A Week In Review

FIF deemed rate of return set

For those of you who use the deemed rate of return method to calculate FIF income for the year, the Income Tax (Deemed Rate of Return on Attributing Interests in Foreign Investment Funds, 2021–22 Income Year) Order 2022 (SL 2022/151) was notified in the New Zealand Gazette on the 26th of May, confirming the rate of 6.01% for the 2021-22 income year. The rate for the 2020-21 income year was 4.43%.

The calculation method, is in essence a backup for the comparative value method, coming into application when there is insufficient market value information for the relevant FIF. Usually, like most FIF calculation methods, income returned under the deemed rate of return method is the only taxable income to be returned for FIF, other receipts such as dividends and realised disposal gains, are not subject to taxation.

There is, however, a potential for a top-up additional FIF income amount, should actual income be greater than the FIF income calculated under the method. Equally, unlike a number of the other FIF calculation methods, it is possible to recognise a FIF loss, if the loss is the product of the calculation.
2022-kilometre rates released

Of probably more interest to most of you than the previous article, the 2021-22 income year kilometre rates used to calculate motor vehicle expense claims have been released:

Tier 1
83 cents per kilometre, increased from 79 cents due to steeper fuel costs

Tier 2
31 cents per kilometre, increased from 27 cents (for petrol & diesel)
18 cents per kilometre, increased from 16 cents (for hybrid)
10 cents per kilometre, increased from 9 cents (for electric)

The tier 2 rates are only to cover the business portion of running costs for any travel in excess of 14,000 kilometres per year.

You can use the kilometre rates:

to calculate expenditure claims for the business use of a motor vehicle;

by employers as a reasonable estimate for reimbursement of expenditure incurred by employees for the use of a private motor vehicle for business purposes.

You can read the detail on both the current release in Operational Statement OS 19/04 (KM 2022), “Kilometre rates for the business use of vehicles for the 2022 income year”, and the expanded commentary on the issue, in OS 19/04A: “Commissioner’s statement on using a kilometre rate for business running of a motor vehicle – deductions” and OS 19/04B: “Commissioner’s statement on using a kilometre rate for employee reimbursement of a motor vehicle.”

However, if you’re short on time, a few key points:

Under s.DE 2, you have a choice of two methods – a cost method based on actual costs, or a kilometre rate method.

If you wish to use the kilometre rate method, you must make an election to use this method, otherwise you are deemed to have elected to use the cost method. The election must be made in the year the vehicle is acquired or is first used for business purposes. Importantly note that the election (deemed or otherwise) is irrevocable, and therefore will apply until the vehicle is disposed of.

You must determine the business use percentage of the vehicle by using a logbook, diary, calendar or another suitable method.

If you have elected to use the kilometre rate, you must at least record the odometer reading on each balance date for the relevant income year, as you need to be able to show whether the annual total travel in the vehicle has exceeded 14,000 kilometres and consequently any claims for travel in excess of this threshold will be based on the tier 2 rates.

If you’re using the kilometre rate method, then you will have no deprecation claims for the vehicle, nor potential depreciation recovery income exposures upon the subsequent disposal of the vehicle.

Since 1st April 2017 (for vehicles acquired or first used for business post this date), a close company whose only provision of a non-cash benefit is the availability of a motor vehicle for the private use of the shareholder, can also make an irrevocable election to use s.DE 2 to calculate motor vehicle claims, thereby avoiding the need to account for FBT on the vehicle.

The old 5,000-kilometre limitation is gone.

A logbook should be maintained for a three-month test period and the business use percentage established can then be used for the following three years for the purpose of both the cost method and the kilometre rate method.

The kilometre rates, while calculated on a GST inclusive basis, do not generate a GST input tax credit claim.

If you do not retain sufficient records, then any claim can be limited to a maximum of 25% business use – so 3,500 kilometres for the tier 1 claim. This maximum assumes that you can justify at least this percentage, which means if you can’t, your claim could be completely disallowed if there were no records to support business use of the vehicle. I’ve had comments in the past where clients have assumed they can do nothing and still claim 25% – this is not correct.

Employers may use the kilometre rates set by IR (Inland Revenue) as an acceptable method of calculating a tax-exempt portion of any reimbursement paid to employees as provided under s.CW 17(3). An employer can, however, also use the actual cost method, or in accordance with s.CW 17(3), the employer may make a reasonable estimate of expenditure likely to be incurred by an employee or group of employees. In this latter regard, should the employer wish to use other 3rd party data, IR expects that care must be taken to ensure capital/fixed costs are not overrepresented in the rates applied (i.e., some sort of two-tier system should apply).
Business & Share Valuations
These are often required by business owners for purchases or sales of businesses or shares, mergers, transfer of interest between shareholders, relationship property matters, succession planning, employee share ownership plans, intellectual property, or calculations of direct or consequential loss.

Learn more…
 If you have any questions or would like a second opinion
on any national or international tax issues, please email me directly.

Contributing Advisors