Richard has had over 25 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 email Richard directly and get onto the database.
- Donee Organisations – “Application of Funds” requirement
- Sharing with others – should we really?
- Bad debt deduction claim out the window
- Were stake payments prize money or consideration for services?
- Deductions for “Standouts”
- GST of low-value imported goods moves one step closer
- “Time is of the essence”
- CPTPP on the verge of the green light
- R&D Legislation hits the House
Donee Organisations – “Application of Funds” requirement
IR has recently released IS 18/05, an interpretation statement that provides the Commissioners views on the qualifying requirement contained in section LD 3(2)(a) of the Income Tax Act, that a donee organisation must apply its funds (wholly or mainly) to specified purposes in NZ, namely of a charitable, benevolent, philanthropic or cultural nature.
Where a person makes a monetary payment of more than $5 to a donee organisation, which is not included in the Schedule 32 list, then provided the donee organisation satisfies the section LD 3(2)(a) requirements, the person is entitled to claim a donation rebate (33.33% of the amount paid for a natural person).
Historically the Commissioner has accepted cases, where provided the donee organisation was applying its funds more than 50% to the specified purposes, it was satisfying the “or mainly” criteria, and consequently entitled a donor to a tax rebate.
However, post a recent review of the legislative meaning of section LD 3(2)(a), IR has formed a view that its historical position was incorrect, the wording of the provision in fact requiring a more restrictive interpretation, and therefore the “or mainly” meaning being something more than a bare majority. Additionally, the review determined that it was also not possible to interpret the legislative provision with any great certainty.
Naturally the latter statement is of little assistance to an organisation attempting to self-police its donee status, and further to be able to provide some level of assurance to its donor’s that a tax rebate is available. In an attempt to provide some certainty to the interpretation issue therefore, IS 18/05 espouses the use of a new “safe habour” threshold by the Commissioner.
In accordance with the published “safe harbour”, provided the organisation can satisfy itself that it meets or exceeds the minimum safe harbour percentage, the Commissioner will generally accept without further enquiry that the organisation meets the “wholly or mainly” requirement of s LD 3(2)(a). The Commissioner has set the safe harbour percentage at a minimum of 75%.
IR also uses IS 18/05 to comment on other aspects of the legislative provision, including the meaning of the terms “funds”, “applied”, “funds are applied” and “when applied in NZ”.
IS 18/05 applies from the 1st April 2019 or the commencement of the taxpayers 2019/2020 income year if later.
Sharing with others – should we really?
Most of you are aware, that presently IR can share information it holds about a taxpayer with the NZ Police, once strict criteria has been satisfied, including that such information sharing will assist the NZ Police with detecting, preventing or prosecuting serious crime.
The Government is now considering whether the ability for the Inland Revenue to share otherwise confidential information, should be expanded to include the Serious Fraud Office and NZ Customs.
A discussion document has been released in this regard, and should you wish to have your say, submissions must be filed no later than 30th October 2018.
Bad deduction claim out the window
Considering the amount of literature on the subject over the past few years, most of us are aware, that provided a trade debt is physically written off as bad in the relevant income year, a bad debt deduction can be claimed to the extent of the amount written off, in that income year.
However, what if you have lent monies to your clients and for one reason or another, they are unable to repay the principal amount lent. Arguably you have only lent the funds because you are in business and have a connection with the client in that regard, albeit to provide services or goods completely unrelated to the subsequent loaning of a monetary sum, so surely the loss of the funds must be a tax deductible, the general permission nexus test having been satisfied.
A recent High Court decision however, has shown that claiming a tax deduction for the unrecoverable principal sum, is not as easy as one may think.
While in the first instance it could be seen to be a reasonable position to take that the general permission has been satisfied, and therefore a bad debt deduction should be available to at least alleviate some of the pain of the monies lost, consideration must however be given to section DB 31, which instead restricts any claim for a bad debt deduction unless the taxpayer can satisfy one of the provisions criteria.
In this respect, in relation to a scenario of a principal sum lent now unable to be recovered, the taxpayer must show that they are in fact carrying on a business, which includes dealing in or holding financial arrangements, of the type of financial arrangement that is now bad.
In the present case, a lawyer had lent funds to two of his clients who were in financial difficulties, out of a fund he had created specifically for that purpose, and having to subsequently write the amounts off as bad, he claimed a bad debt deduction in the relevant income year. IR however denied the claim, and the TRA at first instance sided with IR, including the imposition of a shortfall penalty for failing to take reasonable care, on the basis that the deductions did not fall within any of the section DB 31 exceptions allowing a claim.
