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.
- TWG completes final report
- Late filing penalties
- Electronic filing exemption
- Short-stay accommodation tax implications
- Remember director’s full names
- Budget 2019 date release
- Short-stay accommodation items – item 1
- First it was remote services GST…
- Depreciation recovery income upon a change in use event
- Received in time?
- TWG final report
TWG Completes Final Report
The Tax Working Group has now completed its Final Report, delivering it to the Government for sign-off before its contents are released to you and I.
It is expected that it will be three weeks (a scheduled media briefing on 21st Feb) before we get to see the Group’s conclusions, the key item most are waiting for, being the recommendations surrounding the introduction of a capital gains tax, and how it might operate in practice.
Once the Report has been presented to Cabinet on the 18th February, the Government will then target an April 2019 deadline, upon which its full response to the Report will be published.
The Government will look to pass the legislation implementing any policy changes before the end of the current Parliamentary term. However because the Government promised us all, that no new taxes would be introduced until post next year’s election, no new policy measures will come into force until 1st April 2021.
Consequently, with National adamant it would reverse any capital gains tax that was legislated for by Labour (and to some extent one could say retribution for Labour immediately quashing National’s proposed tax cuts as soon as they walked through the door victorious in the 2017 election), in essence the issue is likely to be decided by us the voters.
Watch for coverage of the final report in a future edition of AWIR therefore, and then expect the political games to begin, once the Government issues its response in April.
Late Filing Penalties
IR has issued a draft standard practice statement (ED0211), which provides commentary on the issue of late filing penalties, what tax returns or other filing obligations they will apply to, and what notification may be given by IR to the taxpayer, prior to a late filing penalty being imposed.
The main points of ED0211 are:
- Application to income tax returns, ICA returns, ACC reconciliation statements, PIE returns, RLWT statements, the new employment income information requirements (payday filing post 1/4/19) and GST returns;
- Penalties range from $50 (default until actual filing occurs) to $500;
- Except for employment income information and GST returns, 30 days advance notice must be given to the taxpayer, where post the expiry of the 30 day period, the penalty will then be imposed if the required filing has not occurred. Notice can be directly to the taxpayer concerned or by public notice to a group of taxpayers;
- Employment income information and GST returns have a “get out of jail free” card for the first offence, however any further offending in the following 12 months results in an automatic imposition. After 12 months of good behaviour, the taxpayer’s slate is wiped clean and they get to start over;
- There is only a single penalty imposed in respect of employment income information, even if the taxpayer has failed to file a number of times during the same month; and,
- Late filing penalties can be remitted in certain circumstances, including for example, where the employer was registered but did not pay any salaries during a particular month, so no employment income information was provided to IR.
The deadline for comment is 22nd March 2019.
Electronic Filing Exemption
IR has issued OS 19/01, which is an operational statement setting out the criteria for exemption from electronic filing for:
- from 1st April 2019, employers included in the online employers group (last years gross tax payable >$50k);
- GST registered persons with taxable supplies exceeding a certain threshold (not yet set); and,
- investment income payers from 1st April 2020.
The operational statement confirms that the Commissioner has a discretion under the legislation to exempt certain taxpayer from electronically filing, and that this may apply where a person is unable to comply with the requirements due to the lack or inadequacy of digital services. Guidance is then given as to the meaning of the phase, lack or inadequacy of digital services, which includes:
- the nature and availability of digital services to the person, including reliability issues (remote rural areas for example);
- the person’s capability to use a computer (disabilities for example); and
- compliance cost issues – unreasonable to expect the taxpayer to have to comply (payers of investment income for example, who may not be in business and therefore do not already own a computer).
OS 19/01 contains a list of details which must be provided to IR when applying for an exemption, including whether the person has a computer capable of connecting to the internet, and a detailed reason why the person requires the exemption.
In granting an exemption, IR will state why it was granted, a time period if applicable, and where no time period set, cancellation notification will be given as appropriate, with a 6 month expiry period.
