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
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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.
- Clean, green, rebate scheme, 16 August
- In need of Covid-19 support?, 23 August
- Calculating foreign tax credits, 23 August
- Excusing estates from income tax filing obligations, 30 August
- Using the right RWT rate, 30 August
- Hotel, motel, boarding house on-site living expenses QWBA, 30 August
- Employee working from home payments, 30 August
- Using foreign exchange rates, 6 September
- You can run but you can’t hide, 6 September
- Home office claims – watch out!, 6 September
- RSP eligibility criteria change, 6 September
- Tax Bill introduced, 13 September
- Determining bloodstock cost price, 13 September
Clean, green, rebate scheme
Have you bought your new EV yet to take advantage of the Governments Clean Car Discount Scheme?
In case you’ve been living under a rock and have not heard about the regime, purchasers of new and used zero and low emission vehicles which are first registered in New Zealand between 1st July 2021 and 31st December 2021, will qualify for a rebate. That is unless the purchase price of the vehicle (including GST and on-road costs) exceeds $80,000, or the Rightcar website specifies a less than 3-star safety rating for the vehicle.
The rebate for zero emission vehicles is $8,625 for a new vehicle and $3,450 for a used model, while low emission (plug-in hybrids) new vehicles qualify for $5,750, with a $2,300 rebate for those used versions.
However clearly I’m not simply writing this article in an attempt to encourage you to clean up your image by dangling the rebate carrots in front of you. Instead, most things in my world come back to tax, and this article is no different. If your vehicle is to be used for business purposes, and someone is giving you money to assist you in buying it (attempting to make it more affordable in this instance in comparison to petrol and diesel alternatives), then questions surrounding income tax, GST and FBT implications are likely to arise.
In this regard, Inland Revenue has kindly issued some guidance, which not only applies to these rebates, but also to those persons who post 1st January 2022 will incur a fee due to their vehicles high emissions.
From an income tax perspective, the rebate/fee is neither assessable income nor a deductible expense. However the amount does affect your depreciation calculations for the vehicle, reducing the vehicles cost base in respect of a rebate received and conversely increasing it where a fee has been paid.
Similarly, where FBT is to be paid on the vehicle, the cost base used to determine the taxable value of the benefit will be reduced by the rebate amount, and increased where a fee is incurred.
Finally, from a GST perspective, if the person is GST registered and receives a clean car rebate for a vehicle which is used in the taxable activity being carried on, then under the rules which apply in relation to the receipt of Government grants, the amount received is a deemed supply and the registered person must return GST on the rebate in their next GST return.
Note that the above rules also have application to a lessor who acquires the vehicle to lease to others under an operating lease. However where the lease is a finance lease, the base cost of the vehicle will be determined under the financial arrangement rules in the usual way.
In need of Covid-19 support?
Firstly, I hope you are all coping okay with our latest lock-down, which I suspect, for those of us located in Auckland at least, will extend for another week, if not two, just to ensure we do completely stamp out this community outbreak.
Moving to an alert level 4 lock-down has activated a raft of Covid-19 support measures, which you or your clients may now wish to seek. I thought it would be useful to outline them here for you, although remember, the best place to check for anything regarding the pandemic is here.
Wage Subsidy Scheme (WSS) – any eligible employer (including those who are self-employed) in New Zealand can apply for the WSS if they expect a loss of 40% of revenue (as a result of the move to alert level 4 on 17th August):
- over the period 17 August 2021 to 30 August 2021 (inclusive) (revenue test period), when compared to a typical 14-day consecutive period of revenue in the six weeks immediately prior to the move to Alert Level 4 on 17 August 2021 (default comparator period); or,
- if you are an employer that has highly seasonal revenue, of at least 40% over the revenue test period when compared to the same 14 consecutive days in 2020 or 2019 (seasonal comparator period), provided you can demonstrate that the seasonal nature of your business makes it harder to meet the 40% revenue decline using the default comparator period than if your business was not of a seasonal nature; and
- in relation to your above two calculations, you exclude any payments made to you in relation to this subsidy, other Covid-19 Wage Subsidy schemes, the Covid-19 Short-term Absence Payment scheme, Covid-19 Leave Support schemes, Covid-19 Essential Workers Leave Support scheme, Covid-19 Resurgence Support Payment scheme or the Covid-19 Small Business Cashflow scheme.
