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 articles 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.
- IR releases 20-04
- Covid-19 – further relief tax measures announced 20-04
- Covid-19 wage subsidy – a recap
- IR overseas rental property Interpretation Statements 28-04
- CRS update 28-04
- Covid-19 Tax Residency related issues 28-04
- Extension of Zero-rating period 28-04
- Safe Harbour Guidance released for working from home costs 04-05
- Second round of Covid-19 tax relief measures now law 04-05
- IR guidance on Covid-19 related GST issues 11-05
While most of us have been hunkered down in lockdown for over three weeks now, IR have themselves remained busy, even during their own close down period recently while the latest business transformation updates were effected, releasing the following three documents last week:
CS 20/01 “GST liability for insurance and settlement payments to third party claimants — s 5(13) of the Goods and Services Tax Act 1985” – a Commissioner’s statement to confirm her position on the GST liability of a GST-registered third-party claimant, when they receive a payment for damages or loss incurred (including by way of settlement agreement) under a contract of insurance.
It had come to the Commissioner’s attention, that there was some confusion as to whether GST was payable on the receipt by the third party claimant, with some taxpayers taking a position that where the insurer made the payment directly to the claimant and not to the insured who would then pay the claimant, the claimant did not have to account for GST output tax on the receipt due to the wording of s.5(13).
The Commissioner has now confirmed her position, and states that it is one that she has always held, that when an insurer pays an amount to a GST-registered third-party claimant, that person must return GST on the receipt (provided the other requirements of s 5(13) of the Act are met).
It is suggested that taxpayers who have not taken this position in the past, may wish to consider filing a voluntary disclosure.
IS 20/01 “Income tax — treatment of the receipt of lump sum settlement payments” – an interpretation statement which considers the income tax treatment of lump sum payments received to settle claims that are both capital and revenue in nature. In particular, the statement considers when apportionment will be required. Note that IS 20/01 is essentially a re-release of IS 16/04.
interpretation statement concludes that whether a settlement payment is taxable
depends on what it is paid for – in this case, what was given up in return for
the payment – and its nature in the hands of the recipient. It is essential to
first determine what a payment is for before determining whether apportionment
It is IR’s view that New Zealand courts would seek a reasonable basis for apportioning a lump sum, and consequently, where a single undissected sum is received, it should be apportioned between its capital and revenue elements where possible. Any apportionment must be made on an objective basis. The starting point for determining an appropriate apportionment will be the settlement agreement and any related documents (for example, the statement of claim (if there is one)). Other relevant circumstances and evidence may also be taken into account, however the onus of proof will always be on the taxpayer to show the apportionment is appropriate.
In the rare circumstance where the payment cannot be appropriately apportioned, the whole amount should be treated the same. Where the lump sum includes an amount that is taxable under a provision in Part C of the Income Tax Act 2007, the taxpayer has the burden of proving what part of the amount is not taxable. If a taxpayer is unable to show what part of a lump sum payment is capital, the Commissioner’s view is that generally the whole amount should be treated as income.
RA 18/01 – Dividend Stripping – Some Share Sales Where Proceeds Are At A High Risk Of Being Treated As A Dividend For Income Tax Purposes – a Revenue Alert to put you all on notice that IR are increasingly seeing sales of shares to related entities in situations where they consider the sale proceeds are a dividend under the general tax avoidance rule in section BG 1 and also sometimes the dividend stripping rule in section GB 1.
As most of you will be aware, unless acquired on revenue account, the sales of shares in a company is usually a capital transaction for the seller. IR’s concern is where taxpayers are structuring transactions in such a way to take advantage of this capital characterisation, where arguably the true flavour of the restructure is enabling the taxpayer to access amounts which in the usual course of events would have constituted a taxable dividend, had it not been for the sale of the shares.
Keep in the back of your mind therefore when advising clients of potential restructuring solutions, particularly where a group of existing shareholders will remain in the structure post perhaps exiting others as one example, that IR will be on the look-out for potential dividend substitution transactions and may challenge what you may have otherwise considered was a genuine commercial transaction (remembering that IR will simply need to assert that the tax effects of the arrangement were more than merely incidental, in order to invoke the anti-avoidance provisions).
