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.
- Consultation proceeds on use of kilometre rates for vehicles
- Budget 2019
- “Amazon Tax” GST bill reported back
- Taxation of digital services
- Private boarding services determination released
- Livestock values released
- Late filing penalty SPS released
- Short-stay accommodation determination issued
- R&D tax incentive guidance published
- Administrative approach agreed with our cousins
- OECD Secretary-General expresses concern
- Non-resident entertainers and sportsperson IS
- QWBA on donee organisation requirements
- Omnibus tax bill passes third reading
Taxation of Digital Services
Close on the heels of Budget 2019, in which the Government signalled its intention to progress public consultation on a digital services tax (“DST”), the Ministers of Revenue and Finance have released a discussion document titled “Options for taxing the digital economy”.
The topic itself is presently on the OECD/G20 agenda, and while the Governments preference would be to implement an internationally agreed solution through the OECD, it is also seeking public feedback on introducing a DST as an interim measure, particularly if the OECD cannot make sufficient progress on the issue during the remainder of 2019.
Interestingly, our Aussie cousins have just completed their cycle, introducing their discussion document in October 2018, with a decision by the Government in March 2019, not to proceed with a DST, submitters to the discussion document overwhelmingly in favour of supporting Australia to continue with its engagement in the multilateral process at the OECD instead.
Returning to NZ’s proposed DST, the option presently being explored is a 2-3% tax on certain revenues earned by highly digitalised multinationals operating in NZ, the rules narrowly targeted however, towards digital platforms that depend on a base of users for income from advertising or data, and not to general sales of goods or services themselves via a digital platform. Examples of those businesses likely to be impacted by the introduction of a DST, include Uber, Airbnb, eBay, Facebook, YouTube, Instagram and companies which provide search engines and then sell the data about users collected. So offshore outsourcing accounting services provided via the cloud, would not be subject to a DST.
It should be noted that a DST would only be an interim measure, likely to be repealed once the OECD’s international solution was implemented.
Submissions on the proposals are requested to be filed no later than 18th July 2018.
Private Boarding Services Determination released
IR has released DET 19/01: Standard-cost household service for private boarding service providers, which can be applied by those who provide private boarding services within their own home.
There are 3 elements to the standard cost determination:
- a weekly standard-cost per boarder, initially set at $186, which represents the direct costs per week of providing the boarder with items or services such as food, power, cleaning services and use of bedroom chattels and general household furniture;
- an annual housing standard-cost, which is determined via the application of a set formula, and represents the annual cost of providing the domestic accommodation, including such costs as financing, rent, rates and insurance; and,
- an annual transport standard-cost, which is also determined via application of a formula which includes the use of the Commissioners mileage rate, and represents costs associated with the use of a motor vehicle to provide the private boarding services.
A taxpayer who provides private boarding services in their own home, has the option of either calculating their tax position based on actual expenditure they incur during the year in providing the private boarding services, or by using DET 19/01. When a taxpayer elects to use the latter, only income derived above the quantum of standard-costs calculated, needs to be reported to IR.
Naturally where a person elects to use DET 19/01, no additional costs not covered by the standard-cost calculations can be claimed (even where a particular element had not be used). DET 19/01 also cannot be applied where:
- there are more than 4 boarders at any one time during the year (boarder defined as not including anyone under 5 years old who accompanies a parent/guardian who is a boarder);
- the private boarding services are provided as part of a GST taxable activity of a registered person;
- a trust owns the property unless the host either personally pays all the annual housing standard-cost element or does not claim this element;
- the accommodation is used both for private boarding services and short-stay accommodation services during the income year; or,
- other deductions for the accommodation have been claimed against income derived from the use of the property – for example a home office claim against business income.
DET 19/01 applies for the 2019-20 income year onwards, until it is specifically withdrawn, the Commissioner likely to update the rates annually however in line with annual movements in CPI.
Livestock Values Released
For those of you accounting for livestock in your annual tax positions, the release of the 2018/19 income year national average market values of specified livestock will be of relevance to you and you can locate the determination here – https://www.classic.ird.govt.nz/technical-tax/determinations/livestock/national-averages/livestock-national-market-values-2019.html.
