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.
- Employer-Issued Crypto-Assets
- Taxation (KiwiSaver, Student Loans and Remedial Matters) Bill
- Omnibus Tax Bill now law
- Crypto-Asset Rulings finalised
- UOMI Changes
- Claiming a home office?
- Time for a promo
- We have the power!
- First reading of new Tax Bill
- New guidance tool available
- The wait is almost over
A new draft public ruling (PUB00344), examines the application of the employee share scheme rules and the associated income tax treatment, where an employer has issued to an employee, in connection with that persons employment, a crypto-asset which satisfies the s.YA 1 definition of a “share”.
The ruling only applies to employees and not to those who provide goods or services to the employer or who are self-employed.
Where the crypto-asset is a “share” for income tax purposes and the employee is not required to pay their employer market value for the crypto-asset they are issued with, then the value of the taxable benefit will be determined in accordance with the provisions of s.CE 2, and the benefit amount itself will be deemed to be the employees’ employment income under the provisions of s.CE 1(1)(d).
“Crypto-assets” are digital assets that use cryptography and blockchain technology to regulate their generation and verify transfers. Satisfying the “share” definition which would then trigger the application of PUB00344, could occur in the context of an Initial Coin Offering or a Token Generating Event (or by other similar means), by the employees’ employer.
The timing of the benefit is determined by the “share scheme taxing date”, which in simple terms is the date on which the employee would be deemed to hold the shares just like any other shareholder in the company. Under an employee share scheme, this is now defined as being the time at which there is no material risk that the ownership of the shares may change.
When the share scheme taxing date has been deemed to have occurred, the quantum of the benefit to the employee will be the difference between the market value of the crypto-asset on that date, and the amount actually paid by the employee to receive the crypto-asset.
Since the benefit derived by an employee from an employee share scheme is not included within the definition of a PAYE Income Payment contained in s.RD 3, to which the PAYE rules would then apply, the tax payable on the benefit is the direct responsibility of the employee themselves.
The deadline for comment on PUB00344 is 6th August 2019.
Taxation (KiwiSaver, Student Loans, and Remedial Matters) Bill
Introduced into Parliament during the week, this Bill has as its main objectives, continuation of the Government’s simplifying and modernising of social policy administration, further improving the application of NZ’s broad-base, low-rate framework, and further encouraging research and development expenditure.
The proposals contain amendments to the existing KiwiSaver scheme rules, to take advantage of the new payday employment information filing regime, which can now facilitate a faster transfer of employer contributions to a members fund, IR forwarding contributions on the basis of the payday information its received, which will be before the contributions have actually been received by IR.
The new legislation would also see from the commencement of the 2020/21 income year, R&D tax credits becoming more broadly refundable, with the cap based instead on the quantum of payroll taxes paid by the business each year.
The recent administrative review of the income tax treatment of trusts has also identified several areas of the law which could be improved, including clarifying the relationship of the residence rules to trustees and their obligations under the Income Tax Act 2007, and clarify the rules relating to the value of a settlement.
And in a couple of land related proposed amendments, firstly it has been identified that while the main home exclusion for the bright-line test requires that a person use the land as their main home for most of the time they own the land, situations can arise where the period that a person owns land under this general definition can differ from the period that the bright-line test applies to. Consequently there is a desire to align the period of ownership for the main home exclusion for the bright-lines test with the bright-line period. Secondly, the Bill contains a remedial amendment to clarify that a one-off payment for the grant of a permanent easement is not taxable.
We wait now for the FEC’s report once the Bill has passed its first reading and has been sent to them for their review and comment.
Omnibus Tax Bill Now Law
Further to last week’s update that the Taxation (Annual Rates for 2019-20, GST Offshore Supplier Registration, and Remedial) Act 2019 had passed its third and final reading, the legislation received the Royal Assent on 26th June 2019 and consequently is now law.
Crypto-Asset Rulings Finalised
In a previous edition of AWIR, I provided an update with respect to two draft Public Rulings that had been released for consultation, which covered the issue of the income tax treatment of crypto-assets received by employees as part of their regular remuneration and bonuses.
