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.
- Special Reports on BEPS released
- R&D Tax Credit Bill passed
- Welfare Expert Advisory Group report slams existing welfare system
- Business Premises QWBA’s released
- R&D Tax Credit Regime now law
- High Court decideds “financial services” issue
- CPI adjustments released
- Government releases two pre-Budget announcements
- Exempt income status of Mosque attack support payments confirmed
- Are you paying your employees in cryptocurrency?
- Income equalisation deposits and refunds SPS finalised
Special Reports on BEPS released
While the legislation itself was enacted in June 2018, with application to income years commencing 1st July 2018 onwards, IR has only now just released five special reports on the new rules, each document covering a particular cross-border issue which has been affected by the changes.
The reports cover the following topics:
limitation – new rules to govern how an interest rate on borrowings between
related parties should be determined. Naturally where the parties are related,
there is an opportunity for the lender to charge an interest rate higher than
that which would arise in an arms-length arrangement with a third-party
borrower, thereby providing a mechanism for lowering the taxable profit in the
borrowing parties jurisdiction.
If your client’s total cross-border borrowing is less than $10m, then the new rules will not have application to the financing arrangement, and instead the more simplified transfer pricing rules may be applied. As guidance in this regard, IR have also stated that provided the interest rate set between the parties is no more than 3% above the applicable commercial base lending rate, then IR will generally not investigate further.
Of more relevance to most of us in my view, this document also covers the change to the debt/asset calculation, used to determine whether your client may have a thin cap issue in the first place. When computing the total assets component in the formula, you are now required to deduct non-debt liabilities from the total asset amount – trade creditors, employee and tax accrual provisions etc. Naturally the consequence of the change is the potential higher debt/asset ratio resulting in a potential exposure to the thin cap rules that your client may not have had previously.
- The use of hybrids – new rules to counter inappropriate use of hybrid instruments/hybrid entities. Predominantly to prevent cross-border scenarios where for example the related parties end up getting a tax deduction in both jurisdictions, or scenarios where the income may be exempt in one jurisdiction but the payment is tax deductible in the other jurisdiction. IR’s commentary suggests that as the rules are quite specific, the actual application of the new rules is likely to be quite rare.
- Transfer pricing – the changes include an update to the OECD transfer pricing guideline reference from the 2010 version to the 2017 version, greater focus on the economic substance of the transaction over the formal legal terms of the contract, and, increasing the statutory time bar from four to seven years. The most important change to appreciate in my view however, is the shift of onus from the Commissioner to the taxpayer, to prove that the transfer pricing positions are correct and have been determined using arms-length conditions. As a consequence, I suspect we will see an increased level of transfer pricing scrutiny by the Revenue going forward.
- Permanent establishments – rules unlikely to affect most of us, only having application where the multinational group has global turnover in excess of $750m euros. The new rules may deem a PE to exist in situations where under the particular DTA it would not; and,
- Administrative issues – rules to define a large multinational group, to request information or to collect unpaid tax from a multinational group, and commentary on Country-by-Country reports.
R&D Tax Credit Bill Passed
The Taxation (Research and Development Tax Credits) Bill, first Introduced on 25th October 2018, has passed its third and final reading in the House, and is now awaiting Royal Assent.
Introduced to encourage businesses to spend more on research and development activities, the new legislation will see businesses incurring eligible expenditure from 1st April 2019, entitled to receive a 15% tax credit. The first $225k of the tax credit is fully refundable, with any excess being carried forward to the following income year. A minimum $50k annual R&D spend is required before the regime will have application to the taxpayer. The existing tax loss cash-out regime for predominantly start-up companies is not affected by the new regime (at least not for the time being).
Welfare Expert Advisory Group report slams existing welfare system
While we have recently experienced an arguably surprising rejection of the Tax Working Group’s CGT recommendation, I would suggest we will not see a similar reaction when it comes to the Government considering the recommendations made by the Welfare Expert Advisory Group.
Expect therefore to see some changes to the various family orientated tax credit regimes in the not to distant future, if the Government adopts the recommendations to:
- increase Family Tax Credit rates
- replace the In-Work Tax Credit and the Independent Earner Tax Credit with a new tax credit (referred to as an Earned Income Tax Credit)
- repeal the Child Tax Credit; and,
make the Best Start Tax Credit universal for the first three years of children’s lives.
Business Premises QWBA’s released
IR has just released two draft QWBA’s for public consultation, both covering the business premises exclusion potentially available to taxpayers who would otherwise have triggered a taxable event upon the disposal of land under the various land taxing provisions.
The first QWBA is referenced PUB00316, and examines the business premises exclusion in taxing events triggered via application of sections CB 6 to CB 11 of the ITA07. The exclusion in this instance is contained within section CB 19, and is to apply in scenarios where there is land with a building on it that is occupied by the landowner mainly for carrying on a substantial business.