For commonly owned groups, it is a whole of group approach as opposed to individual companies within the group. When you apply for the WSS, the rules are the same as previously in terms of including such things as:
- the need to sign a declaration, which includes signing off that prior to applying for the WSS, you took active steps to mitigate the impact of the lock-down on your business (e.g. talked to your bank, used cash reserves etc);
- retaining evidence of how the decline in revenue was attributable to the move to alert level 4;
- existing employment law obligations remain, and you will confirm that you will retain the named employees for the period of the subsidy claim;
- you’ll use your best endeavours to pay the named employee at least 80% of wages; and,
- you’ll repay any amount of the subsidy as appropriate.
Note that the rates of the WSS have increased to $600 per week per full-time equivalent employee and $359 per week per part-time employee. The wage subsidy will be paid as a 2-week lump sum and applications are already open.
Resurgence Support Payment (RSP) – you are entitled to claim this support as well as the WSS, and it is available if you incur a loss of 30% of revenue (or decline in capital-raising ability) as a result of the alert level increase (compared with a typical 7-day revenue period in the 6 weeks prior to the increase from alert level 1). When the RSP is activated, eligible businesses and organisations can apply to receive the lesser of:
- $1,500 plus $400 per full-time equivalent employee (FTE), up to a maximum of 50 FTEs, or
- 4 times (4x) the actual revenue decline experienced by the applicant.
To be eligible, you must have been in business for at least six months, be considered viable/ongoing, have a physically present New Zealand business, the 30% decline must be actual and not forecast, and you must have a NZBN (New Zealand Business Number).
You can find out more about the RSP criteria here.
Leave Support Scheme (LSS) – this support provides a two-week lump sum payment of either $585 per week for full-time workers, or $350 per week for part-time workers, who must self-isolate and cannot work from home. You can check here for the full eligibility criteria here.
Short-term Absence Payment (STAP) provides a one-off (once per 30 days) $350 payment for workers who must miss work due to a Covid-19 test and cannot work from home. This payment is also available to self-employed workers. You can check here for the eligibility criteria here.
Calculating foreign tax credits
IR has released a draft interpretation statement titled “Income tax – foreign tax credits – how to calculate a foreign tax credit”. The document reference is PUB00370.
The commentary explains how to calculate a foreign tax credit under subpart LJ of the Income Tax Act 2007. Its introduction section states:
- an important part of this calculation is to divide the foreign-sourced income into segments. To do this, the foreign-sourced income must first be divided by country and then further divided by source or by nature (s LJ 4).
- once the foreign-sourced income has been segmented, the person’s notional New Zealand income tax liability must be calculated. A formula is then applied to find the amount of New Zealand tax payable for each segment of foreign-sourced income. Any expenditure incurred must be attributed to each segment, and some adjustments may be required.
- the person is then entitled to a foreign tax credit for the foreign tax paid on the segment, up to a maximum of the amount of New Zealand tax payable on that segment.
PUB00370 is broken into three parts – part 1 explaining how to calculate a foreign tax credit and relevant compliance obligations, part 2 explains in greater detail how to segment foreign-sourced income, and finally, part 3 illustrates how the foreign tax credit calculation applies in some specific scenarios. I would suggest that the flow chart on page 3 is very useful as a first glance determination of whether you may or may not have an entitlement to claim a credit for foreign taxes paid.
The document is 54 pages long, and can be found here.
Excusing estates from income tax filing obligations
You may be aware that section 43B of the Tax Administration Act 1994, can be used by trustees of a non-active trust, to obtain an income tax filing exemption, similar in the way in which non-active companies can obtain the same.
It is not unreasonable to think of the estate of the deceased which is under the control of executors and administrators as being similar to a trust, and consequently should be entitled to the section 43B exemption. However, at common law this is not the case, and the Commissioner has now issued Operational Statement OS 21/03 to clarify when she considers that the executors/administrators of an estate have transitioned from holding the property in the estate “in the right of the deceased” to now holding that property “on trust”.
