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.
- Updated China DTA
- IR Cheques Update
- Land Holding Costs – second consultation document issued
- Adjusting the consideration on a supply
- Partnership Act gets a makeover
- Short-Stay Accommodation – GST treatment
Updated China DTA
In April this year, The Double tax Agreements (China) Order 2019 (LI 2019/241) was signed between the New Zealand Government and its counterpart, the Government of the People’s Republic of China.
The agreement and protocol between the two countries will come into force on 31st October 2019, and will revoke the present 1986 agreement at this time accordingly. Most of the provisions of the new agreement will have effect from 1st January 2020 in respect of taxes to be withheld at source, and for any taxable year commencing post this date in the case of other taxes.
A few changes I noted between the two agreements (besides becoming gender neutral):
- The tiebreaker test for dual resident companies moves from being one of a “head office” determination, to instead being one determined by mutual agreement by the competent authorities of the respective Contracting States, having regard to such relevant factors as the company’s place of effective management, place of incorporation etc;
- Under the permanent establishments article, there is a broadening of the dependent agent principle, where the test expands to include any person who not only habitually concludes contracts on behalf of their enterprise in the other State, but additionally where any person plays a principal role leading to the conclusion of contracts that are routinely concluded without material modification by the enterprise; and,
The across the board 15% NRWT rate on dividends now reduces to 5% where the shareholder is a company which owns at least 25% of the paying company (throughout a 365 day period which includes the dividend payment date).
IR Cheques Update
Further to my recent AWIR commentary in which I confirmed that IR would cease to accept any cheques for tax payments from 1st March 2020 (search with keyword AD268 on IR’s website for more info), equally in relation to GST refund cheques being issued by IR, these have been stopped as at 25th September 2019. Consequently, taxpayers will need to ensure their IR accounts reflect an active bank account where GST refunds can be banked into, otherwise the credits will remain sitting in the relevant GST period, until such details have been provided to IR.
Land Holding Costs – second consultation document issued
Following closely on the heels of the recent consultation document issued to consider tinkering with the wording of the legislation contained in the ‘pattern of habitual buying & selling of land’ proviso, IR have issued another land-related consultative document, this time seeking public feedback on its proposal to clarify the rules surrounding the deductibility of holding costs (for example, rates, interest, insurance, and repairs and maintenance expenditure) where land that is subject to tax on sale is used privately while it is held.
IR proposes three potential options:
- apportioning the holding costs between the taxable gain on sale and the private use of the land while it is held;
- allowing deductions for all holding costs, even though there is private use; and,
- denying deductions for all holding costs for periods of private use.
Of the three options, the third is the preferred solution. Under this approach, you would take into account how the land has actually been used for any particular income year, to determine the deductibility of any holding costs for that particular income year. Where there is a mix of private and income earning use for the income year, then it is proposed that deductions would only be denied for the days where the land is actually used for private purposes.
Note that under this proposed option, for those of you with clients who like to regularly purchase properties for do-up, and live in the property while doing so, any holding costs incurred during the period of their occupation would be considered non-deductible.
consultation document also briefly discusses the scope of the new rules,
suggesting that they should apply consistently to individuals, partnerships,
trusts and look-through companies. In the case of ordinary companies, private
use of the asset by shareholders where the company is deriving no income from that
use, usually dictates that most holding costs will not be deductible to the
extent of that private use in any event.
Officials do acknowledge however, that with respect to interest costs, a company gets an automatic deduction with no nexus to income derivation required, which could therefore encourage taxpayers to use company structures simply to ensure 100% of their borrowing costs are tax deductible. The potential for abuse in this area, is tempered though by the fact that private use of a company asset by shareholders/employees where a market rent is not paid by the occupier in return, leads to deemed dividend consequences for the shareholders or taxable employment income/FBT exposures in respect of company employees. Officials propose to simply monitor this scenario, to determine eventually whether any legislative tinkering will be required to curb taxpayer behaviour.
Public feedback is also sought on the rule proposals targeting a popular pastime of some of our clients – land banking. Your client acquires a piece of land, often a vacant lot, and just sits on it for a period of time, perhaps commencing a minor subdivision within the requisite 10-year ownership period which then triggers a taxable disposal event. How should the deductibility rules apply to land that is not actively used for long periods of time – should the land be deemed to be a private asset or an income earning one?
Officials presently propose that the treatment of periods of vacancy as either private or income earning use should be based on the other uses of the land throughout the period of ownership. Arguably therefore, if your client was confident that they would never use the land in question for private purposes and that it will ultimately be put to an income earning use e.g. a rental property dwelling erected upon the land, then the holding costs incurred throughout the period of ownership should be fully deductible.
Finally it is proposed to make some amendments to section DB 23, to ensure that deductions in respect of revenue account land are not denied due to failure to satisfy the general permission at the time the expenditure was incurred or due to application of the private limitation. Both of these potential deduction limiting provisions will be overridden when a disposal of revenue account property occurs.
Submissions on the proposals close 1st November 2019 and the consultation document can be found here – http://taxpolicy.ird.govt.nz/sites/default/files/2019-ip-land-holding-costs.pdf.
