Richard has had over 30 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. If you would like to receive them as they happen, please sign up for the weekly mail out here.
- Having your say
- Minimum wage increases
- Final SPS version on voluntary disclosures issued
- ACC Levies annual review
- New Payday Reporting – Error Corrections
- NZ signs new DTA with China
- Non-resident entertainers exposure draft
- R&D Tax Credit Bill reported back
- Can you confirm??
- All is not what it seems
- Special Reports released
- Public Rulings program
- Government responds to TWG report
- Vendor loses out
- New IS on Personal Services Income Attribution
- Provisional Tax QWBA’s
- IR’s Accommodation Items – Item 3
Having your say
I thought it would be useful to remind you all of certain draft IR document’s presently out in the public arena for feedback, from both the perspective of reminding you of closing submission dates in case you were eager to share your views with the policy drafters, or in more general terms, of a number of specific issues in relation to which we are likely to see finalised statements by IR over the coming 12 months.
Draft OS ED0207 — Square metre rate for the dual use of premises
To coincide with recent simplification measures (s.DB 18AA) which will assist you in calculating expense claims in relation to premises used for both business and personal purposes, ED0207 sets out IR’s proposed operational statement as to how the new legislation will be interpreted and applied in practice. Submissions are due no later than 10th May 2019.
PUB00344 — Salary, wages and bonuses paid in cryptocurrency
This item covers two draft rulings, the first in respect of whether a bonus received by an employee in cryptocurrency is subject to PAYE, and the second, and perhaps more primary question, of whether actually paying your employees general remuneration in cryptocurrency in the first place, is subject to PAYE (as opposed to FBT). Submissions are due no later than 3rd May 2019.
Draft QWBA PUB00333 — What is the fringe benefit tax, GST and income tax treatment of an employee contribution to a fringe benefit?
The paper considers the potential implications for employers from a FBT, GST and income tax perspective, where the employer has provided a fringe benefit to the employee, and the employee then makes a contribution towards the fringe benefit provided by their employer. Submissions are due no later than 1st May 2019.
Draft QWBA PUB00337: Donations — What is required to establish and maintain a fund under s LD 3(2)(c) of the Income Tax Act 2007?
Have you ever considered establishing a fund to which others can contribute to and receive a donation rebate credit? If so, then this draft QWBA may be of interest to you, as it sets out IR’s views of what is required to establish and maintain such a fund. Submissions are due no later than 25th April 2019.
IRRUIP 13 — Consequences of GST group registration The GST group registration rules allow a group of related entities to be treated as a single entity for GST purposes. Supplies made or received by a group member are treated as made or received by the representative member. This issues paper sets out two possible interpretive approaches to the GST group registration rules and identifies cases where the GST outcome differs depending on the approach applied. Submissions are due on 5 April 2019.
Minimum Wage Increases
Just in case you have forgotten, and with the new tax year kicking off on the 1st, increases to the minimum wage and the minimum starting-out/training wages come into play. From Monday, the minimum wage increases to $17.70 per hour, while the minimum starting-out/training wage (which is usually set at 80% of the minimum wage) increases to $14.16.
Also recently published, was the current Governments intention to increase the minimum wage to $18.90 per hour effective 1st April 2020, and to $20 per hour effective 1st April 2021.
Final SPS version on voluntary disclosures issued
In a previous AWIR, I alerted you to the release of IR’s draft standard practice statement with respect to taxpayers who have filed a voluntary disclosure, and the factors that IR will consider when forming an opinion as to whether the potential application of shortfall penalties should be impacted by the contents of the voluntary disclosure.
In the first instance, there are four essential elements which must be present in any voluntary disclosure filed by a taxpayer, before IR will form an opinion with respect to whether what has been disclosed by the taxpayer, amounts to a full voluntary disclosure, to which a potential shortfall penalty reduction could then be considered.
The four essential elements required, are that the voluntary disclosure:
- must disclose a tax shortfall; and
- must disclose all the details of the tax shortfall; and
- must disclose something to the Commissioner; and
- must be made voluntarily.