Some of the confusion, actually I expect it’s the core reason, is created by the fact that an estate file an IR6 income tax return, which you will all be aware is the income tax return for a trust. However, this is purely for administrative convenience, and not because the Commissioner considered an estate was automatically a trust.
So, when exactly would an estate become entitled to the section 43B filing exemption? Well initially the executors/administrators have duties to collect the deceased’s property, to use it to meet any expenses, debts and legacies, and then to distribute what is left according to the directions in a will or the law of intestacy. A trust will only arise when executors/administrators have completed their duties to the point that they stand ready to “distribute” the remaining property – aka the “assent” phase. If at this point, rather than distributing the remainder assets to other trustees, the executor/administrator continue to hold the assets in a trustee capacity and no longer in the capacity as executor/administrator, then a trust has now arisen for the purpose of section 43B. Note that when this occurs, the estate does not need to apply for a new IRD number to recognise that it has now transitioned to being a trust.
Using the right RWT rate
Unsure of the correct RWT rate to provide to payers of interest and dividends? Well let me share with you IR’s published guidance.
If you’re an individual, you can elect 10.5%, 17.5%, 30%, 33% and 39% (although the payer has until October 1st to make the 39% deduction rate available to you). Now if you have provided your IRD number to the payer but forgot to advise them an RWT rate, then for existing accounts they should deduct at 17.5% and for new accounts, 33%. Be aware however, that if you haven’t provided your IRD number, then you’ll be stung 45%.
If it’s a company (not acting in a trustee capacity), the elective rates are 28% or 33%. Forget to elect, but an IRD number has been provided, then it’s a set 28%, otherwise again you’ll be stung 45%.
If it’s a trust or any other taxpayer, elective rates of 17.5%, 30% and 33% (although a testamentary trust can also elect 10.5%), and the same rate exposures as an individual, where no election made and an IRD number either has or has not been provided to the payer.
The trickier scenarios are in relation to joint accounts, where only one RWT rate can be elected. Usually, IR expects the income from a joint account to be split equally between the account holders (there is the ability to elect otherwise by notifying IR), so it will be a case of selecting an RWT rate appropriate to the likely end of year taxable incomes of the account holders. Note that where the account holders are a mix of resident/non-residents, RWT must be deducted (not NRWT) and if this results in the non-resident being over-taxed, then they should either file an IR3NR or IR386 form to recover the excess.
The RWT rate for dividend payments is a flat 33%, although the rate will be reduced to the extent that imputation credits are attached to the dividend, to a minimum 5%.
Hotel, motel, boarding house on-site living expenses QWBA
IR has now finalised its QWBA QB 21/10 titled, “If I run a hotel, motel or boarding house and live on site, what expenditure can I claim?”
I would suggest that the take-outs from the commentary are not rocket science – all costs solely related to the running of the business are fully deductible (the general permission – subject to any general limitation, primarily the capital limitation), those solely related to the proprietors private quarters or family life are non-deductible being private or domestic in nature (the private limitation), and those expenses that relate to both aspects (say the rates for the property) are deducible to the extent that they relate to the running of the business.
If you have an on-site manager or other employee living on the premises, then the costs relating to their accommodation will also be 100% deductible (subject to any of the general limitations applying).
When calculating the deductible proportion of any mixed-use expenses, most commonly a space and time calculation methodology will be appropriate – however you are quite entitled to use another method, if that calculation would be easier or more accurate for your particular circumstances.
QB 21/10 is a 15-page document and around eight of those pages are filled with examples.
Employee working from home payments
The latest lockdown and the potential for future lockdowns (at least until the population is substantially vaccinated) due to the Delta variant, with the consequent scenarios of employees working from home where they are able to, and employer payments being made to compensate for increased cost exposures in this regard, has seen IR issue Determination EE003, hot on the heels of previous versions EE001, EE002, EE002A and EE002B.
Partly the release is due to the fact that Determination EE0002B only applied to payments made to employees up to 30th September 2021, so the issue of Determination EE003 facilitates the extension of the payment period, plus enables IR to amalgamate all the information from the previous four documents into the one determination.