However the exclusion is unlikely to apply to any extra land and buildings that are not occupied or reserved by the landowner mainly for carrying on a substantial business. Additionally, the business premises exclusion is not available if the landowner has engaged in a regular pattern of buying or building, then selling, business premises.
The QWBA explains what is meant by the term “business premises” and it is the Commissioner’s present view in this regard, that there must be a building of some sort on the land. Also required is that it is the landowner themselves who must occupy the land, and that the landowner must carry on a substantial business from the land (reference then made to the business test case of Grieve v CIR). In this regard, IR will focus more on the size and scale of the business carried on from the land, and not the time and effort the landowner actually commits to the business undertaken.
The second QWBA (PUB00316) provides commentary on the bright-line test, and when the business premises exclusion may apply. In this instance however, there is no business premises exclusion per se. It is instead the definition of residential land itself (which the bright-line rules only have application to), that does not include land that is used predominantly as business premises.
Regarding the term “business premises” reference is naturally made to the previous QWBA, and once this definition has been satisfied, the two remaining requirements are that in order to satisfy the predominant test, more than 50% of the area of the land must have been used as business premises, and the land must have been used as business premises for more than 50% of the time the seller owned it. Feedback on both QWBA’s is requested to be submitted no later than 7th June 2019.
R&D Tax Credit Regime now law
The Taxation (Research and Development Tax Credits) Act 2019 received the Royal assent on 7th May 2019 – the final stage in NZ’s legislative process.
The regime is effective from 1st April 2019, with the consequence that eligible businesses with an annual R&D spend of more than $50,000, will be entitled to claim a tax credit in respect of their eligible R&D costs incurred post the effective date.
Once an R&D tax credit claim has been approved, to the extent that there remains a credit balance once the businesses annual income tax obligation has been satisfied, up to $225k will be refunded in cash to the business, with any excess credit over the refundable amount, being carried forward to the next income year.
Should you require assistance or have any questions with respect to any aspect of the new R&D tax credit regime, please do not hesitate to contact Robert Aydon in our office.
High Court decides “financial services” issue
The High Court was recently brought into play to settle a dispute between IR and an insurance company, over whether the premiums to be charged by the latter to its customers on two particular policies, should be subject to GST output tax or not.
The products on offer, had been designed to mitigate risk for the insured in respect of repayment obligations they may still be faced with in respect of motor vehicles they had purchased on credit, should certain insured events occur, like the write-off of the motor vehicle following an accident for example, and the pay-out received from a comprehensive motor vehicle insurer did not cover the outstanding loan balance.
The insurance company had taken the view, that the premium related to the provision of financial services in terms of dealing with any remaining credit facility obligations of the insured, and consequently was an exempt supply for GST purposes. IR had taken a different view and the disputes process between the parties had been unable to reach a conclusion.
The High Court found in favour of IR, stating:
- apart from brokerage/intermediary services, it was not Parliament’s desire to exempt services connected with the provision of financial services that were not themselves financial services;
- the nature of a supply for GST purposes was determined by the contractual relationship between the supplier and the recipient of the supply. The fact that the services supplied may benefit another party in relation to a contract of financial services did not transform what were, in this case, insurance services provided pursuant to a contract of insurance into exempt financial services;
- the financial service in question was the provision of a contract of insurance. The parties were the insurer and the insured. A contract of insurance was not a credit contract; and,
- the supplier of the service that is connected to, or involved in, a financial service provided by someone else is not itself the supplier of a financial service.
CPI adjustments released
IR has released two CPI adjustments, the first in relation to the standard-cost household for boarding service providers, and the second in respect of the standard-cost household service for childcare providers.
In both cases, for providers who have a standard 31 March balance date, the CPI adjustments will apply to their calculations in respect of the income year ended 31st March 2019.
For boarding service providers, the weekly variable standard-cost for the first two boarders will be $270 each (previously $266), with the standard-cost for the third and subsequent boarders reducing to $222 each (previously $218).
For childcare providers, the variable standard-cost component is $3.60 per hour per child (previously $3.55 per hour per child) and the administration and record-keeping fixed standard-cost component will be $352 per annum for a full 52 weeks of childcare services provided (previously $347 per annum).
Government releases two pre-Budget announcements
Budget 2019 is to be delivered by the Minister of Finance, Hon Grant Robertson on Thursday, 30th May 2019
In a pre-Budget announcement however, the Minister of Revenue, Hon Stuart Nash, has signalled an intention to align the GST rules on telecommunication services with OECD guidelines and with the treatment of other remote services. Presently there are special rules for telecommunication services, and it is felt that these rules are now out of step with the OECD’s guidelines for GST and for establishing taxing rights, raising the possibility that a person can either be taxed twice or not at all for using global roaming services.
