IR3 FILERS WISHING TO CLAIM A TAX CREDIT FOR DONATIONS, CHIDCARE OR HOUSEKEEPER IN THE 2011 TAX YEAR

Last year, if you recall , there were some issues pertaining to the above, with holdups in refunds issued for the above, particularly if you filed Claim Returns for the above prior to the filing of your Income Tax Return.  This was because  the tax law had only recently changed to the ability to  claim a donation rebate up to the level of your taxable income for the year (rather than up to a set  $ level as previous), and IRD were not in a position to establish your taxable income  if the 2010 Income Tax Return had not been filed prior to the filing of the Income Tax Return. 

IRD have advised that they will need the IR3 Personal Income Tax Return to be filed before they will issue refunds for donations being claimed for the 2011 Income Year.

IRD have advised that they will be sending the IR526 Rebate Claim Forms out in May 2011.   Many clients get these sent direct to themselves rather that to the Tax Agent.  IRD have advised that they will not be processing the IR526s received until the date that the IR3 Personal Income Tax Return is received from the Tax Agent.  Therefore if you wish to make such a Claim you will not receive any applicable refunds until your 2011 Personal Income Tax Return is filed with IRD.   IRD are therefore suggesting that you hold up filing these with IRD, with the relevant receipts attached, until the IR3 Personal Income Tax Return is filed.  They have stated that they will then endeavour to issue refunds within 6 weeks of receipt.

 

 

PAYE FROM 1 APRIL 2011

If you are an employer PAYE rates changed from 1 April, 2011, so you should be taking the new PAYE deduction amounts from your employer's earnings from that date.

IRD have stated that they do not as a matter of course issue PAYE Tables unless these are requested, so if you haven't received these and to get the PAYE Table information:

• you can contact IRD and request these to be sent to you
• you can get these on the Internet

The path to get them on the Internet is:

• www.ird.govt.nz
• in Search type "PAYE Tax Tables 2012"
• choose the alternative you want for your pay period-  weekly? / fortnightly? / four weekly? / monthly?
• then search as per weekly/ fortnightly/ four weekly/ monthly gross wages/ salary

 

 

NEW TAX DEPRECIATION RULES

Budget 2010 removed depreciation deductions for most buildings (those with useful lives of 50 years or more) from the start of the 2011-12 income year. You can still claim depreciation on the fit out of commercial and industrial buildings

Commercial Fit-outs depreciable

The law has been clarified so that commercial and industrial fit-outs remain depreciable property.

Items of fit-out that are shared between commercial and residential purposes, eg, lifts, electrical cabling, fire protection, sewerage and water reticulation, in a mixed-purpose building, will be depreciable if the dominant purpose of the building is commercial. Fit-outs used only for commercial purposes will be depreciable property.

A definition of "dwelling" has been added that excludes a number of types of buildings that provide residential-type accommodation. This ensures that fit-outs associated with these buildings will continue to be depreciable property. The types of buildings that will be specifically excluded from the meaning of dwelling are:

• hospitals
• hotels, motels, inns, hostels and boarding houses
• certain serviced apartments
• camping grounds
• convalescent homes, nursing homes and hospices
• rest homes and retirement villages - from hospital care through to residential care facilities.

A new rule will allow commercial building owners, who don't itemise building fit-out separately from the building at the time of acquisition, to amortise up to 15% of the building's adjusted tax book value at 2% straight-line per year until the building is disposed of.

Residential Fit-outs not depreciable

Residential fit-outs are generally non-depreciable.

 

 

CHANGES TO QUALIFYING COMPANY RULES AND THE INTRODUCTION OF A NEW TAX ENTITY CALLED A LOOK THROUGH COMPANY

All clients who had LAQC Companies (prior to 31 March, 2011) have been sent an in-depth letter of explanation of the changes that have been announced. Please contact McLean and Co. if you are in this category and you did not receive this, as there are significant and important changes to consider.

The changes will take effect from 1 April 2011.

