Tax returns
Under New Zealand taxation law, the responsibility for the completeness and correctness of income tax returns remains with the Lender. Harmoney does not take any responsibility for income tax obligations of lenders.
The following is a summary of the New Zealand income tax treatment of income and expenses arising in respect of Harmoney Lending. It is not exhaustive. Lenders should be aware that their own particular circumstances may affect the New Zealand income tax treatment of these amounts. This is a general guide only and does not constitute financial or tax advice and does not take into account your financial objectives, or tax position. It should be treated with appropriate caution. It is recommended that independent tax advice is sought before preparing your tax return.
Please note that this summary is relevant for New Zealand tax residents (who are not transitional residents). Lenders who are not New Zealand tax residents or who are transitional residents should obtain relevant independent tax advice.
Tax returns
Harmoney does not pay income tax on behalf of lenders. Lenders are responsible for including the income and expenditure arising in respect of their Harmoney lending in their income tax returns and for claiming any deductions that are available to them.
Interest derived from Harmoney Lending will be taxable to lenders. Harmoney withholds Resident Withholding Tax on interest earned and passes that to Inland Revenue on lenders’ behalf. Resident Withholding Tax is calculated using the tax rate provided by each Lender. Resident Withholding Tax withheld by Harmoney should be allowed as a credit against Lender’s tax liability in respect of interest derived.
Lenders are charged a Service Fee of 1.25% p.a. of the principal and interest payments collected on each note or a Lender Fee of 15%/17.5%/20% of interest payments collected on each note. The Service Fee or Lender Fee is deducted from repayments into the lender account and should be tax deductible. Lenders will need to claim a deduction based on the information provided in their Tax Statement.
The tax treatment of interest income, Service Fees, and Payment Protect income and expenditure will be different for each lender depending on their personal circumstances and:
- whether you are a cash basis person or a non-cash basis person for the purposes of the financial arrangements rules;
- whether you carry on a business of dealing or holding financial arrangements; and
- whether you are associated with the Borrower for tax purposes.
Cash basis persons v non-cash basis persons
A lender is a cash basis person for an income year if:
- The value of the lender’s income and expenditure in the income year under all financial arrangements to which the lender is a party is $100,000 or less; OR
- On every day of the income year, the absolute value of all financial arrangements to which the lender is a party added together is $1,000,000 or less; AND
- The result of applying the following formula: (accrual income – cash basis income) + (cash basis expenditure – accrual expenditure) to each financial arrangement to which the lender is a party at the end of the income year and adding the outcomes together is $40,000 or less.
If a lender is not a cash basis person the lender will be a non-cash basis person for tax purposes.
Carrying on a business/association with borrower
Whether you carry on the business of holding or dealing in financial arrangements, and whether you are associated with the borrower for tax purposes, will depend on your own specific circumstances. Lenders should seek their own independent advice on these issues.
Explanation of the fields on your Tax Statement
| Field Name | Explanation |
|---|---|
| Average Tax Rate for year ended dd/mm/yyyy | This is your average tax rate applied to RWT for the year. If you updated your tax rate with Harmoney during the year, then the rate shown is an average rate of the rates supplied, weighted by the RWT paid under each rate. |
| Actual tax rate at 31 March xxxx | The tax rate on your account as at 31 March xxxx. |
| Gross Interest | Gross cash interest income earned on your lending during the income year. |
| Resident Withholding Tax | RWT on interest earned withheld and paid to Inland Revenue by Harmoney on your behalf. |
| Net Interest | Gross Interest less RWT. |
| Service Fees Paid | Retail Lenders are charged a Service Fee of 1.25% p.a. of the principal and interest payments collected on each note or a Lender fee of 15%/17.5%/20% of interest payments collected on each note. The Service or Lender fee is deducted from repayments into the Lender’s account. |
| Charged Off Principal | Charged off principal indicates that this unpaid principal has become unlikely to be repaid. Loans are put into a charged off state after being in arrears for 120 days or earlier if a review has found there is no reasonable likelihood that the debt will be repaid. The charged off amount represents the principal that is owing under the loan when it is charged off. Any amounts recovered after charge off are shown in the Recovered Principal line. |
