Richard's October 2020 tax updates

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.

• CSR application to certain supplies, 5 October
• GST of LHFAP payments received by body corporates, 5 October
• We’re here to help you, 5 October
• Political party tax promises comparison, 12 October
• Labour comes out on top – what’s next? 19 October
• Returning to work earlier than planned, 27 October

CSR application to certain supplies

IR has just released a draft QWBA, as a follow-up to IS 17/08 – Goods and Services Tax – Compulsory Zero-rating of Land Rules (General Application). It was felt that IS 17/08 left the door open on certain supplies, from the perspective of whether they involved a supply that wholly or partly consisted of land.

The QWBA discusses the following supplies:

• the sale of transferable development rights (TDR’s),
• the sale of standing timber,
• the sale of a purchaser’s interest in a sale and purchase agreement for land; and,
• the grant of a licence to use land.

For those of you who have not dealt with TDR’s before, they are essentially a saleable right that is created when an owner of land who in essence has land that the local Council does not favour further development of (environmentally sensitive properties, open space, wildlife habitats, historic landmarks, or any other places that have value to a community), sells their right to develop their own land (so for example covenants with Council they will fence off from farming a wetland area which can then become a wildlife habitat), to someone who owns land that Council would like to see developed further (say in an urban area), but presently lacks the right under the RMA to do so for whatever reason. So, the first person, the owner of donor land, can sell their TDR to the second person, the owner of the receiving site.

Now because a TDR is ‘purely a creature of the RMA’ as one court judgement referred to them, and in essence simply enables the owner of a receiving site to obtain a subdivision consent where they would not otherwise have been able to, my first thought was that while the TDR was clearly not an estate or interest in land itself, it would also not have a sufficient causative link to amount to a right that gives rise to an interest in land either, because the owner of the receiving site is simply obtaining a right to subdivide land which they already own.

IR however considers that the phrase ‘gives rise to’ should be interpreted broadly, thereby meaning ‘indirectly or directly gives rise to’ and consequently considers that a TDR does give rise to an interest in land, to which the CZR rules should apply.

The QWBA then progresses through an analysis of the other three items, with findings that:

1. The sale of standing timber which is a profit à prendre (the right to take something off another person’s land, or to take something out of the soil) is an interest in land under the common law, therefore subject to CZR;
2. Application of the CZR rules to the sale of a purchaser’s interest in a sale and purchase agreement for land, is dependent on whether the sale and purchase agreement is binding or non-binding. Note that most conditional agreements (e.g. subject to finance) are still binding as opposed to say an agreement where a due diligence process must be completed first before the purchasers will bind themselves to a contract with the vendor, which would be a non-binding agreement. The former is subject to CZR, where the latter is not.
3. The grant of a license to use land does not create any interest in the land or proprietary right that is binding on the licensor, and consequently a supply of this nature will not be subject to CZR.

The deadline for comment on the draft QWBA is 3^rd November 2020, its reference being PUB00381.

GST on LHFAP payments received by body corporates

IR has issued a Commissioner’s Statement CS 20/05, with respect to the GST treatment of payments received by a GST registered body corporate from the Ministry of Business, Innovation and Employment (MBIE) under the Leaky Homes Financial Assistance Package (FAP).

Under the FAP scheme, MBIE makes payments to eligible claimants as a contribution towards the repair of their leaky property.

It is considered that a payment under the FAP scheme from MBIE to a body corporate is not a payment in respect of any actual supply of goods and services made by the body corporate in return for that payment. However, these payments are in the nature of a grant or subsidy from the Crown under section 5(6D) of the Act, and therefore are deemed to be in response to a supply from the body corporate.

Consequently, a GST registered body corporate which receives such payments is therefore obliged to include the GST component in its GST return and to pay for any net GST output tax.

We’re here to help you

IR has issued a timely reminder to small businesses, that one of its present priorities is to assist small businesses affected by the impacts of Covid-19. With the wage subsidy scheme at an end, I suspect we will now start to see the real damage the pandemic will inflict on small businesses throughout New Zealand, both pre-Christmas and well into the New Year.

IR says it can help taxpayers and their businesses in several ways, support that extends to the self-employed, those working as a contractor or as a sole trader. Available amongst other support measures are: 

Small business cashflow (loan) scheme – This is a one-off loan with a term of five years. A business may be entitled to a loan of up to $10,000 plus $1,800 per full-time-equivalent employee. The annual interest rate is 3% beginning from the date of the loan being provided. Interest will not be charged if the loan is fully paid back within one year.

