August 2014 E Newsletter
Welcome
It’s the 5th of August already!... Only 86 days till the General Elections or just 140 sleeps till Christmas! You take your pick!
In this month’s issue of Focus, we detail the Changes in the Tax Pooling Rules, UK Capital Gains Tax on Properties Owned by Non UK Residents, the introduction of FATCA and how to best word your Terms of Trade to increase the chances of getting paid.
Changes to Tax Pooling rules
It was announced earlier this month that the Minister of Revenue Todd McClay has introduced a legislation to change the current tax pooling rules.
Tax pooling arrangements can be used by businesses to pay provisional tax and to reduce the cost of interest owed as a result of an amended tax assessment or tax dispute. The current rules allow taxpayers to withdraw funds from a tax pool to cover any core debt owed but not for any use of money interest that might be due.
The minister recognises that this was never the original intent of the legislation, and as of 4 July taxpayers will be able to use tax pooling arrangements to pay interest accruing on core tax debt.
The changes will make tax pooling more user friendly to the taxpayer and will be of most benefit to those taxpayers who have tax to pay having been subjected to an historic audit by the IRD. They will be able to use tax pooling more effectively against any back-year liabilities.
Additionally, if taxpayers are involved in lengthy legal disputes with the IRD they will be able to use tax pooling to stop use of money interest from continuing to accrue at 8.4 per cent. It has the effect of capping any interest charge whilst the taxpayer goes through any lengthy and protracted dispute.
All this adds up to businesses having more certainty in respect to their tax obligations which.
UK Capital Gains Tax on Properties Owned by Non UK Residents
HM Revenue & Customs (the UK tax department) have announced that they will be extending their capital gains tax regime to apply to non-UK residents who dispose of UK residential property.
These changes will come into effect in April 2015, and will apply to gains arising from April 2015 onwards.
This change is intended to remove the inequity between UK residents, who must pay CGT on disposal of residential property, and non-residents, who currently do not. In a consultation statement released in March 2014, HMRC stated:
“…the government does not believe that it is right that UK residents pay capital gains tax when they sell a home that is not their primary residence, while non-residents do not. Similarly, we do not believe that it is right that UK companies are subject to tax on gains that they make from disposals of residential property, whereas non-residents are not. It is important for the integrity of our tax system that when gains are made from UK residential property, UK tax is paid”.
From April 2015, UK capital gains tax will apply to any UK property that is used, or is suitable for use, as a dwelling or residence. This will include residential rental properties, investment properties, and dwelling places which are still under construction or in the process of being adapted for residential use.
If you have a residential property in the the UK, and are concerned with how these changes may affect you, please contact us to discuss your personal circumstances.
Foreign Account Tax Compliance Act
Does FATCA affect me?
The US Foreign Account Tax Compliance Act (FATCA) rules came into effect on 1 July 2014.
While the rules principally place obligations on banks, fund managers and other financial institutions (FIs), there are important implications for all customers of FIs.
FATCA has particular importance for trusts, which are commonly used for investment in New Zealand. Anyone who is a trustee of a trust needs to understand their FATCA obligations, which surprisingly, can include having to register for FATCA with the US Internal Revenue Service (IRS) even if the trust has no US assets or beneficiaries.
What is FATCA?
FATCA aims to reduce the opportunity for US citizens to evade US tax by investing money with foreign financial institutions (FIs) and not reporting income for US tax purposes. In the aftermath of the Global Financial Crisis it was evident some foreign FIs actively facilitated US persons to hide money outside the US resulting in significant amounts of non-taxed income.
It can be difficult for the IRS to know when a US person shelters money offshore unless detailed enquiries are made with respect to a specific person. The FATCA rules reverse this position by placing a positive global obligation on global FIs to identify and report to the IRS on US customers. This gives the IRS the ability to follow up with those customers on whether the correct US tax has been returned.
Of course, the US Government cannot directly impose such requirements on FIs outside the US. Therefore, to ensure compliance with the requirements the rules prima facie impose a 30% deduction from payments of interest or dividends or sale
proceeds from shares or debt instruments from a person in the US to a foreign FI if that institution has not met its FATCA reporting obligations.
To implement FATCA in New Zealand, the Government has entered into an intergovernmental agreement (IGA) with the US and has enacted domestic legislation.
For further information please go to the IRD website regarding FATCA
Terms of Trade - update now and improve your chances of being paid
recent High Court decision has ordered that a second mortgagee must share proceeds of sale with trade creditors with unregistered mortgages under their Terms of Trade.
The important message from this decision, for trade suppliers, is that including a properly drafted mortgage clause in your Terms of Trade will significantly improve your chances of recovery - particularly in an insolvency or shortfall situation.
The case [1] concerned the failed property development company, Starplus Homes Limited. When Starplus defaulted on its loans ASAP Finance Limited [2], the first mortgage holder, sold 20 properties resulting in a surplus of $1.7m. Four parties applied to the court for rights in the surplus. One of the parties, Mr Wei Sun, held a second ranking registered mortgage over the last 2 properties sold. The 3 other parties were all building suppliers who had supplied materials to Starplus for the construction of homes.
Each of the suppliers’ Terms of Trade contained a clause granting the supplier an equitable mortgage over any land which the developer owned. These mortgages were supported by caveats.
The Court recognised the equitable mortgages from the time they were granted. In some cases, Starplus did not own the land mortgaged at this time.
Mr Wei Sun, having a second registered mortgage, would ordinarily prevail over the equitable mortgages under the Property Law Act. On first glance, he was entitled to the surplus ahead of the suppliers.
However, the suppliers argued on the basis of the equitable doctrine of “marshalling”. The argument is that the arbitrary choice which ASAP made in determining the order of sale of the mortgaged properties resulted in a windfall for Mr Wei Sun. The windfall arose as ASAP’s debt was repaid by the time the last 2 properties were sold. If ASAP had sold those properties first, Wei Sun would have been left with nothing. Under marshalling, a court remedies the impacts of the arbitrary order of sale. It does so by allocating the surplus between subsequent mortgagees (i.e. Wei Sun and the trade creditors) in an equitable manner.
This result shows the importance of having a properly worded mortgage clause in Terms of Trade. It could mean the difference between being paid and receiving nothing. It is timely, for suppliers and other businesses, to review Terms of Trade to see whether they are properly protected.
Also, a word of caution to second mortgagees: the decision highlights the importance of proper due diligence on other securities granted by a borrower. Prior to making advances, a first mortgagee’s full security position should be reviewed. This exercise will determine whether or not recovery could be undermined by marshalling.
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