Richard's tax updates: May/June

Richard has had over 30 years’ experience with New Zealand and International taxation. His team provide services including:

• Q&A service for accountants
• Tax opinions
• IRD risk reviews and audits
• IRD arrears
• International tax advice

Below are articles from Richard’s weekly email ‘A Week in Review’ over the last month. You can sign up for his ‘A Week in Review’ newsletter here and get the updates weekly, directly to your inbox.

• Small business cash flow loan eligibility criteria, 18 May 2020
• UOMI rates change, 18 May 2020
• Budget 2020… hmm, 18 May 2020
• Courier drivers – employee or independent contractor? 25 May 2020
• Covid-19: your questions answered, 25 May 2020
• Tax free support for those losing jobs, 2 June 2020
• IR determinations – updates issued, 2 June 2020
• IR kilometre rates unchanged for now, 2 June 2020
• First exercise of new administrative flexibility powers, 2 June 2020
• 8-week wage subsidy, 9 June 2020
• New SPS on amending assessments, 15 June 2020
• Tax write-off threshold increased, 15 June 2020
• New tax bill introduced, 15 June 2020
• Final IS in short-stay accommodation guidance series released, 15 June 2020

Small business cash flow loan eligibility criteria

The eligibility criteria for the new Covid-19 related small business cash flow loan facility has now been clarified, with the application process going live on 12^th May 2020 and with a number of our clients already having had their request for financial assistance approved.

We were already aware that the quantum of loan available to each applicant was to be $10,000 plus $1,800 for each fulltime employee (for businesses with no more than 50 employees), that the loan was to be interest free if fully repaid within the first 12 months, or alternatively that it could be repaid over a five year period, with no mandatory payments in the first two years.

Last week, full details of the eligibility criteria was confirmed, which on top of what we already knew, clarified that:

• If the loan was not fully repaid within the first 12 months, interest of 3% p.a. would be charged on the loan, accruing from the date the loan was provided;
• The maximum loan amount was $100,000;
• Sole traders/self-employed with no employees could still be eligible for a loan of $11,800;
• An eligible business was one that presently qualified for the Covid-19 wage subsidy, i.e. amongst other things, had already experienced (or expected to experience before June 2020) a greater than 30% reduction in revenue (month on month 2020 to 2019);
• Commonly owned groups of businesses and organisations treated as a single firm when assessing eligibility criteria;
• All applications are to be made via MyIR, required the input of a NZBN (New Zealand Business Number), and required the applicant to make various declarations including confirming business in existence pre 1^st April 2020, confirming loan proceeds will only be used to fund core operating costs, confirm the business is viable and ongoing (evidential requirements which could include a statement from their accountant), and confirm that the loan would not be passed through to shareholders/owners;
• That loan applications could be made up to 12^th June 2020; and,
• That interest paid on the loan is not subject to RWT and that loan amounts are not income for Working for Families purposes.

UOMI rates change

With the present climate, it is not surprising to see IR adjust both its paying and charging use of money interest rates (UOMI), applied to both over payments and under payments of tax.

The new rates are already in practice now (application with effect from 8^th May), and see a reduction in the Commissioner’s paying rate from 0.81% to 0%, and a reduction in the taxpayer’s paying rate from 8.35% to 7%.

Budget 2020… hmm

Termed ‘The Rebuilding Together’ Budget, it was fairly predictable in these ‘unprecedented times’, that the Government would be throwing everything, including the kitchen sink, at a Covid-19 response package.

And throw they certainly did, a massive $50 billion towards a Response and Recovery Fund, one consequence of which will be to see net core Crown debt levels increase to 53.6% of GDP by 2023.

However there was no mention of any looming tax increases to fund the spending pot (it is an election year after all), but some of the main take outs (was going to say highlights, but probably not the right term) were:

• An eight-week extension of the wage subsidy scheme, although now with a 50% revenue decline criteria;
• A $150m temporary loan scheme to incentivise businesses to continue Research & Development programmes that would otherwise be at risk because of Covid-19;
• $216m to New Zealand Trade & Enterprise to support exporters;
• A $1b jobs-oriented environmental package;
• A $5b housing package – designed to create 8,000 new jobs over the next four to five years;
• $400m to develop and launch a Tourism Sector Recovery Plan; and,
• A $20b kitty fund, just in case.