Determination EE003 is titled “Payments provided to employees that work from home; employee use of telecommunications tools and usage plans in their employment” and applies to payments made by employers for the period from 1 October 2021 to 31 March 2023. For the determination to apply:
- an employer must make a payment to an employee
- the payment must be for expenditure/loss incurred (or likely to be incurred) by the employee
- the expenditure or loss must be incurred by the employee in deriving their employment income and not be private or capital in nature (the capital limitation does not apply to an amount of depreciation loss)
- the payment must be made because the employee is doing their job and the employee must be deriving employment income from performing their job
- the expenditure or loss must be necessary in the performance of the employee’s job; and,
- where an employee is partly working from home and partly outside of their home, the home-based work must be more than minor. (For example, the determination can apply to an employee who works at the employer’s premises on alternate days).
Rather than trying to set out all the rates and specifics of Determination EE003 here, it is recommended that you refer to the determination directly (which can be accessed directly from IR’s website), but in essence the set exempt income rates are $15 per week (works from home but no use of employees own telecommunication tools and/or usage plans), $20 per week (where employee works from home and does use their own telecommunication tools and/or usage plans) and $5 per week (where employee does not work from home but does use their own telecommunication tools and/or usage plans). There is also a single $400 per employee amount to reimburse the employee for the costs incurred in acquiring new furniture and equipment to enable them to work from home.
It should be noted that Determination EE003 is not binding on employer or employees, and following the principles of section CW 17, an employer could make alternative payments to the employee as exempt income.
Using foreign exchange rates
I suspect that when most of you are wanting to convert a client’s foreign currency amounts into New Zealand dollars (NZD), you simply jump on IR’s website and look-up the appropriate rate here. Since April 1st, IR has commenced obtaining these rates from the Reserve Bank of New Zealand.
While it is certainly convenient in my view to use what has been published by the Revenue for the purpose of your calculations (and unlikely IR will dispute the same), you can (unless the Act or Commissioner prescribes a currency conversion method, rate or source for a particular transaction or arrangement) obtain your foreign currency exchange rates from other sources.
In this regard, IR has published an exposure draft titled ‘Foreign Exchanges Rates’ with the reference PUB00401, which is a determination to approve the sources of rates that can be used to convert a foreign currency into NZD to determine a tax liability if the rates needed are not published by IR, or the rates published by IR are not used; and the use of mid-month, end of the month and rolling average rates.
If you use appropriate rates from either the IR link posted above or the foreign exchange rates published by a country’s central bank, then these rates will be considered acceptable for converting your foreign currency amounts to NZD. Depart from the use of either, however, then the risk exists that IR will not accept the rate you selected as correctly reflecting the NZD amount for your tax position – for example, where the rate selected is not considered to be appropriate given the nature of your transaction.
The draft determination also explains how you should source mid-month, end of month and rolling average rates from your selected source, and how to calculate a mid-rate of a currency where one is not provided – for example, instead you are given two rates for the relevant currency – a bid/buy rate and a offer/sell rate. Also explained is what to do if the source does not provide an NZD base rate (often a USD rate will be given however, so naturally you’d convert into USD and then convert into NZD).
Note that if you choose your own rate source, then you must also apply your source consistently (from year to year). If you’d like to comment on PUB00401, please do so no later than October 11th. I think I’ll just stick with my trusty link.
You can run but you can’t hide
Well, that’s certainly the intention of The Convention on the International Recovery of Child Support and Other Forms of Family Maintenance (the 2007 Hague Convention) which was concluded at the Hague on 23 November 2007 and was ratified on 23 July 2021 and will be active in New Zealand from 1 November 2021.
So, if you do want to be able to hide, just make sure it’s not to one of the other 43 countries who have also signed the Convention, where commencing November 1st, IR will be able to lean on them to request collection and enforcement of child support and domestic maintenance.
Home office claims – watch out!
Clearly IR must have too much time on its hands if you’ve had a chance to read the latest issue of ‘Agents Answers’. The article in question discusses home office claims and suggests that if a company uses a home office, that is, the home of one of its shareholders, it will not be able to claim a deduction for the office unless it has incurred the actual cost.