The SPS goes on to explain each of these four elements in quite some detail, and to explain what IR considers will be a “full” voluntary disclosure by the taxpayer, which should see the following information, at a minimum, being disclosed:
- sufficient details for the Commissioner to satisfactorily identify the taxpayer (name, trade name, IRD number) and confirm the taxpayer’s contact details (postal address, contact telephone number(s), email address); and
- the tax periods and tax types involved; and
- an explanation as to why the tax shortfall occurred; and
- sufficient detail of the tax shortfall including its amount, and full details of the facts and circumstances leading to the tax shortfall to enable the Commissioner to make a correct assessment of the tax shortfall; and
- any further information that is necessary for the Commissioner to make a correct assessment.
SPS 19/02 applies from the 29th March 2019, so any voluntary disclosures now being filed, should be prepared in accordance with the latest practice statement, particularly if relief from potential shortfall penalty application is going to be sought.
ACC Levies annual review
With the ringing in of the new income year, we usually also see the coming into effect of any changes to the ACC rates – the Work Account levies (to cover work-related injuries) and the Earners levy (non-work injuries).
In this regard therefore, taking effect from 1st April 2019:
- the average Work Account levies will decrease from 72 cents per $100 to 67c per $100; and,
- the Earners levies will remain at the current level of $1.21 per $100 of liable earnings.
New Payday Reporting – Error Corrections
Section 23N of the Tax Administration Act provides for regulations to be made, which will set out how an employer may correct errors they have made in relation to the employment income information they have filed for a particular payday.
So in this regard, we have now seen the release of the Tax Administration (Correction of Errors in Employment Income Information) Regulations 2019. These regulations provide commentary on the nature and types of errors that may be corrected by the employer, and the manner in which correction of those errors can occur.
The regulations are easy to read, contain a useful flowchart in the Explanatory Notes section towards the end of the document, and includes examples throughout the regulations themselves, to illustrate the nature of the particular error that the employer has subsequently identified and the appropriate method of correction.
The regulations are targeted towards overpayments of PAYE income (not underpayments however), errors in calculating the amount to be withheld (although not where the employee has provided an incorrect tax code), or the error relates to certain other employment related deductions (e.g. child support) that the employer should have withheld.
The regulations are effective from 1st April 2019.
NZ signs new DTA with China
Considering all the recent media attention in recent weeks suggesting the weakening of NZ/China relations, you could say therefore that it is somewhat surprising to see that our first resigned, effectively modernised (BEPS inclusive) DTA, is with the Asian nation.
Relatively unchanged since the treaty was first signed in 1986, the new DTA is designed to reduce barriers to cross-border trade and investment with China, and contains measures to prevent companies structuring to avoid paying taxation on their profits in the respective taxing jurisdictions.
The new agreement will see a reduction in the withholding tax rates on certain dividends, reducing from the present standard rate of 15% to 5%, where the beneficial owner of the paying company is a company which holds a greater than 25% interest in the paying company.
The new DTA will eventually be brought into force via the exchange of diplomatic notes between NZ and China.
Non-resident entertainers exposure draft
IR has released PUB00317 for comment, which explores the issue of whether the income derived from NZ by the non-resident entertainer can be exempt from income tax via application of section CW 20 of the Income Tax Act 2007.
In this regard the statement discusses the four potential situations where section CW 20 could have application:
- where the activity/performance occurs in a cultural programme belonging to and funded by, either the NZ Government or an overseas central government; or,
- when the activity/performance occurs in a cultural programme that is wholly or partly sponsored by a government (where the NZ Government/overseas central government provides more than minimal funding for the cultural programme); or,
- when the activity/performance occurs as part of a programme that belongs to certain types of overseas not-for-profit bodies (must be foundation, trust or other organisation, with more than minimal purpose of promoting cultural activity, and cannot be carried on for the private pecuniary profit of any member, proprietor, or shareholder); or,
- where the activity relates to a game or sport, where the participants are official representatives of a body that administers the game or sport at a national level in an overseas country.