Courier drivers – employee or independent contractor?

If you’ve been around as long as I have (I had just ceased working for IR at the time), you may remember the 1993 Court of Appeal decision in TNT Worldwide Express Ltd v Cunningham, which determined the relationship between the company and its drivers, to be that of principal/independent contractor as opposed to employer/employee.

Having just completed an 8 year ‘sentence’ with the Revenue at the time, one of the activities I had been undertaking while in the SME investigations team, was completing reviews on various employers to ensure that they were not trying to ‘contract out’ their obligations as an employer (thereby mitigating their exposures to the various payroll related taxes), simply via expressing the nature of their relationship with their workers as being a ‘contract for services’ in the written contract.

The risks for the Revenue in this regard were twofold – regular deductions of PAYE were not being deducted from the workers payments (increasing the risks that income taxes would not be paid – IR’s computer systems certainly lacked the power they have today), and as independent contractors, the employment deduction limitation contained in section DA 2(4) ITA07 no longer applied, so that those workers who did actually declare the income, were declaring less of it, due to the deductions they were now entitled to claim (so less revenue being collected for the Government coffers than arguably should have been in true ‘contract of services’ relationships).

The employer review generally involved completing a multi-page questionnaire, which targeted five specific elements of any working relationship – a series of tests which had been developed by the case law over time (still used in practice today):

1. the intention of the parties test;
2. the control test;
3. the independence test;
4. the fundamental test; and,
5. the integration test.

Having applied these tests in practice for some time, the decision in TNT came as a surprise to many, particularly due to the significance of the level of the control that the company exhibited over its drivers, including:

• the company set the type and colour of the vehicle used and stipulated the advertising it was to carry;
• the company controlled the routes and directed the customers to be serviced;
• the driver was required to wear a uniform; and,
• the driver was not to engage in any other courier contracts.

The Court of Appeal however did not specially address the five classical tests in the case, instead deciding to acknowledge that…

“Courts must recognise the increasing use of contracts for services in many business activities, of which courier and other owner-driver operations are but one example. Where there is a large organisation and a competitive industry, a considerable degree of control may be required to ensure cohesion and efficiency, and a high public profile. This will be for the benefit of the contractors as well as of the owners of the business. The voluntary assumption of such controls in order to gain entry to the industry should not be seen as reason for treating the contract as other than what on an overall consideration it truly is. There are many reasons why both employer and contractor prefer the independent contractor arrangement. They should be free to exercise their choice without paternalistic intervention by the Courts.”

The Court concluded therefore, that the owner-driver accepted only that degree of control and supervision necessary for the efficient and profitable conduct of the business he was running on his own account as an independent contractor, and found that the following factors supported an independent contractor status, in that each courier driver:

• had his or her own territory;
• provided the vehicle, the goods and services transport licence required under the Transport Act 1962, an approved radio-telephone and insurance;
• was responsible for employing any relief driver;
• was employed under financial arrangements that were consistent with an independent contractor and not with salary and wages, with goods and services tax included in the invoices and the payment of accident compensation levies by the owner-driver;
• was remunerated mainly per trip; and,
• carried the risk of profit or loss in the contractor’s business.

Now you may be wondering by now, what’s my point? Why are we discussing one of New Zealand’s leading case law authorities on employee/independent contractor distinction that is nearly 30 years old?

Well the answer is simply curiosity.

I am just curious, and exploring the possibility of whether an Employment Court decision released last week, may eventually lead to a change in approach by IR, particularly if the decision is appealed by the courier company, but is then reaffirmed at the highest levels.

Why? Because the facts of this case which involves Parcel Express are so similar to TNT, yet the judgement has determined an employment relationship exists between the parties.