Short-stay Accommodation Tax Implications
Hold on to your hat as IR has just released 7 draft items on the taxation obligations that may apply if you provide short-stay accommodation. Some may say the release is well overdue, considering the prevalence in the marketplace for some time now, of the likes of Airbnb and Bookabach.
The 7 draft items, which can all be located presently on IR’s public consultation page, are:
- PUB00303 — Overview — Consultation on accommodation items
- PUB00303/a — Set costs for boarders in your home
- PUB00303/b — Set costs for short-stay accommodation in your home
- PUB00303/c — Standard rules for short-stay accommodation in your home
- PUB00303/d — Which income tax rules apply to accommodation in a holiday home?
- PUB00303/e — Applying the mixed-use asset rules to a holiday home
- PUB00303/f — Applying the standard rules to a holiday home
- PUB00303/g — Short-stay accommodation — GST registration
It is recommended that you read the Overview document first, which contains a flow chart, guiding you to the other documents that may be appropriate to your particular scenario. I am yet to read through all the draft items myself, however I will look to comment further in upcoming issues of AWIR, on any narrative I consider may be of use to you all.
It is advised that there will also be further consultation items of the coming months, namely one focused on GST issues in detail, and the other in respect of properties that are held in trust ownership.
With regard to the present draft items however, the consultation period ends on 22nd March 2019.
Remember Director’s full names
While not exactly tax flavoured, I thought it was important nonetheless, to pass on a recent reminder issued by the Companies Office, that directors must provide their full names for the purpose of the Companies Register. In essence this should be the name appearing on their driver’s license or passport.
The risk of non-compliance in this regard, is that the director may find they are unable to manage any of the company information on the Register, which may or may not be an issue for them, as I am sure you will appreciate in relation to the characteristics of certain clients of ours (the classic “do I really care since I am paying you to look after everything”).
And continuing with the Companies Office Register theme, you should all be aware by now, that all NZ companies require a NZ resident director, and failing to have one, can result in the removal of the company from the Register.
An exception does exist however, where one of the directors of the NZ company, is also a director of an Australian company, and is registered with the Australian Securities & Investments Commission (ASIC) in this regard. Should you have any concerns surrounding the requirements however, particularly to ensure your client is complying, the Companies Office has released a guide which may be of assistance.
Budget 2019 date release
Its official! Budget 2019 will be presented on Thursday 30th May 2019.
This year’s budget is presently being promoted as the “Wellbeing Budget”. It will see the use of the Coalition government’s new Wellbeing approach, which will see Ministers and departments in essence bidding for their funding, having to show that their policies will deliver outcomes that will make real differences to NZ’drs wellbeing.
The 5 priorities currently listed for Budget 2019 are:
- Creating opportunities for productive businesses, regions, iwi and others to transition to a sustainable and low-emissions economy.
- Supporting a thriving nation in the digital age through innovation, social and economic opportunities.
- Lifting Maori and Pacific incomes, skills and opportunities.
- Reducing child poverty and improving child wellbeing, including addressing family violence.
- Supporting mental wellbeing for all New Zealanders, with a special focus on under 24-year-olds.
Short Stay Accommodation Items – Item 1
In last week’s AWIR, I mentioned IR’s recent release of 7 draft items which each cover specific areas of short stay accommodation and the consequent taxation implications that may arise for the taxpayer deriving the short stay revenue.
In this regard, I mentioned I would comment further in future AWIR editions, as to the relevant take-out points I found useful in each item.
Rather than start from the first item however, and somewhat pursuing my desire to break the mould wherever possible, I’ve decided to start with the item which I think will probably be of most interest to you all – GST registration issues. By far my most common enquiry over at least the past 12 months, is from those looking to make some money from Airbnb, and whether they may have any GST obligations (PUB00303/g).