Late Filing Penalty SPS Released
Certainly topical this time of year is the latest SPS issued by IR, as those of us who may be a bit tardier than others, are now receiving letters from the Revenue in respect of 2018 income tax returns not yet filed, advising that extension of time arrangements are no longer, and additionally a late filing penalty has now been imposed.
Standard Practice Statement 19/04 sets out the Commissioners practice in respect of imposing late filing penalties, not only with respect to income tax returns however, but also in relation to failures to file other returns, including employment income information and GST returns on time.
With the exception of employment income information and GST returns, the Commissioner must give 30 days’ notice of an intention to impose a late filing penalty. Provided the required return is filed within that 30 day period, no penalty will be imposed.
The scenario for late filings of employment income information and GST returns, is slightly different, with in essence a warning given for the first late filing, and a penalty only imposed if the taxpayer is tardy again in the succeeding 12 month period.
Late filing penalties for income tax returns range between $50 and $500, determined by the taxpayers’ amount of net income for the relevant income year. With the exception of GST returns, all other late filing penalties are a standard $250. This same quantum of penalty applies for GST for those registered on the invoice/hybrid basis, whereas a $50 penalty applies for those registered for GST on the payments basis.
SPS 19/04 applies from 30th May 2019.
Short-stay Accommodation Determination issued
Accompanying the release of the standard-cost determination for private boarding services, is DET 19/02, which again provides an option for taxpayers who provide short-stay accommodation in their own home, to use a standard-cost basis to determine their annual tax filing positions as opposed to having to calculate deductions and return all of their income from the activity on an actual cost basis.
Naturally a lot of commentary outlined in DET 19/01, applies to this determination as well, no additional expenditure being able to be claimed if the Determination is used, and equally only income in excess of the standard-cost calculated amount being required to be reported.
Similar restrictions to those listed in DET 19/01 apply, the primary difference of course being no reference to the number of boarders, but instead to a limitation on the number of room rental nights per year being capped at 100 nights.
The standard-cost nightly rate is initially set at $50 where the home is owned and $45 where the home is rented. There will also be annual CPI adjustments made as appropriate.
DET 19/02 applies for the 2019-20 income year onwards, until it is specifically withdrawn.
R&D Tax Incentive Guidance published
With the recent passing of the legislation which resulted in the introduction of a R&D tax credit regime for businesses, IR has now updated their draft guidance issued in February 2019, to incorporate changes made during the legislative process and feedback that was received on the initial release.
The guide which is available on IR’s website (www.ird.govt.nz), covers the topics of:
- eligible activities, entities and expenditure
- using, and becoming, an approved research provider
- claiming and receiving the tax credit, and
- managing disputes.
Consultation Proceeds on Use of Kilometre Rates for Vehicles
IR has released two draft operational statements on the use of the Commissioner’s kilometre rates (IRD mileage rates for those of you that have the same grey matter as I do!) for calculating business deductions and employee reimbursements with respect to the business use of a motor vehicle.
The first is ED00214a, in essence a discussion between the alternative options of using either the kilometre rate or the cost method to compute the business deductions for the use of a motor vehicle. My view of the main takeaway points:
- From income years commencing 1st April 2017, unless you elect to use the kilometre rate method for a vehicle in the income year it is first used, the cost method is the default rate and it will then apply until that vehicle is sold. Elections are on a per vehicle basis and are irrevocable.
- The kilometre rates have two tiers, presently 79c in respect of the first 14,000km total travel by the vehicle during the income year, and then a tier two rate which is dependent on the type of vehicle, ranging between 9c and 30c. Note there is no longer a 5,000km cap.
- A 90 day logbook can be used to establish the business use proportion for either calculation method for the subsequent three year period, the odometer reading then simply required to be recorded at the end of each income year for the kilometre rate method, so you can determine the total travel by each vehicle and consequently the application of the tier one/two rates.
- Use of the kilometre rate method results in no depreciation deduction/recovery income for a motor vehicle and in the case of a close company, no separate interest claim under either section DB 7 or 8 in respect of any finance costs associated with the vehicle.
- A close company (5 or fewer natural person/trustee shareholders holding >50% of voting/market value interests) can elect to use these calculation methods instead of paying FBT, provided the only non-cash benefit the company provides is the private use of a motor vehicle to shareholders.