Accompanying RA 18/01 is a useful scenario based Q&A, RA 18/01a, which certainly assists in illustrating IR’s position.
Covid-19 – further relief tax measures announced
On 15th April 2020, the Government published a further round of proposed tax changes to assist those taxpayers negatively affected by the impacts of Covid-19. The latest proposals follow-on from those which were part of the Government’s initial response to the virus outbreak, which have already been legislated for via the enactment of the Covid-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 on the 25th March 2020 (note that a special report has now been issued by IR on these earlier changes which can be found here – https://taxpolicy.ird.govt.nz/sites/default/files/2020-sr-covid-19.pdf).
The latest proposals are:
A temporary loss carry-back scheme (although with a proposal to make it permanent with application from the 2021/22 and later income years) – the ability to carry back a tax loss incurred in the 2020 income year to offset a taxable profit in the 2019 income year, thereby potentially creating a tax refund in respect of 2019 taxes already paid. Equally the same facility for expected 2021 income year losses to offset 2020 income year profits, and in this regard, with the final instalment of 2020 provisional tax not due until 7th May 2020 (for standard March balance date taxpayers), the proposed rules will enable taxpayers to now re-estimate the 7th May instalment, which for some could dictate that they have already paid sufficient provisional tax for the 2020 income year, and consequently no final payment is now required. Additionally, to the extent that the 7th May re-estimate reflects an overpayment of your 2020 income tax liability, you will be able to obtain a refund of the excess amount. There will also be no rush to make 7th May re-estimates prior to that date, as the proposed law change will include a provision to allow the filing of re-estimates post the 7th May. The loss-carry back temporary mechanisms will be included in a Bill to be introduced to Parliament in the week of 27th April and it is proposed to make the rule permanent, by way of legislation likely to be contained in a tax Bill to be introduced in the second half of 2020.
Amendments to the tax loss continuity rules – addressing the Government’s concerns that the negative impacts of Covid-19, will have a consequence of companies looking to source additional capital from potential investors in order to survive and the present risk for these companies of course, is any change to their existing shareholder structures of more than 51% due to the new investment of capital, will result in loss forfeiture. To mitigate this potential outcome, as well as arguably making a company more attractive to new investors due to the preservation of the tax losses if they were to come on board, the Government proposes to amend the tax loss continuity rules, with application to the 2020/21 and later income years. While there are no definitive statements at this time as to how the new rules may be designed (public consultation to be undertaken first, with a tax Bill introduced in the second half of 2020), IR’s update page suggests that we may see a similar rule introduced to that presently used in Australia – a ‘same or similar business’ test. In simple terms, the tax losses are unaffected by shareholding changes provided the business of the company continues in the same or similar way it did prior to the ownership change.
Giving IR flexibility to change due dates – to date, the Government’s response packages have made no amendments to IR’s discretion to modify timeframes or procedural requirements for taxpayers who are impacted by Covid-19. The newly released proposal therefore, is to introduce a discretionary power into the Tax Administration Act 1994 to allow IR to provide an extension to due dates and timeframes, or to modify procedural requirements set out in the Revenue Acts. This could include, for example, extending deadlines for filing tax returns and paying provisional and terminal tax. At this stage, the power will be time-limited for a period of 18 months and will apply to businesses affected by COVID-19.
IR overseas rental property Interpretation Statements
Still in their draft form, IR closed its public consultation process for three items last week, all related to Overseas Rental Properties.
The first is PUB00310(a), which considers the income tax issues arising from ownership of overseas rental properties by NZ tax resident individuals. In my view, this IS is very generalised in its nature, in essence only identifying “consideration issues” and then referring you to numerous other IR interpretation statements (e.g. IS 16/03: Tax residence or IS 16/06: Income tax – timing – when is income from professional services derived?), so do not open the document with an expectation that it will provide you with detailed guidance in relation to everything you need to know on the topic. In saying that however, if you did then go on to read all the referred documents, I have little doubt that you would exit from that process having a well-rounded knowledge of all the potential income tax implications for your clients who owned offshore rental properties.