Legislation passed in December 2010 made important changes to the rules for qualifying companies (QCs) and loss attributing qualifying companies (LAQCs). These changes mean that LAQCs will no longer be able to attribute losses to shareholders. The changes will affect all existing QCs and LAQCs, and also closed companies that may have wished to elect to use the qualifying company rules for income years starting on or after 1 April 2011. These changes also include the creation of a new tax entity known as a look-through company (LTC) to provide for a transparent form of tax treatment. This is to ensure that income and expenses are shared according to the owner's effective interest in the LTC.

Changes to the QC and LAQC rules

• The introduction of a new look-through company (LTC) tax entity for closely-held companies.
• Existing QCs and LAQCs will be able to transition into a LTC, or change to another business entity (such as a limited partnership or sole tradership) without a tax cost.
• Existing QCs and LAQCs will be able to continue to use the current QC rules without the ability to attribute losses.

The new Look-Through Company rules

• The new rules create a new tax entity, called a look-through company (LTC).
• The new rules mean that the owners of a LTC will pay tax on the company's profit and use the losses, subject to limitations.
• This is different from the existing LAQC rules because it is the owners of a LTC who will be taxed on the income of the company.
• A LTC's income, expenses, tax credits, rebates, gains and losses are passed on to its owners, in accordance with their effective interest in the company.
• Shareholders of QCs and LAQCs will be able to elect to become an LTC.

A Look-Through Company is still a Company

• A LTC retains its identity as a registered company.
• A LTC will keep its corporate obligations and benefits under general company law, such as limited liability.
• The look-through treatment applies for income tax purposes only; the owners of an LTC are regarded as holding the LTC's assets directly and carrying on the activities of the LTC personally.

Loss limitation for Look-Through Company owners

• The LTC rules also have a loss-limitation rule, similar to that of limited partnerships.
• This will mean that owners can offset tax losses only to the extent that their losses reflect their economic loss.
• Any losses an owner cannot use are carried forward and may be used by the shareholder in later years.

Here's what's happening to current QC and LAQC rules

• The ability for LAQCs to attribute losses has been removed; this effectively means the LAQC rules have been abolished.
• Existing LAQCs will default to QCs which may continue using the current QC rules.
• The current QC rules will remain while the Government reviews the tax rules for dividends, with a view to simplifying them for closely held companies.

Your options if you have an existing QC or LAQC

You have several options to choose from 1 April 2011. For instance, you can, without a tax cost:

• do nothing and continue as a qualifying company (QC) without the ability to attribute losses (the default option), or
• be taxed as an ordinary company by revoking your LAQC election, or
• elect to become a look-through company (LTC), or
• use the new transition rules to become a limited partnership, an ordinary partnership or a sole tradership. You will need to restructure your business and either make the company non-active or wind it up if you choose this option.

The New Rules come into effect on 1 April 2011

• The legislation for these new rules was passed in December 2010 and comes into effect from 1 April 2011.
• The LTC regime will come into effect from 1 April 2011.
• LAQCs will no longer be able to attribute losses from the income year starting on or after 1 April 2011.
• The transition to a new entity can take place in either one of the first two income years starting on or after 1 April 2011
• QCs and LAQCs have six months from the start of their transitional year to advise us of their transition. The tax treatment for the entity they transition into (ie, LTC, partnership, or sole tradership) will then apply from the start of the transitional year.
• Provided the election to become a LTC or notification to become another entity is made within the first six months of the income year, the transition will be deemed to take effect from the start of the income year and will incur no tax cost.

Time to make an Election

Elections must be received by the Commissioner before the start of the income year they apply to. However, for the next two income years (starting from 1 April 2011 to 31 March 2013), existing QCs and LAQCs have a six-month extension period to elect to transition into a LTC, eg by 30 September 2011 if you have a standard balance date and to apply in the 31 March 2012 income year. The LTC (look-through treatment) will apply from the start of the transitional year.