In this regard, IR’s view is that a company can only claim a deduction where the following conditions are satisfied:
- The company can prove a nexus between its business income and the home office expense that the company is claiming. Any private portion cannot be claimed.
- The company has incurred the expenditure within the income year the deduction is being claimed. That is, it has a liability to pay the expense either direct to the provider or to the homeowner.
- Appropriate accounting records must be kept showing that these conditions have been satisfied, along with any agreement allowing the company to use the home.
The commentary then goes on to discuss that payments to shareholders can only be exempt income to the shareholder (applying section CW 17) where an employment relationship exists i.e., the person is considered a shareholder employee. Since it’s a Monday and I’m feeling kind, here’s the Act’s definition so you don’t need to go looking for yourself:
shareholder-employee means a person who receives or is entitled to receive –
(a) salary or wages to which section RD 3B or RD 3C (which relate to income other than PAYE) applies:
(b) income, other than from a PAYE income payment, to which section RD 3B or RD 3C applies,
Now I must admit that I am certainly not going to be losing a lot of sleep over the article, materiality being the primary reason for that, but because they’re made the effort to say something, you might just want to mention to any non-shareholder-employee client of yours with a home office, that the numbers they give you annually do have some sort of correlation to actual expenses incurred by them, just in case the Revenue comes knocking on their home office door.
RSP eligibility criteria change
Now refocussing on something that is actually important, hopefully by now, those of you entitled to make a resurgence support payment claim due to the present Alert Level changes, have already lodged your application and been paid out.
However, if you have a new business, you may have felt you lucked out due to not being able to satisfy the requisite six-months in business eligibility criteria. Well from 8am on the 9th of September, all this is about to change, the six-month qualifying criteria is being reduced to one-month, so as long as you commenced your business prior to 17th July 2021, you will now be entitled to make a claim (satisfying all the remaining criteria of course – 30% decline in revenue being the main element).
Now remember that the RSP is a single one-off claim to assist with rent and other fixed costs during the higher Alert Level period – calculated as $1,500 plus $400 per FTE employee up to 50 employees (max payment $21,500). I suggest no hurry in making your claim (purely from a cut-off perspective) however, as its going to remain open until we’ve all been back at Alert Level 1 for a month, and sadly I think that is a long way off yet.
Tax Bill introduced
Last week saw the introduction of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill, and for once, I’m quite excited, if it’s possible to use such words when one is referring to a proposed new legislation?
Why would that be you may ask (or perhaps you’ll just think I’ve been in lock-down for too long)? Well, post the recent frustrations of the increased bright-line period to ten years and the interest deduction limitation proposals, a fair number of the amendments to be affected by the Bill are actually taxpayer friendly.
While the draft legislation includes both income tax and GST amendments, it’s the latter that has really got me buzzing (I’m sure there’s a more of a ‘hip’ word for it now, but I’m still old school), and will be the sole focus of my narrative here.
Amendment number one – ok so, this one hasn’t really got me excited, but I thought I should include it regardless, is the clarification that crypto-assets are neither subject to GST nor the financial arrangement rules. However naturally where crypto-assets themselves are used to acquire good or services, those latter transactions will still have GST consequences.
Amendment number two – now this is a real goody. Presently, if you use an appreciating asset (most commonly land), for both taxable and non-taxable use, when you go to dispose of that asset, your input tax claim is limited to the GST content of the original purchase price – so you are effectively over-taxed. To explain, you buy an asset for $11,500 which you use from the outset 25% for private use. In your first GST return you only claim an input tax deduction for $1,125 therefore, and then because the use is consistent for the next three years, no further adjustments are required. You then dispose of the asset for $23,000 (clearly it’s a piece of Auckland land!), which has a GST component of $3,000. Now you should only have to pay $2,250 GST due to the assets 75% taxable use, however the current disposal adjustment calculation only allows you to claim any input tax included in the original purchase price which you have not yet claimed – so $375.00 in the present case. So you have to pay $2,625 GST to IRD, not $2,250, and are therefore over-taxed by $375.00. The amendment will ensure the disposal calculation enables you to claim $750.00 additional input tax in the disposal return period, with the consequence that you will now only be paying GST on the taxable use portion. The amendment will apply from 24th February 2020.
