Interest deduction in an LTC03.5.2014

Question
Our client sold their family home into an LTC. The property is now tenanted by a third party.

Prior to the restructure, the mortgage on the family home was $200k. In order to purchase the property from the client, the LTC borrowed a further $250k from the bank.

Can the LTC get an interest deduction on the full mortgage of $450k or are the deductions limited to the original mortgage of $200k?

Answer
If the LTC has borrowed $450k to purchase the property from your client, an interest deduction would be allowed for the full amount of interest (i.e. on the $450k) provided the property continues to be used as an income-earning asset.

Note that the automatic interest deduction provision that applies to companies does not apply to LTCs, therefore the interest on the bank loan will only be deductible if the general deductibility criteria are satisfied. The IRD’s view is that where borrowed funds are used to acquire an income-earning asset (such as a rental property) and the property continues to be used as an income-earning asset, then that would establish a sufficient connection.

The IRD has specifically confirmed this position – Refer to QB 11/03: Income Tax – look through companies and interest deductibility:

http://www.ird.govt.nz/technical-tax/questions/questions-general/qwba-1103-it-ltc-interest-deductibility.html . In particular, refer to paragraph 23 and Example 2.
Provisional tax and use-of-money-interest

Directors Fees and GST02.24.2014

Question
Our client is a solicitor and practises as a sole trader. He is registered for GST.

Our client has also recently taken up a directorship position for which he receives directors’ fees. Withholding tax is deducted at 33% from the fees.

Should our client be charging GST on the directors’ fees?

Answer
Generally, the occupation of company director is a non-taxable activity. A proviso to s 6(3)(b) of the GST Act states that it is taxable if the position is accepted in the course of the person’s own taxable activity. The IRD considers that the proviso can apply only to a sole trader.

The solicitor is GST registered for his legal practice. We assume he will have accepted the directorship in the course of his taxable activity of providing legal services.

Therefore if your client is engaged as a director as part and parcel of the work he does as a solicitor (sole trader) then the directors’ fees will be subject to GST.

Gift vouchers given to employees as Christmas bonuses11.21.2013

Question
An employer company decides to give gift vouchers of $150 to its employees as a Christmas bonus. Is any FBT payable in relation to these gift vouchers?

Answer
Fringe Benefit Tax (FBT) would usually apply to gift vouchers than cannot be exchanged for cash. Depending on whether the employer provides any other fringe benefits to staff during the year and depending on whether FBT is paid annually or quarterly, the gift vouchers may not be subject to FBT.

The benefit will be an unclassified fringe benefit and will therefore not be subject to FBT if the exemption rules apply, namely, no FBT is payable if:

– The aggregate taxable value of unclassified benefits provided to each employee does not exceed $300 per quarter for employers paying FBT on a quarterly basis (or $1,200 per employee per annum for employers that pay FBT on an annual or income-year basis);

– The total taxable value for the past four quarters of all unclassified benefits provided by an employer to all its employees does not exceed $22,500 for employers paying FBT on a quarterly basis (or $22,500 for all employees per annum for employers that pay FBT on an annual or income-year basis).

Gifts of food or wine to employees09.30.2013

Question
An employer decides to give Christmas gifts of bottles of wine to some employees & Christmas food hampers to others.

How should this expenditure be treated for tax purposes?

Answer
Gifts in the form of entertainment (eg. wine & food) given to employees are subject to fringe benefit tax (FBT) because the employees can enjoy the gift when they choose.

The benefit will be an unclassified fringe benefit and will therefore not be subject to FBT if the exemption rules apply, namely, no FBT is payable if:

– The aggregate taxable value of unclassified benefits provided to each employee does not exceed $300 per quarter for employers paying FBT on a quarterly basis (or $1,200 per employee per annum for employers that pay FBT on an annual or income-year basis);

– The total taxable value for the past four quarters of all unclassified benefits provided by an employer to all its employees does not exceed $22,500 for employers paying FBT on a quarterly basis (or $22,500 for all employees per annum for employers that pay FBT on an annual or income-year basis).