It is proposed that the statement would also apply to exempt amounts derived by another person (Service Provider) who provides the services of a non-resident entertainer during a visit to NZ if certain conditions are met.
The deadline for comment is 10th May 2019.
R&D Tax Credit Bill reported back
The R&D Tax Credit Bill has been reported back from the Finance & Expenditure Committee, post consideration of public submissions made on the Bill.
The Bill as originally drafted remains relatively unchanged, with a few minor exceptions:
- The internal software development expenditure cap has been raised from $3m to $25m;
- The contracted R&D profit margin clause which automatically sought to deduct 20% from the outsourced cost for the purpose of calculating the principals credit claim, has been deleted, as the FEC accepted submissions that the contracted cost was in fact the true cost to the claimant in undertaking the R&D, and retaining the clause could create bias towards not outsourcing the particular R&D activity, even in circumstances where it may have been more efficient to do so;
- Amend any use of the term “paid” with “incurred” to ensure consistency between timing of expenditure claims under the R&D rules with those under the tax rules;
- The addition of other employment related costs as eligible expenditure such as bonuses, recruitment and relocation costs, because these costs can represent a genuine cost of R&D to a business; and,
- That IR contact a claimant before declining their claim, thereby providing an opportunity for the person to provide additional information before the claim is formally declined.
We now await the Bill’s second reading.
Can you confirm??
IR has released an operational statement (OS 19/02), which deals with the issue of who has the authority in the Commissioner’s eyes, to be able to confirm an income statement of a deceased person or to be able to provide information to IR to finalise the tax account of the deceased.
O/S 19/02 covers two separate income year periods:
- in respect of an income statement (who can confirm) for the income year from 1 April 2008 to 31 March 2019 of a deceased person who died without a will, and an executor or administrator has not been appointed; and,
- in respect of providing information to enable IR to finalise a tax account for income years from 1 April 2019, where the deceased does not have a will and no executor or administrator has been appointed.
Those with the appropriate authority will include:
- the widow or widower of the deceased person
- a person who is the surviving civil union/de-facto partner of the deceased person
- a child of the deceased person
- a person who is entitled to administer the estate
- a person related by blood or marriage and be maintaining the deceased person’s child/children, and
- a person who has the custody and control of the decreased person’s child/children.
The statement is effective from 4th April 2019.
All is not what it seems
A recent TRA case decision should be a warning to all shareholders in close companies, of the need for accurate record-keeping should you wish to be able to dispel a subsequent contention by IR, that amounts received by you in your capacity as a shareholder of the company are income.
In the tax years in question, the taxpayer had received various payments from the companies of which she and/or her husband were shareholders, and certain expenditure had been paid on her behalf. The taxpayer filed nil income tax returns for each of the years in question, claiming that all amounts she received from the various companies, were in respect of repayments of shareholder loans.
IR on the other hand, having reviewed the taxpayer’s records, contended that the amounts were instead either wages, dividends or income under ordinary concepts. The Revenue’s position was that the taxpayer had failed to provide sufficient evidence to support her position, that the amounts were indeed repayments of loans, and therefore non-taxable.
The taxpayer’s position was not assisted by the fact that the company’s bank statements, narrated certain payments to her as “wages” and were coded as such. The taxpayer argued that this was simply a coding error, however this argument was in essence discounted by both IR and the Court, because on the same day she had also received amounts which were narrated as being drawings and therefore coded as such. Further, the payments were also regular in nature, and the taxpayer had admitted that she did undertake some work for the companies.
In relation to other amounts that were not narrated as being “wages”, because the taxpayer had insufficient records to support a position that the payments were in fact repayments of shareholder loans, there was then no basis to negate the Revenue’s argument that section CD 4 applied to treat the amounts as being dividends received by the taxpayer.
And as if IR’s determination being upheld by the Court was not already painful enough for the taxpayer, just to add further salt to the wound, the Court also agreed with the Revenue’s shortfall penalty assessment of 40% for gross carelessness.
Special Reports released
Further to the recent enactment of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019, IR has now released two special reports to explain some of the new rules:
- simplifying tax administration – individuals’ income tax; and
- the taxation of bloodstock.
