Agents Answers - 2010

Agents Answers Issue 122 March 2010

• Reminders
• 2010 annual returns
• Calculations for new secondary rates
• Changes to RWT rates and thresholds
• No paper IR345 for online payers
• Trusts and timing of income allocation
• Public rulings on deductibility of break fees
• Attribution rule and company intermediaries
• Non-standard balance dates for horse breeders
• Return filing and refunds for unit trusts
• Eligible relocation expenses - how to claim tax credits
• Reducing paper statements and notices we send

Reminders

31 March

Final date for "ratio option" provisional tax applications: If you want to use the ratio option to calculate 2011 provisional tax you must apply to us by the end of March if you're working with a 31 March balance date.

Student loan repayment: If you have clients with a student loan who are based overseas and not on a repayment holiday their repayment is due.

LAQC status applications: For companies wanting this status for the 2010 tax year. (Applications received after 31 March - LAQC status will apply for the following tax year.)

1 April

New PAYE tax rates take effect: Please remind your employer clients and your own payroll staff to make sure they're using the rates for 2011.

2010 annual returns

With the end of the 2010 tax year just days away we're being asked those age-old questions; "when will you be sending out tax returns?", "when will my summary of earnings come out?" and "what about my Working for Families change of circumstances letter?"

To help you plan for this busy period we've put together a list of when we'll be sending annual returns and supporting notices.

Return type	Date
Companies income tax return (IR4)	End of March
Estate or trust income tax return (IR6)	End of March
Partnerships income tax return (IR7)	End of March
Māori authorities income tax return (IR8)	End of March
Clubs or societies income tax return (IR9)	End of March
Registered superannuation funds income tax return (IR44)	End of March
Resident withholding tax on interest reconciliation statement (IR15S)	End of March
Non-resident withholding tax on interest, dividends and royalties reconciliation statement (IR67S)	End of March
Working for Families change of circumstances letter	Mid-May
Summary of earnings (IR544)1	Mid-May
Individual tax return (IR3)	End of May
Individual tax return for use by tax agents (IR3A)	Early May
Non-resident individual taxpayers income tax return (IR3NR)	End of April
Tax credit claim form (IR526)	Mid-April
Personal tax summary (IR537) and (IR538)	End of July

¹ Summary of earnings available through E-File mid-May.

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Calculations for new secondary tax rate

There's a new, low, secondary tax code (SB) for individuals who want to use the 12.5% rate for their secondary income. The new tax code can be used by individuals who expect their total income from all sources to be less than $14,000 for the year. A new formula will apply to employees who select this code.

Our online PAYE/KiwiSaver calculators will be updated from 1 April to include the new SB tax code. To calculate PAYE, use our PAYE/KiwiSaver calculator - go to "Work it out".

From 1 April 2010 we'll be updating our online 2011 PAYE tables:

• Weekly and fortnightly PAYE tables (IR340)
• Four-weekly and monthly PAYE tables (IR341).

We'll also be updating the Tax code declaration (IR330) form in March with the new secondary tax code SB.

If your clients use payroll software these changes should be incorporated into their payroll package for pay periods ending on or after 1 April 2010.

To find out more go to new secondary tax rates.

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Changes to RWT rates and thresholds

From 1 April 2010, RWT rates on interest will be aligned with recent changes to personal tax rates and the company tax rate.

Inland Revenue as a payer of RWT for income equalisation schemes and environmental restoration accounts will be amending applicable RWT rates from 1 April.

These changes may have implications for your clients if they're paying RWT or receiving interest.

To find out more information go to RWT rate changes.

We'll be updating the RWT section of our website with more information in mid-March.

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No paper IR345 for online payers

If you or your clients file an EMS (IR348) and make PAYE payments online, you'll no longer receive a paper IR345 in the mail. The EDF/IR345 can be completed online after the EMS has been sent. It will be pre-populated and quick to complete.

Go to "Secure online services" "Demonstrations" which shows you how to file online and will help you get started.

