SPRING / OCTOBER 2016
TOPICS IN OUR NEWSLETTER THIS QUARTER
Pre-emptive Rights
These are common amongst private companies, particularly closely held companies. They serve to protect existing shareholders from having unwanted bed partners. The protection is in the form of a first right of refusal to acquire shares of a co-shareholder who wishes to leave.
They do, however, require great care in drafting. Take for example a shareholder who wishes to exit the company. The other existing shareholders are not compelled to buy the existing shareholder’s shares, thus he or she is “locked in” unless he or she can attract a third party interest.
Here is the rub. How might an existing shareholder attract a third party buyer? The existing shareholder will be able to provide only limited information about the company to the third party. Most company information will be in the hands of the company, or its board, and will be confidential. Consequently, without support of the company, the existing shareholder has his or her hands tied and will be denied the ability to introduce a third party buyer.
There is a solution to this conundrum. The solution is to insert into the company’s pre-emptive rights (either in the constitution or a shareholders agreement) provisions requiring the company to assist a shareholder upon an intended exit. Degrees of assistance are varied; the essential point is to turn your mind to the need for it in crafting the pre-emptive rights in the first place.
If you believe your own company’s pre-emptive rights are or may be defective in these respects, we would welcome hearing from you.
The Zoning changes predominating the Auckland landscape highlight and attract a longstanding and little heralded tax result. Land that is “untouched” and not bought with an intention of resale generally attracts a capital characterisation. Consequently, any gain realised on sale is generally not taxable, courtesy of there being no capital gains tax regime in New Zealand’s tax system.
Many landowners presently reaping the rewards of an uplift in the value of their property as a result of zoning changes will beg to differ. Those landowners do indeed suffer a tax liability on sale of their property and may argue that NZ does have capital gains tax. This is because a little known section in our land taxing provisions brings to tax, gains on the sale of a property, where 2o% or more of the gain is attributable to a zoning change or the likelihood of a zoning change. These provisions apply where the land is sold within 10 years. There are exceptions for residential properties and farm land.
In the present Auckland (and elsewhere) housing climate, the 20% threshold of attribution to a zoning change is easily triggered, or at least difficult to refute. Consequently, an unintended side bar to the unitary plan and other zoning changes is a windfall for the IRD, converting what would otherwise have been capital account property (non-taxable) to revenue account property (taxable).
Against this, helpfully, there is a reduction in the tax amount available that escalates by 10% for every year of ownership. Where land is sold after only 1 year of ownership, the taxable amount is reduced by 10%. Where land is sold after 2 years of ownership, the taxable amount is reduced by 20% and so forth.
As always when buying or selling land, be well advised.
School donations are made regularly throughout our children’s school life, some of these donations may be included in an annual donations rebate filed with the Inland Revenue Department (IRD) which entitles the recipient to a 33.33% claim back on the gross donations paid. In this article we will review some of the basic principles to consider when claiming school donations for rebate purposes.
From a basic starting point any payment of $5 or more to a charity qualifies for a donations tax credit if it is a “gift”. Most schools, but not all, are registered charities. A payment of money is a “gift” when it is:
- made voluntarily;
- made for no consideration;
- the giver (or someone else) receives no benefit of a material character by way of return; and
The payment is made by way of benefaction where the charitable organisation suffers no countervailing material disadvantage.
You can claim a school donation tax credit on donation payments made to:
- state and state integrated schools, or
- state run kindergartens, or
- other schools who have been approved as donee organisations
The donations must go to the general fund of the organisation and you’re required to provide proof of payment with a receipt including the word ‘donation’ written on it.
The tax principles are very clear that donations are to be made voluntarily, they are unconditional and there is a complete absence of exchange. There is a misconception that the following fees are considered as “donations” and are entitled to a donation tax credit rebate:
- Attendance due fees
- Tuition fees, i.e. where a separate fee is charged for any course of tuition.
- University, polytechnic or other tertiary education fees.
- Private kindergarten or other early childcare fees.
IRD have been and will continue to conduct investigations into donation claims that include attendance fees and activity fees that have been disguised as donations. IRD considers any resulting rebate claim to be a form of tax evasion by both:
- the school, which is not paying any GST on receiving the donation: and
The parent or relative, who is attempting to receive an illicit and unintended gain from filing the rebate claim.
It seems a little unfair that taxpayers should be held liable to such tax evasion accusations in situations where they genuinely believed that the payments were donations based on information communicated to them. With increasing political pressure building for IRD’s auditors to increase efforts towards preventing incorrect claims it is important to ensure the validity of claims.
If you require any advice regarding filing your donations rebate or are concerned that your donations may not qualify as a legal deduction, please contact us for advice. We will make sure you are maximising your entitlement while ensuring that you avoid being swept up in an IRD tax evasion investigation.
“A team is not a group of people that work together. A team is a group of people that trust each other”
Jack Fowler has been offered a position as an offshore trust advisor & will be departing TEAM J A C A L in mid-October 2016. He will be traveling to the British Virgin Islands in the Caribbean. We say good luck & wish him many successes in the future.
On the other hand we are happy to announce our new J A C A L arrival Lucy Hwang. Welcome Lucy to the craziest bunch of accountants I have ever met, I’m sure you’ll fit in perfectly!
Disclaimer – While all care has been taken, Johnston Associates Chartered Accountants Ltd and its staff accept no liability for the content of this newsletter; always see your professional advisor before taking any action that you are unsure about.