Another avenue the IRD may pursue to determine whether there is any taxable gain is where the taxpayer (or someone associated to taxpayer) is engaged in the business of dealing in land. The Courts have found that ‘dealing’ refers to buying and selling or exchanging land. This would mean the act of buying and selling without altering the land in any material way.

Whether a taxpayer is in the ‘business’ of dealing in land is dependent on a number of factors to see whether the transactions amount to a business activity and there is the necessary intention to make a profit.

The factors to consider include:

  • Whether there is a series of repetitive transactions in respect of blocks of land;
  • The timeframe and period over which the transactions occur;
  • Commitment of time, money and effort;
  • The scale of the operations and whether the activity is organised in a commercial manner;
  • The financial results that are achieved.

The business of dealing in land must have been carried on by the taxpayer (or associate) at the time the taxpayer acquired the land for the gain to be taxable.

If the taxpayer lives on the property will any profit still be taxable under these provisions? There is an exemption that may apply where the taxpayer or any member of their family lives at the property. However, the exemption will not be available if a regular pattern of buying, living and selling in the properties concerned has occurred. Therefore, care needs to be taken if there is a possibility of a pattern emerging when buying and selling property.

Salary Sacrifice

Given recent debate about savings for retirement in the workplace, it may be a good time to consider benefits obtained by “salary sacrifice”. There are advantages to careful planning of salary arrangements to allow contributions on behalf of employees that can be applied to a number of benefits such as employee share plans, entitlements, plans or superannuation schemes. Salary sacrifice refers to the concept that an employer and employee agree that a reduction in salary is taken in return for the employer making a contribution on behalf of the employee; commonly to a superannuation fund. In other words, by sacrificing part of their wage or salary so that it is not available as cash, the employee is building up a savings investment for retirement. The agreement with the employee to sacrifice part of their pre-tax salary needs to be made prior to the employee earning the salary.

Benefits from salary sacrifice provide added incentives for individuals to save for their retirement. Since the recent increase in taxes many employers have sought advice on the use of salary sacrifice for employees in higher income brackets. The key to reviewing benefits of salary sacrifice is that pre-tax income is being used.

Superannuation contributions by way of "salary sacrifice" are taxed under the Superannuation Scheme Contribution Withholding Tax (SSCWT) provisions, which currently can apply variable tax rates in individual circumstances. An employer can now elect to deduct SSCWT at the employee’s marginal tax rate. The tax rate may be as low as 15% depending on the salary paid. The rate of SSCWT that will apply is determined according to the salary paid to the employee in the previous year. The salary ‘sacrifice’ is not counted as part of the salary derived by the employee. As the salary will be lower once it has been ‘sacrificed’, the savings will come through the year after the agreement is entered into. To ensure no FBT is payable, the salary sacrifice contributions must go into a registered superannuation scheme.

Aside from the tax advantages, there are two critical economic issues to consider here. Firstly, the employee’s cashflow position. Can they afford the salary sacrifice or do they need that money for their day to day living? How long is it before they will want to access the funds invested? If withdrawals are required before retirement a 5% Fund Withdrawal Tax will apply unless one of the limited exemptions are available. The second issue is how the risk and return of the particular superannuation scheme compares with other investments the employee could make with those funds.

Changes To Depreciation Rules

A Depreciation Issues Paper released in July 2004 proposed changes to the depreciation regime including the depreciation of patents, special tax depreciation rules, plant variety rights and losses on disposal or destruction of buildings. These changes have been included in the Taxation Bill released on 16 th November 2004. The depreciation proposals included in the Bill are:

  • Deductions for losses on destruction of buildings if the destruction is due to events that are beyond the taxpayer’s     control, for example, as a result of a natural disaster. Currently no deduction claim can be made.

  • Plant variety rights (granted under the Plant Variety Rights Act 1987) and the right to use them will be included as     depreciable intangible property. The rights granted generally relate to new varieties of cultivated plants. As a result of     this change, any amounts that are received on the grant of plant variety rights will constitute a taxable royalty.

