Richard has had over 25 years’ experience with NZ taxation, and particularly enjoys dealing with land tax issues and the GST regime. He deals with clients of all types and sizes and provides tax opinions on the appropriate treatment of items of income and expenditure, assists clients with IRD risk reviews and audits and can assist clients who are having difficulties meeting their tax payment obligations to make suitable repayment arrangements with the IRD.
Here are snippets from Richard’s weekly email ‘A Week in Review’ over the last month…
- PE additional guidance doc released
- Tax debt relief options
- Tax bill enacted
- Rent loss ring-fencing
- Farm related QWBA’s
- When is an arrangement materially different?
- Minimum wage increase
- GST registration effective dates
- Changing your balance date
- Useful IR website updates
- Bad debt write-offs – timing is everything
- Door opens for R&D incentives
- Distributing trust’s “goods” to beneficiaries
- Liquidator – rule in re condon applied
PE Additional Guidance Doc Released
The OECD has just released a report entitled “Additional Guidance on the Attribution of Profits to Permanent Establishments (“PE”)”, which is a follow-on to the 2015 final BEPS package report on “Preventing the Artificial Avoidance of Permanent Establishment Status”.
The guidance document sets out high-level general principles, which countries agree are relevant and applicable in attributing profits to PEs in accordance with applicable treaty provisions. It also provides examples on the attribution of profits to certain types of PEs arising from the changes to the PE definition under BEPS Action 7.
One area that will require a rethink by advisors when considering a client’s cross-border trading activities and whether they may have triggered a PE in another State (with a consequent tax filing obligation), is the present list of items deemed not to establish a PE, such as a storage warehouse or those activities which historically have been considered of a “preparatory or auxiliary character”.
The guidance document provides the example of a storage warehouse for a MNE selling its goods on-line. Most of you would probably agree, that provided the MNE simply stores its goods at the warehouse, for the purpose of subsequent delivery to customers, with no activities of a sales nature being undertaken from the warehouse, the MNE would satisfy the PE exclusion. However the guidance document suggests, that since the warehouse would be considered an important asset of the MNE, and where it required a number of employees of the MNE to operate, the PE exclusion would no longer apply because the warehouse would constitute an essential part of the MNE’s sale/distribution business and its storage and delivery activities would no longer be considered to have a preparatory or auxiliary character.
Once a PE has been established under this scenario, the guidance document then discusses how the warehouse should now be treated as if it were a separate and independent enterprise performing the same storage and delivery activities, and profit attribution methodologies in this regard.
You can find the document here http://www.oecd.org/tax/transfer-pricing/additional-guidance-attributionof-profits-to-permanent-establishments-BEPS-action-7.pdf.
Tax Debt Relief Options…
IR has released a draft standard practice statement (“SPS”) ED0200, which sets out the Commissioner’s practice when considering the options to remove or defer the taxpayers obligations under the Tax Administration Act 1994 (“TAA”) to pay tax, interest and/or penalties. The SPS suggests the options available are debt remission, write-off, entering into instalment arrangements or a combination.
The document contains detailed discussion on the issues of:
- Financial relief via entering into instalment arrangements or serious hardship write-offs;
- Unrecoverable amounts including voluntary administration and the no asset procedure (one-off process providing fresh start to natural persons as alternative to bankruptcy – debts from $1,000 – $47,000); and,
- Remission – common grounds for granting relief such as events beyond control and declared emergency events.
It should be noted that draft SPS ED0200 does not apply to either child support or student loans.
The deadline for comment is 18th May 2018.
Tax Bill Enacted…
The Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Bill (249-3) (“the Bill”) passed its third and final reading, and then received Royal Assent and was enacted on 29th March 2018.
A recent addition to the Bill was the increase of the bright-line period for residential land disposals, from 2 years to 5 years, the increased period applying where the purchaser obtained their first interest in the land post the date of enactment (the signing of a binding purchase agreement for most). We now have confirmation that the relevant date is 29th March 2018.