- Failure to maintain the requisite logbook (or actual records) can result in vehicle deduction claims being limited to 25% or lesser – I find that often people think it is an automatic 25% claim which is not correct.
The second operational statement is ED000214b, which deals with the issue of employee reimbursements, and where the employer chooses to use the kilometre rate method as a reasonable estimate of the expenditure likely to be incurred by the employee in using their private motor vehicle for employment purposes. IR decided to issue two operational statements on the kilometre rate method, to minimise the risk of confusion between business deduction claims and employee reimbursements. Main takeaway points:
- While employers can base reimbursement payments on actual expenditure incurred by the employee, they are entitled to use an alternative method provided the amount calculated is a reasonable estimate of the expenditure likely to be incurred by the employee. Using the kilometre rate method is acceptable for the purposes of the “reasonable estimate” criteria.
- The same two tier system applies, although the tier one rate reduces to 76c for the first 14,000km, and the tier two rates range between 9c and 26c. Again no 5,000km cap, a logbook and then an annual odometer recording simply required to determine firstly the business use proportion and secondly the application of the relevant tier rate.
- No logbook (alternative acceptable evidence) results in tier one reducing to 3,500km (25% of 14,000). Again note that 25% is a maximum claim, not a minimal entitlement.
- Reimbursements made in accordance with these rules are exempt income to the employee. While these rules are to take affect from 2018 income years and onwards, considering we are already now in the 2020 year, it is expected the new rates will only apply from the date of the operational statement.
Deadline for comment on both exposure drafts is 28th June 2019.
With the theme of Budget 2019 being a focus on wellbeing measures, it is not surprising that there was no main course offered on the Day itself, post the early entrée pre-Budget announcements of changes to the GST rules on telecommunication services and the repeal of the racing totaliser duty (aka the betting duty).
In essence the GST changes are likely to see you now being charged GST on your roaming services when you travel overseas, with non-residents not being so charged when travelling in NZ.
Budget 2019 did make a mention however of the proposed digital services tax, timetabled for introduction in 2020, although with no detail other than the signalling of a discussion document to be issued shortly which will explore options for taxing the digital economy, one potential template being hinted as a 2-3% tax on turnover.
Some would also argue no doubt, that the new international visitor levy of $35 to be implemented and charged to most international visitors entering NZ from 1st July, is effectively a tax, albeit not imposed on our own citizens.
Post the release of Budget 2019, we have also seen the introduction to Parliament of a myriad of Budget related Bills, including social assistance legislation to give effect to income support policy changes announced (indexing benefits to average wage increases) and legislation to introduce a school donations scheme for decile 1-7 schools, where participating schools (those agreeing not to request donations from parents – hmmmm??) will receive $150 per student per year from the Government, reducing the financial pressure on parents to ensure their children’s basic needs are met, by feeling compelled to have to make annual donations to the school.
“Amazon Tax” GST Bill reported back
The so called “Amazon Tax” legislation has been reported back to Parliament by the FEC.
A key element of the Bill is the introduction of GST on low value imported goods (now defined as <$1,000), although the FEC has now recommended an implementation date of 1st December 2019, as opposed to the original 1st October 2019. Additional recommended changes have seen:
- a transitional rule added for contracts entered into pre the legislation application date but where payments will be received by the supplier post 1st December 2019 (say an annual magazine subscription), to not be subject to the new rules for the first 396 days of the agreement;
- the ability for offshore suppliers who primarily sell goods to consumers to also charge GST on B2B supplies and to issue a single document that satisfies both the tax invoice and GST receipt requirements thereby enabling NZ businesses to recover the GST charged; and,
- reducing the 95% threshold as introduced, which enabled offshore suppliers to collect GST on goods valued >$1000 (as opposed to NZ Customs collecting it), to a scenario of 75% of the total value of their sales to NZ are items valued at less than $1,000.