If you need further help our customer service specialists can talk you through the process. Please call us on 0800 377 772.

In the meantime, if you file an EMS online but still make payments by cheque, you'll continue to receive a paper IR345.

Please tell your clients about this change.

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Trusts and timing of income allocation

Section HC6(1) of the Income Tax Act 2007 has been amended to allow beneficiaries' income allocation to be made in the later of the following periods:

• six months after balance date, or
• the earlier of:
  • the date on which the trustee files the return of income for the income year, or
  • the date by which the trustee must file a return for the income year under section 37.

This amendment applies to income derived in the 2009-10 income year and subsequent years.

If the trust has a tax agent, the extension of time for filing income tax returns still applies.

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Public rulings on deductibility of break fees

Two recent public rulings consider whether a break fee paid by a landlord to a lender to exit early from, or vary the interest rate of, a fixed interest rate loan is deductible:

• BR Pub 09/09: Deductibility of break fee paid by a landlord to exit early from a fixed interest rate loan
• BR Pub 09/10: Deductibility of break fee paid by a landlord to vary the interest rate of an existing fixed interest rate loan.

Read the public rulings on our website.

Early exit break fee

Where a break fee is paid to terminate a loan before its agreed repayment date, a base price adjustment is required. The negative base price adjustment amount is interest and therefore automatically deductible by companies and deductible by other taxpayers if the general permission is satisfied. Where the money was borrowed to purchase a property from which rental income is derived, the general permission will be satisfied.

Loan variation break fee

Where a break fee is paid for a variation of a loan to adjust the interest rate, no base price adjustment is required. For taxpayers using a spreading method, the deduction of the break fee will be spread over the remaining term of the loan. Cash basis persons will be able to deduct the amount of the break fee under the general permission when it is incurred, provided the money was borrowed to purchase a property from which rental income is derived.

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Attribution rule and company intermediaries

The attribution rule is an anti-avoidance rule to prevent employees using an intermediary (usually a company or a trust) to avoid paying income tax at the top individual marginal rate. When the rule applies, the income of the intermediary is attributed to the individual who provided the services.

The Income Tax Act 2007 allows certain companies that aren't qualifying companies (QCs) to use the QC fully imputed/exempt qualifying company income distribution mechanism. This was to prevent double taxation that could arise with the attribution rule when the new 30% company tax rate was introduced.

Where attribution occurs, deemed imputation credits arise, by way of notional credits. Companies that choose to use the QC dividend methodology cancel notional credits immediately before they're deemed to be attached to the dividend.

The cancellation of the notional imputation credit will be recorded in the Annual imputation return (IR4J) by showing a debit entry.

The amendment applies from the 2008-09 and later income years.

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Non-standard balance dates for horse breeders

Horse breeders who want to use a balance date other than 31 March, or the industry-approved non-standard balance date of 31 July, must obtain approval and explain why they can't use the standard dates.

Although a non-standard balance date of 31 August has been approved in some instances, it should only be approved in exceptional circumstances. At issue is that approval of alternative balance dates may allow the taxpayer to take advantage of a tax incentive or concession.

The Commissioner's policy for non-standard balance dates is set out in SPS 08/04: Elections to change a balance date. Paragraph 29 of the SPS says the Commissioner recognises a number of industry specific, non-standard balance dates. Horse breeders have an approved industry balance date of 31 July.

Despite having an industry balance date, taxpayers may still seek to have another date approved, where the industry date doesn't suit their particular circumstances. Taxpayers wanting a non-standard balance date other than the industry agreed date (or 31 March) need to make a full application. The application needs to specifically set out why the industry agreed date or 31 March aren't appropriate to their particular circumstances. In other words, state what is different about their operation to others in that industry.

Any approval of an alternative date must strictly adhere to the criteria set out in the SPS. Approval won't be given where the change is made for reasons of tax deferral, or to take advantage of any tax incentive or concession.

SPS 08/04 was published in Tax Information Bulletin Vol 20, No 11 (February 2009).