The second document however is more detailed in nature, PUB00310(b), which considers for income tax purposes, the application of the financial arrangements (“FA”) rules to foreign currency loans used to finance overseas rental property. The document discusses first, the two potential, although unlikely, excepted financial arrangement scenarios which would then negate your clients having to consider the application of the FA rules, it then moves on to outline the cash-basis persons test (and calculations in this regard), followed with how those non-cash basis persons should apply Determination G9A to determine their annual FA income/expenditure and concludes with a discussion on the Base Price Adjustment and its calculation methodology.
The final document, PUB00310(c), is in essence an Approval – foreign rental property amounts – currency conversion. It sets out the Commissioner’s approval of various conversion methods and exchange rate sources, with a view to minimise compliance costs for taxpayers, while at the same time protecting the integrity of the tax base. It does however only apply to individual taxpayers, including natural person trustees, and only to those who have an interest in foreign rental properties. It should be noted that the Approval does not overrule any specific Act requirements to use certain currency conversion methods (under the FA rules for example). The Approval refers to the use of either an annual or monthly methods (although only the annual method in respect to converting foreign tax paid amounts), and in the first instance to using the exchange rates published by IR, which should be able to be located on IR’s website.
The latest IR publication of the list of participating overseas jurisdictions for the Common Reporting Standard applied standard has been issued – Determination AE 20/01.
The Determination reflects those jurisdictions who will provide NZ with CRS information with effect from 1st April 2020. No doubt by now, most of you would have experienced the receipt from IR of a CRS information query, triggered where your client has filed their tax return with no reference to a particular offshore financial account (usually a bank account although recently one enquiry was in relation to a foreign held term life insurance policy), which IR has received information about from the relevant foreign jurisdiction.
Covid-19 Tax Residency related issues
Both IR and the OECD have recently published statements in relation to implications for both corporate and individual taxpayers, who may have unexpectedly ended up having to spend extended time in a particular jurisdiction due to the effects of global travel restrictions.
In this regard, while IR suggests most corporate taxpayers tax residence status potentially will not be impacted by these extended stays because more than simple physical presence is often required to trigger a tax residence status for these taxpayers (i.e. the wider question of how the company is managed in reality is the real test), certainly individual taxpayers are exposed to unintended tax residency determinations due to the black and white nature of the physical days presence test (183 days).
In this regard, IR has stated that provided these individuals are seen to have left NZ within a reasonable time period post any travel restrictions having been lifted, then the extra days the person has remained in NZ during the restriction period, will be ignored by IR when it undertakes any tax residency determinations.
The IR statement also covers the 92-day rule for non-resident contractors (or others earning income from the performance of personal or professional services in NZ), transitional residents and student loans. The OECD guidance follows a similar vein to IR, DTA jurisdictions should ignore unintended extra stay days when determining their taxing rights over individuals who have been caught up in the travel restrictions.
Extension of Zero-rating period
Naturally also as a direct consequence of the Covid-19 lock-down restrictions, IR has issued guidance with respect to the usual requirement for an exporter to export their goods outside of NZ within 28 days in order to qualify for zero-rating the supply.
In this regard, the Commissioner has always had the ability to extend the 28 day rule upon specific application by the exporter, however due to Covid-19, exporters will now have an automatic additional three-month extension to the 28-day window to complete their export. The extension commences on the day the 28-day period expires and has application to any supply of goods up to and including 31st July 2020.
Safe Harbour Guidance released for working from home costs
The Alert Level 4 response to Covid-19 has seen all but essential workers required to work from home, a requirement which has now continued under Alert Level 3 (unless that is not possible and the workplace can operate ‘safely’), and is recommended once the Country moves to Alert Level 2.
For those employees working from home, there have naturally been cost exposures they would not otherwise have incurred, whether that be the initial set-up of the office at home, or additional home running costs due to the person’s presence in the home for a longer duration than normal – increased electricity and gas costs for example.
In this regard, employers have already been making, or intend to make, payments to their employees to reimburse some of these costs. Since the payments will relate to the employment relationship of the parties, the tax treatment of the amounts paid needs to be considered.