Following on in the light of the current ethos that “employment relationships should not be viewed through a conventional contractual lens”, the judge considered the requirement of section 6 of the Employment Relations Act 2000 to determine “the real nature of the relationship” between the hirer and the worker, and that while the courier company promoted aspects of “freedom and flexibility for its driver”, in the judge’s view these benefits were actually not real, particularly when balanced against some very substantial restrictions over the driver which included that he:

• was assigned a run, the boundaries of which were set by the company and in which he had no say (even as to changes in the run);
• performed the job full-time from Monday to Friday and had to be back at the depot at three specified times during the day;
• worked where and when he was directed by the company and was required to work in Parcel Express’s best interests at all times;
• had to wear a uniform specified by the company and observe its procedures and the commands of its managers;
• had to attend in-house briefings;
• had to maintain a telephone link at his home, and provide another vehicle if his own vehicle — required to carry the Parcel Express colours and insignia and to be otherwise free of all other information, even his name — was not in good order and condition;
• had to take out insurance with a company approved by Parcel Express, and for an amount and for such risks as it decided;
• could not take more than 20 working days’ holiday in a year without the prior approval of the company and had to organise a relief driver, who had to be approved by the company, during any period of leave; and,
• was subject to a restraint of trade (for six months post termination and within a 100 km radius of Auckland’s CBD) and to confidentiality requirements.

In the judge’s opinion, few of these elements could be said to be mutually beneficial, and she was not swayed by protestations about industry practice. 

Time will tell naturally whether the case goes to appeal, and equally how IR attempts to use this decision to distinguish between those contractual relationships relying on TNT and other case law authorities to support their principal/independent contractor positions. If we do see such a trend start emerging from IR, how wide-reaching will its effects be, as it certainly would not be limited to the courier driver industry in my view.

Food for thought.

Covid-19: your questions answered

Have you seen this useful link – https://www.ird.govt.nz/roles/tax-agents/covid-19.

It is a regularly updated Questions and Answers for Tax Agents covering a myriad of Covid-19 tax related issues, including any legislative changes further to Government response packages, late filing issues (LTC elections, subvention payments etc.), and IR’s approach to tax residency determinations, where for example, a person may have had their physical presence in a particular taxing jurisdiction extended unintentionally due to border movement restrictions.

As a good example of its usefulness in terms of providing IR views, the first round of legislative response measures saw the reintroduction of depreciation on commercial buildings from the 2021 income year. For those clients operating short-stay accommodation facilities like Airbnb, IR has proactively recognised that this will likely lead to questions by these taxpayers as to whether an Airbnb (due to the nature of the operation) can be classified as a commercial building and consequently depreciated.

IR’s view – not if there are less than four separate units within the same property, due to the recently passed legislative amendment to the definition of a residential building in section YA 1:

Residential building —

(a) means a dwelling; and

(b) includes a building intended to ordinarily provide accommodation for periods of less than 28 days at a time, if the building, together with other buildings on the same land, has less than four units for separate accommodation.

Tax free support for those losing jobs

From 8^th June 2020, those who have lost their jobs due to the impacts of Covid-19 during the period 1^st March 2020 to 30 October 2020, will be entitled to apply for and receive the Covid Income Relief Payment (CIRP).

CIRP is a 12 week scheme, payable at the rates of $490 per week for a full-time worker (usually worked more than 30 hours per week) and $250 per week for part-time workers (usually worked 15 – 29 hours per week). For those previously working less than 15 hours per week, CIRP is not available to them, and they will need to consider other financial assistance options already provided by the Ministry of Social Development (MSD).

CIRP will also be available to those self-employed persons, if due to Covid-19, their businesses are no longer viable, and there is no prospect of any further work or income.

For both affected employees and the self-employed, CIRP’s amounts received are tax-free, and will not be treated as income for either child support, Working for Families or student loan purposes.

A person may apply for CIRP provided they are either a New Zealand citizen or a New Zealand resident and they normally live and work in New Zealand.

Income testing will apply to CIRP applicants, with no entitlement to the scheme arising;

• should the applicants partner earn $2,000 or more gross per week in wages or salary,
• should the applicant have received a redundancy payment of $30,000 or more,
• should the applicant receive income protection insurance payments or,
• should the applicant be receiving earnings-related ACC payments.

CIRP entitlements are not affected however by any non-work income the person receives such as rental income.

