GST: Whether property sale is zero-rated. Time bar. In this TDS, the taxpayer was a GST-registered company whose taxable activity involved building residential properties for sale. The taxpayer entered into an agreement for the sale of a dwelling – the purchase price was stated to be “inclusive of GST (if any)”, the going concern clause had not been deleted, and the purchaser stated they were also GST-registered. The GST clauses were not fully completed by settlement – the purchaser had not indicated whether they would use the property to make taxable supplies. However, the property was settled as a zero-rated supply for GST purposes. Weeks after settlement, the purchaser’s solicitors amended the GST schedule, confirming GST registration and signalling they did intend at settlement to use the property for making taxable supplies. Further, the purchaser applied for holiday home registration in respect of the property. The TCO decision was that the sale should not have been zero-rated as a supply of a going concern, nor under the compulsory zero-rating provisions. The latter decision was on the basis that, at the time of settlement, there was insufficient evidence to prove the purchaser intended to carry on a taxable activity of supplying short-stay accommodation, and the onus was on the taxpayer, as the vendor, to correctly determine the amount of GST payable. Four years had passed from the GST return assessment period, hence the Commissioner had applied to amend the assessment under the time-bar exception on the basis the taxpayer knowingly or fraudulently failed to disclose all the material facts that were necessary for determining the amount of GST payable. This was rejected by the TCO, who considered that the available evidence suggested the taxpayer filed its GST return believing its position to be correct. As a result, time-bar applied to the transaction and the proposed amendment to re-assess the return was rejected. This TDS provides useful insight into how Inland Revenue apply both the GST zero-rating and time-bar provisions and is written in a simple language for all readers. It also highlights, once again, the need to take care when completing sale & purchase agreements – even though a transaction factually qualifies for compulsory zero-rating, if the GST clauses have not been correctly completed by settlement, the TDS implies Inland Revenue are unlikely to be sympathetic. 

On 20th July 2022 Inland Revenue released a 51-page interpretation statement 22/04 – Claiming depreciation on buildings. In light of the re-introduction of depreciation on non-residential buildings from the 2021 income year, the interpretation statement is intended to give guidance to building owners on when they can claim depreciation on buildings. Specifically, the statement emphasises the importance of understanding the difference between a residential building – where the depreciation rate remains at 0% – and non-residential buildings. The basis of the interpretation statement appears logical enough, however, it includes the following surprising statement: “where a building is used for both residential and non-residential purposes, it will only have a depreciation rate of greater than 0% if it is predominantly or mainly used for non-residential purposes: it is effectively an all-or-nothing test” This is relevant, for example, where a building that has retail shops on the ground floor and residential apartments on the first floor, or in a rest-home context where there may be independent living apartments within a building that also provides hospital or assisted care. The statement provides that the “predominant use” of the building must be established to determine whether the applicable depreciation rate for the entire building is more than 0%. This suggests (but not specifically commented on) that the owner of a unit titled residential apartment in a predominantly commercial building, is able to depreciate it at the commercial building rate. Building owners who own all or part of a mixed-use building should read the interpretation statement carefully to determine their depreciation obligations.

There are common misconceptions in relation to how portfolio shareholdings in foreign companies are treated for tax purposes. One misconception is that if either the profits of the foreign company or the dividends it pays have been subject to tax overseas then New Zealand (NZ) tax does not apply. Another is that if the foreign company does not pay a dividend at all, then there should be no income to disclose, and hence no tax to pay. However, unless a specific exemption applies, income might be deemed to arise under the foreign investment fund (“FIF”) regime – this regime gives rise to annual New Zealand income tax obligations, regardless of whether a cash return is received. The FIF regime was originally introduced in 1993 alongside other international tax regimes to prevent New Zealand tax residents from avoiding or deferring New Zealand income tax by establishing foreign entities in jurisdictions with lower tax rates. Under the regime, a person is required to determine their annual FIF income using one of the prescribed methods. For foreign companies which are traded on a recognised stock exchange and an annual market value is readily available, the applicable FIF methods are the Fair Dividend Rate (FDR) method, and the Comparative Value (CV) method. The FDR method deems a shareholder to derive income equal to 5% of the opening market value of the shares (irrespective of the amount of dividends received), with an adjustment for any purchases and sales made within the same year. The CV method calculates income based on the change in the value of the shares plus dividends received. Where the CV method results in a loss for the year, in most circumstances the loss is not claimable and hence would be limited to $0. A person subject to the FIF regime is required to apply the FDR or CV method to their entire portfolio – i.e. they cannot choose FDR for one investment and CV for another. Where the market value of a foreign company is only obtainable by way of independent valuation, the cost method is commonly used – this deems 5% of the opening cost base to be taxable FIF income, and the cost base itself is increased by 5% each year. Generally, once chosen, a calculation method must continue to be applied in later income years, unless a change of method is permitted – for example, a natural person or family trust is able to change between the FDR and CV method on an annual basis. Further, the cost base under the cost method can be “reset” every five years by an independent valuation – this is useful if the investment has appreciated by less than 5% each year. Usually, any foreign tax withheld is available as a foreign tax credit to offset the tax liability on the FIF income. There are exclusions from having to apply the FIF rules, for example, where the investment is in an ASX-listed company or for specific investors, where the cost of the interest is less than $50k. Although, if the FIF regime does not apply, dividends received will still be taxable under ‘ordinary rules’. Due to the kiwi love affair with land, investing in rental properties is often favoured over share investments. However, with the increase of the bright-line period for some residential property to 10 years, disallowing interest deductions and ring-fencing residential rental losses, investing in shares has become comparatively more attractive than it used to be. But don’t get tripped up by not understanding the rules that apply to foreign share investments.