To mitigate any potential confusion, the income tax issues surrounding the receipt of crypto-assets as part of the employees’ regular remuneration are discussed in the first Ruling – BR PUB 19/01, while the bonus payment related issues are discussed in the second Ruling – BR PUB 19/02.
BR PUB 19/01 applies to situations where the crypto-assets are payments for services performed by the employee under an employment agreement, are for a fixed amount and form a regular part of the employee’s remuneration. The Ruling concludes that crypto-asset payments generally satisfy the PAYE income payment definition contained in section RD 3, and consequently the payments are subject to the PAYE rules.
I use the phrase “generally satisfy”, because it is also accepted that not all crypto-assets will be considered “salary or wages”, particularly in scenarios where the crypto-asset is subject to a material lock-up period or the crypto-asset cannot be converted directly into a fiat currency (on an exchange). A fiat currency is legal tender whose value is backed by the government that issued it e.g. NZD, USD, EURO. Where the crypto-asset payment does not fall within a “salary or wages” definition, then the FBT rules will apply instead.
BR PUB 19/02 on the other hand, applies to situations where the crypto-asset payment to the employee is received in connection with that persons’ employment as an incentive or bonus. The general premise of BR PUB 19/02, is similar to that outlined in BR PUB 19/01, in that the payments will generally be considered a PAYE income payment, subject to the PAYE, unless the crypto-asset cannot be converted directly into a fiat currency, in which case the FBT rules are likely to apply instead.
Once a crypto-asset payment has been determined to be a PAYE income payment, therefore subject to the PAYE rules, both Rulings then discuss how the PAYE amount itself should be calculated, which will often be determined by whether an agreement between the employer and the employee states that the payment of the crypto-assets will be considered a gross or net amount in the employees’ hands. In the latter scenario, a grossing up calculation is likely to be required to determine the quantum of PAYE payable.
The two Public Rulings both take effect from 1st September 2019, and will apply for a period of three years.
Since 8th May 2017, we have seen a taxpayer’s paying rate for use of money interest set at 8.22%, with the Commissioner paying out 1.02% when the roles are reversed.
Effective from 29th August 2019, we will see an increased in the paying rate to 8.35%, while at the same time, somewhat surprisingly (ok that’s an arguable statement I accept), a reduction in the receiving rate to 0.81%.
Perhaps a good time to consider the use of a tax pooling service provider if you have not used them in the past, and you have short-paid your tax payment obligations – I have heard of one provider who is keeping their paying rates the same (for the foreseeable future at least).
Claiming a home office?
You may be aware that recent (relatively speaking as we’re talking 2017) legislation passed (The Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act 2017) included new section DB 18AA to the Income Tax Act 2007 – Square Metre Rate Method.
Subsection 1 in essence explains the purpose of the new provision:
DB 18AA(1) WHEN THIS SECTION APPLIES
A person may choose to apply this section to determine the amount of a deduction, in an income year, for the proportion of business use of a premises (the premises) that is used partly for business purposes and partly for other purposes.
So it’s a simplification tool, targeted to reduce a persons’ compliance costs, where instead of having to calculate all of the individual costs that a person may incur in relation to their home office, they can instead apply a set formula which is based on the area of the home used for business purposes.
However use of the metre rate does not reflect certain premises costs such as mortgage interest, rates and rent, as clearly these are taxpayer specific costs, very much determined by the individuals own fact circumstances, and they can therefore be materially different from one person to the next. Consequently, it is a case of calculating the square metre rate component and then adding to that result the relevant proportion of premises costs – calculated in the same way we always have.
To assist in applying the new section DB 18AA, IR has released Operational Statement OS 19/03, which has application from 4th July 2019.
OS 19/03 outlines the 3 steps in the calculation process in some detail, including commentary surrounding the definitions of what is considered to be buildings, premises and curtilage. Also included in the operational statement are a number of useful examples to illustrate the actual application of aspects of the calculation.
