The New Zealand Government launched a gun buy-back and amnesty scheme which includes compensation payments being paid for firearms, parts, magazines and ammunition. This is effective between 20 June and 20 December 2019.
The general tax treatment of compensation payments is provided below.
If you have more questions or want to know specific tax treatment of your compensation payment please contact your tax agent or contact us.
For information around the scheme itself refer to the New Zealand Police website.
Recreational hunters and shooters, hobbyists and other personal use
There are generally no tax consequences for receiving compensation for firearms, parts, magazines or ammunition intended only for personal use.
Any payment received under the scheme is not taxable. Any loss incurred is not tax deductible.
But, if your main purpose or intention when buying was to sell the items for a profit, you may be liable to pay tax on any profit you have made. See the information under Buying and selling - traders and dealers below.
Firearm used as part of a business – farmers, professional hunters and other sports
There are tax obligations you need to meet if you received compensation for firearms bought and used, or planned to use, as a part of a business and claimed the cost as an expense or claimed depreciation.
Revenue expense: If you deducted the cost of the original purchase, you must treat any payment you received as income to the extent of the initial deduction. You are required to return this in the income year in which you receive the compensation payment.
Capital expense: You may have treated firearms as a capital asset and depreciated the original cost. In this case, you'll have either depreciation recovery income or a depreciation loss.
Deduct your payment from the asset’s adjusted tax value (book value). If the resulting amount is a positive amount this is income. If it is a negative amount this is a depreciation loss.
Example
| Purchase cost (GST exclusive) on the depreciation schedule | $5,000 |
| Book value at 1 April 2019 | $2,000 |
| Compensation payment received | $6,000 |
The difference between the compensation payment and the purchase cost is a non-taxable capital gain ($1,000).
The difference between the compensation payment and the adjusted tax value (less the non-taxable capital gain) is depreciation recovered ($3,000). You must return it as income for income tax purposes.
Example
| Purchase cost (GST exclusive) on the depreciation schedule | $5,000 |
| Book value at 1 April 2019 | $2,000 |
| Compensation payment received (GST exclusive) | $1,000 |
The difference between the compensation payment and the book value is a loss on disposal ($1,000). You can claim it as a deduction for income tax purposes.
There are different rules where an asset was only partially used for business purposes or if the asset was in an asset pool.
To find out more about depreciation and what adjustment you need to make when disposing of business assets, refer to Depreciation - a guide for business - IR260.
Depreciation - a guide for businesses - IR260
If you're GST registered and have already claimed an input tax deduction for the original purchase or any subsequent adjustments, then exclude GST from the payment amount before working out your depreciation income or loss.
GST: If the business is registered for GST then any payment is considered payment for a taxable supply. You must include it in the return for the period in which you receive the compensation payment.
No payment: Firearms may have been handed in and destroyed and no payment was received. In these cases, treat the payment as zero and use the treatment described in the relevant situation(s) above.
Buying and selling - traders and dealers
Whether a payment received under the scheme is taxable depends on several factors and we advise you seek independent tax advice for your situation.
Some factors to consider when determining if you are a dealer or trader include:
- nature of your activities
- period engaged in these activities
- the scope of the operation
- the volume of transactions undertaken
- commitment of time, money and effort
- pattern of activity, and
- financial results achieved by the activity.
It is likely the payment is taxable income if the firearms, parts, magazines or ammunition were acquired:
- as part of a trading business
- with the intention of reselling at a profit
- as part of a scheme or undertaking to make a profit.
If the gun was purchased with more than one purpose, the main purpose or intention at the time of the original purchase applies.
You may be required to provide evidence to support your position so ensure you retain adequate records.
Investor
Whether any payment received under the scheme is taxable depends on the main purpose or intention for the items at the time of their original purchase.
A brief overview is included above in Buying and selling - traders and dealers.