Richard has had over 30 years’ experience with New Zealand and International taxation. His team provide services including:
- Q&A service for accountants
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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.
- ‘Safe Harbour’ provisions almost up, 7 September 2020
- Frucor loses on appeal, 7 September
- Extension to R&D approval date, 14 September 2020
- Labour announces tax rate increase, 14 September 2020
- What is the first step? 14 September 2020
- GST agency or not? 14 September 2020
- International tax reforms report, 21 September 2020
- Understanding cryptoasset taxation, 21 September
- Offering the carrots, or are they? 28 September 2020
‘Safe Harbour’ provisions almost up
I’ll sneak it in here, because while not directly tax related, firstly I am short on content this week with the tax front line being rather quiet last week (unless you were excited to hear that Family First had won its charitable status claim in the Court of Appeal), and secondly, because arguably indirectly it is tax related. Because without the safe harbour provision, directors could be potentially exposed to the Inland Revenue for having allowed their ships to continue sailing whilst in the midst of a liquidity storm.
The Covid-19 Response (Further Management Measures) Legislation Act 2020 introduced with effect from April 3rd 2020, a ‘safe harbour’ from sections 135 and 136 of the Companies Act 1993, which would provide potential relief to company directors facing insolvency as a result of Covid-19.
Section 135 is the reckless trading duty that directors owe to creditors, and section 136, the duty in relation to a director not agreeing to the company incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so. Naturally, in a Covid-19 environment, these two provisions come to the fore, putting pressure on directors to seriously considering winding up the business or otherwise face a personal liability exposure.
Under the ‘safe harbour’ provision, directors’ decisions to keep on trading, as well as decisions to take on new obligations, over the coming six months would not result in a breach of duties if:
- In the good faith opinion of the directors, the company is facing or is likely to face significant liquidity problems in the next six months as a result of the impact of the Covid-19 pandemic on them or their creditors.
- The company was able to pay its debts as they fell due on 31 December 2019 (or the company was incorporated between 1 Jan and 3 April).
- The directors consider in good faith that it is more likely than not that the company will be able to pay its debts as they fall due within 18 months (for example, because trading conditions are likely to improve or they are likely to able to reach an accommodation with their creditors).
It is important to note that the safe harbour provisions are not designed to support an entity that has no realistic prospect of continuing to trade by deferring a decision about liquidation to the detriment of its creditors.
Directors must also be aware that these temporary safeguards do not release them from their other obligations and duties under the Companies Act 1993. These include acting in the best interests of the company, and their duty of good faith, and that directors can still be held accountable for a serious breach of these duties, and for dishonestly incurring debts.
The ‘safe harbour’ provision is due to expire on 30th September 2020.
Frucor loses on appeal
Some of you may have been following the tax avoidance case between IR and Frucor Suntory New Zealand Ltd (‘Frucor’), which Frucor had won in the High Court.
Just to give you the flavour:
“Frucor was advanced $204m by Deutsche Bank in exchange for a fee of $1.8m and a convertible note (the note) redeemable at maturity in five years’ time at Deutsche Bank’s election by the issue of 1,025 non-voting shares in Frucor. The bulk of Deutsche Bank’s advance of $204m was funded by a contemporaneous payment of $149m by Frucor’s then Singapore-based parent, Danome Asia Pty Ltd (DAP), for the purchase of the shares from Deutsche Bank in five years’ time at a pre-agreed price matching the face value of the note (the forward purchase agreement). The balance of $55m was contributed by Deutsche Bank. Upon receipt of the $204m from Deutsche Bank, Frucor immediately returned $60m of capital to DAP in a share buyback and the balance $144m was paid in satisfaction of an existing loan from another Danome entity, Danome Finance SA in France.”
Frucor claimed $66m in interest deductions over the five year period, computed on the full $204m advance, which made IR sad, who claimed that the $66m was in effect $55m of principal and $11m of interest, and Frucor had used our tax legislation in a way that Parliament would never have contemplated (a statement now made famous by the Ben Nevis Forestry case – one which enables the taxpayer to gain the benefit of the specific provision in an artificial and contrived way).
Having lost in the High Court (Muir J comfortable the arrangement was not tax avoidance), IR threw all its toys out of the cot and appealed. The Court of Appeal reinserted a pacifier in IR’s mouth to quieten her down, by allowing the appeal, with a finding that:
- When the economic / commercial effect of the funding arrangement was examined in its context, it became clear that tax avoidance was its principal purpose or effect or, at least, tax avoidance was not merely an incidental purpose or effect.
- By entering into the funding arrangement, Frucor achieved a $66m interest deduction without incurring a corresponding economic cost for which Parliament intended deductions would be available. As a matter of commercial and economic reality, $55m of the claimed interest represented the repayment of principal borrowed from Deutsche Bank and was not an interest cost.
