Bright-line test for gains on property
The bright-line test introduced last year requires income tax to be paid on any gains from property purchased and sold within a two year period, though there are some exceptions.
The objective is to improve compliance with the current residential land sale rules and ensure that property owners pay their fair share of tax on gains made from residential property sales.
To assist with the application of the legislation, many terms were defined in the enacted Taxation (Bright-line Test for Residential Land) Act, the more important ones which are explained below.
- 1. Exceptions include the sale of an owner’s main home (as defined), inherited property, or property transferred in a relationship settlement.
- 2. The start and end of the two-year bright-line period starts when a person obtains registered title for the property and ends when the person enters into an agreement to sell the property.
- 3. All existing property will be ‘grand parented’ ie any sale of property purchased before 1 October 2015 will not be subject to the bright-line rules.
- 4. Losses arising under the bright-line test will be ‘ring-fenced’ meaning the losses can only be used to offset gains from the sale of another property. The Act also includes an anti-avoidance rule to prevent companies or trusts being used to circumvent the test.
- 5. There is an additional rule for ‘off the plan’ purchases – if a bare section in a planned subdivision capable of having a dwelling erected on it is sold within the relevant 2-year period, the bright-line test applies. The period for ’off the plan’ sales apply from the entering into of the contract to buy until the entering into of the contract to sell.
- 6. Where an investment property is transferred under a relationship settlement to one party and that party then sells within two years of its purchase, it will be subject to the bright-line test as it would have been owned by that party, either jointly or solely, for two years.
- 7. Where an investment property is purchased for a mixed use, for example a small dwelling on the top floor which is rented out and a larger ground floor shop from which business operations are carried out and is subsequently sold within the two years, the gain will not be subject to the bright-line test because the property was predominantly used as business premises.
- 8. Farmland is not included in the bright-line test but a lifestyle block is which is not capable of being farmed as an economic unit due to its small size.
Employing the Right People
While deciding to employ others to work in a business can become a necessity if the business is to survive and grow, it is nevertheless a big step for any business. And at this critical time, these are some questions you need to ask about the type of person that is needed:
- How much work there is?
- Is there a deadline for this work – when does the work needs to be completed?
- What are the different types of staffing options and what suits my business?
- Do I need an employee or a contractor?
- What are the rules are around the different employee types.
Overview of different employee types
Type Suitable when:
- Permanent there is ongoing work which is expected to continue indefinitely, whether it is full-time or part-time. Wages and conditions of work must be formalised in an employment contract.
- Fixed Term hiring for a specific period eg to cover the workload of an employee on maternity leave or for a specified project. The fixed term agreement must clearly state the dates and reason for the employment.
- Casual a business needs extra help with uncertain hours to which casual workers are most suited. Although only hired when needed, they are still entitled to paid leave which is usually added at 8% to their wages.
Employees vs Contractors
Employees are people who work for you. You provide them with an employment agreement and the equipment they need to do their job. Employees are entitled to a range of minimum standards, including holiday pay, receiving at least the adult minimum wage and paid public holidays with time off. Employers also pay less obvious costs involved such as recruitment, training & development, office space and equipment, KiwiSaver contributions, ACC levies, FBT etc…You are responsible for registering as an employer with Inland Revenue and telling them the employees’ start date, deducting PAYE from their salary/wages and paying it to IRD, and paying annual ACC levies.
Contactors are self-employed. They control what work they accept. They have special skills or knowledge which the business may need for a limited time to complete a specific piece of work. Contractors sort out their own obligations with Inland Revenue and ACC, and provide their own equipment to complete the work they’ve been signed on to do.
Which is best?
Be clear about your expectations and what is suitable for the role and then determine which option is best. Don’t be tempted to use a contractor simply to avoid financial commitments particularly where appointing a permanent employee could take your business to a whole new level. The following sets out the important differences between the two.
|Work for you directly and told what to do, when to do it, and how to do it.||Decide when and how they do the work and can employ other people to help them finish it.|
|Work a set number of hours per week or month, and get paid overtime when they work extra hours.||Are responsible for getting the work done to the required standard in the agreed time frame.|
|Work where you tell them to using equipment you provide.||Generally take care of their own assets and equipment.|
|Have an employment agreement with you.||Advertise their services and are free to work for other people.|
|Require employers to pay their PAYE and KiwiSaver for them.||Pay their own income tax, KiwiSaver and ACC levies.|
Important: This is not advice. Clients should not act solely on the basis of the material contained in the Client Newsletter. Items herein are general comments only and do not constitute or convey advice per se. Changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. The Client Newsletter is issued as a helpful guide to clients and for their private information. Therefore it should be regarded as confidential and should not be made available to any person without our prior approval. 01/2016.