I expect that the “simplifying tax administration” special report will be more keenly sought after by most of you, than the special report on the “taxation of bloodstock”. You can find the former report here – and it contains detailed information on:
- the year-end income tax obligations of individuals;
- refunds and tax to pay;
- pro-active actions;
- tailored (special) tax codes; and,
- the administration of donations tax credits.
Public Rulings program
The latest update to IR’s Public Rulings program can be found here.
For those of you who have not viewed the report previously (which is usually updated monthly by IR), it is a useful guide to see what taxation items IR are presently seeking public feedback on, what items are presently in progress (some of which may not yet have reached the public forum stage), and what items IR have in the pipeline for future consideration (what can provide valuable insight into whether some of the hot topics you are experiencing with your own clients, may soon be addressed by IR).
Some of the items which may be of interest to you all per the latest report include:
- Income tax – Depreciation – Residential rental properties and healthy homes standards (which I expect will discuss the capital v revenue treatment when you have no choice but to incur the required expenditure);
- Income tax – Trusts – New Zealand/Australia DTA (which I suggest could provide useful guidance in respect of cross-border implications for your family trust due to NZ’s settlor taxation basis v Australia’s trustee taxation basis);
- GST – Definition of “dwelling” (useful to understand your client’s potential GST registration exposures); and,
- Income tax – Land – Work of a minor nature (perhaps a revamp of the 2005 interpretation guideline to assist with determining whether your land subdivision may trigger income tax exposures (although potentially a CGT introduction will knock this item on the head).
Naturally as various items are released, AWIR will endeavour to provide an update.
Government responds to TWG report
Well you could have bowled me over with a feather! The Coalition Government has released its response to the Tax Working Group’s (TWG) report, with a decision not to adopt any of the recommendations on capital gains taxation (CGT).
Certainly the view of the majority I had spoken to in the weeks leading up the Government’s announcement, was that we would see some sort of CGT introduction, even if it was simply tinkering with the existing bright-line rules, perhaps to the extent that all residential land disposals would be taxed unless you could claim the main home exclusion.
Personally I thought that we would not end up with a CGT, however not because the Coalition Government would not pass legislation to introduce the tax, but because the NZ public would then get to vote on the issue in next year’s election, National regaining the leadership reins as a result, and they would then act swiftly to repeal the new legislation prior to its planned commencement date of April 1st 2021.
However, while we will not see any direct CGT introduction, the Government’s response did reflect an intention to update its Tax Policy Work Programme (circa June/July) to explore further options for targeting land speculators and land bankers. Watch this space for further updates in this regard therefore.
The Governments response document is in essence colour coded, responses to TWG recommendations categorised into one of five groups, ranging from a light green “Endorse the TWG recommendation” to a dark orange “Consider as a high priority for work programme”. Recommendations falling within the latter group include:
- a review of the current rules of taxing land speculators;
- reinstating building depreciation for seismic strengthening;
- consider developing a regime that encourages investment into nationally-significant infrastructure projects;
- review loss-trading, potentially in tandem with a review of the loss continuity rules for companies;
- consider IR having the ability to require a shareholder in a closely-held company to provide security to IR if the company owes a debt to IR, the company is owed a debt by the shareholder, and there is doubt as to the ability/and or the intention of the shareholder to repay the debt;
- consider further measures to improve tax collection and encourage compliance, including making directors who have an economic ownership in the company personally liable for arrears on GST and PAYE obligations (as long as there is an appropriate warning system), the use of departure prohibition orders, and aligning the standard of proof for PAYE and GST offences;
- consider how IR can strengthen the enforcement of rules for closely-held companies;
- the Productivity Commission should include vacant land taxes within its review of local government body financing. Consider that vacant land taxes are best levied at the local rather than the national level.
- consider repealing the ten-year rule regarding selling property for a gain caused by changes in land use regulation; and,
- consider requiring disclosure of IRD numbers on the Land Transfer Tax Statement when transferring a main home.
You can find a full copy of the report here.