- The primary purpose of the funding arrangement was the provision of tax efficient funding to Frucor.
- The transaction was in many respects artificial and it was clearly contrived for the very purpose of enabling Frucor to gain the benefit of the specific provision allowing interest deductions. Taken together, the features of the arrangement revealed that its purpose was to dress up a subscription for equity as an interest-only loan to achieve a tax advantage. It was hard to discern any rational commercial explanation for the artificial and contrived features of the arrangement, other than tax avoidance.
- The principal driver of the funding arrangement was the availability of tax relief to Frucor in New Zealand through deductions it would claim on the coupon payments. The benefit it obtained under the arrangement was the ability to claim payments totalling $66m as a fully deductible expense when, as a matter of commercial and economic reality, only $11m of this sum comprised interest and the balance of $55m represented the repayment of principal.
- The Commissioner was entitled to reconstruct by allowing the base level deductions totalling $11m but disallowing the balance.
It was not all lose / lose for Frucor however, the Court of Appeal agreeing with the High Court that shortfall penalties should not be imposed in the case. While the Court came to a different conclusion from the High Court on the core tax avoidance issue, it said that Frucor’s arguments could not be dismissed as lacking in substantial merit. The Court acknowledged that Muir J was an experienced commercial Judge, who had not only regarded Frucor’s argument as deserving serious consideration, but he had also explained in a careful, closely reasoned and comprehensive judgment, as to why he was persuaded it was both factually and legally correct.
Extension to R&D approval date
The new R&D tax credit regime now requires taxpayers to obtain approval from IR with respect to the R&D activities they are undertaking. With effect from 1st April 2020, for the 2020/21 and later income years, the due date for filing the approval application, is the 7th day of the second month post the end of the relevant income year – so 7th May 2021 with respect to the 2021 income year of a standard balance date taxpayer.
This week saw the release of COV 20/10, which acknowledges that due to Covid-19, certain taxpayer’s ability to plan/conduct R&D, obtain information, seek advice, and formulate an application may be delayed. Consequently, COV 20/10 will extend the due date for filing the general approval application by three months.
COV 20/10 is a variation that applies for the period 1st September 2020 to 30th September 2021.
A general approval application can specify a period of up to three income years, the taxpayer then simply having to provide a statement to IR for each subsequent income year, confirming that there has been no material change for their business. This statement itself must be provided no later than the 7th day of the second month post the end of the relevant income year.
Labour announces tax rate increase
Post Labour’s win in this year’s election (I just cannot see National getting over the line, even with Crusher Collins now at the helm), they are going to increase the top personal marginal tax rate to 39%, for those with personal incomes in excess of $180k per annum.
This was Grant Robertson’s announcement during the week, unsurprisingly with reference to the recent Covid-19 relief measures (most notably the wage subsidy) which required greater Government borrowing to fund, and now requires new funding sources to repay, and assist the whole country to recover and rebuild.
So, he’s asking
only the top 2% of earners to help. At this time, I have not seen an effective commencement
date, my best guess being 1st April 2021, by the time Parliament
reconvenes, relevant legislation is drafted and passed etc.
The 6% increase in the top rate, is expected to generate $500m additional revenue for the Government coffers per annum (so where is the rest going to come from one may ask?).
There has been no suggestion of any change to either the 28% corporate tax rate, or the 33% trustee tax rate, so we should all expect to see a greater focus by IR on earnings retained by companies in their 2021 and subsequent income tax returns, particularly where a family trust owns the majority of the shares in the company, and additionally where shareholder salary allocations have suddenly reduced when compared to what was paid in 2020 and earlier income years.
What is the first step?
Most of you should be aware, that distributing capital gains during the life of a company does not provide the greatest of tax outcomes, such distributions falling within the ‘dividend’ definition and consequently fully taxable in the shareholder’s hands (with the requisite obligation for the paying company to deduct a 33% dividend withholding tax to the extent that the dividend is not imputed).
To avoid this unfortunate taxing consequence therefore, most capital gains are trapped within the company, until the company is put into liquidation – available subscribed capital per share and most capital gains able to then be distributed to shareholders tax free.
Naturally to understand when it is considered ‘safe’ to distribute the capital gain (or in fact for any transaction where a liquidation status is relevant), one needs to appreciate what IR considers is the first step in the liquidation process.
In 2014, we saw the release of BR Pub 14/09, which covered off IR’s view with respect to short-form liquidations (usually the passing of a directors / shareholder’s resolution confirming the company had ceased to trade etc).