It should be noted that use of the new provision is entirely at the taxpayer’s option, and there is also no lock-in rules requiring a person to continue to use the method for a specified period of time, once they have used it to calculate their deduction entitlements for a particular income year. However whenever the taxpayer’s deduction is being calculated in accordance with section DB 18AA, there is no ability to claim any additional costs a person may incur, over and above mortgage interest, rates or rent.
While OS 19/03 only applies from 4th July 2019, the legislation itself was passed on 21st February 2017, and was effective from 1st April 2017 with application to 2017-2018 income years and later. In this regard, OS 19/03 provides two square metre rates – $41.10 for the 2017-2018 income year and $41.70 for the 2018-2019 income year. Future rates will be set and published by IR annually. You can locate the OS 19/03 statement on IR’s website or by clicking on the following link – https://www.classic.ird.govt.nz/technical-tax/op-statements/1903-square-metre-rate.html.
Time for a Promo
It has been a surprisingly quiet time in the tax updates arena over the past seven days, in an otherwise frantically busy time of the year, as the in-flow of 2019 year end related tasks (tax returns, financial statements) engulfs us all.
I thought there would be no better time therefore, to shamelessly promote some of the other things that I do when I am not drafting the weekly editions of AWIR.
One of the reasons I commenced AWIR nearly three years ago (first edition was 12 August 2016), was to assist in the promotion of a new tax advisory service we had launched, that was targeted towards other accountancy practices (predominately Auckland based), who either lacked their own internal tax specialist resource, or had sufficient expertise but were often looking for a sounding board to bounce ideas off or to provide a second opinion.
Our tax advisory service offering has four main components:
- A question and answer (Q&A) service, where either by phone or via a brief email, I am called upon to provide answers to those more curly questions that may crop up when preparing the clients annual financials or as the result of a query from the client themselves. There is no minimum cost to use the Q&A service, my time to provide a response recorded as appropriate, with a monthly invoice issued to which is attached a WIP report so you can see exactly where the time has been spent, and more importantly, in relation to which client for your own billing purposes;
- The preparation of more detailed tax opinions to provide commentary with respect to the application of NZ tax legislation as appropriate to your client’s transactions or structures. By far the most common opinions provided under this aspect of the advisory service offering, are in respect to land related projects (subdivisions, tainting issues, GST consequences) and tax residency determinations. These more detailed opinions are first scoped to ensure all parties are on the same page as to the extent of the advice to be provided, and then costed upfront so your client is fully aware of the fees they will be incurring to receive the advice with a “no surprises” policy;
- Assistance with IRD risk reviews, which may have evolved into a full audit by the time I become involved. The extent of the service offered ranges from providing simple strategy advice through to complete management of the review/audit process. As everyone will no doubt appreciate, when it comes to dealing with the Revenue, “how long is a piece of string” in terms of trying to estimate the level of work that may be involved to conclude the review, so I instead provide upfront cost estimates on a task by task basis – cost to prepare initial response letter, cost to attend a meeting, cost to draft a NOPA etc; and,
- Assisting with IRD tax arrears issues your clients may have, providing a service to help identify potential solutions to manage tax debts, which can range from negotiating simple instalment repayment plans to preparing applications for full write-off of all debt under financial hardship relief provisions. Once again it becomes the “how long is a piece of string question”, which dictates upfront costing estimates (often more critical here if the client is already under financial pressure) on a task by task basis.
I also undertake a fair amount of cross-border advisory work, particularly with Australian accounting practices who have clients looking to expand their business operations to NZ. Equally I assist NZ based businesses looking to go offshore, this service offering certainly enhanced by GS being affiliated with international accountancy and legal groups, enabling us to connect with independent firms just like ours all over the globe, providing in essence in-country expertise.
While the tax advisory offering is targeted towards accounting practices, it is in essence available to anyone who has a need, so please do not hesitate to contact me accordingly.
Right, enough of the plug, back to the more exciting stuff in next week’s edition.
We have the power!