Vendor loses out
An interesting decision of the High Court recently which we should all be mindful of when completing contractual agreements for the sale and purchase of land.
The parties entered into an agreement with respect to a piece of rural land that had been used for grazing stock but had no dwelling situated upon it. When it came to the GST aspects of the agreement, the vendor stated that he was not GST registered for the purpose of the transaction, and would not be so at settlement date (thereby invoking application of clause 15.1 that this was a correct statement at the date of signing the agreement), and the purchasers stated that they were not GST registered and would not be so at settlement date (thereby invoking application of clause 15.2 that this was a correct statement at the date of signing the agreement).
One week before settlement however, the purchasers changed their minds and decided to register for GST. The purchasers did not advise the vendor of their change of GST status in accordance with clause 15.5. Settlement proceeded and naturally the purchasers lodged their second-hand goods claim with IR.
It came as some shock to the purchasers, when they received a response from IR, that their $43k refund claim was denied because the vendor was in fact GST registered (he later submitted to the Court that it was simply an oversight and he did not consider it would matter in any event as the purchasers had warranted they would not be GST registered at settlement date).
The purchasers filed a claim for summary judgement in the District Court, on the basis that they were now out of pocket some $48k, due to the breach of the clause 15.1 warranty by the vendor. The vendor naturally defended the claim on the basis that the purchasers had breached their clause 15.2 warranty, and further, that they had failed to provide the requisite change of registration status notice to him as required by clause 15.5. The District Court denied the purchasers claim, which resulted in the appeal to the High Court.
The High Court however ruled in favour of the purchasers on the basis that:
- it was foreseeable at the time the agreement was entered into that, if the vendor’s warranty was breached, the purchasers would be denied an input credit for the GST component of the purchase price if they became registered for GST before settlement. That was a loss that arose naturally from the breach of the contract.
- the purchasers’ warranty was correct at the date of the agreement. At the date of the agreement, the purchasers were not registered for GST and would not be registered for GST at settlement. Therefore, at the date of the agreement, while the vendor was definitively in breach of his warranty, the purchasers were not.
- once the purchasers registered for GST, the vendor did still not need to account for the GST component of the purchase price because the transaction was zero-rated. The vendor therefore was not worse off because the purchasers failed to give notice that they had registered for GST.
- the vendors breach of warranty meant the purchasers did not receive the input credit they anticipated. The purchasers were therefore worse off than they expected to be under the agreement.
Considering the vendor had agreed to accept a GST inclusive (if any) price, you may be asking yourself, as I certainly am, exactly what was the vendor trying to achieve by the GST misstatement (deliberate or accidental – I’ll leave you to be the judge)?? A costly lesson in logic I would suggest – too clever for his own good – or did he in fact rely on the advice of others. The former as opposed to the latter one would hope!
New IS on Personal Services Income Attribution
IR has just released IS 19/02, which is an interpretation statement providing IR’s commentary on the correct application of the attribution rule in respect of income derived from personal services. IS 19/02 replaces IS 18/03, and like its predecessor, does not discuss or explain the calculation rules which are contained in section GB 29 (Attribution Rule: Calculation).
IR has advised that there are only a few minor amendments or clarifications to the earlier IS, which are:
- Flowchart 1 is amended to clarify (a) what income is included in the various threshold tests, and (b) that the “substantial business assets” test is plural and not a singular asset.
- Flowchart 2 and the associated headings are clarified to highlight that the depreciable property must be a necessary part of the associated entity’s business structure for the provision of personal services, and also that the depreciable property must relevantly cost more than 25% of the associated entity’s income from personal services for the year.
- Paragraphs  to  are corrected to show that the relevant income for the $70,000 threshold test is the net income of the working person if the income attribution rule applied, and includes all sources of the working person’s income (not only personal services income). A new example is included to show how this works.
- Paragraph  and the associated heading (as well as the heading to paragraph ) are clarified to show that the relevant income is the associated entity’s income from the provision of the personal services.