To answer the question, I would suggest that it could be as simple as asking your client 3 questions:
1. Are you likely to derive more than $60,000 in revenue (not net profit) in a 12 month period? Yes, then go to question 2. No, then you could potentially still voluntarily register for GST, but I would ask why would you, particularly if there is a chance you may cease the activity without selling your property and consequently have to source the funds needed to pay GST output tax on the value of the property at that time, from other sources (and usually in a situation where the market value of your property has increased since you originally commenced the letting activity). Important note – $60,000 threshold is based on revenue from all taxable activities you are carrying on at the same time, so not just the Airbnb activity.
2. Could it be said that the accommodation you provide would be the person’s principal place of residence and that the person has rights of quiet enjoyment? No, which is the likely answer in an Airbnb scenario, then go to question 3. Yes, then the arrangement is likely to be deemed as the supply of accommodation in a dwelling, which is an exempt supply for GST purposes. Important note – short stay accommodation for the purpose of the item means accommodation for up to four weeks in the dwelling, so if this scenario correlates to your guest stays, I would suggest it will be near impossible that you could argue the “principal place of residence test” has been satisfied.
3. Are you actually carrying on a GST taxable activity? While the definition of a “taxable activity” itself contains numerous components, I’d submit it really does just come down to whether the activity you are carrying on could be seen to be continuous or regular. Yes, you should be register for NZ GST. No, then you can forget about GST for today, but you may need to consider it again tomorrow should any aspects of your present scenario change.
So having made it all the way to question 3, you now are potentially faced with the grey area of the legislation (alternatively it may be a very black and white situation), is the activity you are carrying on, either “continuous” (carried on over a period/in sequence uninterrupted in time – must not have ceased in a permanent sense or have been interrupted in a significant way), or “regular” (carried on at reasonably short intervals with a steadiness or uniformity of action – should be of a habitual nature and character)?
PUB00303/g contains a list of factors to consider that may be relevant in the short stay accommodation context, and additionally makes an important point, that even though you may have ruled out GST implications with respect to your activities, reference should also be made to PUB00303/c – f, to confirm what other, if any, taxation implications may arise for you.
If you need some assistance, please do not hesitate to make contact.
First it was remote services GST…
Introduced to capture amongst other things, the potential missed GST on the ever-increasing acquisition of offshore digital products by NZ based consumers, the remote services (the “Netflix tax”) GST regime has effectively changed the “place of supply” rules where a non-resident supplier is involved, to now deem a NZ place of supply where the remote services are provided to NZ consumers.
Prior to the law change, you may recall that when the supplier was a non-resident, and the services were not provided by a person who was in NZ at the time the services were performed, the supply was deemed to be made outside of NZ, and consequently not subject to GST.
Even before the remote services GST rules were introduced however, there had been ongoing discussions both within NZ, but more particularly at the OECD level as part of the BEPS project, around whether income tax source rules required some rework, to also deal with the increasing use of digital services cross-border, potentially as a mechanism by multi-national enterprises (MNE’s) to shift profits from high tax to low tax jurisdictions. The classic example in this case, was setting up an entity to own the MNE’s core IP in a low tax jurisdiction, which then charged license fees for the use of that IP to the MNE’s subsidiaries carrying on business in the higher taxed jurisdictions. While there were still potential obligations on the subsidiary to deduct a withholding tax from the royalties paid, often this was at a rate of no more than 15%, reduced to 5% in numerous case under the terms of a double tax treaty if one existed between the two jurisdictions.
While the OECD is still working on the finer details of exactly how these cross-border digital services could be better taxed, NZ, like its Aussie cousins, has decided not to wait, and is now looking to introduce some sort of interim solution. In this regard Parliament has advised that a discussion document will be released around May 2019, so watch this space for further updates accordingly.
Depreciation Recovery Income Upon a Change in Use Event
IR has released a draft QWBA (PUB00343) to answer the question of whether depreciation recovery income may arise in relation to depreciable assets, for a business that becomes a charity and begins deriving exempt income. While the article is centred around charities, it should be noted however, that the views espoused by IR, can essentially apply to any scenario where the use of a depreciable asset changes from assisting in the derivation of assessable income (or in running a business for that purpose), to that of a private nature or in deriving exempt income.