Loss carry-back scheme – This can be used if a business is expecting to make a loss in either the year 2020 or 2021. The loss can be offset against profits from the previous year. IR can refund some or all of the tax already paid for the previous year before the loss year has finished or the return is filed.

Instalment arrangement – An instalment arrangement can be set up to pay tax off over time and interest and penalties can be waived. This applies to businesses with tax due between 14 February 2020 and 25 March 2022.

Provisional tax payments – If a business is paying provisional tax on the expectation of making a certain profit this year and no longer thinks the business will be making that profit, a re-estimate can be made at any time in myIR. This will reduce the provisional tax payments. IR can also arrange early refunds if provisional tax has been overpaid.

A full list of available support and the latest Covid-19 initiatives can be obtained directly from IR’s website.

Political party tax promises comparison

A couple of weeks back, AWIR covered a number of Parties election tax policies. With not much happening in New Zealand’s world of tax last week, this edition is dedicated to a brief recap for those of you who missed the previous edition, plus a few extras:

Labour:

• Increase the tax on incomes more than $180k to 39%.

• No other changes to other existing tax brackets and rates (still no mention of any change to the trustee rate).

• No other new taxes introduced during the next parliamentary term.

Maori:

• A vacant house tax. Leave your house unoccupied for more than three months in any one year and face a 2% tax on its capital value.

• A capital gains tax of 2% on properties other than the family home.

Act:

• A three-tiered personal marginal tax rate regime as opposed to the present four-tiered system, dropping the 30% rate so that you would be taxed at 17.5% from $14k to $70k.

• Cutting the GST rate to 10%, but only until June 2021.

• Temporarily exempting redundancy payments from tax.

National:

• No new taxes or increases to existing taxes.

• Within three years, adjust income tax brackets for inflation and regularly thereafter.

• Temporary increase in tax thresholds from 1^st December 2020 to 31^st March 2022 – $14k increased to $20k; $48k to $64k, and $70k to $90k.

• To improve the rental market – remove ring fencing of rental losses and reduce five year bright-line period back to two years.

• Repeal the Auckland regional fuel tax.

Greens:

• Introduce a wealth tax – 1% where individual net wealth over $1m, 2% where over $2m. Application to those using trust structure and ability to defer the tax on a home until it is sold.

• Introduce two new income brackets from 1^st April 2021 – income over $100k taxed at 37% and over $150k taxed at 42%.

NZ First:

• Increased penalties for tax evasion.

• No increases in personal or business taxes and oppose any plan to introduce a capital gains tax.

Advance NZ:

• 0% tax up to $35k, lower flat upper tax rates for individuals and businesses.

• Review tax arrangements for multi-nationals.

• No capital gains tax on sales of residential properties and remove GST from real estate fees.

• Removal of GST from food and medicine.

New Conservative:

• $10b in tax cuts via changes in bottom tax bracket (first $20k tax free) and petrol tax reductions. 17.5% bracket extended to $60k, 30% to $100k and incomes over $100k taxed at 33%.

• Government charges such as council rates exempt from GST.

• Introduce ability for couples to split income to reduce income tax.

• Repeal of Auckland regional fuel tax.

• Explore replacing GST with a financial transaction tax – Every Transaction Tax.

TOP:

• Introduce a tax-free universal basic income of $13k pa for those over 18, and additional $2,080 pa per child.

• Introduce flat tax of 33% on all income, which would also apply to companies, trusts and PIE’s.

• Introduce a 33% property tax based on the equity value of each property owned (3%).

• Remove tax from Kiwisaver investment earnings.

Labour comes out on top – what’s next?

We saw yet another relatively quiet week on the tax front, perhaps not surprising in the run up to Election 2020. I don’t think anyone would have been surprised with that result however, with the exception perhaps that Labour this time was not going to need to hold anyone’s hand for the next three years and has the mandate to govern alone.

So, what’s next on the taxation agenda then, with Jacinda and her team getting ready to take the reins again within three weeks.

Well if they do indeed stick to their pre-election tax policy promises, then the only changes in store in the short term at least, are an increase in the top personal tax rate to 39% for income above $180,000, and if the OECD doesn’t hurry up and reach some sort of consensus, the introduction of a digital services tax, targeting predominantly multi-national corporations.

It has been just over a decade since we last saw the 39% top rate, the implementation of which also saw the introduction of section GB 27 – attribution rule for income from personal services ‘PSAR’. Section GB 27 at the time, was IR’s newest addition to its arsenal of specific anti-avoidance provisions. The increase to the top personal tax rate, saw no corresponding amendments to either the company or trustee tax rates (both 33%), so there were concerns that taxpayers would shelter themselves from the impact of the higher rate, via the use of interposed entities – most commonly a self-employed person (‘working person’) restructuring their business into a company which was wholly owned by a trust.