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Return filing and refunds for unit trusts

If you have unit trust clients and need to request a refund or file an end-of-year return for them, don't forget they're treated as companies for tax purposes.

This means they don't file an Estates or trusts income tax return (IR6) but need to file a Companies income tax return (IR4). An Annual imputation return (IR4J) also needs to be completed and sent with the IR4. Once the IR4J is filed, we can process any refund owing.

If you've filed an IR6 for one of your clients in error you'll need to re-file an IR4 and IR4J. This is one reason why you may receive a reminder to file a tax return when you think you've already done so.

Also, to cease a unit trust we need a final set of accounts showing that the distributions, assets and income have been handed back to the unit holders.

All enquiries on unit trusts can be made to Large Enterprises on 0800 443 773 or 64 4 978 0644 for overseas or mobile calls.

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Eligible relocation expenses - how to claim tax credits

Determination DET 09/04: Eligible relocation expenses issued on 28 October 2009 applies to relocation expenses incurred in the 2002-2003 and subsequent tax years. A list of the eligible relocation expenses is attached as a schedule to the determination.

This list sets out the types of expenditure that may be treated as exempt income when an employee is reimbursed, or the expenditure is paid on an employee's behalf, when the employee (including their immediate family) relocates for employment purposes.

As well as being a listed eligible relocation expense, the other criteria under section CW 17B of the Income Tax Act 2007 (or section CW 13B of the Income Tax Act 2004, or section CB 12(1B) of the Income Tax Act 1994, as applicable) must also be met for these expenses to be exempt income.

As the legislative changes have been backdated, some employers and employees could be entitled to tax credits for PAYE and/or FBT paid on relocation expenses for 2002-2003 and later income years.

Where FBT has been claimed as a business expense for income tax purposes in the last four years, an adjustment may be required in the corresponding income tax return.

If you're making a claim for tax credits, you should include the following information:

• written notification of the tax type, the return period and the amount of the adjustment requested
• a detailed breakdown of the type of relocation expense(s) and the amount for each of the requested adjustments
• Employer monthly schedule amendments (IR344) completed for the return period(s) subject to the claim (this is not required for FBT adjustments). If your adjustments cover more than 6–10 staff per period and/or multiple periods from the 2002-2003 tax year, you may email a spreadsheet to Vicki.Kennedy@ird.govt.nz in the same format as the IR344, rather than having to send the IR344 for each period
• advice in writing of the amount of FBT expenditure claimed in the income tax returns in the last four years.

Because an incorrect summary of earnings or personal tax statement may have been issued, employers should inform the employee that their income details have been changed.

If you're entitled to make a claim for tax credits please forward the above information to:

• Attention: Vicki Kennedy
  Team Leader Large Enterprises
  Inland Revenue
  PO Box 2198
  Wellington 6140

The determination was published in Tax Information Bulletin Vol 21, No 9 (December 2009) and legislation commentary in Tax Information Bulletin Part II, Vol 21, No 8 (October/November 2009) in relation to the related legislative changes.

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Reducing paper statements and notices we send

In early December 2009 we introduced an initiative to reduce the mail you receive from us so, we suppressed the paper based return acknowledgements. However as the result of feedback and discussion from NZICA, we resumed these in late December 2009.

As we're keen to reduce paper communications to you we're developing an electronic return acknowledgement. The suppression of paper-based return acknowledgements is planed to be reintroduced in June 2010. The electronic forms will be available through approved E-File software packages.

Another initiative was to change from open to bank style statements. This was to reduce the number of pages per statement. You get all the information you received before but in a new, easy to understand and read format.

From your feedback, some of you still prefer the open style statement and this can still be requested. However this will default back to bank style for your next statement.

Please use our online service if you require further information. Go to "Get it done online" "Look at Account Information service" . This is a quick and easy way to check account details.

We appreciate your feedback and thoughts. If you have any further suggestions for improvement to our online services, please contact your agent account manager.

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Date published: 24 Feb 2010

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