The 2013 Budget continued the recent pattern of making small changes to New Zealand’s tax framework, which implies the Government is broadly happy with how it is operating. The changes that were announced are intended to strengthen the tax base and support the business environment. A brief overview of the proposed changes is provided below.
Tax refunds for R & D intensive start-up firms
Typically, if a company incurs a loss it is carried forward and offset against income in a future year. The Government has commenced consultation on allowing R&D intensive start-up companies to cash-up losses, rather than carrying them forward. For example, a company could cash up a $100,000 tax loss and receive a $28,000 tax refund. The initiative is intended to assist with cash flow, encourage investment and promote growth in R&D.
Thin capitalisation rules
The thin capitalization rules limit interest deductions for certain entities (such as foreign-owned companies) if their debt burden is above certain thresholds. This inhibits the extraction of profits from New Zealand in the form of interest payments; with the advantage being that interest is subject to a lower tax charge than the standard 28% corporate rate.
The current rules have a gap as they do not apply to groups of foreign investors ‘acting together’. This gap is to be filled through updated legislation to be enacted from the 2015/2016 year.
Land acquisition
If a taxpayer acquires land with the intention or purpose of disposal, then any profit made from the disposal is taxable. There has, however, been uncertainty regarding when land is acquired and therefore when a person’s ‘intention’ or ‘purpose’ is determined. At this stage, the IRD has proposed that the acquisition date should be either (A) when an agreement is entered into; or (B) when an agreement becomes unconditional.
“Blackhole” expenditure
Expenditure that is capital in nature and does not result in a depreciable asset is typically referred to as “black hole” expenditure because no tax deduction arises and it effectively drops into a black hole. To address this, the following types of black hole expenditure are to be specifically deemed deductible:
- deductions for legal and administrative costs in applying for patents
- certain fixed-life resource consents will be depreciable
- costs of abandoned resource consents that haven’t been lodged
- the cost of paying dividends (but not dividends themselves)
- stock exchange listing fees
- the costs of annual general meetings (but not special general meetings)
Student loans
Due to the poor repayment habits of student loan
borrowers residing overseas, several measures are to be introduced to not only increase repayments but provide the Government with ‘teeth’ when dealing with overseas defaulters. The changes include:
- An information matching arrangement between the IRD and the Department of Internal Affairs to gain access to an individual’s passport contact details.
- A fixed repayment obligation threshold will be introduced requiring overseas-based borrowers with higher loan balances to make higher loan repayments.
- To knowingly default on your student loan while based overseas will become a criminal offense. The IRD will have the power to request an arrest warrant, preventing non-compliant borrowers from leaving New Zealand.
A stable legislated environment is a positive place to be, as it allows business owners to focus on their core business and not get distracted by compliance changes.
All information in this newsletter is to the best of the authors’ knowledge true and accurate. No liability is assumed by the authors, or publishers, for any losses suffered by any person relying directly or indirectly upon this newsletter. It is recommended that clients should consult a senior representative of the firm before acting upon this information.