Section GB 27 contained a 4-step test, PSAR applying if all 4 of the following tests were satisfied:

1. 80% or more of the interposed entities personal services income was from the same person (widened to include associated parties of the person), and,
2. 80% or more of the work was done by the working person (widened to include a relative of the person), and,
3. The working persons net income for the year, assuming PSAR applied, would exceed $70,000, and,
4. Substantial business assets were not required to be used to derive the personal services income.

Like any new toy, IR played around with PSAR quite a bit in its first year or so, issuing the usual scare tactic blanket dump of fishing letters to all and sundry, suggesting that ‘you’d better front up with your voluntary disclosures before we get to you’.

For those of you who were around at the time, you may also recall that the Revenue were not just satisfied with using their new toy in its current form, but were also keen to see how they could modify the personal attribution concept, extending their review activities to those who had interposed entities (many well before any inclination was given as to the tax rate increase) and had multiple clients (so GB 27 of no application), but were not paying themselves what IR considered was a ‘market salary’. Particularly targeted were those who had capped their company shareholder salary to $60,000 (the 39% threshold at the time), and would have minimal defences to IR’s assertions that they were clearly flouting the system to avoid the 39% tax rate, even when they had been paying themselves this level of salary for some time.

However, like all toys, once they grew a bit older, and new toys arrived under the tree, and we saw the top marginal rate reduce to 33% again, in more recent years I have not experienced the same level of enthusiasm from the Revenue to raise the personal attribution issue. Sure, with a lower company tax rate now than both the individual and trustee rates, there is the potential to obtain a timing deferral by retaining profits within the walls of the company rather than paying larger shareholder salaries or dividends, however as most of us will appreciate, many of our SME clients just want the cash in their hands to live on, so deferring the pay-outs just to temporarily save 6% is out of the question in any event.

Like all articles I write, hopefully for the reader there is some purpose behind the topic, and I can say that yes there is for this article too.

The FAQ attached to Labour’s tax policy statement says that there are no plans to increase the trustee rate at the same time, there being a view that there are legitimate reasons for people to use trusts. However, that stated viewpoint also comes with the attached warning – “But if we see exploitation of the trust system then we will move to crack down on those people who are exploiting it. The Government has invested more than $30 million into IRD’s capacity to go after people dodging their tax obligations, and we will continue this work.”

So my suspicion is that we will start to see a re-emergence of the attribution questions by IR, for those clients paying themselves salaries of less than $180k, retaining profits within the company to an extent that coupled with the shareholder salary there is a quantum in excess of $180k, with the retained profits being paid out as dividends to a shareholding trust shortly thereafter. Thankfully, according to Labour, only the top 2% of income earners will be affected by the new top tax rate, so we will not see the influx of letters coming across our desks as we did when the trigger threshold was only $60,000.

In closing, no commentary I have seen yet as to timing, but my guess would be a kick-off date of 1^st April 2021, for income years commencing post that date.

Returning to work earlier than planned

Finding a nexus with taxation for this article is probably as difficult as trying to write-off the cost of having your teeth crowned (my latest experience!) but nevertheless a good ‘just so you know’. Covid as we know it has had all sorts of consequences, one of those being that employees on parental leave may be looking to return to work earlier than planned for a number of reasons.

In the first instance, both the employer and the employee have a duty to act in good faith to ensure the early return benefits both parties, and in this regard, the employer should be clear as to whether it is considered to be an occasional, temporary or permanent return to work.

With an occasional return, the employee can have ‘keeping in touch’ days to help them remain connected to their employer, however the total hours during their parental leave payment period cannot exceed 64, and they cannot work within 28 days of their child’s birth. Breaching these conditions results in the employee being considered to have returned to work permanently, thereby forfeiting all further parental leave payments. Any further payments made to the employee are then considered to be an overpayment, which must be paid back to IR (aha, there’s the nexus!).

Temporary amendments to the parental leave legislation during Covid, have provided for employees to be able to return to work temporarily, without forfeiting any remaining leave entitlements. A qualifying employee in this regard is a ‘Covid-19 response worker’ – for reasons related to the Covid-19 outbreak, there is an unusually high demand for workers in their role, or their skills, experience or qualifications and nobody else can fill their role. Eligible employees can return to work for up to 12 weeks and then go back on parental leave.

Finally, there is the permanent return to work, which requires the employer’s agreement and at least 21 days advance notice. There are some rather sombre exceptions however, where a child is miscarried, stillborn or dies, or for whatever reason the employee is no longer the primary carer of the child.

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