Canterbury Earthquake

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Earthquake tax changes – what you need to know

By Don MacKenzie (Deloitte)

After the earthquake tax was probably the last thing on most business owners’ minds. Unfortunately even an event as devastating as the February 22 earthquake won’t keep the IRD at bay forever. Tax still needs to be paid, and ensuring that you are compliant with all tax legislation in the aftermath of the earthquake is not easy.

There are new issues to consider such as ex-gratia payments to staff, donations and deemed disposals of buildings amongst others. Even getting sufficient information to ensure that you file routine returns (GST and PAYE) and make payments on time can be very hard, if not impossible, for some businesses.

The good news is that due to extensive lobbying, a number of taxpayer friendly changes have been rushed through Parliament.

Firstly filing and payment deadlines. Missing these can result in the IRD imposing penalties and use of money interest. The IRD now has the ability to extend any deadline or payment date where a taxpayer has been unable to meet the date due to the affects of the Christchurch earthquake. This could be the case where a business’ records or their tax agents records are inaccessible (in the red zone for instance) or have been destroyed.

The IRD have also offered to help businesses to recreate business records based on information held by the IRD.

If your business has been charged any late payment penalties, late filing penalties of use of money interest by the IRD and your business has been impacted by the earthquake you should contact the IRD to get these reversed.

A lot of businesses have donated goods to help those affected by the earthquake. The problem with this is that when a taxpayer gives away or sells trading stock at below market value they are deemed to derive an amount equal to its market value. In other words they end up with a tax bill for making a donation!

Changes have been introduced to fix this. The concession applies to goods donated between 4 September 2010 and 31 March 2012 to alleviate the affects of the earthquake. No tax or gift duty is payable.

Staff are key to any business. In the aftermath of the earthquake many businesses made ex-gratia payments or provided accommodation or goods to their staff to help them get through. The IRD’s initial view was that the tax treatment of welfare contributions made to staff was crystal clear – they were taxable. If the welfare contributions were cash or accommodation they were subject to PAYE and if they were goods they were subject to FBT.

Tax changes have been introduced to retrospectively fix this. These changes apply where the welfare contribution was made to an employee within 8 weeks of 4 September 2010 or 22 February 2011 and certain other criteria are met (such as the contribution not being in lieu of wages and not being dependant on the employee’s seniority). Accommodation provided to employees which meets these criteria is tax exempt - as is the first $3,200 of benefits per employee (whether in cash or kind).

If an employer has already deducted PAYE or paid FBT in respect of welfare contributions, this must be corrected either via an employer monthly schedule amendment for PAYE or as part of the fourth quarter square up for FBT.

Of course some businesses may need to either downsize or cease altogether. If employees are made redundant, they are entitled to receive the redundancy tax credit of 6% for the first $60,000 of the redundancy (i.e. a maximum of $3,600). This entitlement to a redundancy tax credit was due to expire on 31 March 2011 but has been extended to 30 September 2011. To claim a redundancy tax credit the employee must complete an IR524 form and attach proof of the redundancy and the amount received (usually a letter from the employer).

A big area of change is the tax treatment of property which has been destroyed.

Normally where property is destroyed, a taxpayer has a tax liability equal to the amount of depreciation recovered. This will occur where the insurance proceeds are more than the tax book value of the property. The income is derived on the day the property was destroyed, despite the fact that the insurance proceeds may not actually be received until many months later.

For a provisional taxpayer with a standard 31 March balance date, the tax on this “income” is due in 3 instalments – 28 August 2010, 15 January 2010 and 7 May 2011. So to add insult to injury not only is your property destroyed, but you have to pay tax on insurance you may not have received and 2 of your three instalments were already late when the property was destroyed on 22 February!

The good news is that the Government realised that this made no sense and have made some changes to the tax legislation to fix it. Taxpayers now have the option to rollover the income arising from depreciation recovered and apply this against the cost of the replacement asset. This will result in a reduced depreciation deduction going forward, but at least there will be no unexpected upfront tax cost.

Rollover relief requires that the property which was destroyed is replaced by the end of the taxpayer’s 2016 income year. A taxpayer must elect to apply rollover relief. This is done by advising the IRD in writing when the return covering the depreciation recovery is filed (or 30 September 2011 if later).

The changes introduced also defer the timing of the income from the date the property was destroyed until when the amount of insurance proceeds can be quantified. For a lot of taxpayers this will defer the timing of this income from the 2011 income year to the 2012 income year. This is important where the property is not going to be replaced, and so rollover relief will not apply.

Taxpayers are not generally allowed a deduction for a loss on disposal of a building, except where the building is destroyed by an event outside the owner’s control. This has been extended to cover situations where the building is relatively undamaged, but the building must be demolished to allow the land underneath to be remediated or to allow another building to be demolished.

Finally changes were introduced which ensure that disposal and demolition costs of an earthquake damaged building are deductible.

As you can see from the above, the Government has been reasonably busy introducing new tax legislation to make life a little easier for Christchurch businesses. Hopefully this allows businesses to concentrate on the important task of rebuilding rather than worrying about unexpected tax costs.