Tax Bites #14

About the Author:

MURRAY McCLENNAN

Director at Tax Central
A chartered accountant and a member of the International Fiscal Association and the Society of Trust and Estate Practitioners, Murray has over 30 years experience in tax.

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Inland Revenue Audit Focus - update

Inland Revenue have established specialist teams at various District Offices to review non-compliance for income tax, and possibly GST, by providers of Airbnb and other short-term accommodation. It is relatively easy for Inland Revenue to establish that income from short- term accommodation has been earned.

When is income derived?

There can be confusion or debate over when certain types of income are derived. The following discussion addresses some of the more common income types where establishing derivation can be an issue.

Lump sum royalties or advances derived by authors

Section EI 3 applies to payments of an income nature derived by a taxpayer who is the author of a literary, dramatic, musical or artistic work where copyright is assigned, whether wholly or partially, AND the author was engaged in the making of the work for more than one year.

Income may be spread between the income year of receipt and the previous income year if the author spent up to two years producing the work. If the author spent more than two years producing the work, income may be spread over the income year of receipt and the two previous income years.

Written request must be made to Inland Revenue to spread the income.

Forestry income

Forestry income derived from the disposal of timber, the right to take timber, or standing timber incorporated in a sale of land. In such cases the taxpayer may be allowed to allocate the income over the current income year and any of the previous three income years. Written application must be made to Inland Revenue requesting the spread of income. This must be made within 12 months of the end of the year of disposal.

Similarly, the allocation of the cost of the timber sold may be spread. The spreading provisions do not require the income and expenses to be allocated on any sort of proportionate basis over the years in question. Accordingly, income and associated expenses taken together can be allocated unevenly over the four-year period. This does provide the opportunity for some tax planning. 

Business interruption insurance pay-out

Where a person receives an insurance pay-out, indemnity payment or compensation for an interruption or impairment of business activities section CG 5B applies. The pay-out, indemnity payment or compensation is treated as income to the extent that it relates to income that the taxpayer would otherwise have derived if the event giving rise to the claim had not occurred.

Income arising is allocated to the later of:

• The income year to which the replaced income relates, and

• The earlier of the income year in which the amount is received and the income year in which the amount is reasonably able to be estimated.

In practice this can result to all the income being taxable in the year of receipt if the income cannot be reasonably estimated until that income year.

Murray McClennan

Director

Tax Central Ltd

027        244-5365

www.taxcentral.co.nz

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