I have included detail on the Bill in previous editions of AWIR, but as a reminder, the main proposals contained in the Bill were:
- setting the annual rates of income tax for the 2017–18 tax year (at the same rates as for 2016–17);
- introducing measures to improve administration of the pay-as-you-earn (PAYE) rules, in particular through the provision of employment information to Inland Revenue (one example being a requirement for employers to report PAYE information on a payday basis, mandatory from 1st April 2019, although PAYE payment obligations remain unchanged);
- introducing changes to improve the collection of information about investment income; and,
- introducing changes to the taxation of employee share schemes.
The text of the Bill as enacted can be found here – http://www.legislation.govt.nz/act/public/2018/0005/latest/DLM7175206.html
Rent Loss Ring-fencing…
Well it is fast becoming a reality, as the intention of the new Government to curb enthusiasm away from residential property investment, firstly via greater taxation of historically what may have been true capital gains (the extended bright-line test period now enacted), and secondly, restricting the off-setting of rental losses against the investors other income sources, is further progressed by the release of the officials issues paper on ring-fencing of rental losses.
Under the proposals, commencing from the start of the 2019-20 income year (although there may be a phased introduction), losses from residential rental properties will no longer be permitted to be off-set against a taxpayers other income sources, and will instead need to be carried forward to the next income year, only available for offset against rental income derived in that income year or against taxable income arising on the disposal of any residential land.
The ring-fencing would be portfolio based, in other words losses could be offset against the rental or disposal income of any residential property in the taxpayer’s portfolio, but ring-fencing would not apply to either mixed-use assets or land that is held on revenue account for whatever reason.
The new rules would apply to any ownership entity (so LTC’s, trusts, limited partnerships), and there would be special rules to capture attempts to restructure borrowings using interposed entities, where the funds are used to acquire shares in the interposed entity which owns residential investment properties (so arguably the interest deduction is not ring-fenced) as opposed to funding a residential investment property acquisition
directly (interest deduction ring-fenced).
The definition of residential land would be the same as that used presently for the purpose of the bright-line rules.
The closing date for submissions is 11th May.
Farm Related QWBA’s…
IR has recently released two draft Questions We’ve Been Asked (“QWBA”), dealing with issues in the farming sector.
PUB00237 looks at the question of the income tax treatment of allowances paid and benefits provided to farm workers. However, it is worthwhile noting that the majority of the commentary can be applied to nonfarming scenarios as well.
The key points of PUB00237 are:
- Reimbursing allowances for expenses the employee incurs in connection with their employment can generally be paid tax-free, unless of a capital/private nature (because to qualify under s.CW 17, the employee must be able to claim the expenditure if it were not for the employment limitation, which could not occur in a capital/private expense scenario).
- Estimates of the amount of a reimbursement allowance is permitted but onus on employer to show a reasonable calculation basis has been used to determine the amount to be paid.
- Benefit allowances are taxable as employment income to the employee and subject to PAYE. These are allowances of the type paid to compensate an employee for the conditions of their service, such as using a dangerous piece of equipment, working in a dangerous or dirty environment, or working in a remote location.
- The expenditure an employer incurs on the two items is usually deductible provided the relevant employee’s salary or wages are deductible.
- Non-cash benefits may be subject to fringe benefit tax, and in these instances, any expenditure incurred in providing the benefits is usually deductible, as is any fringe benefit tax paid.
- The principles can apply equally to those contractors who are not employees but their payments satisfy the PAYE income payment definition. Naturally however, if their reimbursing allowance is exempt income, they cannot claim the actual expenses incurred.
- PUB00237 does not apply to shareholder employees due to additional considerations required with respect to payments of reimbursing and benefit allowances they may receive.
The draft QWBA provides a reasonable table of examples of payments and their associated tax treatment, as well as some narrative examples.
The second exposure draft, PUB00309, considers the question of whether sharemilkers and contract milkers can deduct farmhouse expenditure using the approach in IS 17/02 – deductibility of farmhouse expenditure, which permitted a 20% deduction for farmhouse expenditure without the need to calculate the actual business use of the farmhouse.
