Audio and visual transcript
Kia ora everyone and welcome to this webinar. My name is Rata Kamau and I'm an Account Manager at Inland Revenue.
There are a number of changes which are proposed to come into effect on or before the 1st of April 2023. Today I'll be taking you through the changes for:
- Ngā Rawa - Property
- Ngā rōpū kaitiaki me ngā rawa tuku iho - Trusts and Estates
- Te tāke moni whiwhi mō ngā tāngata takitahi - income tax for individuals and
- Ētahi atu mōhiohio whaitake - other useful information.
The information in this presentation is current as of 16 March 2023.
Last year, the Government introduced the Taxation (Annual Rates for 2022-23, Platform Economy and Remedial Matters) Bill and this introduced a number of proposed changes and clarification for property rules, including:
- build-to-rent exclusion for interest limitation
- extinguishing losses carried forward
- rollover relief clarifications and
- changes to the 2023 income tax returns.
I'll only be covering the rollover relief clarifications and changes to the 2023 income tax returns. If you'd like to hear more about the build-to-rent exclusions or extinguishing losses carried forward, I recommend you watch our webinar on the property and trust changes.
Remedial amendments are proposed to clarify rollover relief for the bright-line property rule and interest limitation rules for:
- Māori authorities
- Te Tiriti o Waitangi settlements
- look-through companies (LTC)
- partnerships and
- transfers within companies.
The extent of relief under the bright-line property rule generally depends on the amount of consideration paid for the transfer to determine if full or partial relief is provided within the relevant bright-line period.
The Bill also includes clarifications and amendments to ensure various rules work as intended for the bright-line property rule. These include the rules for inherited property and co-ownership.
We have made an update to the residential income key point in the 2023 income tax returns.
The 'Total residential income' key point, that was included in 2022 returns, has been separated into the following 3 key points for 2023:
- Gross residential rental income.
- Net bright-line profit (excluding losses).
- Other residential income.
This impacts all income tax returns for all entity types.
Further changes will be made to 2024 returns to make it easier for you to repost property information.
There are a number of proposed changes from trusts. These can be split into 2 topics:
- foreign trusts and
- non-active trusts.
We'll start by looking at the changes for foreign trusts.
The Taxation (Annual Rates for 2022-23, Platform Economy, and Remedial Matters) Bill (No 2) proposes a number of remedial changes for foreign trusts. The changes include a mixture of amendments to rules and clarifications which are intended to remove uncertainty and make it easier for foreign trusts to comply.
To be a non-active trust, a trust must meet certain criteria.
It must be a complying trust, in short that means it has met its tax obligations over its lifetime.
It has to have made a declaration, either via myIR or the IR633, that it meets the non-active criteria.
The general criteria is also that the trust has no income and no expenses and has done nothing with its assets that results in income to any other person.
When considering the criteria we can ignore a few things, such as:
- bank interest of less than $200
- reasonable professional fees
- bank fees and admin charges of less than $200
- any occupancy costs associated with a beneficiary occupying a trust property, the current wording specifically mentions insurances rates, and 'other' expenditure.
When we introduced the new trust disclosure rules last year, we made sure they excluded any non-active trust, because those trusts don’t actually file returns.
During our consultation on the trust disclosure rules, we received a lot of feedback about the non-active criteria.
It highlighted that the costs of complying with the disclosure rules far outweighed the income that many small trusts are earning, so they effectively incur a loss because they have to file a return.
The feedback also advised that:
- allowing only bank interest was too restrictive and doesn't factor in things like energy company dividends that the trust might derive if it owns a property occupied by a beneficiary
- the $200 threshold was too low and
- the rules for giving rise to a third party were too restrictive, as in many situations a trust that does not derive any income but holds property might incur maintenance costs that give rise to a third party.
To resolve the range of issues raised, we have introduced two new criteria, the first, criteria A, is very similar to the existing rules.
The trust still needs to have met its tax obligations and made a declaration.
But we’ve broadened the types of income that can be earned from just bank interest to ‘reportable income’.
