Don't get caught out – potential taxpayer pitfalls

Taxpayers who earn income from various sources may get caught short if they don't plan ahead. This could come about in various ways:

  • Airbnb
  • Overseas investment
  • Shares in an overseas company

Airbnb income

If you rent rooms or homes through Airbnb, you may not realise that the IRD considers you to be a landlord. Your rental income must be included in a tax return.

If you're unsure of your tax obligations please consider seeking professional advice.

Overseas rental property

You must declare any rental income you get from properties overseas. You can claim deductions for rental-related expenses, and you may also be able to claim a credit for tax paid in the other country on that income. Complexities can arise when loans and mortgages are held overseas. Call us if this applies to you.

Overseas trusts

Under New Zealand law, trust matters are settlor-based. This means New Zealand tax treatment of the trust depends on where the settlor of the trust lives. As a trust does not have a legal personality, there is no concept of residency for trusts. However, a trust is recognised as a taxpayer, so New Zealand generally verifies the residency of the trustee to determine what income of the trust is subject to New Zealand tax.

If you own shares in a foreign company

You will have to pay tax in New Zealand on foreign share dividends. Special rules apply if:

  • You are a transitional resident, or
  • The shares are subject to the foreign investment fund or controlled foreign company rules.

Dividends paid by overseas companies to transitional residents or non-New Zealand tax residents are not taxable in New Zealand for the transitional period.

The rules surrounding Foreign Investment Funds and Controlled Foreign Companies are complex and you should get professional advice on the taxation of offshore investments, whether from us or your financial advisor.

Overseas-issued credit/debit card

Having an offshore credit or debit card may or may not trigger New Zealand tax obligations. Note, however, that even if foreign withholding tax has been deducted on foreign income, it does not necessarily mean the income is no longer taxable in New Zealand.

It can be tricky to work out your tax position. Call us if you're unsure.

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Creditors get more protection from indebted businesses

A threshold for reportable tax debt is now in effect, giving creditors greater protection from businesses owing tax debts of more than $150,000.

The IRD is now allowed to disclose to certain credit reporting agencies, information about companies with significant tax debt. An Order in Council set a threshold of $150,000, so a company's tax debt over that amount may be disclosed. This took effect on 29 June.

Disclosure may inform smaller creditors who would otherwise not know they were dealing with a business with a significant tax debt.

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Fairer tax rules affect cashflow

A tax bill passed in May made changes that affect cashflow.

Companies get more choice with RWT

From 2017/2018, companies can choose to not deduct resident withholding tax on a fully imputed dividend paid to a corporate shareholder. A fully imputed dividend has a tax credit passed on because the company's already paid tax.

Another option for some shareholder-employees

Shareholder-employees of close companies (with five or fewer participants) who receive regular salary or wages, and variable amounts of other employment income, now have a third option as to how they pay tax.

They can now split their income so the base salary is subject to PAYE and the variable amount is paid out before tax. Previously they had to choose either one or the other.

A shareholder-employee who decides to either apply provisional tax to all their earnings, or use the new split method, is committed to their choice for three years.

Look Through Company changes

With the loss limitation rule being removed for most Look Through Companies, losses that were previously restricted and carried forward are now freed up from 2017/2018 and available for offsetting against income. However, LTCs that carry on through a partnership or joint venture will still be subject to the loss limitation rule.

The loss limitation rule ensures the losses an owner can claim reflect their economic loss in the LTC. The deductions an owner can use are limited to the contribution the owner has made, or is liable for.

If you would like us to look into how this affects your business please contact us.


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Contractors get more tax choice

The way contractors pay tax changed on 1 April, giving greater choice, and making it easier to get tax right.

The rules around schedular payments have changed to allow this, and are compulsory for all contractors hired by a recruiter - or other labour hire business - and those previously under schedular payment rules.

Other contractors can opt in if their payer agrees to deduct tax on their behalf.

Contractors already under schedular payment rules

Contractors must complete the new tax rate notification form (IR330C) when starting any new job. On this form, they pick their preferred tax deduction rate. New Zealand tax residents can pick any rate from 10 percent to 100 percent.

If you complete the form but don't pick a tax rate, the labour hire business will deduct tax at 20 percent. If you don't complete the IR330C, the no-notification rate of 45 percent will apply.

Self-employed contractors

If you contract directly for any business and do not have to have tax deducted by the hirer, you may choose to have tax deducted from your payments. You and the payer must agree to this approach, and a written record of the agreement should be kept. If you work for several businesses, each must agree to the request.

If a payer doesn't agree, you will continue to pay tax for that work as previously.

Use-of-money interest charges for underpaying provisional tax are also changing. From the 2018 tax year, new rules mean fewer people will have to pay it.

Paying contractors

If your business hires contractors you need to follow the following steps when paying them:

  • Download the new tax rate notification form (IR330C) and get contractors to complete it
  • Add the contractor to your EMS and complete as for any other person receiving schedular payments - ignore additional deductions
  • If you employ contractors directly, you must record the agreement with them to deduct tax
  • If you use payroll software, check it includes the option to choose variable tax rates

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Key tax dates a quick overview

Date Category Description
20 Sept PAYE Small & large employers return & payment
20 Sept RWT Return & payment due for deductions from dividends and deductions of $500 or more from interest paid during August
20 Sept NRWT/ Approved Issuer Levy Return & payment for August
28 Sept GST Return & payment for August

 

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