Adjusting the consideration on a supply
IR has issued draft QWBA PUB00352 for feedback, providing the Commissioner’s view on the correct application of section 25 of the GST Act.
For those of you familiar with the more frequently used sections of the GST Act, you will appreciate that section 25 is the provision which deals with the issue of debit or credit notes, when post the issue of a tax invoice (for which there should only ever be one in respect of a particular supply) the supplier wishes to amend the previous consideration charged on the supply, for whatever reason may necessitate that adjustment being required – for example, a calculation error resulting in customer being under-charged, a discount offered due to a customer’s displeasure with the quality of a supply, or perhaps the initial GST treatment of the supply being found to be incorrect (standard-rated when it should have been zero-rated).
The draft QWBA is relatively short, clarifying first that as long as one of the ‘events’ in section 25(1) has occurred, then an adjustment should be made in the period where it becomes apparent that the output tax accounted for was incorrect.
The primary point to understand about the correct application of section 25 however, and one stressed by the QWBA, is that an adjustment made in accordance with section 25, can only amount to the GST component on the difference between the original consideration charged and that amended. So for example, if the original consideration was $115, and the amended is $100, the difference in GST is $1.96, and it is only this amount that can be adjusted for in the relevant GST return by using the section 25 provision.
If you have a scenario therefore, where the reason for making the adjustment is one of incorrect characterisation of the initial supply (standard-rated instead of zero-rated/exempt for example), then in IR’s opinion, you should not be using section 25 to make an adjustment, but instead utilising the Tax Administration Act’s section 113 process (requesting the Commissioner’s discretion to amend a previous return filed) to correct the error (unless the monetary concessions for making adjustments in subsequent GST returns apply – section 113A(1) or 113A(4) of TAA).
The basis for the Commissioner’s view is due to the wording of section 25, which only permits an adjustment for the GST component on the difference in the two considerations charged for the particular supply – even if the original GST treatment itself was wrong, because the reason for the adjustment in consideration is irrelevant.
The draft QWBA includes two examples to clearly illustrate the point.
Note that if you wish to make a section 113 adjustment request, guidance on the Commissioner’s likely approach can be found in SPS 16/1.
Feedback on PUB00352 is requested to be received no later than 12th November.
Partnership Act gets a makeover
It’s been the Partnership Act 1908 since I was just a wee lad at school and first came across it in a business studies class, but on the 21st October 2019, that all changed, when the Partnership Law Act 2019 received the golden stamp of Royal assent.
However do not be fooled by the new title, as essentially the purpose of the new legislation is to simply re-enact the existing law in a more up-to-date and accessible form, with no substantive policy changes to the rules governing partnerships as we know them.
From a taxation perspective, the passing of the legislation also has the flow-on effect of amending various references to the Partnership Act 1908, as they appear presently in both the Goods & Service Tax Act 1985, and the Income Tax Act 2007.
Should you wish to know more intimate details, you can refer to Schedule 4 of the new Act for a list of the consequential amendments to the two taxing Acts.
Short-Stay Accommodation – GST Treatment
IR has released draft interpretation statement PUB00347 for public comment and feedback.
and Service Tax: GST Treatment of Short-Stay Accommodation”, the paper
considers the GST implications of providing short-stay accommodation,
predominantly a guidance document targeted towards taxpayers using peer-to-peer
websites like Airbnb, Bookabach and Bachcare, to provide short-stay
The term “short-stay accommodation” is usually defined to mean stays of less than four weeks by the guest in the accommodation, and in this respect, PUB00347 covers accommodation:
- which is provided for a period of less than four weeks, and
- which is not the guest’s main residence during the period in question.
The main takeaway from the guidance document, is an awareness that while most people automatically consider that the supply of residential accommodation will be an exempt supply for GST purposes, and consequently have no taxing implications in this regard, this will not automatically be the case in relation to short-stay accommodation scenarios.
Short-stay accommodation will not be considered an exempt supply, and consequently the GST implications associated with the supply of such facilities, will instead be determined by the more generic principles of GST registration obligations such as the quantum of annual supplies (whether they exceed the $60k compulsory registration threshold), and satisfaction of the definition of a taxable activity – a question which is usually focussed on the “regular” or “continuous” nature of the supply aspects.
With respect to the registration threshold question, do not forget that this quantum includes the value of all taxable supplies being made by the taxpayer over the relevant 12 month period, and not just those supplies tied to the provision of short-stay accommodation.
It is also important that your client understands from the outset, the potential downside consequences of bringing their property into the GST net, the main one being the triggering of an output tax liability based on the market value of the property (or original deemed cost in some instances), should they ever cease providing the short-stay accommodation facility. This negative implication will often arise in circumstances where the property in question itself is not being sold, and consequently, the taxpayer has to fund the requisite GST liability by other financing means. Feedback on PUB00347 is requested to be received by IR no later than 3rd December 2019.
If you have any questions or would like a second opinion on any national or international tax issues, please contact Richard Ashby.
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