We have also increased the amount of income a trust can earn to $1,000. It’s important that this income is taxed correctly at source, otherwise the trust will no longer meet the requirement to be a complying trust.
We have increased the expenditure threshold to $1,500.
We have also changed the wording around transactions with other parties to only include associated persons.
We will continue to ignore any costs associated with a beneficiary occupying a trust property, and that extends to ignoring any deemed income that arises if the beneficiary pays those costs. The wording in the legislation has been slightly tweaked to clarify that occupancy costs include interest.
We have also introduced a new set of criteria specifically for testamentary trusts that don’t meet the criteria for category A.
A testamentary trust is a trust that is created by the terms of a Will that states, or implies, that the trustees must hold some assets in trust for beneficiaries. For example, this may occur where there are underage children nominated as beneficiaries and the assets must be held in a trust until they turn 18.
Testamentary trusts can earn reportable income up to $5,000 and any other income up to $1,000, as long as they have deductions that would reduce the income to below $200.
There are no other requirements for these trusts, so they can have any level of expenses, and they can still allocate income to beneficiaries. Beneficiaries of non-active testamentary trusts still have an obligation to include the income in their personal tax returns.
These changes are proposed to come into effect on the 1st of April 2023, but they are being retrospectively applied to the 2021/22 income year to align with the trust disclosure rules.
Because they don’t come into effect until the 1st of April 2023, if you make a non-active declaration for the 2022 income year before the 1st of April, you still need to meet the lower threshold criteria. You can’t make declarations under the new criteria until the law passes.
This means there is a timing issue because the 2022 income tax returns are due at the end of March, so it doesn’t allow you any time to make the declaration before the return becomes overdue.
We have designed a transitional process for tax intermediaries. This process will allow tax intermediaries to provide us with a list of their clients who will be able to be non-active under the new criteria.
You can find the transitional process on our website - search for ‘reduced disclosure requirements for small trusts’.
Note: the criteria for non-active companies has not changed, the income threshold for companies is still only $50.
Now we’ll look at a change that relates to estates.
Income received after a person's death is generally considered income of the trustee of the person’s estate. This requires the estate of the deceased person to register for an IRD number and file a separate tax return for the estate.
For some, this requirement can seem excessive, particularly in situations where the amount received was reportable income, such as superannuation, wages, interest etc, and the income has already been fully taxed at source.
From the 1st of April, an Executor will be able to choose if reportable income received within 28 days of a person’s date of death is included in the individual’s income tax return to date of death or, as currently, in an estate income tax return.
It’s important to mention, that there may be social policy implications depending on what return the income is included in.
In addition to the new key points for property, there are a number of changes being made to individual income tax returns.
From the 2023 tax year onwards, individual income tax returns will capture more information regarding foreign sourced income and foreign tax residency. This information will be required across all channels.
For IR3 filers, there will be a new IR1261 Overseas Income Summary attachment. This will need to be filed with Individual income tax returns that include overseas income and/or tax paid.
The IR1261 will include a repeated table to capture the following information for multiple income types and jurisdictions:
- Income type.
- Gross amount.
- Tax credit (which is the lesser amount of the tax paid or the tax credit claimable based on the total taxable income).
If your income profile includes overseas income, or you select that you received overseas income, then the overseas income summary will automatically be included as part of your return when filing through myIR.
Unlike with other attachments like the IR3R for rental income, you will not need to select to include the IR1261.
When you reach the overseas income section of the return, you will need to click ‘Add record’.
You will then be able to add the overseas income details. There are drop down boxes for the income type and jurisdiction fields.
You will need to add a record for each income type.
The ‘Allowable overseas tax credit’ field displayed auto calculates based on the values you enter in the ‘Gross amount’ and ‘Tax credit’ boxes and the total income.
If you add multiple records of overseas income, the ‘Allowable overseas tax credit’ value may recalculate if there is an increase in the total income. For this reason, the overseas income section will be displayed last on the IR3 return in myIR, rather than in the order on the paper IR3 return.