CIRP recipients cannot receive the Jobseeker Support benefit at the same time, and a person receiving CIRP is expected to seek work or retraining during the 12 week period, and should new work be found, then the CIRP payments will cease at this time.

Applications to receive CIRP can be made up until 13^th November 2020.

IR Determinations – Updates Issued

IR has certainly continued being busy of late with its publications, last week issuing a number standard-cost updates to previous Determinations issued.

The first was with respect to DET 09/02 – Standard-cost household service for childcare providers, where the hourly standard cost (per child) has been increased from $3.60 to $3.70 and the annual fixed administration and record-keeping standard cost from $352 to $361.

The second was in relation to DET 19/02 – Short-stay accommodation, where the daily standard-cost household service for short-stay accommodation (for each guest) has been increased from $50 to $51 for an owned dwelling and from $45 to $46 in respect of a rented dwelling.

Finally, DET 19/01 – Household boarding service providers, has had its standard-cost household service for boarding service providers increased from a weekly standard cost (per boarder) of $186 to $191.

Last week also saw the release of the National Average Market Values (NAMV) of Specified Livestock Determination 2020, applies to specified livestock on hand at the end of the 2019/20 income year. NAMV’s are used by taxpayers who are in the business of livestock farming to value their livestock on hand where the taxpayer has elected to use the herd scheme to value livestock in an income year.

IR kilometre rates unchanged for now

Around this time of year, IR will usually release its kilometre rates for the business use of vehicles (either used to reimburse the use of an employee’s private vehicle for work purposes, or alternatively for taxpayers choosing not to base their deduction claims on actual costs incurred), which in the present case, could be used by taxpayers filing their March 2020 income tax returns.

However as IR sources the information from a third party to then calculate the applicable per kilometre rates, it has advised that one impact of Covid-19 has been a delay in receiving the required information from the third party, and consequently taxpayers should continue to use the 2019 rates for their 2020 filing positions or reimbursing their employees at this time.

Once the 2020 rates are released, taxpayers who have filed their 2020 income tax returns and feel that they have been materially adversely affected by using the 2019 rates, can seek an adjustment via either section 113 or 113A of the TAA94.

The 2019 rates were:

• Petrol/diesel vehicles – 79c for Tier 1, 30c for Tier 2
• Petrol hybrid – 79c for Tier 1, 19c for Tier 2
• Electric – 79c for Tier 1, 9c for Tier 2

If you require a recap on how to apply the kilometre rates in practice, reference should be made to either OS 19/04A: “Commissioner’s statement on using a kilometre rate for business running of a motor vehicle — deductions” or OS 19/04B: “Commissioner’s statement on using a kilometre rate for employee reimbursement of a motor vehicle”.

First exercise of new administrative flexibility powers

You may recall that the recent passing of the Covid-19 Response (Taxation and Other Regulatory Urgent Measures) Bill, provided the Commissioner with greater administrative flexibility powers to deal with potential Covid-19 impacts on a group of affected taxpayers in attending to their compliance with the various Revenue acts.

Prior to the legislative change, the Commissioner would usually require an Order in Council to amend the likes of a particular filing due date, which in itself was not a time efficient process.

Last week we saw the first exercise of the new flexibility muscle, with the issue of Determination COV 20/01, which in this case has application to section HB 13(3)(b) of the ITA07, which governs the due date a new company must file an LTC election by, in order for that company to essentially obtain the LTC status from day one.

With respect to a ‘new’ company that commenced during the 2019 income year, those entities with a tax agents extension of time, in essence had until 31^st March 2020 to file the LTC election notice. However recognising that the country was in Level 4 lock-down on the 31^st March 2020, which may therefore have impacted on the ability of the company to file the LTC election on time, IR has issued COV 20/01 to extend the due date for filing until 30^th June 2020.

8-week Wage Subsidy

The key update I wanted to alert you all to, was a couple of changes to the eligibility criteria for the new 8-week wage subsidy, which include:

• businesses now only having to show a revenue drop of 40% or more, reduced from the previous 50% requirement: and,
• an adjustment to the period of the revenue drop (which is compared to revenue of the comparable period last year), which must now be for a 30-day period in the 40 days immediately prior to the application date (but beginning no earlier than 10 May 2020), where previously the period was simply the 30 days before the application date.