  • Currently, depreciation on patents is allowed from the date a patent is granted; however, legal protection applies from     the date when an application is lodged. The Bill introduces a new provision, which allows depreciation to be claimed     from the date the patent is given legal effect (when the completed application is lodged). Depreciation will be deductible     from the date of application to the date the patent is granted, in the income year in which the patent is first used or     available for  use in earning income.

  • Amendments to the special tax depreciation rate rules to allow the IRD more flexibility in determining a special tax     depreciation rate when requested by a taxpayer. The bill also proposes to extend the special tax depreciation rules to     fixed-life intangible property if the taxpayer believes that the economic life of the asset will be significantly less than the     legal life of the asset.

Office News

In January we farewelled Rachel Sciascia from our office after 5 years of being our Receptionist. We wish her well in her new career. We welcome Cindy Stout to our team who has taken on the role of Director of First Impressions.

We have recently discussed with UDC Finance Limited lending facilities for our Clients to enable borrowings for plant & equipment. Rates are very competitive. Please contact us if you are in need of finance for your future plant purchases.

Sharebroking
Forsyth Barr Limited, have increased their minimum brokerage from $40.00 to $60.00 on all trades. This increase is bought about by increased overhead costs such as computerisation and compliances and is still very competitive.
Have you completed your Client Agreement Forms yet?? If you haven’t please do so and if you have any queries please call into the office and Natalie will help you. This is a compulsory requirement by the NZX.

Have you completed your Client Agreement Forms yet?? If you haven’t please do so and if you have any queries please call into the office and Natalie will help you. This is a compulsory requirement by the NZX.

Upcoming Issues
Forysth Barr Limited are hoping to have a possible Bond Equity issue in May/June of this year and which we will have more information closer to this time.

Did you know you can enter the sharemarket for as little as $1000.00? If you would like to know more contact us.

Secured Debenture Stock
We have some outstanding long term Secured Debenture Stock rates at the moment. Please contact the office for up to date interest rates.

Little Snippets

Prison Sentence for Tax Evasion
The Tauranga District Court recently imposed a 21 month prison sentence on a taxpayer who pleaded guilty to two charges of tax evasion. The taxpayer was in the fruit picking industry and had not accounted for approximately $158,584 of GST, PAYE and income taxes. The prison sentence followed an increased focus by the IRD on tax evasion in the fruit picking and contracting industries. The IRD has focused on the Bay of Plenty, Hawkes Bay, Waikato, Otago and Marlborough areas and have indicated that currently there are approximately 60 investigations underway in these areas. The sentence sends a clear warning that the Courts see tax evasion as a serious crime.

Beware of Pre-Incorporation Contracts
Agreements entered into to bind a company in contemplation of its pending incorporation are usually referred to as pre-incorporation contracts. Pre-incorporation contracts are commonly entered into on behalf of the company, to ensure the company has legal rights to take over business undertakings once incorporation is completed. Therefore, if there is no incorporation contemplated when the agreement is entered into, it will not be a pre‑incorporation contract. The High Court recently held that a sale and purchase agreement was not a pre‑incorporation contract because at the time the agreement was entered into there was no ‘specific or ascertainable’ company in mind, and the agreement was entered into on behalf of a company or trust yet to be formed. As there was no specific company in mind, the agreement could not have been entered into in contemplation of its incorporation. Pre-incorporation contracts are quite often ratified after the company is formed, to confirm that the new company intends to adopt and perform the pre-incorporation contract .

Pre-emptive Rights and Trustee Changes
In the previous newsletter, the case Calan Healthcare Properties Limited was mentioned in relation to a change of trustees. The Court, in that case, held that a change in trustees triggered other shareholders’ pre-emptive rights, which was a bizarre outcome, as there was only a change in legal ownership, not beneficial ownership. The case was appealed and since our last newsletter, the Court of Appeal has overturned the decision. The result is that the pre-emption rights are triggered only where there is a change in both legal and beneficial ownership. Changing trustees, which only entails change in legal ownership is not sufficient to trigger pre-emptive rights.