In this example $900 has been entered as the tax credit for the Australian Foreign employment/Service income.
Based on the total income of $70,000, the system has calculated that their allowable overseas tax credit for this income is $600.86.
As a result, a warning is displayed to advise that the 'Tax credit is greater than the allowable overseas tax credit. You can attach documents to support this at the end of the return.'
If you believe the amount entered, in this case $900, is accurate you can submit the return with supporting information.
If you are completing paper IR1261s you will need to attach the completed form to the individual income tax return.
This is what the paper IR1261 form will look like. There is space for five income types on the paper form.
If you require more forms, you will be able to download and print them from our website, or order forms through our normal stationary channels.
IR3 filers who have overseas income active in their income profile and who do not have a myIR account, will be issued the IR1261 paper form in their IR3 tax pack.
We are also updating the income tax return for non-resident individual taxpayers, the IR3NR, to capture foreign tax residency details, including jurisdiction of tax residency, as well as foreign tax identification number.
As we approach the 31st of March, we are looking at how we can improve our customers experience when it comes to end of year assessments and filing individual income tax returns.
As part of this, we’ve updated the wording on the alert that IR3 customers will receive. Individuals who receive these alerts will still receive an alert in April to let them know that they’re required to file an individual income tax return. But, the alert will suggest that they wait until June to file their return if they receive any reportable income, for example:
- salary and wages
- dividends or
- portfolio investment entity income, such as Kiwisaver.
This is to increase the likelihood of us having all of these income details when they complete the return.
I’ll now take you through the assortment of other proposed changes, starting with the changes to rates and thresholds.
From the 1st of April 2023, the following rates and thresholds are expected to increase.
The student loan repayment threshold will increase from $21,268 to $22,828.
The family tax credit entitlement rate will increase from $6,642 per year to $7,121 per year for the eldest child, and from $5,412 to $5,802 per year for any subsequent children.
The best start tax credit entitlement rate will increase from up to $3,388 per year to up to $3,632 per year – an increase of up to $4 per week.
The minimum family tax credit threshold will increase from $32,864 (after tax) to $34,216 (after tax), and the ACC earners' levy will increase from 1.46% to 1.53%.
A fringe benefit tax exemption will be introduced for certain public transport fares, such as bus, train, ferry and cable car, when these are subsidised by an employer for the main purpose of their employee travelling between home and work.
The proposed amendments would have effect for fringe benefits provided on and after the 1st of April 2023.
A 4-year time bar will apply for student loans. As with other time bars, this will prevent the Commissioner of Inland Revenue from amending assessments including salary or wages deductions for student loans after 4 years. Exceptions may apply for fraud or if it would have a significant adverse event on a borrower.
The aim of the change is to provide increased certainty for a borrower.
Owners and admins of non-individual entities (i.e. directors or executive office holders) will be able to manage the entity’s myIR logons using their personal myIR logon.
This means they will not be required to log in to the entity’s myIR account to manage account access or change the level of access a logon has. Instead, they can navigate to ‘Manage third party access’ following the below.
- Log in using personal myIR logon.
- Go to 'Manga my profile'.
- Select 'I want to...'.
- Select 'Manage third party access'.
- Select the logon you want to manage.
However, they will not be able to create new logons using their personal myIR logon, they will still need to log in to the entity’s myIR account to create a new logon.
Various rules are also being clarified or amended to ensure they work as intended. This includes the following changes for provisional tax.
Provisional tax customers, who have elected to use the standard option, will not be able to calculate their second provisional tax instalment using their residential income tax from two years ago plus 10% if their preceding year's return is filed on or before the second instalments due date.
Adding to this, there is a further related clarification, if a provisional tax instalment due date falls on a weekend or public holiday, payments received or returns filed on the next working day will be deemed to be received on time.
That brings us to the end of our presentation. If you want to find out more about the upcoming changes, go to ird.govt.nz/aprilchanges
Thank you again for joining us, ngā mihi.