There has also been an extension to the application period for the small business cash flow loan, which was to end on the 12^th June, but has now been extended to the 24^th July.

New SPS on amending assessments

IR has issued SPS 20/03 – Requests to Amend Assessments, which is to replace the previous version, SPS 16/01, effective 2^nd June 2020.

The standard practice statement is in essence a guidance document for both IR staff and taxpayers, reflecting how the Commissioner should exercise her discretion, when considering s.113 (TAA94) applications to have prior assessments amended to ensure their correctness.

The main take-outs from SPS 20/03 are:

• Most s.113 requests will be considered using a four-phase process:

1. Initial examination of request to see if the matter can be disposed of simply (either by making the amendment or not).
2. If it cannot, consideration of whether additional resources should be applied to consider the request further.
3. Determine whether a correct assessment will result from the requested amendment; and,
4. Finally, determine whether there is any residual reason (other than limited resources) why the requested amendment should not be made.

• Most requests involving clear arithmetic, transposition or keying errors, will be accepted and processed without any further consideration by IR.

• For more complex scenarios, IR’s care & management principles (s.6 & 6A TAA94) will require consideration – basically, will exercising the discretion protect the overall integrity of the tax system, and will it collect the highest net revenue practicable over time having regard to:
   
  • The resources available to the Commissioner; and
  • The importance of promoting compliance, especially voluntary compliance, by all persons with the Inland Revenue Acts; and
  • The compliance costs incurred by persons.

• Note that if you are able to make the correction yourself applying either s.113A (TAA94) or proviso to s.20(3) (GSTA85), then you should not make a s.113 application (although in limited circumstances it may still be accepted). An s.113A correction provides for two scenarios where the tax involved is either income tax, GST or FBT – error of $1,000 tax or less, or where the error is not material. Materiality in this regard is determined by the tax involved being less than or equal to the lesser of $10,000 or 2% of the annual gross income/output tax (as applicable). This is a ‘per single return’ threshold test. The proviso to s.20(3) is essentially your automatic entitlement to claim any GST input tax not previously claimed, within a two year period of the earlier of the date you paid that input tax or received a tax invoice in respect of it.
• The ‘residual’ reasons which may lead to IR still declining an s.113 request, include tax avoidance concerns, and where the amendment will simply change one correct assessment to another one due to taxpayer having a ‘change of mind’ (note this differs from ‘mistake / oversight’ or ‘lack of possession of all relevant facts at time’ scenarios).
• S.113 requests can be made via phone or in writing (incl. via myIR), however where tax effect of amendment greater than $10,000, the request must be in writing.
• For ‘qualifying individuals’ (individual who only earns ‘reportable income’ for an income year and has no other income information that must be provided to IR), they should not be using the s.113 option to amend any ‘IR finalised account’ until post the relevant terminal tax due date, as prior to this date, the individual can freely amend the income information, with each previous assessment then effectively disregarded.
• The only available process for challenging any s.113 decision made by IR, is via a judicial review.

Tax write-off threshold increased

The threshold for writing off tax owed by a ‘qualifying individual’ (refer to definition above) has increased from the present $50 to $200, effective 3^rd June 2020.

New tax bill introduced

The Taxation (Annual Rates for 2020/21, Feasibility Expenditure, and Remedial Matters) Bill (273-1) has been introduced into Parliament, targeted to support growth and assist businesses on the road to economic recovery.

So, what is in there:

A new deduction provision targeting feasibility expenditure, ensuring it does not become ‘black-hole’ type expenditure (for which no deduction is available under the law) and therefore discourages such investment spending. So providing the expenditure incurred in completing, creating or acquiring property, that would be either depreciable or revenue account property if completed, but is abandoned prior to completion and no other deduction is available under the Act, then deduction can be spread evenly over a five year period. Also a compliance cost saving measure, where immediate deduction available in cases where annual spend less than $10,000 (even where no abandonment of project), provided the expenditure not deducible under other provisions – i.e. cannot be used as a replacement for tax depreciation of low-value assets. Note that there will also be a claw-back, should the abandoned project be subsequently completed.

