Tax Updates: 11 April 2023

Welcome to this week’s review of tax issues where Richard comments on what’s been happening in the world of tax over the past week. If you have a question or would like a second opinion on any national or international tax issues, please contact Richard via email at richard@gilshep.co.nz.

New reports issued post-passing of tax bill

Inland Revenue (IR) has issued three new special reports post the passing of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (No 5 of 2023), which received the Royal assent on 31st March 2023.

The first report provides commentary on the new build-to-rent exclusion from the interest limitation rules. While you, like me, may have been excited at first (do the words excited and tax actually go together?) to hear of the new exclusion, a deeper dive into the proposal brought only heart-break, with an appreciation that it was only targeted towards large-scale rental property projects – 20 or more dwellings. If you do meet the asset class definition however, then your residential land will be deemed to be excepted residential land, and therefore have an in-perpetuity exclusion from the new interest limitation rules. Note however that you must continue to satisfy the asset class definition over subsequent periods, and should you fail to do so, then you will no longer be able to rely on the exclusion.

The second report provides commentary on the amendments made to the GST apportionment and adjustment rules. The main changes in this regard are:

• Introducing a principal purpose method (main, primary, or fundamental purpose, which does not necessarily equate with “more than 50 percent taxable use” for goods and services acquired for $10,000 or less (GST exclusive) that allows a registered person to claim a full GST input tax deduction (instead of apportioning the deduction based on the percentage taxable use). Note that the method is optional, but if you do not elect to use it (and therefore continue to use the general apportionment rules – because under the rule if the good/service was not acquired for the principal purpose of making taxable supplies, you now have no input tax claim), then you are locked into your choice for at least 24 months (applies to acquisitions post 1st April 2023).
  
• Changes to the number of required adjustment periods – no subsequent adjustments are made for goods or services acquired for $10,000 or less; ten years for land (was unlimited); two years for goods and services acquired for between $10,000 to $20,000 (GST exclusive) (applies to adjustment periods beginning on or after 1st April 2023 – so if in the adjustment period ending 31st March 2024, you have now made the requisite number of adjustments under the new rules for an asset acquired in 2021, you do not have to make any further adjustments – at least until you sell the asset at which time a wash-up adjustment under section 21F may still be required).
  
• Allowing GST-registered persons to elect to treat certain goods that have mainly private or exempt use, such as dwellings, as if they only had private or exempt use. This means no input tax deduction is claimed when purchasing the goods, and no output tax is charged when the goods are sold. To utilise this election, you cannot have acquired or used the goods for the principal purpose of making taxable supplies (from the “acquired” perspective – principal purpose means main, primary, or fundamental purpose, which does not necessarily equate with “more than 50 percent taxable use”), you must not have claimed any GST input tax on either the cost of the goods or capital improvements made to the goods, and you must not have acquired the goods as a zero-rated supply (say land under the CZR rules) unless you have made an output tax adjustment for the nominal GST component under section 20(3J(a)(iv) – an adjustment which must have been made post 1st April 2023. Note that in relation to the “no input tax claimed” component, there is a transitional rule for goods acquired pre-1st April 2023, where you can repay any input tax claimed during the window of 1st April 2023 to 31st March 2025. Further, you can still claim the input tax on operational costs (like power and rates related to a home office) without then dragging the good into the GST net. To take advantage of the new rule, unless you are utilising the transitional period to remove a good from the GST net, you do not need to notify IR of your election, instead simply taking a tax position when the relevant good is disposed of, not to reflect any output tax payable on that supply. (Applies to goods acquired post 1st April 2011, which consequently results in taxpayers who have disposed of assets and not accounted from any output tax as being deemed to have taken correct tax positions, however, only those who have paid output tax on a disposal of goods (but would not have been required to under the new rules) between the period 30th August 2022 and 31st March 2023 can apply to have their tax positions reassessed).
  
• The wash-up rule contained within section 21FB will be able to be applied at the end of the adjustment period in which any permanent change of use occurred (as opposed to the present rule of having to wait another whole adjustment period), and it can be applied to any permanent change percentage, not just 100% changes. So, if you permanently changed your land use from 100% taxable to 30% taxable, you will now be able to make a one-off adjustment under section 21FB for the 70% change, whereas previously you could have only made the one-off adjustment if the land use was changing to 100% non-taxable use (applies to adjustment periods beginning on or after 1st April 2023).
  
• The mixed-use asset rules contained within sections 20(3JB) and 20G will be repealed from 1st April 2024, and have effect from the first adjustment period beginning on or after 1 April 2024. So for a mixed-use asset acquired in 2022, you would use the mixed-use adjustment rules in the adjustment period ending 31st March 2024, but then the general adjustment rules in the adjustment period ending 31st March 2025.

The third report provides commentary on the tax relief for North Island flooding events. In this regard, a legislative exemption is provided for certain welfare contributions made by an employer to employees because of the North Island flooding events. The exemption may be applied to accommodation, “sundry” fringe benefits when the employer cannot reasonably estimate which employees received which benefits, and the first $5,000 of monetary remuneration and fringe benefits of the kind where the employer can reasonably be expected to know which employees received which benefits. A further legislative change extends the definition of “project of limited duration” for projects that are recovering and rebuilding the affected areas (applies where the employee starts work at the distant workplace within six months of the first date of the relevant North Island flooding event).

The Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 (No 5 of 2023) also included several other proposals, which in the main have been enacted as originally drafted. I covered these proposals in some detail in September 2022 editions of AWIR, but briefly:

Platform economy – think Uber, Airbnb, and the like – basically electronic marketplaces that connect buyers with suppliers of goods and services. The Bill includes two proposals to ensure that New Zealand (NZ)’s tax settings remain fit for purpose considering the platform economy and its expected growth. The first proposal is targeted at ensuring IR has better access to information about income earned by sellers on digital platforms based in NZ and offshore. It will see the implementation of an OECD information and reporting exchange framework in NZ that would require NZ-based digital platforms to provide IR with information annually about the consideration sellers on those platforms received from relevant activities. The original proposal was amended at the select committee stage however, where the activities subject to the new requirements were reduced to just those relating to the rental of immovable property (including commercial, short-stay, and visitor accommodation), and personal services (including any time- or task-based work, such as ride-sharing, food and beverage delivery, and graphic and web design services). The regime would commence in the 2024 calendar year with the first information reporting obligations (and exchange) occurring in early 2025. The second proposal is targeted towards maintaining and promoting the sustainability of NZ’s broad-based GST system by requiring digital platforms to charge and collect GST on services provided through them in NZ. This will see a category of “listed services” introduced, within which would be included “taxable accommodation services”, which would include all forms of accommodation (such as commercial, short-stay, and visitor accommodation) other than exempt residential accommodation, and “transportation services” which would be ridesharing, and beverage and food delivery. The new rules would take effect on 1st April 2024.

Bright-line – clarifying the bright-line test exclusion for inherited property. Inherited residential land is effectively exempt from the bright-line test. This outcome is achieved through three different sections in the Income Tax Act – sections CB 6A(2B), CZ 39(7), and FC 9 – but it is not always clear that they operate together. The amendments will work to clarify that the bright-line test does not apply to the transfer of the land from the deceased to a beneficiary beneficially entitled to the residential land under the terms of the deceased’s will or the rules governing intestacy, including any intervening transfer to an executor or administrator, or to a scenario where the executor or administrator of the estate or the ultimate beneficiary sells the residential land. The proposed amendments would take effect on the day after the date the Bill receives the Royal assent.

Land tax provisions – partitioning of land among co-owners. The proposed amendment would ensure that the allocation of subdivided land among the co-owners of the original undivided land does not constitute a disposal for the land sales provisions. This exclusion would apply to the extent that the value of the allocated properties under the partition aligns with the co-owners’ interests in the original undivided parcel of land and contributions to development and construction costs. Any difference in these proportions (including any wash-up payments between the parties) would continue to be subject to income tax where applicable, as this difference would represent an economic change in ownership and actual disposal. The proposed amendment would have effect for partitions occurring on or after 27 March 2021.

GST – improvements to the place of supply rules. The proposed amendments would enable a broader range of suppliers to use the proxies available to non-resident suppliers of remote service and distantly taxable goods to determine the GST treatment of their supplies. Section 8(4) currently allows the non-resident supplier of goods that are in NZ at the time of supply and the GST-registered recipient of those goods to make an agreement that the supply is made in NZ – however, it has been acknowledged that it can be burdensome to enter into and manage these agreements in circumstances where non-resident importers have a lot of GST-registered customers. The amendment proposes replacing the requirement to have an agreement with the recipient of the goods with an option for the non-resident supplier to unilaterally treat the supply as being made in NZ. The non-resident supplier would implement this by charging 15% GST on the supply of the goods. The proposed amendments would take effect on the day after the date the Bill receives the Royal assent.

Time for a plug

Sometimes overlooked but often simply misunderstood are NZ’s transfer pricing rules. We have a specialist in our team working on the below issues, so if you do have any concerns or are in need of any assistance, please do not hesitate to contact us.

Restricted transfer pricing:
Do you have NZ clients with related party loans borrowed from their overseas affiliated companies in excess of NZD 10 million? If you do, there is a potential risk that your clients may be subject to the restricted transfer pricing (RTP) rules. The RTP rules are enacted from income years commencing on or after 1 July 2018. Under the RTP rules, IR has stipulated a set of rules that restrict the credit rating of NZ borrowers, which effectively reduces the interest rate that the overseas affiliates could charge. IRD expects an in-depth analysis to be undertaken by the NZ borrower to substantiate that the interest rate is at arm’s length.

Further, RTP rules also disregard certain features, such as the term of the loan being more than five years or the borrower being allowed to defer interest payment for more than 12 months (this is not an exhaustive list). We are able to price the interest rate by accessing Refinitive Eikon’s database (recognised by IRD) on cross-border related party loans to ensure alignment with the RTP rules.

Transfer Pricing
Do you have clients that have been charged by their cross-border associated parties, for the following services:

• Royalty fees/license fees on the intellectual property, including patent/know-how, trademarks and tradenames;
• Cash pooling arrangements;
• Management fees (including HR, accounting and legal services);
• Purchase and sales of finishing products; or,
• Provision of IT infrastructure services.
  If you do, it is important to ensure the overseas associated parties are charging at an arm’s length rate. We are able to review your clients’ transfer pricing position and advise if they have any potential risk areas which are likely to be challenged by IR.

If you have a question or would like a second opinion on any national or international tax issues, please contact Richard via email at richard@gilshep.co.nz.

This article was originally published through the A Week In Review newsletter. If you would like to receive Richard’s tax updates every Monday morning, you can subscribe here.