Accumulus Newsletter - October 2018                                                                                                                                                                                                


(Anti-Money Laundering and Countering Financing of Terrorism Act 2009)

Accountants have been brought into the Anti Money Laundering "AML" bureaucracy from the beginning of this month.

We have already experienced the massive additional demands for collecting and storing identity documentation for clients and their related entities from the banks over the last couple of years.

The government estimates that the AML bureaucracy will cost the general public around $100 million a year. We don't know how their calculations have been done, but have little doubt that this is a significant underestimate.

This is a hidden tax on businesses and individuals.

At a recent seminar given by the department of internal affairs the speaker was asked what the story was with all the additional costs being imposed on businesses, the speaker blithely responded "Oh you just increase your fees"!

One way or another that is what all affected businesses have to end up doing.

The speaker also explained that the department was going to take on another 28 staff to help them deal with administering the bureaucracy.

The hope is that the Police Special Investigations Unit "SIU", to whom all the reporting flows, will be able to identify and eliminate $billions of the proceeds of crime or undeclared income and recover this or bring it into being properly taxed for the future.

However comparative research of other jurisdictions that have brought in various levels of AML bureaucracy indicates that there is no correlation with any significant increased identification of money laundering activity.

The consequence of all this for Accumulus is that we are obliged in certain circumstances to obtain and retain on file identity information on individuals and entities for whom we act and possibly to report transactions without their knowledge to the SIU.


The Tax Working Group reports released last month covered several matters which would impact on property owners.


a.    The re-introduction of depreciation on buildings.

(NZ is fairly exceptional in not allowing depreciation on buildings and the evidence internationally is that buildings do depreciate.)

b.    Introduction of some form of Capital gains tax.

(NZ is also fairly exceptional in not having a formal capital gains tax which is seen as a way of removing tax distortions in investment decisions, being more equitable in terms of the taxation treatment of income and capital, and of course raising further tax revenue.)

It seems that these two measures are regarded as working well together. For example for a commercial property the total purchase costs and total sale consideration will ultimately be brought into the tax net either as taxable income or expenses or capital gains or losses*.

Presently earthquake strengthening is regarded as a capital improvement for which no income tax deduction is available and on sale any capital gain or loss is not assessable or deductible.

At least if depreciation was available there would be an additional deduction on the capital expenditure and if ultimately as a consequence of the additional expenditure there was a capital loss on sale there would be tax recognition of this loss.

The same might apply to leaky buildings where the IRD is in many cases aggressively arguing that the whole of any remediation expenditure is capital expenditure and not R&M.


c.    Ring fencing

It is likely that rental losses will be ring fenced, meaning that they will not be available immediately against a taxpayers other income, but instead will only be available to offset other rental profits.


*The same is likely with capital losses being ring fenced so that they are only available against other capital gains 

Historically the IRD have allowed "farmers" including orchardists to claim 25% of the farmhouse costs and 100% of the rates and interest without any further justification. This hails from the days of larger farms and smaller farmhouses, rather than what is locally more common, which is a small (in relative land area) orchard with a larger house. 
Rates and interest have already generally been restricted to the business portion of those expenses by using the relative values of property and house. 

The IRD have issued an interpretation statement which deals specifically with farmhouse expense claims which had effect for the 2018 tax year.

A blanket 25% is deemed to be too generous.

20% is acceptable with no further justification where the house (and curtilage) value is 20% or less than the value of the whole property, which is rarely the case locally.

Despite being 29 pages long there is no clear guidance on how to establish the business use % of farmhouse costs such as interest, rates, insurance, power, r&m, etc. The interpretation statement says:

"…the expense will need to be apportioned on some fair and reasonable basis between the business and private portions of the expense."

Practically the deductible business proportion:

-        is unlikely to be as high as 20% (per IRD) - but could be more.

-       minimum would be the area of an office as a proportion of the area of the house.

(for one room in a smaller house that alone might be 15%)

Other factors might include:

-       storage of equipment in house or garage,

-       laundry for cleaning orchard clothing,

-       kitchen/lounge as meeting rooms,

-       kitchen as "smoko" room,

-       kitchen as preparation area for working meals, tea and snacks,

-       extent of use by time of areas of house other than office,

-       (With mobile phones anywhere can be the office on occasion)

We would expect claims to be in the 15% plus range depending of course on the specifics!