The answer to the draft QWBA is yes, if:
- they carry on a sharemilking/contract-milking business as sole traders/partnership independent from the farm owner’s business;
- the business is of sufficient scale to require its own home office and centre of operations in their farmhouse; and,
- their farmhouse is used in a similar manner to and to a similar extent as other farmhouses on type 1 farms (farm where the cost or value of the farmhouse is less than 20% of the cost or value of the farm).
The deadline for comment on both draft QWBA’s is 11th May 2018.
When is an Arrangement materially different???
QWBA QB 18/07 provides IR’s view in this regard, the now finalised version of the earlier draft PUB on the subject of when a particular arrangement for which a private or product ruling has been prepared, will then be considered materially different to the extent that the private or product ruling will no longer have application to the arrangement.
QB 18/07 states “The revised arrangement is “materially different” for the purpose of ss 91EB(2)(a) and 91FB(2)(a) of the TAA if, in relation to a tax type, the difference between the revised arrangement and the arrangement identified in the ruling is capable of affecting the tax outcome referred to in the ruling.”
The QWBA then goes on to state further, that “Whether the revised arrangement is materially different from the arrangement identified in the ruling will be considered on a case-by-case basis, because it will turn on the facts and circumstances of each case.”
Minimum wage increase…
Just in case you missed it, the latest increase in the minimum wage took effect from 1st April 2018. The new rate is $16.50 per hour, up from the previous $15.75. The increase also impacts on the starting-out rate and training wage, which continue to be set at 80% of the minimum wage, therefore now to be $13.20 per hour.
GST Registration Effective Dates…
Recently released ED0206 is a draft Standard Practice Statement (“SPS”) describing how IR will approach GST registration applications, particularly those applying for voluntary registration and with a retrospective effective date.
The SPS first sets out that required registrations (supplies exceeding registration threshold) will usually have an effective date which coincides with the date the person becomes liable to be registered for GST, which could be at a date which is earlier than the application date, although there is discretion for the date to be a later date than the “first becomes liable to be registered date”, where considered equitable. However the SPS suggests such discretion is rarely applied.
The issue of voluntary registration is then discussed. Usually IR will assign an effective date that coincides with the date the Commissioner is satisfied that the person was able to be GST registered. In this respect, the SPS suggests that in exceptional circumstances, IR may approve a retrospective effective registration date requested by the applicant (our experience to date however, would suggest approval commonly granted in
less than exceptional circumstances – perhaps we will now see a change).
Several examples are provided of when a retrospective date may be approved, including circumstances involving sickness or absence overseas preventing an earlier application being filed, the person holding an honest belief that registration would just occur automatically or the person holding a genuine belief that they were ineligible to register and then later discovering that this was not the case.
Finally the SPS discusses land transactions, and the use of the discretion to backdate the registration effective date in this regard. In most cases it appears that the practice will be to simply apply a current or future registration date, which should not cause too much distress for the applicant provided their application is filed prior to settlement date of the land transaction (the relevant date for CZR purposes). However, do not expect retrospective applications to be approved simply to accommodate your client’s desire to obtain a second-hand goods claim with respect to land acquired from an unregistered vendor, at a date earlier than the first adjustment period following the registration date, where they would otherwise be able to make a claim for assets introduced into the taxable activity.
Any comments on ED0206 are requested by 31st May 2018.
Changing your Balance Date…
IR has released SPS 18/02 (replacing SPS 08/04), setting out their practice with respect to requests for balance date changes (standard/non-standard, non-standard/standard, non-standard/non-standard). All such requests should be made in accordance with s.38 of the Tax Administration Act 1994 (“TAA94”).
SPS 18/02 includes the following as examples where an application to change will usually be approved:
- Where it can be demonstrated that the nature of the taxpayers business makes a 31 March balance date impractical;
- To align with an agreed industry balance date;
- To allow a shareholder-employee to use the same balance date as the company from which they derive their primary source of income;
- To allow a subsidiary company to use the same balance date as the parent company.