Arguably of equal concern to our own investors and with the potential to further numb the Auckland property market, are the new ring-fencing rules with respect to residential rental property deductions. Unfortunately however, there is no such deferral recommendation by the FEC to the present April 1st 2019 commencement date, although there are some amendments to the rules as introduced, the primary one being a widening of the range of income to which ring-fenced deductions could be applied, to include depreciation recovery income (usually related to historic depreciation claims now), rental income from revenue account property outside the scope of the existing rules, and taxable income from property that arises in the year there is a change of use of the property – residential to commercial for example.
We now await the second reading.
Administrative approach agreed with our Cousin’s
For those of you who know the script of the Australia/NZ double tax treaty agreement (“DTA”) inside out, or at least its residency Article (Art.4), you will appreciate that a company which is considered tax resident of both jurisdictions under their respective domestic corporate tax residency rules, is then deemed in accordance with the DTA to be tax resident in the jurisdiction within which the company’s centre of effective management (“COEM”) is deemed to be situated.
In scenarios where the company cannot determine its COEM, Art.4.3 of the DTA suggests that the IRD and the ATO should then determine the issue by mutual agreement, post consideration of a number of listed factors.
With both Australia and NZ having signed the Multilateral Convention (“MLI”) demonstrating a commitment to address BEPS risks and ensure a better functioning international tax system, they have now signed MLI Article 4(1), which sets out Australia and NZ’s administrative approach, when faced with dual resident companies making COEM self-determinations in accordance with Art.4.3 of the DTA.
The point of MLI Article 4.1, is to use a measured risk based approach to provide some certainly and therefore minimise potential compliance costs for taxpayers, by way of the two Revenue authorities essentially agreeing to leave COEM self-determinations alone, where the particular taxpayer satisfies the eligibility criteria set out in the MLI Article. The eligibility criteria are broken into three separate tranches – structure, financials and compliance activities.
Naturally, where a taxpayer cannot make their own COEM determination, or they are uncertain about or do not meet the eligibility criteria, then an application should be lodged with the appropriate Authority.
OECD Secretary-General expresses concern
Hard on the heels of our Government’s digital tax discussion document release, the OECD Secretary-General has delivered a report to G20 Finance Ministers and Central Bank Governors, which sets out a programme of work to develop a consensus solution to the tax challenges arising from the digitalisation of the economy.
The report identifies two pillars of work considered necessary to close existing loopholes used by MNE’s:
- Pillar One focuses on the allocation of taxing rights, and seeks to undertake a coherent and concurrent review of the profit allocation and nexus rules.
- Pillar Two focuses on the remaining Base Erosion and Profit Shifting (BEPS) issues and seeks to develop rules that would provide jurisdictions with a right to “tax back” where other jurisdictions have not exercised their primary taxing rights or the payment is otherwise subject to low levels of effective taxation.
The present target is to arrive at a consensus solution and to produce a final report by the end of next year.
The current report expressed the concern of the Secretary-General, of the risk that not delivering a consensus solution within a reasonable timeframe, would result in further jurisdictions just going off and doing their own thing. I think the following narrative is useful reading in this regard:
“A growing number of jurisdictions are not content with the taxation outcomes produced by the current international tax system, and have or are seeking to impose various measures or interpretations of the current rules that risk significantly increasing compliance burdens, double taxation and uncertainty. One of the focal points of dissatisfaction relates to how the existing profit allocation and nexus rules take into account the increasing ability of businesses, in certain situations, to participate in the economic life of a jurisdiction without an associated or meaningful physical presence. An unparalleled reliance on intangibles and the rising share of services in cross border trade are among the causes typically identified. This dissatisfaction has created a political imperative to act in a significant number of jurisdictions. Cognisant that predictability and stability are fundamental building blocks of global economic growth, the Inclusive Framework is therefore concerned that a proliferation of uncoordinated and unilateral actions would not only undermine the relevance and sustainability of the international framework for the taxation of cross-border business activities, but will also more broadly adversely impact global investment and growth.”
A full copy of the report can be found at www.oecd.org/tax/oecd-secretary-general-tax-report-g20-finance-ministers-june-2019.pdf.