Now IR has released a draft QWBA that explores the same question with respect to long-form liquidations. In contrast to BR Pub 14/09 however, IR’s draft view is that it is not a resolution passing that commences a long-form liquidation, but instead the appointment of a liquidator as required by the Companies Act 1993.
The draft QWBA has a comment deadline date of 21st October 2020 and has a reference PUB00366.
GST agency or not?
And in case you are not interested in long-form liquidation timings, but would still like something to read (because you do not have anything better to do with your time), then you may be more satisfied by PUB00327, IR’s QWBA on the question of GST and agency.
This draft statement discusses whether a person is acting as an agent or as a principal for the purposes of the Goods and Services Tax Act 1985.
PUB00327 is broken into four parts, plus an appendix:
- Part one identifies a series of features that indicate the existence of an agency relationship for GST purposes.
- Part two explains how, in certain circumstances, the Act can operate to modify an agency relationship.
- Part three outlines the specific compliance obligations on agents and principals in the Act.
- Part four contains worked examples that illustrate how to determine whether a relationship is an agency relationship for GST purposes.
- The Appendix contains summaries of relevant agency cases from New Zealand and overseas.
The deadline for comment is 20 October 2020.
International tax reforms report
If you have an interest in what other OECD (The Organisation for Economic Co-operation and Development) jurisdictions, plus the likes of Argentina, China, South Africa and Indonesia, have been up to with respect to both tax reform pre-Covid, and fiscal responses post, then the latest OECD report – Tax Policy Reforms 2020 is just for you.
The report naturally reflects variations within each countries individual Covid-19 relief measures, but without a doubt, the common theme across all jurisdictions is that the response has been significant. Also similar in nature is the focus on adopting a phased approach, modifying relief packages as the pandemic has progressed, the initial target being to ensure household incomes are supported, and business liquidity is maintained, often via access to Government backed, low interest loans from financial institutions.
More recently, it is becoming clear that numerous countries will be supporting their recoveries via the use of expansionary fiscal policies – Government modifying its taxation and spending policies to provide support within the economy where it is needed most.
The report also comments on the pre-Covid world, which reflected a trend of countries focussed on reducing the personal tax rates for low and middle-income households, stabilisation of standard value-added taxes and the continual decline of corporate tax rates.
Take a visit to the OECD’s website – www.oecd.org – if you would like some riveting bedtime reading.
Understanding cryptoasset taxation
If you or your clients deal with cryptoassets, then take note that IR’s taxation guidance has recently been updated on its website.
So first the meaty stuff – what is a cryptoasset? IR’s website description explains that cryptoassets are cryptographically secured digital representations of value that can be transferred, stored, or traded electronically. They use some form of distributed ledger technology such as blockchain.
While cryptoassets is the term IR uses, they are also known as:
- cryptographic assets
- digital financial assets
- digital tokens
- virtual currencies
You can buy, sell, and exchange cryptoassets, provide goods or services in exchange for them, mine cryptoassets, and earn staking rewards (or ‘crypto interest’) among other things.
From a tax perspective, cryptoassets have no special tax rules, however it has been determined that a cryptoasset is treated as a form of property, one consequence of which, is that anything you make from selling, trading or exchanging them is likely to be taxable.
IR’s cryptoasset webpage, as well as explaining what they are (arguably you’re still no further ahead in your understanding post reading the above definition!), breaks the topic down into sections for individuals, businesses and the taxation of cryptoasset income.
With respect to businesses, while your business may not be a cryptoasset business in its own right, you may still deal with them (accept them as payment currency for example) and consequently you will need to understand the taxation implications for your business accordingly.
Check out IR’s website for more info – https://www.ird.govt.nz/cryptoassets/about
Offering the carrots, or are they?
It was a relatively quiet week on the tax front, so with Election 2020 just around the corner, I thought I would use this week’s edition to outline the various parties’ tax policies. So commencing with the incumbent:
- No income tax changes for 98% of Kiwis
- On personal income earned over $180,000 a new top tax rate of 39% will apply – this change affects 2% of earners
- Extra revenue raised will be used to protect health and education, control debt, and support the recovery plan
- No new taxes, or further increases to income tax next term
- We also won’t raise fuel taxes
- We’ll continue closing tax loopholes to make sure multinational corporations pay their fair share
- We will not introduce a capital gains tax under a Jacinda led Labour government
This policy is forecast to generate $550 million of revenue a year. The new tax rate for the top 2% of earners will help keep debt under control, while protecting vital services like health and education.
The new threshold matches Australia’s top tax threshold of A$180,000, but Australians earning over this threshold pay a higher rate of 47% (including a 2% Medicare levy).
