TAX TIDBITS
Issue Nineteen, September 2007
In this months issue:
Low Value Assets
Loss Attributing Qualifying Companies & Rental Properties
GST on the Sale and Purchase of Property
Transfer Pricing - Trading in Australia
Trusts & Beneficiaries Debts to Inland Revenue
Upcoming Workshop
LOW VALUE ASSETS
For assets acquired on or after 19 May 2005 and costing less than $500 (GST exclusive if the taxpayer is GST registered or GST inclusive if the taxpayer is not GST registered) a deduction can be claimed in full in the year of purchase. Prior to 19 May 2005 this threshold was $200. There are restrictions to eligibility;
- The asset must be of a separate nature and cannot become integrated with another asset that is depreciable property.
- The asset cannot be purchased from the same supplier at the same time as other assets to which the same depreciation rate applies.
Please contact HWI if you have any queries regarding whether a transaction can be classified as an expense or whether capitalisation is required.
Loss Attributing Qualifying Companies & Rental Properties- Why they should make a profit
The Inland Revenue Department has recently suggested that there will be greater attention paid to whether losses in a Loss Attributing Qualifying Company (LAQC) will be allowable tax deductions to shareholders. An extra $14.6 million was allocated to the department in this year’s budget to be applied to strengthening the audit of rental property taxation.
In order to attribute losses to shareholders a LAQC should make a profit at some point in the future. Careful consideration needs to be paid to a business or investment structure that is set up in such a way that it never makes any taxable income.
The LAQC structure has often been used for rental properties and in today’s market rental properties are increasingly likely to make losses because of the high interest paid on borrowings. The losses incurred in the short term are attributed to shareholders on the basis that, over the long term, it is expected that the loan will be repaid resulting in an expected rental profit. Alternatively, an increase in expected rental yields could also result in a profit in the future. However, if the borrowings are structured on an interest only basis, and the company is not expected to ever make a profit, then the Inland Revenue Department could consider disallowing the deduction for the losses in the shareholder’s hands.
Transfer Pricing - Trading in Australia
The ATO (Australian Tax Office) has recently outlined it’s 2007/08 compliance programme with a key focus on cross border transactions. Of particular interest to the ATO will be
- A cross border dealing with a related party that results in an Australian tax profit that does not reconcile with the entity’s economic performance in Australia;
- Global corporate restructuring that results in the shifting of assets, functions and risks offshore; and
- Financial arrangements to achieve cross border arbitrage.
The New Zealand Inland Revenue Department is likely to pay a high degree of attention to the implementation of the ATO’s compliance programme. If you are trading in Australia via a branch or related entity, it is therefore vital that fair market values are used for cross border transactions. If you require any assistance with establishing these values, or have any queries regarding Transfer Pricing issues, please contact HWI to discuss the matter in greater depth.
Trusts & Beneficiaries Debts to Inland Revenue
Where a trust owns the family home it is accepted that the Department cannot force the trustees of the trust to sell the home in order to meet debt owing by beneficiaries. Where the Department believes that beneficiaries have some degree of influence over trustees to either sell the property or provide funds to pay debts, they have made it clear that they will not provide relief and will instead bankrupt the debtor. The granting of hardship write-offs to a taxpayer with an interest in a trust is only considered in exceptional cases.
Upcoming Workshop
A registration form will be forwarded shortly for the next free HWI breakfast workshop;
Topic: MYOB Workshop
When: 9am – 11am, Wednesday, 17 October 2007
Where: HWI Boardroom, Level 3, 139 Carlton Gore Rd, Newmarket
We look forward to seeing you there.
Disclaimer Information contained within this document is of a general nature and does not constitute advice. Readers are cautioned not to act or reply on it without first seeking professional advice.