However applications to change a balance date are unlikely to be approved where:
- a reason for the change is to defer the payment of tax/take earlier advantage of a tax incentive/concession than would otherwise not have been the case had no change of balance date occurred;
- the request has been made because of a wish to smooth out administrative workloads within the customer’s business (setting aside matters relating to seasonal businesses);
- the non-standard balance date is the anniversary date of the commencement of the business, unless that date coincides with an agreed industry balance date.
SPS 18/02 sets out the various ways in which a person may apply for a balance date change, which depending on the reason used, could be via MyIR, telephone or written correspondence. In most cases the change in balance date will be applied in respect of the income year following that during which the request to change is made, although retrospective application may be approved in limited circumstances.
Finally, the statement provides commentary on the consequent implications of a balance date change for provisional tax payments and GST filings, and includes a couple of useful appendices.
Useful IR Website Updates…
The following updates have been added to IR’s website which may be of interest to you:
Payday filing – while electronic filing will be mandatory for those above the threshold from 1st April 2019, there is an option to voluntarily commence from 1st April 2018. Further information in this regard can be found at http://www.ird.govt.nz/news-updates/payday-filing.html.
Cryptocurrency and tax – IR has issued some preliminary commentary surrounding the tax issues associated with bitcoin and other cryptocurrencies. The initial view is that cryptocurrency is property, not currency, therefore not subject to the financial arrangement rules (which would have taxed any gain on disposal), but instead to the general considerations given to disposal of any property – particularly whether it is being held on capital or revenue account. A key issue here, will be whether IR considers that the property has been acquired with a resale intent and/or purpose. In this respect, IR refers potentially affected parties to its recently published views on gold bullion, on the basis that the taxing considerations are similar. Neither property will generate returns over the life it is held, instead only providing a result for the investor at the time of disposal or exchange. IR consider that this characteristic alone would be strongly indicative of an “acquisition for resale purpose”, and consequently any profit should be assessable. However they do leave a door open for the taxpayer to prove in the alternative. More commentary on the issue can be found at http://www.ird.govt.nz/income-tax-individual/cryptocurrency-qa.html.
Dual use of premises – recent legislative amendments introduced for the 2017/18 income year, a new standard cost formula method for calculating home office claims, to remove the need to keep accurate records of costs such as electricity and the like, in order to calculate home office claims. To facilitate use of the new formula, each year IR will advise a standard square metre rate, which will be multiplied by the area of the home determined by the taxpayer to be used for business purposes. Added to that result to determine the final claim amount, will be the relevant portion of rates/rent and mortgage interest – costs not included in the standard cost due to their variability across taxpayers. The standard per square metre rate for the 2017/18 income year is $41.10.
Bright-line extension – further detail on the extension of the bright-line period from two years to five years can be found at http://www.ird.govt.nz/news-updates/brightline-extension.html.
Bad Debt Write-offs – Timing is Everything…
A recent TRA decision should be a reminder to us all, that a bad debt deduction may only be claimed in the income year that it is physically written off – section DB 31(1)(a)(i).
The basic facts in this case, was that the taxpayer was a barrister and solicitor in sole practice. He had set aside a pool of funds post a property sale, for lending to client’s who were in financial difficulties. His goal was to increase the size of the fund over time, with the ultimate aim of developing a sizeable bequest to a specified charity upon his death. He planned to grow the fund fairly quickly via the borrowers not only having to pay interest on their loans, but also bonuses (which the taxpayer would return as income).
In the 2011 income year, the taxpayer claimed bad debt deductions for two loans that had been written off, an amount of circa $170,000. IR contended both amounts had been loaned to individuals (although the taxpayer attempted to claim the $50,000 loan was to a company). One individual was bankrupted, and the company claimed as being the debtor (not accepted by the Court) was struck off.