| Recovered Principal | Principal recovered from Borrowers after a loan has been put into a charged off state. |
| Net Charge Offs | Net of charged off principal and Recovered Principal. |
| Waived Principal | The Waived Principal amount shows the amount of principal that has been waived due to a successful Payment Protect claim. |
| Protect Borrower Fee Amount | The total protect fee payable by the Borrower over the term of the loan to receive the benefits of Payment Protect. |
| Protect Borrower Fee Realised | An allocation of the principal repayments for the income year that is attributed as Payment Protect Fee income. This is calculated as an allocation of the monthly principal when received. |
| Protect Borrower Fee Waived | The amount of the Protect Borrower Fee that has been waived (not paid by the Borrower) due to a successful claim. |
| Protect Borrower Fee Charged Off | If a loan has been charged off then a proportion of the charged off amount is the Protect Borrower Fee. |
| Protect Borrower Fee Rebated | This is the amount of the Protect Borrower Fee that has been rebated to the Borrower as they have prepaid their loan in full. |
| Commission Amount | The amount of Sales Commission that Lenders pay to Harmoney for arranging the sale of Payment Protect to Borrowers. |
| Commission Realised | An allocation to the relevant income year of Sales Commission payable to Harmoney over the life of the loan. The monthly allocation is made using the same formula that is used to calculate the Protect Borrower Fee Realised - this allocates an amount of the Sales Commission Fee to each monthly repayment. |
| Commission Rebated | This is the amount of the Sales Commission that has been rebated to Lenders. |
| Management Fee Amount | The amount of Management Fee that Lenders pay to Harmoney to conduct fair and transparent claims assessment and processing; effective complaint and dispute settlement procedures; and appropriate supervision of claims-related services. |
| Management Fee Realised | An allocation to the relevant income year of the Management Fee payable to Harmoney over the life of the loan. The monthly allocation is made using the same formula that is used to calculate the Protect Borrower Fee Realised - this allocates an amount of the Management Fee Realised to each monthly repayment. |
| Management Fee Rebated | This is the amount of the Management Fee Commission that has been rebated to Lenders. |
Summary of tax treatment of income and expenditure
Set out below is a general summary of the income and expenditure items arising under Harmoney lending.
| Item | Tax Treatment | |
|---|---|---|
| Cash basis | Non-cash basis | |
| Gross Interest | Taxable income when received, over term of loan | Taxable income, income spread over term of loan under the financial arrangements rules |
| Service / Lender Fees | Deductible expense when charged (i.e. deductions spread over term of loan) | Deductible expense, deductions spread over term of loan under the financial arrangements rules |
| Payment Protect Borrower Fee | Taxable income when received, over term of loan | Taxable income, income spread over term of loan under the financial arrangements rules |
| Payment Protect Sales Commission | Deductible expense when charged (i.e. at commencement of loan) | Deductible expense, deductions spread over term of loan under the financial arrangements rules |
| Payment Protect Management Fee | Deductible expense, deductions spread over term of loan as prepaid expenditure | Deductible expense, deductions spread over term of loan under the financial arrangements rules |
| Waived Principal (inc. waived Payment Protect Fee) | Deduction for interest which has been included as taxable income but not received (if any), at conclusion of loan. No deduction for waived Principal or Payment Protect Fee unless:
|
Tax Statement items to note — non-Payment Protect loans
Cash basis Lenders
For a cash-basis lender that does not carry on the business of holding or dealing in financial arrangements, the following figures should be relevant for the calculation of your taxable income in relation to your Harmoney Lending:
- Income = Gross Interest1
- Deductions = Service/Lender Fees Paid2
- Tax credits = Resident Withholding Tax3
| Year to Date (FY16-FY17) | Life to Date | |
|---|---|---|
| Harmoney Interest Income | ||
| Gross Interest1 | $1,234.56 | $1,234.56 |
| Resident Withholding Tax3 | $1,234.56 | $1,234.56 |
| Net Interest | $1,234.56 | $1,234.56 |
| Harmoney Fees* | ||
| Service and Lender Fees Paid2 | $23.40 | $23.40 |
| Charged Off Loans** | ||
| Charged Off Principal | $1,234.56 | $1,234.56 |
| Recovered Principal | $1,234.56 | $1,234.56 |
| $1,234.56 | ||
| Net Charge Offs | $1,234.56 |
On termination or conclusion of a loan, a cash basis person will generally be required to calculate a base price adjustment(BPA)under s EW 31 of the Income Tax Act 2007. In broad terms, a BPA is a “wash-up” calculation that brings to tax all income and expenditure accruing under a financial arrangement that has not already been accounted for, for tax purposes.