I must say that Flowchart 1 is a very useful tool, to at a minimum gain a reasonable understanding of your client’s potential exposure to the PSA rules, with commentary on each specific question then following the flowchart, just in case you wanted greater insight into the meaning of the context of the particular question.
Provisional Tax QWBA’s
IR has released two QWBA’s which both provide commentary on specific provisional tax issues.
The first is QB 19/03, which considers the provisional tax implications when an employee receives a one-off payment during an income year with no tax deducted, which has the consequence effect of an end of year RIT of more than $2,500.
The answer to a large extent, then depends on whether the RIT is also in excess of $60,000. Where this is the case, then there is potentially exposure to use of money interest (UOMI) if the person has not paid any provisional tax instalments for the relevant income year (in effect this will occur if the person does not pay the full amount of RIT by their final instalment date – usually 7th May for a March balance date taxpayer).
If however the RIT amount is less than $60,000, then provided the person pays the RIT amount on or before their terminal tax due date (usually 7th February unless they have a time extension), there will be no exposure to UOMI.
Under the new income tax return filing rules for individuals, whether the person will need to notify IRD of the one off amount received, will depend on whether the particular item of income is reportable income or not. If it is, then the amount received should already be included in IR’s automatic annual assessment of the person, and this assessment will also indicate that the person should be paying provisional tax for the following income year as well (which may or may not be appropriate for the person depending on their circumstances – in this case, the person could advise IR to amend their provisional tax calculation method to Estimation, with a nil estimated amount. The person needs to be aware of the exposures to UOMI however, if their nil estimate subsequently transpires to have been incorrect).
The second is
QB 19/04, which considers the provisional tax and consequent UOMI issues for a
person in their first year of business.
Once again the answer is then determined by whether the $60,000 RIT threshold is exceeded. If the RIT quantum will be less than $60,000, then as for the previous QBWA, provided the RIT amount is paid no later than the persons terminal tax due date, no exposures to UOMI will arise.
However if it is expected that the RIT amount will exceed $60,000, then provisional tax instalment payments in the first year of business should be made, and the number of required instalments will be determined by the commencement date of the business taxable activity. The person will be considered a “new provisional taxpayer” in this regard.
It should be noted that the rules for “new provisional taxpayers” (those persons commencing a taxable activity during the income year) are different to those outlined in the first QWBA, as the person will not be able to simply make a lump sum payment of the RIT on their final instalment date, in order to avoid UOMI. They must instead make the number of required instalments during the relevant income year as determined by their taxable activity commencement date.
In this regard, QB 19/04 includes some commentary on the meaning of “taxable activity” and the inclusion in this respect of anything done in connection with the commencement of the particular activity (the timing of which could naturally impact on the number of provisional tax instalments required, so care should be taken in that regard.)
IR’s Accommodation Items – Item 3
This week I review the third of seven draft items recently published by IR, the commentary this time dedicated to the item on home owners who provide short-stay accommodation to guests in their own home – PUB00303/b.
Once again it is proposed that the determination will apply from the commencement of the 2019/20 income year.
So what were the important take-outs from PUB00303/b –
- the rules for boarders can’t be used for short-stay accommodation guests. However, similar rules are proposed which will specifically apply for short-stay accommodation hosts who rent out rooms in their own home;
- in order to be eligible to use the proposed rules, the main criteria are likely to be that rooms are rented out <100 nights per year (counting each room that’s rented out separately); no trust ownership of property unless taxpayer has themselves paid all of the property costs for the year (eg, mortgage interest or rent, insurance, rates, and repairs and maintenance); taxpayer not providing accommodation as part of a GST taxable activity; and taxpayer is a natural person;
- there will be set standard nightly costs for deductions, reflecting IR’s view of the likely average costs incurred by short-stay accommodation hosts. The proposed standard costs are $50 a night if the host owns their home, and $45 a night if the host rents their home; and,
- income from short-stay guests up to the amount of the standard costs would not have to be declared. Hosts would only need to return income in excess of the standard cost amount.
If you have any questions or would like a second opinion on any national or international tax issues, please contact me firstname.lastname@example.org.
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