OPINION: As 2013 draws to a close, it is a time for reflection on what were the biggest tax issues during the year, what might have been and what was.
The big four issues continue to be: Tax residency
Whether gains from land transactions are taxable
Whether a transaction or series of transactions is in fact an avoidance arrangement
The Inland Revenue Department's application of its view on how the split of personal services income
Tax residency is a critical issue, as New Zealand imposes income tax on a tax resident's worldwide income. Residency issues that I have dealt with during the year include:
Determining whether regular visitors to New Zealand are in fact tax residents. Most were, but some were not.
Whether the various double tax agreements were of assistance in delaying the commencement of New Zealand tax residency or determining that another country had a stronger tax claim.
Whether foreign non-personal services income was temporarily excluded from New Zealand tax in terms of the transitional residents' regime.
Whether to hold investments in trusts to maximise asset protection and estate planning.
The overlapping rules relating to the taxation of gains from land transactions and the limited exclusions from those rules can be confusing and the results sometimes appear to be very harsh. That, however, is the reality of an ad hoc tax system that taxes some capital gains, but not others, as income. Often, planning before commencing a subdivision and even an isolated transaction does result in a better tax position.
At one extreme there is the view that any tax planning is tax avoidance and at the other extreme is the view that all and every legal method used to reduce tax is perfectly legitimate. Somewhere in between lies the dividing line between legitimate planning and tax avoidance. I believe that the judiciary is taking a reasonably hard line on what constitutes tax avoidance; but again that is the reality of the situation and we have to live with it.
Inland Revenue issued a comprehensive policy statement on tax avoidance; however, in my view, some departmental staff are very quick to express the view that there could be an avoidance issue and thus the prospect of a 100 per cent shortfall penalty.
This brings me to the last item, Inland Revenue's reviews and audits of the allocation of personal services income post Penny & Hooper. In my view, some of the proposed adjustments arising from the reviews and audits border on being retributive.
Finally, I would like to wish you all a merry Christmas, and a happy New Year. The good old Kiwi Christmas and the New Year holidays are among the highlights of the year for many of us as we get to spend quality time with our families and friends and to relax and recover. It is also a great time to reflect on the past year as well as what the coming year may hold. As always, tax is a consideration in any business decision. May you all keep safe and sound in both your travels and tax planning!
» Murray McClennan is director of Tax Central Ltd, a specialist tax consulting firm. The comments in his column are of a general nature only and are not a substitute for specific advice.
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