Where a cash-basis Lenderdoescarry on the business of holding or dealing in financial arrangements, that Lender should be able to claim a bad debt deduction for Net Charge Offs (and provided the Lender is not associated with the Borrower).
Non-cash basis Lenders
For a non-cash basis Lender, income and expenditure arising in respect of Harmoney Lending, will need to be accrued over the term of the relevant loan, in accordance with an applicable spreading method under the financial arrangements rules.
The financial arrangements rules prescribe various methods of spreading such income and expenditure over the term of the relevant financial arrangement.
Where a Lender prepares financial accounts in accordance with International Financial Reporting Standards, that Lender should be able to apply the IFRS spreading method under s EW 15D of the Income Tax Act 2007. Under this method, the tax treatment of income and expenditure will generally follow the treatment for accounting purposes (subject to some potential modifications).
Where a Lender is permitted to use a default method under s EW 22 of the Income Tax Act 2007, the Lender will be able to spread income and expenditure over the term of loans in a manner that is consistent with commercially acceptable practice and allocates reasonable amounts to each income year over the loan term. For a taxpayer permitted to use a default method, it may be possible to allocate income and expenditure as follows:
- Income = Gross Interest1
- Deductions = Service/Lender Fees Paid2
- Tax credits = Resident Withholding Tax3
| Year to Date (FY16-FY17) | Life to Date | |
|---|---|---|
| Harmoney Interest Income | ||
| Gross Interest1 | $1,234.56 | $1,234.56 |
| Resident Withholding Tax3 | $1,234.56 | $1,234.56 |
| Net Interest | $1,234.56 | $1,234.56 |
| Harmoney Fees* | ||
| Service and Lender Fees Paid2 | $23.40 | $23.40 |
| Charged Off Loans** | ||
| Charged Off Principal | $1,234.56 | $1,234.56 |
| Recovered Principal | $1,234.56 | $1,234.56 |
| &nsbp; | &nsbp; | $1,234.56 |
| Net Charge Offs | $1,234.56 | &nsbp; |
However, non-cash basis lenders should seek their own specific tax advice as to which spreading method to use, and how this spreading method applies to income and expenditure arising in respect of their lending.
As above, on termination or conclusion of a loan, a non-cash basis person will generally be required to calculate a BPA under s EW 31 of the Income Tax Act 2007. In broad terms, a BPA is a “wash-up” calculation that brings to tax all income and expenditure accruing under a financial arrangement that has not already been accounted for, for tax purposes.
Where a non-cash basis Lenders carries on a business of holding or dealing in financial arrangements, that Lender should be able to claim a bad debt deduction for Net Charge Offs (provided that the Lender is not associated with the Borrower).
Tax Statement items to note – Payment Protect loans
Cash basis Lenders
For a cash-basis Lender that does not carry on the business of holding or dealing in financial arrangements, the following figures should be relevant for the calculation of your taxable income in relation to your Harmoney Lending:
1Income = Gross Interest +4Protect Borrower Fee Realised +5Commission Rebated
2Deductions = Service Fees Paid +6Sales Commission Amount +7Management Fee Realised
3Tax Credits = Resident Withholding Tax
| Year to Date (FY16-FY17) | Life to Date | |
|---|---|---|
| Harmoney Interest Income | ||
| Gross Interest1 | $1,234.56 | $1,234.56 |
| Resident Withholding Tax3 | $1,234.56 | $1,234.56 |
| Net Interest | $1,234.56 | $1,234.56 |
| Harmoney Fees* | ||
| Service and Lender Fees Paid2 | $23.40 | $23.40 |
| Charged Off Loans** | ||
| Charged Off Principal | $1,234.56 | $1,234.56 |
| Recovered Principal | $1,234.56 | $1,234.56 |
| &nsbp; | &nsbp; | $1,234.56 |
| Net Charge Offs | $1,234.56 |
| Year to Date (FY16-FY17) | Life to Date | |
|---|---|---|
| Payment Protect*** | ||
| Protect Borrower Fee Amount | $200.00 | $1,234.56 |
| Protect Borrower Fee Waived | $1,234.56 | $1,234.56 |
| Protect Borrower Fee Charged Off | $1,234.56 | $1,234.56 |
| Protect Borrower Fee Rebated | $1,234.56 | $1,234.56 |
| Protect Borrower Fee Realised4 | $1,234.56 | $1,234.56 |
| Sale Commission Fee Amount6 | $50.00 | $1,234.56 |
| Sale Commission Fee Realised | $1234.56 | $1,234.56 |
| Sale Commission Fee Rebated5 | $1234.56 | $1,234.56 |
| &nsbp; | ||
| Management Fee Amount | $25.00 | $1,234.56 |
| Management Fee Realised7 | $1,234.56 | $1,234.56 |
| Management Fee Rebated | $1,234.56 | $1,234.56 |
| Waived Principal | $1,234.56 | $1,234.56 |
On termination or conclusion of a loan, a cash basis person will generally be required to calculate a base price adjustment(BPA)under s EW 31 of the Income Tax Act 2007. In broad terms, a BPA is a “wash-up” calculation that brings to tax all income and expenditure accruing under a financial arrangement that has not already been accounted for, for tax purposes.