The first point of reference for employers, is section CW 17 of the ITA07, which provides that expenditure on account of an employee or a reimbursement amount an employer pays to an employee, is exempt income to the extent that the employee would be allowed a tax deduction if the employment limitation (prohibits any deductions by employees in their income tax returns for expenditure they incur in connection with their employment activity) did not exist. In other words, if the employee could show a nexus of the home running/office set-up costs to the derivation of their income (which like most home office claims we do for self-employed/business clients involves apportioning the costs incurred on a basis that reflects business use versus personal use of the home), then they could claim an expense for tax purposes for the business related proportion of the expenditure.
Application of the section CW 17 provision however, requires the employer to duly consider how much of the payments they are making to the employee, would satisfy the legislative criteria (‘to the extent the employee would be allowed a deduction’) and therefore qualify as being exempt income in the employee’s hands (so not subject to any PAYE deductions etc). IR has now come to the party in an attempt to ease the employer’s administration difficulties and associated additional compliance costs therefore, by releasing Determination EE002 – ‘Payments to employees for working from home costs during the COVID-19 pandemic.’
DET EE002 can
be applied to any payments made during the period 17th March 2020 to
17th September 2020. The Determination has two main components, amounts
paid in respect of furniture or equipment costs (reflecting either cost for low
value asset (“LVA”) purchases or a
depreciation loss otherwise), and amounts paid in respect of other expenditure (electricity costs for example) with the exception of telecommunication usage plans costs (employees use of own telecommunication devices and/or usage plans). These latter costs are excluded due to IR’s release of Determination EE001 in December 2019, which provided specific guidance to employers who were making payments to employees in respect of these costs being incurred by the employee.
Employers can now apply DET EE001 and DET EE002 together, however there is no requirement to apply either Determination, employers still entitled to apply section CW 17 to determine the exempt nature of payments made to their employees.
Summarising both Determinations:
- Furniture/Equipment – items not identified – safe harbour of up to $400 maximum – no evidence required to be kept (note if this option used, then you cannot use the next option as well);
- Furniture/Equipment – specific items – 25% of cost (partly used for work), 75% of cost (mainly used for work), 100% of cost (exclusively work) – cost refers to either cost for LVA or depreciation loss otherwise – evidence must be retained of both cost and basis for % claimed;
- Other Expenditure (non-telecommunication) – up to $15 per week – no evidence required;
- Telecommunication Usage Plan Costs – up to $5 per week (safe harbour, no evidence) or same percentage basis above with same evidential requirements.
Second round of Covid-19 tax relief measures now law
Passed under urgency, the second round of tax relief measures are now effective immediately and include:
- A tax loss carry-back regime;
- Greater flexibility for IR to stretch deadlines and other procedural requirements for those taxpayers impacted by the effects of Covid-19;
- Treat benefits and pensions paid to those presently stranded overseas identical to those paid to persons in NZ; and,
- Introduce a small business cashflow loan scheme.
With respect to the tax loss carry-back regime, main components I dissected from the Bill’s commentary –
- Applies to basically any taxpayer type – company, limited partnership, trust or individual (other than “qualifying individuals” – those with only reportable income sources);
- Final estimation date (would usually be 7th May) for 2020 provisional tax now extended to earlier of date 2020 income tax return filed or due to be filed;
- If you do over-estimate your potential loss carry-back, exposure to UOMI (naturally you will not be permitted to claim the new UOMI remission concessions in this regard);
- Usual shareholding continuity rules apply (49% or 66% for groups) and imputation credit rules for tax refunds – so tax refunds generated by a loss carry-back will be withheld by IR to extent insufficient ICA balances;
- Loss companies in corporate group must offset group profits within loss year first before applying the carry-back rules;
- Shareholders who have paid 2020 provisional taxes on basis were expecting a shareholder salary allocation, also eligible to file a re-estimate of their final instalment and receive a refund of taxes already paid on basis that quantum of expected salary will no longer be received;
- A ring-fenced residential property loss is not one eligible for loss carry-back; and,
- IR will not use any tax refund generated via the tax loss carry-back regime to offset any other tax debts presently payable by the taxpayer.