Non-Resident Entertainers & Sportspersons IS
Further to the original consultation document PUB00317, IR has now released the finalised version of its statement clarifying the circumstances in which an exemption from schedular payment withholding tax may apply to payments being made to non-resident entertainers and sportspersons. The exemption can apply to activities or performances which:
- occur under a government cultural programme, where it belongs to, and is funded by, either the NZ Government or an overseas central government;
- occur under a cultural programme that is wholly or partly sponsored by a government, where the NZ Government or an overseas central government provides more than minimal funding;
- occur as part of a programme that belongs to certain types of overseas bodies; or,
- 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.
IS 19/03 is primarily focussed on the intended application of s.CW 20 of the Income Tax Act 2007 – “Amounts derived by visiting entertainers including sportspersons”. Included in the commentary is also a brief outline of the likely tax implications for the visiting non-resident should s.CW 20 not have application, which firstly will require a determination of whether there is a “contract of services’ (employee therefore PAYE) or a “contract for services” (contractor therefore schedular withholding tax), and secondly, whether the payments may still be exempt from tax under the relevant provision (usually Article 17) of a double tax treaty agreement. In this last respect, note that all DTA’s are unfortunately not created equal – for example the NZ/Aus DTA providing NZ a right to tax the visiting Aussie, whereas the NZ/US DTA only providing that same right where the payments to the American will exceed $USD10k.
QWBA on Donee Organisation Requirements
Also following up on the earlier consultation document PUB00337, IR has finalised its answer on the question of a donee organisation looking to establish and maintain a fund which meets the requirements of s.LD 3(2)(c) of the Income Tax Act 2007, and has released QB 19/10 in this regard.
S.LD 3 provides the legislative definition of the meaning of charitable or other public benefit gift, which if satisfied, will usually provide a donor making a cash gift of $5 or more to the donee organisation, with a refundable tax credit or an income tax deduction. Satisfying the s.LD 3(2)(c) requirements therefore, can be critical for a donee organisation which relies heavily on sourcing its funding from the general public – often a small fish in a very large pool – the tax credit element for the potential donor making the donee organisation perhaps more attractive than some of the other fish in that pool.
The s.LD 3 definition includes a fund established and maintained exclusively for the purpose of providing money for charitable, benevolent, philanthropic or cultural purposes within NZ. In this regard, QB 19/10 states that the fund must be established and maintained by a non-profit entity. It must comprise an actual stock of money or other assets set aside for the purpose of providing money for one or more specified purposes within NZ. It requires maintaining the actual stock of money or other assets consistent with the book entries which must show that the fund has been set up on a “firm or permanent basis” for the required purpose. The fund’s money is required to be used for, or used to provide money for, the required purpose. Such a fund must be maintained for the required purpose throughout its lifetime, including the disposal of the fund’s money or other assets if wound up.
The QWBA also sets out a number of exceptions to the “required purpose” use of its funds, including for example, to meet or reimburse costs it incurs specifically in administering the fund.
Omnibus Tax Bill Passes 3rd Reading
The Taxation (Annual Rates for 2019-20, GST Offshore Supplier Registration, and Remedial Matters) Bill (114-3) passed its third reading in Parliament on 20 June 2019 and now awaits the Royal assent.
The passing of this legislation now confirms both the introduction of the new GST on low-value (<$1,000) imported goods and the ring-fencing of residential rental losses rules. While the latter retains its April 1st 2019 (for standard balance date taxpayers) commencement date, note the amended commencement date for the former, deferred for two months from the original proposed date of 1st October 2019, to now a start date of 1st December 2019.
Also just in case you blinked and missed it, a last minute SOP added to the Bill, will see all buyers and sellers of residential land, having to provide their IRD numbers on their land transfer tax statements before a transfer of title will be permitted to proceed. Presently where the property contained a main home for the buyer or seller, either party as relevant could claim that the transaction was a non-notifiable transfer and not have to provide their IRD number as a result.
The original basis for the exclusion, was that in most cases a home owner did not incur tax obligations in relation to the transfer. However, not collecting IRD numbers for those transfers limits IR’s ability to enforce compliance with property-related tax laws, including its ability to identify land transfers that might be relevant for the purposes of the bright-line test and other land-related tax obligations.
The new disclosure rules will come into effect on 1st January 2020, although there will be a six-month transitional period, where if an agreement to transfer land is entered into before 1st January 2020, the tax statement does not need to comply with the new requirements if the transfer is registered on or before 1 July 2020.