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It is a common time of year for employers to do some team building with
Christmas functions. It is important to understand the following clarified
guidelines from the IRD with regard to entertainment expenditure. In some
situations a slight change of the program or the venue can increase the
deductibility for taxation purposes.
Food and/or drinks provided off the business premises for the purposes
of building staff morale or goodwill, including team building events,
are 50% deductible. The venue hire, transport and any associated costs
are also 50% deductible.
If the off-site event is a training course lasting for four hours or more,
the costs will be 100% deductible. If the course runs for less than four
hours, then the expenditure falls back into the 50% deductibility rule.
The key issue is: Was the event held to ‘build staff relationships’?
Or, was the function a ‘training and development exercise’?
Christmas parties will fall into the 50% deductible zone.
RECENT TAX CASES: GST
& Going Going Gone Again!
Earlier
this year we reminded you about sale and purchase agreements and the importance
of the wording accurately recording the agreement between the seller and
the purchaser. We highlighted a sale and purchase agreement involving
the transfer of quarrying rights. This case, CIR v Fatac Ltd (in liq)
was recently transferred to the High Court.
Fatac
Ltd had agreed to sell a property, which included a quarrying site used
by another company. The sale agreement allowed for the quarrying company’s
licence to continue under newly agreed terms with the incoming purchaser.
On a first reading the sale and purchase agreement appeared to be for
a going concern as it contained an agreement in writing referring to the
transfer of a going concern. The sale of a going concern is zero-rated
for GST.
The
IRD queried the sale and purchase document. The case was reviewed by a
High Court judge who concluded that the land was not tenanted. The quarrying
was carried out under a licence, not a lease. Transferring a licence was
not sufficient to meet the going concern definition.
As
a result of the Court’s decision, the buyer will be entitled to a
refund of 1/9th of the purchase price and the seller will have to pay
1/9th of the sale price to the IRD. The seller will receive a lot less
for the sale than expected – an expensive lesson.
How
can you ensure that you are not caught unawares?
Firstly,
the sale must be of a ‘going concern’.
A going
concern is:
* The supply of a taxable activity that is capable of separate operation;
where all of the goods and services needed for continued operation are
supplied to the recipient; and
* The seller carries on the activity up to the time of transfer.
Secondly,
* The activity must be a going concern at the time of supply;
* The buyer and seller must agree in writing that the supply is of a going
concern;
* Both parties must intend that the supply is of a taxable activity that
the buyer could carry on as a going concern.
It
is not necessary for the purchaser to actually carry on the activity after
buying the property.
Sale
and purchase agreements should include the parties' agreement that the
sale is that of a ‘going concern’. Additional evidence will
be a detailed description of the business.
Purchasers
who are not GST registered at the time the agreement is signed must be
expressly required to provide proof of GST registration before the transaction
is settled. Property sold to an unregistered buyer cannot be ‘zero-rated’.
The agreement should also allow the seller to recover GST from the purchaser
if the IRD challenges the going concern status of the sale.
If
you are considering a sale or purchase of a going concern, please ask
us to work with your solicitor on the wording of your agreement to ensure
that you get the GST outcome you expect – and no surprises!
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