Where such a scenario occurs, which results in depreciation deductions for the following income year being denied (because the asset loses its status as being a depreciable asset), the legislation deems a consideration equal to the market value of the asset at that time to have been received by the business, and consequently where that deemed consideration exceeds the adjusted tax value of the asset, depreciation recovery income will arise for the business (naturally capped to the level of depreciation deductions previously claimed).
This effective deemed disposal event is presently treated as occurring on the first day of the next income year, although a present tax Bill before the House, proposes changing the timing to the date immediately prior to the persons income becoming exempt.
The deadline for comment on PUB00343 is 20th March 2019.
Received in time?
IR have now finalised their standard practice statement with respect to when tax payments will be treated as having been received in time.
SPS 19/01 applies for 1st March 2019, and replaces SPS 14/01, the 2014 practice statement on the same issue. It should not be a surprise to any of you, that if a payment is not received at IR on or before the due date for the relevant payment, then clearly it will be late, and exposures to late payment penalties and use of money interest charges may arise.
However the SPS did still contain a few useful take-aways:
- Ensure you understand the banks processing schedule if making your payment electronically. It’s no good setting up your payment at 7pm on the due date if the bank only processes for that day up until 6pm;
- You can pay most taxes via the use of debit/credit cards now, however be aware the bank will charge you 1.42% as a convenience fee to do so;
- You cannot make cash/eftpos payments at IR branches now, although you can do so at any branch of Westpac, however the bank will not accept any tax returns;
- Cheques received through the post must be received on or before the due date – so gone are the days where as long as your envelope was post-marked pre the due date, it was accepted in time; and,
- If a due date falls on a weekend or public holiday, payments will still be made on time if credited or received on or before the next working day.
TWG Final Report
Released as promised on the 21st February, I would suggest the only real surprise was the acknowledgement that the report did not have the unanimous support of the entire group. What impact, if any, making public this aspect of the final report’s completion, coupled with Sir Winnie’s apparent “no capital gains tax under my watch” stance, will have on the Government’s written response to the report to be released in April, we shall have to wait and see. I certainly wouldn’t be as bold as some of the media commentators who have immediately come out and said “it simply won’t happen now”. Considering I never thought the American people would ever elect the Don, or Brexit would ever be a Yes vote, I think it’s a little early to be suggesting the capital gains tax boat has just been sunk to the bottom of the deepest ocean.
So let’s stop trying to read the tea leaves, and get back to some of the key recommendations in the report:
- Will apply to all land (family home exception although note potential exposure where home also used for income-earning purposes), shares (CFC/FIF exception), intangible property and business assets. Will not apply to personal-use assets;
- Will apply to all disposals occurring post 1st April 2021 (including a change of use of the asset which will trigger a deemed disposal), the gain subject to taxation in essence being any increase in the market value of applicable assets held by the taxpayer at the 1st April commencement date , through until the date of disposal. The tax rate will be the person’s marginal tax rate;
- It is likely there will be a number of valuation options provided by IR for taxpayers to use for the various asset classes on Valuation Day (1st April 2021) – for example QV or ratings valuations for land;
- While it has been recommended that capital losses should be able to offset taxable income, there may also be ring-fencing rules to mitigate potential abuse of the system;
- All NZ resident individuals and entities would be subject to CGT, and there is a recommendation to repeal the QC regime – but with transitional rules to pass out any capital gains previously derived; and,
- Certain rollover relief provisions are recommended, such as transfer of assets on death and for small businesses who sell business assets but reinvest the proceeds in replacement business assets.
To somewhat soften the blow, while the TWG did not recommend a reduction in the company tax rate, or any change to the existing imputation system, it did recommend increasing the bottom income tax threshold to $20,000/$30,000 however with a potential increase in the second marginal tax rate from 17.5% to 21%.
Bring on April and the Government’s response.