Justification for the claim, was under section DB 31(3) – that the taxpayer was carrying on a business which included dealing in or holding financial arrangements. However the provision could only apply if the taxpayer could show that he had satisfied one of the requirements set out in section DB 31(1)(a), either:
- The amount had been written off in the income year in which it was claimed; or,
- The debtor(s) had been released from payment under the Insolvency Act 2006 or the Companies Act 1993.
In relation to the first limb, the Court confirmed that where the journals or ledger processing the bad debt write-off are written up after the end of the financial year, then the requirement of the section will not be satisfied and no deduction will be permitted. In the present date, the Court decided there was no evidence from the taxpayer that the relevant date was earlier than 20 September 2012 (when the 2011 financials were prepared), which was some six months post the end of the relevant income year.
With respect to the second limb and the release of the debts by operation of law, having decided that both debtors were individuals, the Court only had to determine whether either had been made bankrupt, and if so, within the relevant timeframe. In this last respect, the Court stated that it is the year of discharge that is relevant, as it is only at this point that a natural person is actually released from their debts. In the present case, since only one of the individuals had been made bankrupt, the provision could only have application to that debt. However in this instance, as the year of discharge was 2013, the second limb requirement was not satisfied.
It should also be noted, that the TRA judge disagreed with the taxpayer’s claim that his business included dealing in or holding financial arrangements (so section DB 31(3) did not apply in the first instance), predominantly due to the fact, that as a lawyer, he was required to comply with the provisions of the Lawyers and Conveyancers Act 2006 and other professional obligations, and that on this basis, it was difficult to see how a money lending business operated in the manner described by him could be part of his law practice.
The Court felt that the two activities were actually being managed separately, and that the lending transactions could best be described as those of a private individual using his capital funds to make loans to assist clients in financial difficulty who also met his lending criteria.
Finally, to rub further salt into his wounds, the shortfall penalties IR had imposed for lack of reasonable care, were also upheld, on the basis that he did not take a tax position which, viewed objectively, met the standard of being “about as likely as not to be correct”. Accordingly it was not an acceptable tax position. The Court also felt that the issues involved were complex enough that he should have sought professional advice to ensure deductibility was available and he had failed to do so, therefore lacking the taking of reasonable care.
Door opens for R&D Incentives…
A public consultation document has been released jointly by the ministers of Revenue and Research, Science & Innovation, to seek feedback around the potential implementation of a R&D tax incentive. The document requests submissions on the topics of:
- which types of businesses, R&D activities and expenditure should be eligible;
- the minimum R&D expenditure threshold;
- the maximum cap on R&D expenditure; and,
- accountability measures.
It is proposed that the incentive be by way of a tax credit, applying in respect of eligible expenditure incurred from 1st April 2019, calculated at 12.5% of the amount incurred. Identical to the 2008 credit regime, in order to ensure shareholders receive a benefit from the tax credit when dividends are distributed, a credit to the imputation credit account equivalent to the amount of the tax credit will occur.
A key driver behind the introduction of the incentive, is Governments desire to lift the present rate of business expenditure on R&D from 0.64% of GDP (OECD average 1.65%) to 2% within ten years.
Other key components of the intended regime are:
- Application to all eligible R&D expenditure (although a $100k minimum spend and $120m maximum), however consideration still to be given as to whether regime should only apply to R&D labour costs or to a broader range of direct/indirect costs;
- Available to all business structure types;
- Eligibility will occur when business in NZ, undertaking NZ R&D activities (although up to 10% of offshore activities may qualify), over which the business has control, bears the financial risk and owns the results;
- The present definition of R&D considered unsuitable and will therefore be updated with a view to being as clear and robust and practical as possible;
- Tax credit is non-refundable so any excess will convert to a tax loss to carry forward (existing cashout regime may also be reviewed as part of this schemes implementation);
- Special rules could deal with shareholder continuity issues so tax credits are not lost when new equity investors are brought in; and,
- Claims made via MyIR portal, with 12 month claim period which will end one year post the end of the income year to which the claim relates.