My 5c worth: No mention of a shift in the trustee tax rate of 33%, so identical to the last hike to 39%, there will be the usual game playing to attempt to shelter pre-taxed income in interposed structures like companies and trusts, with IR likely to counter with an increased work programme focussing on the application of the ‘attribution rule’ to personal services income sheltered within the walls of these entities.
No CGT under Jacinda – does the phrase beg the question of whether Jacinda’s at the top for the whole next term, or off to create a sibling for Neve (the timing is probably right and she must be tired of putting on that smile all the time, when she continually says “we’ll do this together”), opening the door for a CGT to be introduced once she’s no longer at the helm?
Likely timing of introduction – 1st April 2021, with effect from 2021/22 and later income years.
National’s promising a short-term package of tax cuts – worth about $4.7 billion – to kick start the economy, which it says would put $46.50 each week in the pocket of the average earner. The changes would be made by significant increases to income tax thresholds, but would only be in place for 16 months, from December this year until March 2022. So they will:
- Lift the bottom tax threshold from $14,000 to $20,000, the middle threshold from $48,000 to $64,000 and the top threshold from $70,000 to $90,000, from 1 December 2020 until 31 March 2022 – estimated cost $4.7bn
- Offering a 12-month tax incentive for investments over $150,000 for businesses that invest in new plant, equipment and machinery and double the depreciation rate for such businesses – estimated cost $430m
- Increase the low-value asset deduction from $5,000 to $150,000 for two years
- Increase the provisional tax threshold from $5,000 to $25,000
- Raise the GST registration threshold from $60,000 to $75,000
- Winter Energy Payment would not change
- The previously announced JobStart scheme, paying businesses $10,000 for every new job created
- The BusinessStart scheme, allowing New Zealanders who lose their job to claim $10,000 tax credit and up to $20,000 from KiwiSaver for working capital for a new business
My 5c worth: Nothing earth-shattering on the tax threshold front (arguably any Government of the day should be keeping on top of the thresholds in any event, to ensure they are reflective of wage rise inflation – there has been no change to the thresholds since 2011) so you may say why bother, however it does now provide you with the option of choosing the purple carrot – that’s if you could say Labour was offering an orange one in the first place!
The Green’s have a Fair Tax Plan, the aim to have a fairer tax system to help redistribute wealth from those with the most wealthy to support those with the least. Proposed:
- We’ll tax wealth fairly by introducing a new tax on individuals’ net wealth over $1 million. This means those who have their own wealth worth more than $1 million – not including mortgages and other debt – would be asked to pay a small annual contribution to fund stronger social support for all New Zealanders. This would only apply to the wealthiest 6% of New Zealanders. It is proposed to have a 1% wealth tax, for net wealth over $1 million but less than $2 million, with a 2% wealth tax on any amount over $2 million.
- We’ll update progressive income tax so those earning much more income contribute a little more to help fund better social support for everyone. We’ll introduce new income tax brackets of 37% for income over $100,000 and 42% for income over $150,000. We expect this to generate approximately $1.3 billion a year, which will fund improvements for public health, education, income support, and environmental protection, amongst other things.
- We’ll close tax loopholes and minimise tax avoidance by taxing big digital giants such as Facebook and Amazon (if the OECD cannot agree a multilateral solution to tax digital revenues by 31 March 2021, then impose a unilateral digital services tax of 3% of gross revenues from digital services consumed in New Zealand).
My 5c worth: Time for a change of career path – valuation perhaps – particularly if Jacinda’s off for baby number two and we see a CGT introduced as well.
ACT says it will cut taxes. It would:
- Temporarily cut GST to 10 percent (ending June 2021)
- Permanently cut the marginal tax rate paid by those on the median wage from 30 percent to 17.5 percent, simplifying the tax system to three rates.
So, on your first $14,000, you would pay 10.5 percent. On your next $56,000 you would pay only 17.5 percent, while the rate on income above $70,000 would remain 33 percent, under ACT’s plan.
My 5c worth: So assuming the new Government doesn’t have its first sitting until early in the New Year, then has to draft and pass through the legislation to effect a GST rate reduction from say 1st April 2021, so in essence a three month rate reduction – hmm. And further, so those on a bi-monthly odd filing cycle, would have a 31 July 2021 GST period where they have to compute June’s transactions at 10% and July’s at 15% – double hmm.
Difficult to locate any concise tax policy on their website, however I understand that they are proposing:
- No tax rate rises
- Accelerated depreciation for new investment
- Introduce a ‘give it a go’ scheme to provide tax concessions for start-ups in certain rural and regional New Zealand
- Have an immediate deduction for asset purchases up to $3k for SMEs with turnover of less than $1m
My 5c worth: It’s Winston, what more can one say…
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