The lawyer appealed to the High Court and unfortunately he received strike two. His claim was again denied for a number of reasons, however firstly because his own accounting system actually reflected that the write-off had not physically occurred in the income year of the deduction claim (oops), but also due to the court’s view, that he was not even in part, carrying on a lending business for the purpose of deriving assessable income. There was simply an insufficient connection between his business of providing legal services and the financial arrangements he sought to deduct as bad debts. And to add insult to injury, the shortfall penalty imposition was also upheld in the judgement.
Were stake payments prize money or consideration for services?
If you have clients in the horse racing industry who are either trainers or jockeys, then this case may be of interest to you, particularly if you have been treating any stake monies they have received from placing in a race as prize money and therefore not subject to GST (assuming your client is either GST registered or may be required to be so registered if they were to include annual stake monies received in their turnover calculations when assessing their registration obligation).
There has been a level of uncertainly in the racing industry, as to whether stake monies paid on race day to a trainer or jockey by the racing club (“the Club”), was actually consideration for services provided by the trainer/and or jockey to the Club, and therefore potentially subject to GST. If this was the case, then in respect of GST registered trainers and jockeys, the Club would have an entitlement to claim a GST input tax credit on the stake money payment, and correspondingly, the trainer or jockey would have an obligation to return GST output tax on the payment to IR.
I was interested to read that the particular Club in this instance used a strategy I commonly recommend to clients to use, when there is some uncertainty as to whether a particular amount is assessable or deductible, and you essentially want to force IR to provide a view, without having to go through the costly and time consuming process of applying for a private binding ruling.
This strategy is in essence to file the initial income tax or GST return, taking the most conservative position, and then to file a notice of proposed adjustment (NOPA) within the required timeframe, to take the more aggressive position. With the NOPA filed, IR must reject the requested adjustment within two months of the filing of the NOPA, by way of the issuance of a notice of response (NOR), otherwise the taxpayer’s adjustment request is deemed to have been accepted.
While I have found that this strategy works very well in respect of income tax, in recent times it has sometimes backfired for GST additional input tax claims, due to the legislative flexibility that GST input tax claims that have been missed in an earlier return, are permitted to be claimed in a subsequent return, provided that no more than four years (extendable to eight years) have passed since the input tax was originally incurred. Consequently IR simply rejects the NOPA on this basis, with no accompanying narrative surrounding their actual view of the claim.
However this was not the case for the Club, IR prepared to accept the NOPA (perhaps because this was sighted as being a test case on the issue) as filed, but then rejected the GST input tax claim with a NOR, on the basis that the trainers and jockeys only provided services to the horse owners and not to the Club. As a consequence, the Club was not entitled to GST input tax deductions.
Eventually the case ended up in the High Court, which ruled in favour of the Club, on the basis that:
- All parties involved were governed by the Rules of Racing which imposed enforceable and reciprocal obligations on each of them, which were therefore capable of giving rise to a supply for GST purposes, even in the absence of a contract;
- Trainers and riders provided services to the Club on race day, and where their horse placed in a stake-bearing place, the Club paid stakes in exchange for those services;
- While the Club derived a benefit from the participation of both the riders and trainers on race day, this did not alter the position that there was a supply of services;
- The stakes were paid as consideration for services provided by participating and successful riders and trainers on the day; and,
- There was a reciprocal relationship between the parties due to the riders and trainers providing their services to the Club on race day for which they received stake payments if they were successful.
Deductions for “Standouts”
Should you or your clients have an appetite for “investing” (I could suggest the use of other words post my recent dabble in a friend’s horse racing syndicate!) in yearlings for breeding purposes, a recent SOP introduced to the Modernising Tax Administration Bill presently making its way through Parliament, may be of interest to you.
The SOP, introduced by Winston Peters (who himself has absolutely no personal interest in the horse racing industry…), will make changes to the tax treatment of bloodstock, by permitting tax deductions and assessing receipts, as if the investor was themselves carrying on a bloodstock breeding business, where:
- the investor has purchased from a NZ premier yearling sale, an interest in a yearling that has the qualities to be a future stud-founding horse (referred to as a “standout yearling”);
- the investor notifies IR of their intention to breed from the yearling for profit in the future and provides the owners’ details; and,
- where requested by IR, the investor can provide evidence to support their stated intention, including a business plan.
The new legislation will include a bright-line test methodology to assist in determining whether an acquired yearling meets the grade in terms of being a “standout”, and to incentivise investors to actually race their horse in NZ prior to sending offshore, there will also be a rule which will deem an amount of assessable income to arise, being the greater of the sum of all previous deductions claimed or the market value of the yearling, where the horse is sold to overseas investors or exported, without first racing or breeding in NZ.
It is proposed that the legislative amendments apply from 1st January 2019, which is likely to first be applicable therefore, to yearlings acquired at the NZ National Yearling Series held in Karaka in late January 2019.
The ability to make submissions on the SOP closes on the 24th October 2018.
GST on low-value imported goods moves one step closer
The final proposed rules for the forthcoming “Amazon” tax, were announced by Revenue Minister Stuart Nash, at the recent CAANZ tax conference.
