Snippets: Aug – Oct 2019

New provisional taxpayers beware

Changes to the provisional tax regime, effective from the 2018 tax year, have generally been well received by taxpayers.

Prior to the change, Inland Revenue charged interest from each provisional tax date if a taxpayer’s actual liability exceeded their ‘uplifted’ amount from prior year(s). This effectively meant taxpayers were required to predict their full year results as early as five months into the year. Now, providing payments are made under the standard uplift method, no interest is payable – providing any excess tax is paid by the third provisional tax date where tax payable is over $60k, or by terminal tax date where Residual Income Tax (RIT) payable is less than $60k.

However, there is a caveat for “new provisional taxpayers”. IRD have released “Questions we’ve been asked” 19/04 for taxpayers in their first year of business. If the first year’s tax liability exceeds $60,000, then the ‘Use of Money Interest’ (UOMI) concession is not available, and will apply to from the first provisional tax date, as per the old rules.

For example, where a large business is restructuring and diverges part of its business into a new company, the new company cannot rely on having a nil standard uplift liability, so if RIT exceeds $60,000 interest will be charged on any tax shortfall from each provisional tax date. New taxpayers should pay heed of this rule to avoid unexpected interest charges in their first year.

US tax rules

You may think New Zealand’s tax rules are difficult to follow. The following unusual, yet permitted deductions in the US may change your mind.

A man in the US was prescribed regular swimming to treat his arthritis, and so had a swimming pool installed on his property. The associated expenses were subsequently approved by the IRS as tax deductible medical expenses! A similar US provision allowed a tax deduction for the cost of a clarinet and lessons, on the basis of an orthodontist’s recommendation that playing the instrument would help correct a child’s overbite.

An American TV personality once claimed the cost of formal dresses in her tax return. Although initially declined by the IRS, they were permitted as a legitimate business expense once she explained the dresses could only be worn on TV, and not for other personal use, because they were so tight she couldn’t sit down!

But don’t think that means everything is deductible. The cost of lettuce and tomato were denied as a medical expense for a diabetic on a restricted diet, as were the cost of bath oils for a taxpayer suffering from dry skin.

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