A reminder that the present regime is a temporary one with application to the 2020 and 2021 income years, with a more permanent regime to apply to the 2022 income year to be included in a tax Bill to be introduced later this year. In this regard, Officials have already suggested that the permanent regime could have a two year carry-back period as opposed to the present one year rule.
In relation to the new small business cashflow loan scheme, commencing 12th May:
- businesses employing up to 50 full-time staff may apply to IR for loans of $10,000 plus $1,800 per employee; and,
- The loans:
- carry no interest if repaid within 12 months;
- require no repayments for two years; and,
- accrue interest at the rate of 3% if repaid over five years.
With respect to the new loan regime, the legislation included:
- Provisions to ensure that any business expenditure paid for with the loan funds, remains tax deductible should any part of the loan at some point be converted to a government grant; and,
- Provisions to ensure that if a grant conversion does occur, the amount converted does not trigger debt forgiveness income under the financial arrangement rules.
IR guidance on Covid-19 related GST issues
IR has published its view of the appropriate GST treatment in relation to certain Covid-19 events, including cancelled supplies, change of use adjustments and registration cancellations.
Cancelled supplies – where output tax has already been paid on the supply (or conversely input tax claimed) and the supply is cancelled, a GST adjustment entitlement will arise in the GST period that it becomes clear that the output tax returned was incorrect (in this case presumably when supplier notified by purchaser that they are cancelling the contract). Where a tax invoice has already been issued by the supplier in relation to the cancelled supply, then the supplier will need to raise a credit note to support the adjustment amount now claimed. Should the supplier then go on to make a loss-of-income type insurance claim with respect to the cancelled contract, the receipt of any insurance pay-out will be subject to GST in accordance with s.5(13) of GSTA85.
Change of use adjustments – the main focus of the commentary here is whether a change of use adjustment may be triggered (due to calculations exceeding the requisite thresholds – percentage change or quantum involved) and in essence the threshold breach is due to for example, the relevant asset not being able to be used as a direct consequence of the Level 4 lock-down. IR is advising that in cases like these, they will apply a practical approach (hmm) to accepting calculations by the registered person that provide a ‘fair and reasonable’ result in the circumstances.
Registration cancellations – again the focus of the commentary is around whether the business shutdown due to lock-down restrictions (which arguably could continue when we move to Level 2 if the workplace cannot be operated ‘safely’), means that the registered person has in fact ceased their taxable activity, and consequently has the requisite obligation to notify IR within 21 days of the deemed cessation and accordingly account for 3/23rds output tax on the market value of any assets still held by the taxpayer at this time. Naturally IR’s guidance is that every case will need to be judged on its individual merits, however that usually ignoring the Covid-19 ‘unprecedented event’, a registered person who can be seen to have been making regular or frequent taxable supplies for a reasonable period, would not be considered by IR to have ceased their taxable activity until no supplies have been made for a 12-month period subsequent. Taking this view therefore, unless specific factors exist that would suggest otherwise, Covid-19 related ‘forced’ business shutdowns should not trigger any de-registration obligations for the registered person.
Further detail and other Covid-19 tax related guidance can be found here –https://www.ird.govt.nz/covid-19/business-and-organisations/specific-gst-issues.
IR Answers Your Questions
Also published last week, was IR’s guidance and answers to questions on all Covid-19 related issues to date, which I would suggest is very useful. It contains a comprehensive index at the beginning of the document with direct links from there into the specific topic sections, which include:
- First round of tax-related measures legislated – depreciation on commercial buildings, small value asset write-off threshold increase, UOMI remission etc;
- Wage subsidy tax related issues;
- Home office reimbursements/allowances to employees – DET EE001 & DET EE002;
- Second round of tax-related measures legislated – loss carry-back rules, IR flexibility to change filing dates etc;
- Late filing issues – LTC elections, subventions, beneficiary income distributions;
- FBT – motor vehicle availability during lock-down; and,
- Loss continuity rules – proposed change to rules.
The document can be found here – https://www.ird.govt.nz/-/media/Project/IR/Documents/Tax-agents-COVID-19-Q-and-A/4-May.pdf.