Tax Bites #16
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.
In this issue I am highlighting common misconceptions and mistakes made by taxpayers AND examples of poor advice from advisers that I have encountered in recent years.
GST
1. Not appreciating that the threshold for compulsory (and deemed) GST registration applies to the total of all supplies made:
The most recent example I encountered was a husband and wife partnership who were registered for GST for a trading activity and also conducted an Airbnb type business.
They believed that they did not have a liability to account for GST on the Airbnb type business as the turnover from that was less than $60,000. The husband and wife on the advice of their adviser, did not include income from the short-term letting in the partnership’s GST returns Not only should all taxable supplies have been included, but the future sale of the dwelling (a former family home) will also be a taxable supply for GST.
2. Not registering at all when the threshold turnover of $60,000 in a 12-month period is reached or anticipated:
The legislation contains a deemed registration. Therefore, the person has a liability to account for GST on supplies made (and interest and penalties) from the payment date for the returns that should have been filed after deemed registration. For example: After 11 months in business, turnover “clocks over” $60,000. Deemed registration will be from the month in which the threshold was breached. GST will also apply to the future sale of assets used in that activity.
I recently acted for a partnership that acquired a property subject to a residential rental. The contract for the sale and purchase of the property stated that the vendor was not GST-registered. After that tenancy ended, the partnership decided to change to providing short-term accommodation and made a legitimate change in use adjustment to claim the taxable portion of the property's purchase price for GST.
Inland Revenue checked the status of the vendor of the property and concluded that the vendor had used the property for short-term accommodation and should have been GST-registered. Inland Revenue is chasing the vendor for the GST on the sale.
Land
1. Failing to declare tax on the sale of a residential rental property by a tainted taxpayer: There is a provision that taxes a gain on the sale of a rental property built or improved, such as adding a bedroom, by a person in the business of building, or an associated person of a person in the business of building. The gain is taxed unless the property has been held for 10 or more years after the completion of the dwelling, or subsequent improvement. I pointed this out to a new client who was about to sell a rental property and would have had a $100,000 tax bill.
2. That a secondary purpose or intention of resale at the time of acquisition is enough to bring a property into the “tax net”. If Inland Revenue has reasonable grounds to believe that such a purpose or intention existed at the time of acquisition, the onus of proof is on the taxpayer and not Inland Revenue. There are exemptions that can take a property out of the “tax net” such as the family home or business premises.
3. There are separate exemptions for the “family home” from the various taxing provisions. Some of these do not apply to properties owned by trusts where:
3.1 The family home is subdivided in some circumstances – sections CB 12 and 13; or
3.2 The land value has increased due to an actual or proposed change in the permitted use of the land, or similar event, and that event accounts for at least 20% of the increase in value and the land is sold within 10 years of acquisition.
I am aware of experienced advisers overlooking this point.
Director
Tax Central Ltd
027 244-5365
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This issue we talk about MyIR, who is an independent contractor or employee and you probably know that the property brightline test was extended to 10 years, but did you know the other significant change?