Should you wish to make a submission on the proposals, the final date for filing is 1st June 2018.
Distributing Trust’s “Goods” to Beneficiaries…
IR’s latest draft interpretation statement, PUB00281, considers the GST issues that may arise when a GST registered trust makes a distribution of goods (that form part of the trust’s taxable activity) to a beneficiary.
Since section 2A(1)(f) of the GST Act applies to treat a trustee of a trust and a beneficiary as associated persons, special rules in terms of the value of the supply (which usually occurs for nil consideration in the case of a beneficiary distribution) and the time of supply (usually the earlier of any payment being received or the issue of an invoice) will apply to the distribution.
In this respect, PUB00281 reaches the following conclusions:
- The supply will likely be a taxable supply as it will be made in New Zealand in the course or furtherance of the GST-registered trading trust’s taxable activity (however could be an exempt supply under s 14).
- If the recipient beneficiary is to use the goods received to make taxable supplies in the course of their own taxable activity, then sections 10(3A) and 10(3AB) likely to apply to negate the requirement to use the open market value of the goods as the value of the supply. Instead the consideration actually paid by the beneficiary will determine the supply value, which would often be nil.
- Otherwise section 10(3) will deem the supply to be for the open market value of the goods.
- If the distribution vests property in the beneficiary with a right to present possession and the property is to be removed, then the time of supply will be at the time of the removal.
- If the distribution vests property in the beneficiary with a right to present possession and the property is not to be removed, then the time of supply will be at the same time as the resolution to distribute is made (goods deemed available at this time).
- If the distribution vests property in the beneficiary with a right to future possession, the time of supply is at the time the beneficiary is permitted to remove the goods (or they are made available if goods are not to be removed).
- Actual legal title will not affect time of supply (e.g. a transfer delay), and may instead simply deem a bare trustee relationship to exist.
- Distributions may trigger GST registration issues, i.e. requirement for trust to register where the deemed value of supply exceeds threshold, or to deregister where all the trust’s assets have been distributed.
The deadline for comment is 7th June 2018.
Liquidator – Rule in Re Condon Applied…
A recent High Court decision should be a reminder to all of us who may be undertaking liquidations for our clients, that personal liability for a client’s debts may arise if you fail to exercise a duty of care that a liquidator is considered to owe to creditors.
The case involved a liquidator who had basically been appointed when IR had issued a statutory demand to a corporate trustee for the trust’s tax debt which had originated from an audit. At the time the audit was still in progress, however upon its subsequent completion, the account halt was inadvertently lifted which resulted in a significant GST refund being issued to the trust, when it should have simply offset the existing tax debt.
Some 14 months later, IR realised that the liquidator had not returned the refund cheques as would have been expected, since he was aware of the existing tax debt at the time of receipt, but had instead disbursed them to the trust upon the insistence of the accountants of a new trustee of the trust, that he had no rights to hold onto them.
IR therefore applied to the Court to seek recovery of the amount (plus interest) directly from the liquidator, to which, while he accepted the corporate trustee was liable for the GST debts of the trust and that an offset should have occurred, he argued that more than mere negligence on his part was required before he should become personally liable.
The High Court found for IR, and ordered the liquidator to pay the judgement sum plus interest on the basis that:
- He had directly caused loss to the creditor by disbursing the refunds to the trust when he was responsible to retain them for set-off purposes as required by section 310 of the Companies Act 1993;
- He had no basis to believe that nothing was owing to IR when he received the refund cheques;
- “RE Condon” had established the rule that liquidators are not permitted to take advantage of strict legal rights available to them if to do so would mean they were acting unjustly, unequitably, or unfairly. This rule applied to liquidators whether they were Court appointed or not because they were obliged to act in a manner consistent with the highest principles; and,
- He had conceded his conduct in disbursing the GST refunds without taking advice was not consistent with the principles; that conduct being a breach of his common law duty of care and skill owed as liquidator to creditors.