One key change from the original proposals outlined in the May 2018 discussion document, is the increase in the low-value imported goods threshold from $400 to $1,000. Consequently, where the goods are outside of NZ at the time of supply and are to be delivered to a NZ address, and the total taxable supplies of goods and services to NZ by the non-resident supplier exceed $60,000 in a 12 month period, the non-resident business (including electronic marketplaces and re-deliverers as applicable) will be required to register for NZ GST and charge GST on all goods sold to NZ consumers, with a value of less than $1,000.
Where the value of the goods is to exceed $1,000, NZ Customs will continue to levy GST at the border, although where a non-resident’s supplies of goods exceeding this value equates to 5% or less of their total NZ supplies, there will be an option for them to seek approval from IR to also charge GST on these goods. NZ Customs will calculate the customs value of a consignment, however for self-assessment purposes, the supplier will be able to use a “reasonable estimate” to determine the customs value at the time of supply.
The non-resident supplier will not be required to charge GST on their supply of goods to NZ GST registered businesses, however they will be entitled to zero-rate the supply where appropriate to ensure they can still recover any GST input tax they have incurred in making the NZ supply.
It is proposed that the new rules will come into effect from 1st October 2019, and that while returns will be required to be filed on a quarterly basis from 1st April 2020, there will be the option of an initial six month return period, for those non-resident suppliers caught under the new regime from day 1.
As a result of the introduction of GST on low-value imported goods, tariffs and border cost recovery charges on these goods will be removed, however existing risk management processes undertaken by NZ Customs, such as biosecurity assessments, would continue.
We are likely to see legislation introduced into the House in early November.
“Time is of the essence”
IR has issued a draft Standard Practice Statement (“SPS”) ED 0208, which sets out the Commissioner’s position on when tax payments will be considered to have been received in time. The SPS replaces the earlier version, SPS 14/01, and alerts taxpayers and their agents to two main changes in practice:
- Post-dated cheques will no longer be accepted from 1st February 2019, from the perspective that they will simply be presented to the bank for payment on the date received – although IR will endeavour to identify these cheques and return them to the taxpayers (well as if that isn’t going to create headaches for the taxpayer, particularly if the reason for post-dating was because they’re popping overseas for a month or two); and,
- If you wish to physically deliver your tax payment to an IRD office, you will need to do it during office hours, as drop boxes will only be located inside the premises.
Other interesting tiblets I thought from ED 0208 were:
- Internet payments must be completed before the end of your banks online business hours for the relevant day (which needs to be a day on or before the due date), otherwise it will be treated as having been made the following day (you all probably know this one anyway);
- You can set up direct debits for paying GST/FBT through your myIR (income tax from April 2019);
- You can pay your tax using your credit/debit card, although you will be charged a 1.42% convenience tax, unless it’s a payment of child support or student loans, where perhaps because its already exceeding ones acceptable pain thresholds, IR will graciously bear this cost on your behalf;
- While you can make cash or eftpos tax payments at your local Westpac branch, they are not able to accept your accompanying returns; and,
- If a due date falls on a weekend or public holiday (including provincial holidays), payments will still be in time if received by IR on the next working day.
The deadline for comment on ED 0208 is 28th November 2018.
CPTPP on the verge of the green light
Not exactly tax, however I thought of potential interest to most of you, is that NZ has now ratified the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (who comes up with these names??), and is the fourth country in the Asia-Pacific trade deal to do so.
However the CPTPP still requires two more countries to ratify, before the light changes from red to green, at which time its provisions will come into effect 60 days post that sixth signatories ratification.
R&D Legislation hits the House
Further to my article at the beginning of this month, which outlined the final proposals for the R&D tax credit, the Taxation (Research and Development Tax Credits) Bill (108-1) has been introduced into the House for its first reading.
The Bill highlights:
- Applying from 2019-20 income year (in-year approval requirements from 2020-21 income year);
- You’re eligible if you perform (or contractor on your behalf) a core R&D (“core activity”) in NZ (although 10% outside NZ permissible), you carry on a business through a fixed establishment in NZ, and you have R&D controlling rights – essentially you own the results, which you can use for no further consideration;
- A “core activity” is one conducted using a systematic approach, purpose of creating something new, and purpose of resolving scientific or technological uncertainty – some support activities may be included;
- You must spend at least $50k (capped at $120m) on R&D in relevant year, credit then 15% of the spend; and,
- Where credit exceeds year’s tax liability, first $225k refundable, with balance to be carried forward subject to usual tax loss continuity rules i.e. 49% shareholder ownership continuity for period commencing income year credit arises through to income year offset claimed.
If any of these articles/updates have raised questions or concerns, please get in touch with Richard. If you would like to receive his weekly updates straight to your inbox, please email him directly.