Where a cash-basis Lenderdoescarry on the business of holding or dealing in financial arrangements, that Lender should be able to claim a bad debt deduction for Waived Principal where that Waived Principal is written off as bad (and provided the Lender is not associated with the Borrower).
Non-cash basis Lenders
For a non-cash basis Lender, income and expenditure arising in respect of a Harmoney loan, including amounts of income and expenditure in relation to Payment Protect, will need to be accrued over the term of the relevant loan, in accordance with an applicable spreading method under the financial arrangements rules.
The financial arrangements rules prescribe various methods of spreading such income and expenditure over the term of the relevant financial arrangement.
Where a lender prepares financial accounts in accordance with International Financial Reporting Standards, that Lender should be able to apply the IFRS spreading method under s EW 15D of the Income Tax Act 2007. Under this method, the tax treatment of income and expenditure will generally follow the treatment for accounting purposes (subject to some potential modifications).
Where a lender is permitted to use a default method under s EW 22 of the Income Tax Act 2007, the Lender will be able to spread income and expenditure over the term of loans in a manner that is consistent with commercially acceptable practice and allocates reasonable amounts to each income year over the loan term. For a taxpayer permitted to use a default method, it may be possible to allocate income and expenditure as follows:
1Income = Gross Interest +4Protect Borrower Fee Realised +5Commission Rebated
2Deductions = Service Fees Paid +6Sales Commission Amount +7Management Fee Realised
3Tax Credits = Resident Withholding Tax
| Year to Date (FY16-FY17) | Life to Date | |
|---|---|---|
| Harmoney Interest Income | ||
| Gross Interest1 | $1,234.56 | $1,234.56 |
| Resident Withholding Tax3 | $1,234.56 | $1,234.56 |
| Net Interest | $1,234.56 | $1,234.56 |
| Harmoney Fees* | ||
| Service and Lender Fees Paid2 | $23.40 | $23.40 |
| Charged Off Loans** | ||
| Charged Off Principal | $1,234.56 | $1,234.56 |
| Recovered Principal | $1,234.56 | $1,234.56 |
| $1,234.56 | ||
| Net Charge Offs | $1,234.56 |
However, non-cash basis Lenders should seek their own specific tax advice as to which spreading method to use, and how this spreading method applies to income and expenditure arising in respect of their lending.
As above, on termination or conclusion of a loan, a non-cash basis person will generally be required to calculate a BPA under s EW 31 of the Income Tax Act 2007. In broad terms, a BPA is a “wash-up” calculation that brings to tax all income and expenditure accruing under a financial arrangement that has not already been accounted for, for tax purposes.
Where a non-cash basis lenders carries on a business of holding or dealing in financial arrangements, that Lender should be able to claim a bad debt deduction for Waived Principal, where the Waived Principal amount is written off as bad (provided that the lender is not associated with the borrower). In addition, where an amount of interest or Protect Borrower Fee owing by a borrower is written off, non-cash basis lenders (whether or not they are carrying on a business of holding or dealing in financial arrangements) should be able to claim a bad debt deduction to the extent that the interest or Protect Borrower Fee had already been accrued by the lenders as income for tax purposes.