Amendment number three – the plate of goodies continues with this amendment. Presently if you acquire second-hand goods from an associated person, and that associated person acquired the goods from a non-registered person, then your GST claim is nil. This is due to an anti-avoidance rule introduced many years ago, which introduced a ‘lessor of’ rule (cost, market value or vendors original GST cost) to determine your input tax deduction claim. Now like a fair number of anti-avoidance rules, it was an over-reach provision, capturing numerous transactions where there was no ‘mischief’ in the mind of the taxpayer. The proposed amendment will remedy this over-reach, by now permitting you to claim an input tax credit equal to the tax fraction of the purchase price of the goods paid to the non-associated vendor. This change will apply from date of enactment.
Amendment number four – this one will certainly assist any overseas clients you may have who are importing goods into New Zealand, and wholly supply only New Zealand GST registered customers (B2B). Presently these non-residents cannot use the special non-resident business claimants regime to recover the New Zealand Customs GST (potentially their only New Zealand GST cost), because the rules currently deem the New Zealand recipient to have incurred the New Zealand Customs GST, not the non-resident business – another anti-avoidance rule to ensure no GST seepage risk where the imported goods are being received by a non-GST registered customer (or a GST-registered one, but the goods are not for use in the taxable activity). Now due to existing place of supply deeming rules, the only way the non-resident supplier could recover the New Zealand Customs GST, was to register for GST under the standard regime, but to do this, they would then have to have their New Zealand B2B customer agree that the place of supply was deemed to be in New Zealand, and consequently a taxable supply would occur (thereby entitling the non-resident to recover input taxes incurred in making those New Zealand supplies). The amendment will allow a non-resident business to now utilise the special GST regime to recover their New Zealand Customs GST provided the goods are going to a New Zealand B2B customer, instead of having to proceed down the standard GST registration process. This change will also apply from date of enactment.
Amendment number five – in essence is a reflection, that like me with my non-hip use of words, existing GST documentation rules are well past their use-by date, and are certainly out of step with modern business practices. The GST invoicing rules have basically remained unchanged since their introduction in 1986. Post-date of enactment of this amendment, two new terms will be introduced – ‘supply information’ and ‘taxable supply information’ – a list of information now automatically to be supplied by the supplier to the recipient (gone are the days where the recipient has to request a tax invoice from the supplier). The recipient will then simply use the ‘taxable supply information’ to file their input tax claims (so no longer requiring a tax invoice), but there will be penalties imposed on the recipient, where it is discovered that they have claimed the same input tax more than once. For those who use the ‘buyer-created’ tax invoice regime, the requirement to apply for IR approval will also disappear, going forward, there simply needing to be an agreement between the parties that only the recipient will provide the ‘taxable supply information’.
Amendment number six – finally and hopefully this amendment will not be needed in practice too often, but it’s taxpayer friendly nevertheless. Presently if there is a zero-rated transaction and post settlement it is discovered that the zero-rating treatment was incorrect, the purchaser has the obligation to pay the appropriate GST that should have been charged on the supply, with the excess tax payable in the return period covering the settlement date (usually). Not a good outcome if the error is not ascertained until six-twelve months down the track – the purchaser now exposed to penalties and use of money interest as well. The proposed amendment will move the timing to the return period during which the recipient of the supply became aware of the zero-rating error, and will apply from the date of enactment.
Now I expect you are excited too?
Determining bloodstock cost price
If you are a breeder of bloodstock, then QB 21/09 – ‘How to determine the cost price of bloodstock’ may be for you.
The QWBA outlines how to determine the cost price of bloodstock, and it is relevant to a person who has a bloodstock breeding business.
The answer given in QB 21/09, is that the overarching principle is that, wherever possible, actual cost should be used as the basis of valuation. Where the actual cost is not known with certainty, such as with homebred progeny, a consistent means of establishing the cost price of that progeny is still required. For home-bred progeny, the cost price should reflect the cost to the breeder of producing the foal.
QB 21/09 is a ten page document with a number of examples throughout.
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