Land tax provisions – an expansion of the regular pattern restrictions in the main home exclusion, the residential exclusion, and the business premises exclusion to apply to regular patterns of buying and selling land by a group of persons acting together. The amendments will ensure that taxpayers cannot structure around the regular pattern restrictions by using different people or entities to carry out separate transactions, or by varying what is done to the land in each transaction so that there is no ‘pattern’. 

Purchase price allocation rules – to prevent vendors / purchasers adopting different price allocations that results in revenue loss to IR (e.g. vendor applies larger amount to goodwill, whereas purchaser allocates smaller goodwill and larger to fixed assets/trading stock). Core elements are:

• If the parties agree an allocation, must follow in tax returns;
• If the parties do not agree an allocation, vendor entitled to determine allocation, must notify both purchaser/IR within two months of change in ownership of assets. However, vendor must allocate amounts to taxable property (depreciable / revenue account property etc) such that there is no additional loss on the sale of that property.
• If vendor does not make allocation within the two-month time frame, purchaser entitled to determine the allocation, and notify both vendor / IR.
• IR may challenge an allocation if considered not to reflect market values; and,
• The rules will not apply to a transaction if the total purchase price is less than $1 million, or the purchaser’s total allocation to taxable property is less than $100,000.

GST on mobile roaming services – in essence use your mobile phone overseas and roaming charges still subject to GST, but equally for non-residents in NZ using their mobile phones, their roaming charges not subject to GST.

Tightening the definition of eligible R&D expenditure for the R&D tax incentive, as prescribed in s.LY 5 (ITA 07) to clarify that only expenditure that is directly connected with an eligible R&D activity is eligible – expenditure must be required for conducting an R&D activity, integral to conducting an R&D activity, and directly related to conducting an R&D activity.

Beneficiaries as settlors – if, at the end of an income year, a beneficiary of a trust is owed more than $25,000 by the trustee and interest has not been paid on this amount at the prescribed or market rate, then the beneficiary will become a settlor of the trust.

Final IS in short-stay accommodation guidance series released

IR has released IS 20/04: Goods and services tax: GST treatment of short-stay accommodation, the final in its series of interpretation statements to provide guidance on the income tax and GST consequences of providing short-stay accommodation through peer-to-peer websites such as Airbnb, Bookabach and Holiday Houses.

The main points I took from IS 20/04:

• ‘Short-stay accommodation’ means accommodation provided for less than four weeks.
• Confirmation the supply of short-stay accommodation by a registered person is not an exempt supply (meaning it is potentially subject to GST). Most of you will be aware that accommodation supplied in a dwelling will be an exempt supply for GST purposes, however the legislative definition of a dwelling requires that the occupier must use the property as their principal place of residence and that they will usually have rights of quiet enjoyment. Neither of these requirements will usually exist in a short-stay accommodation scenario, and therein lies the logic of why such supplies may be subject to GST (consider GST registration threshold, what other activities the owner is also carrying on, are they already GST registered, is the short-stay accommodation activity either continuous/regular etc).
• Once the property is in the GST net, you have to pay GST output tax upon the subsequent sale (assuming the property is still in the GST net at that time), even if you have not claimed any GST input tax on that property (note s.21F will trigger an input tax claim entitlement however, to the extent any input tax has not yet been claimed).
• Determine if the accommodation satisfies mixed use asset criteria (private/income use, left empty >62 days in the year etc). If so, then you’ll need to apply the s.20G formula when calculating input tax claims. Remember that the MUA rules are applied on an income year basis, i.e. a MUA one income year, may not necessarily be a MUA in the following or prior income year.
• Be aware of your s.21 adjustment calculation provisions – actual use changes over the adjustment period; goods acquired prior to registration; wash-up adjustments for continued 100% taxable/non-taxable use; pre-1^st April 2011 property purchases, and,
• Most importantly (due to potential penalty exposures), do not forget the deemed disposal rules (GST output tax based on market value of property at the time) if you decide to cease your short-stay accommodation activity (which could include leasing the property long-term – which now satisfies the dwelling definition).

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