The recent passing of the Taxation (Annual Rates for 2019-20, GST Offshore Supplier Registration, and Remedial Matters) Act 2019, has extended the Commissioners care and management role, by giving her the power to either modify how tax laws are to apply (by way of an Order in Council recommended by the Minister of Revenue to the Governor-General) or to grant an exemption from certain provisions of the Inland Revenue Acts.
The purpose of the legislative amendments (new sections 6C to 6G of the TAA94) is to provide more flexibility for the Commissioner to address legislative anomalies, where a view has been reached that a particular provision within the Inland Revenue Acts seems to contain an error, does not achieve its intended purpose, is inconsistent with other provisions, or appears to be ambiguous.
The new powers are now detailed in a document released by IR – “legislative modification power”, which states that they will only be exercised, if doing so would be beneficial to the taxpayers. In this regard, whether an affected person uses a particular modification or exemption, is entirely at their option.
Confirming the intent of the new legislation, that any modification or exemption is supposed to be temporary, a three year maximum time period will apply (although in some cases, retrospective application may also be appropriate).
It should be noted that any modifications or exemptions to the Inland Revenue Acts will not be solely IR driven, in essence any person who considers that a provision in the Inland Revenue Acts is not operating as intended, contains an error, is ambiguous, or is inconsistent with other provisions, entitled to raise possible issues with IR by using their dedicated email address Imp@ird.govt.nz.
Upon receipt, a specialist team will review the person’s submission, to determine whether it is appropriate to use the legislative modification power, and if it falls within the scope of the new rules, then the potential issue of a modification or exemption will be progressed through the usual public consultation process, to ensure that IR fully understands the issue. Results will then be published, which will include an explanation of what steps need to be taken by affected people to take advantage of the rules (or to opt out as appropriate), and where retrospective application applies, how to request amendments to previously filed returns.
First reading of new Tax Bill
The Taxation (KiwiSaver, Student Loans, and Remedial Matters) Bill has received its first reading and following our usual law making processes, has now been referred to the Finance and Expenditure Committee (FEC) for their review and comment.
The Bill continues the Government’s simplifying and modernising of social policy administration and its desire to further improve the application of NZ’s broad-base, low-rate framework, and to encourage R&D expenditure. In this last regard, the Bill contains proposed changes to extend the refundability of R&D tax credits, with amendments intended to apply from the 2020/21 income year, making the credit more broadly refundable, with a cap based on the payroll taxes paid by a firm in each year.
The FEC is due to report back on 24 January 2020, with any submissions on the Bill due to be filed no later than 4th September 2019.
New guidance tool available
Following on from the last articles’ R&D tax credit flavour, to assist businesses with assessing whether they may eligible for the new R&D tax credit, IR has developed and now released a new on-line (apparently easy-to-use) eligibility tool with associated guidance material, which is aimed at providing businesses with a useful indication of whether they should explore their eligibility to receiving a tax credit further.
The new tool has been designed to facilitate Governments intention to encourage more businesses of all sizes and across a range of sectors to invest in R&D activities.
You can find out more about the new tool by following this link – www.ird.govt.nz/rd-credit.
The wait is almost over
It has been nigh on two years (1st August 2017) since it was first introduced into the Big House, however the Trusts Bill has finally passed its third reading and consequently now awaits Royal assent.
The new legislation will replace the Trustee Act 1956 and the Perpetuities Act 1964, and has an intended purpose to make trust law more accessible, to clarify and simplify core trust principles and essential obligations for trustees, and to preserve the flexibility of the common law to allow trust law to continue to evolve through the courts.
The new Act’s principal changes include:
- clarification of key features of a trust and the duties of trustees;
- clear rules about when trustees are required to provide information to beneficiaries so that beneficiaries can enforce their rights;
- practical and flexible trustee powers that allow trustees to manage and invest trust property in the most appropriate way;
- options for removing/appointing trustees without having to go to court in simple cases; and,
- modern dispute resolution procedures.
Do not panic however if you are not yet fully up to speed with respect to any of the aforementioned changes, as there is still an 18 month lead-in time from the date the new Act receives Royal assent, until the date its provisions will take effect.
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