An issues paper has been released alongside the media statement issued by the Minister, and it is intended that the new rules will apply from 1st October 2020. Submissions on the issues paper are requested to be lodged by no later than 28th June 2019.
And not to be left out in the cold, the RT Hon Winston Peters has also made a pre-Budget announcement in relation to his treasured racing industry.
The present betting levy (racing totalisator duty) which is paid by the racing industry to the Crown, and in 2018 represented 4% of betting profits or $13.9 million, will be repealed and phased out over a three year period. The intention is to have the freed-up funds then redirected to the racing and sports sector, as a measure to attempt to revitalise the racing industry.
Exempt income status of Mosque attack support payments confirmed
Regulations have been passed to ensure that support payments and any related income received by the victims of the Christchurch mosque attacks and their families are exempted from calculations assessing a person’s income and cash assets for the purpose of determining their entitlements to government assistance through the tax credit and transfer system.
The regulations come into force on 2nd April 2019, and apply retrospectively to any support payment made post 15th March 2019. The exemption will apply for 12 months after the payment is made to recognise that recipients may require time to decide what to do with any amount received.
Are you paying your employees in cryptocurrency?
Well while you may not be doing so, the apparent increasingly common occurrence into today’s cryptocurrency world, has resulted in IR issuing an exposure draft (is it wrong to suggest there are perhaps more pressing issues they could be issuing interpretation statements on??) on how remuneration paid in cryptocurrency should be taxed.
PUB00344 follows on from two other recent draft Public Rulings – Income tax – salary and wages paid in cryptocurrency, and Income tax – bonuses paid in cryptocurrency. The ruling has as its primary focus, scenarios where an employer is issuing cryptocurrency to an employee with conditions attached – namely that the employee will only receive the cryptocurrency if they are still employed by the employer at a specified future date, and the employee cannot sell or otherwise transfer the cryptocurrency until that specified future date. A couple of alternative scenarios are also commented on however.
In the first instance, IR’s view is that remuneration paid in cryptocurrency does not come within “amounts derived in connection with employment” as set out in section CE 1 of the Income Tax Act 2007. As a consequence, it is the FBT rules which now require consideration.
Under the FBT rules, cryptocurrency is considered to be a “good”, and not falling within any of the specifically defined FBT benefit sections of the Act, it will be an unclassified benefit under section CX 37. The issues remaining to be determined however, is when exactly will the benefit be provided, and once this has been established, what is the value of the benefit for FBT purposes.
Not unsurprising is the answer to the first question, which deems the benefit to have been provided at the time the employee has actually satisfied the required conditions – until this occurs, it will not be clear whether the employee will receive the cryptocurrency – provision of the cryptocurrency is contingent on future events that may or may not happen.
Once the conditions have been satisfied however, the value of the benefit will then be determined on the basis of whether or not the employer is also selling the cryptocurrency to arms length buyers at the same time the cryptocurrency is being issued to the employee. If yes, then the value for FBT purposes will be the lowest price for which identical cryptocurrency was sold.
Where the employer is not selling the cryptocurrency at the same time as it is issued to the employee, then the Commissioner may be called upon to determine the appropriate value of the fringe benefit. Factors which may come into consideration at this point, are whether there is
presently the existence of an open market accessible to the public, is the cryptocurrency about to be first issued to the public, or has the employer ceased selling the cryptocurrency to the public. In the latter two circumstances, the likely value of the fringe benefit will be deemed to be the forthcoming first issue price, or the price the cryptocurrency was last sold to the public – as appropriate.
The deadline for comments on PUB00344, is 2nd July 2019.
Income equalisation deposits and refunds SPS finalised
Originally introduced in 1965, the income equalisation scheme (“IES”) provided farmers with a mechanism to be able to iron out their tax rates across income years (due to rises and falls in income), by encouraging them to put aside part of their income in good years to then be able to use these funds for farm development in years where incomes had fallen.
Under the IES, farmers make deposits with the Commissioner, which they then claim a deduction against their income for the year specified in the deposit notice. In an appropriate future income year (when profits are down naturally), an IES refund is requested, the refund amount then deemed to be part of the farmers income for the relevant income year.
In more recent years, farmers have seen the introduction of the use of money interest regime, and with many not actually receiving their income until near the end of the income year in a bulk sum (and therefore not actually having had a use of the funds), the IES also provides famers with an avenue to limit their exposure to the use of money interest cost.
With respect to the IES, IR has now issued SPS 19/03, which sets out the Commissioners standard practice of dealing with both income equalisation deposits for a tax year, and refund applications, that are received outside of the specified period.
SPS 19/03 will in essence permit a one month extension to any deadline, but with the Commissioner still being able to use her discretion in exceptional circumstances.
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. If you would like to receive these updates directly to your mail inbox, you can subscribe by clicking here.