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.

• Is your tax debt out of control?
• Paying Directors fees to non-residents?
• Ruling on Bad Debt Write-offs release
• Personal Attribution rules IS finalised
• BEPS Guidance – have your say
• GST Zero-rating of Land Related Services
• Sale of lifestyle blocks – bright-line?
• Sale of subdivided land – bright-line?
• R&D documents released
• Debit or credit card fees – GST?
• Valuing employer provided accommodation
• Re-issued IS 17/03
• Repatriating human body remains
• Interim TWG report – to be or not to be??
• Corporate tax rate well above average

 

Is your tax debt out of control?”

If the answer is yes, then IR’s recently released SPS 18/04 may be of assistance to you. The topic is the Options for Relief from Tax Debt, and outlined is the Commissioner’s practice when it comes to considering the options for removing or deferring the obligation to pay tax, interest and/or penalties.

In summary, the Commissioner can exercise her discretion to:

• Collect amounts due over time (instalment arrangement), not collect amounts due (write off) or a combination of the two. Usually a write off will occur where collection of the debt would place the person in “serious hardship”.
• Write off amounts considered either irrecoverable or the collection of will be an inefficient use of resources.
• Remit penalties where event/circumstance leading to the imposition was beyond the persons control, however usually with the requirement the person has corrected the failure to comply as soon as practicable.
• Remit interest or certain penalties where to do so would be consistent with her duty to collect the highest net revenue over time.

When considering whether to make an application on the basis of “serious hardship”, there are two important elements to understand. Firstly that the Commissioner must apply a two-step process to the application, step 1 – is there in fact serious hardship? – determined by legislative criteria and must ignore the persons tax compliance record or their ability to maintain entertainment/social activities – and if yes, then step 2 is to determine what relief, if any, should be granted? – where tax obligation compliance will be considered plus the 9 factors listed at the end of SPS 18/04. Secondly, that only natural persons can be considered under the “serious hardship” provisions.

Being pro-active can also be advantageous to your late payment penalty exposures, particularly when you know in advance that you are unlikely to be able to meet a pending tax payment obligation by its due date. If you apply for financial relief prior to the due date and have that relief granted, then only a 1% late payment penalty will apply (no 4% 7 days later or 1% monthly). However interest will always be applied as usual (at least tax deductible though whereas penalties are not).

A few other key takeaways from SPS 18/04:

• Instalment arrangements can be for periods up to 3 years usually (although no legislated timeframe);
• GST arrangement requests can be made via MyIR, where you can instantly review a proposed arrangements forecasted instalment amounts and receive an automatic acceptance notification – your application must exceed the minimum payment criteria ($50wk/$100fnt/$200mth) and less than 3 years repayment period, to be likely to succeed;
• Tax losses and imputation credits are usually forfeited to some extent if a tax debt write off application is granted; and,
• If things are really bad, the “no asset procedure” – one off process providing a fresh start to natural persons with debts from $1,000 to $47,000 as alternative to bankruptcy. Administered by NZ Insolvency & Trustee Service and at completion of process, IR must write off the tax debt as irrecoverable.

SPS 18/04 applies with respect to relief considerations made post 22nd August 2018.

Paying Directors fees to non-residents?

IR has released a draft interpretation statement which considers payments made to non-resident directors, and whether those payments may be subject to schedular withholding tax.

The first question to be answered, is whether the contracted party to provide the directorship services is an individual or an entity. While our Companies Act does require the person holding the office of director to be a natural person, the legislation does not however prevent the NZ company contracting with an “entity” to provide the required directorship services.

Where the non-resident is an individual, the director fees will always be considered to have a NZ source, and consequently subject to schedular withholding, unless a particular exclusion applies. Where the contracted party is a non-resident entity however, then unless that entity has a NZ permanent establishment (PE), the director fees will not be considered to have a NZ source and consequently will be outside of the schedular withholding regime.

The exclusion considerations include firstly whether the contracting party will meet the definition of being a non-resident contractor, and if so, whether the 92 day presence or <$15k annual payment carve-outs may apply. It should be noted here, that unless the directorship services are to be performed in NZ, it is unlikely that the non-resident contractor definition will be satisfied. For a non-resident individual under this scenario, the only likely exclusion from schedular withholding therefore, will be where they have obtained and hold a valid certificate of exemption.

Once you have determined that schedular withholding should apply, you should obtain a completed IR330C from the contracting party. Where this is not completed, you are obligated to deduct at a 45% withholding rate. Otherwise the default withholding rate is 33% for directors fees, although this can be a lesser rate if the non-resident has elected their own rate (at least 15%) or they have obtained a special rate certificate (<15%) from IR. Note that the deduction should be made from the amount payable to the contracting party net of any GST and reimbursement payments.

The deadline should you wish to comment on draft PUB00302 is 5th October 2018.

Ruling on Bad Debt Write-offs release

BR PUB 18/07 is essentially an update and reissue of BR PUB 05/01, providing the Commissioner’s views of when a debt will be considered bad for both income tax and GST purposes, and when it will be considered to have been written off by the taxpayer, which will usually govern the timing of the write off’s tax treatment.

With respect to determining whether a debt is in fact “bad”, the reasonably prudent commercial person test continues as the guiding principle to be applied. Under this test, the question is whether such a person would conclude that there is no reasonable likelihood that the debt will be paid in whole or in part by the debtor.

In this regard, a debt will not be “bad” when its payment is merely doubtful, or when the amount payable is still in dispute between the parties.

Factors that may assist in concluding a debt is bad include length of time outstanding, collection efforts to date, other known information about the debtor, debtor untraceable or the debt has become statute barred.

Naturally, the onus of proof with defending the tax position taken in relation to the debt and recognising an amount as bad, rests with the taxpayer.

Having established the debt is “bad”, the timing of the write off will be determined in accordance with the nature of the record keeping systems of the taxpayer, in all cases requiring some physical act of an appropriately authorised person – for example, in a computer based system, an appropriate entry made recording the debt as written off.

The physical write off of the debt must occur prior to the end of the relevant income year or GST return period for which the bad debt claim is made, and evidence of back-dating of the debt write off will not be permitted by the Commissioner if discovered.

The Ruling is to apply for an indefinite period commencing 1st September 2018.

Personal Attribution rules IS finalised

IR has issued its finalised version of an interpretation statement on the rules surrounding the attribution of personal services income (“PSI”) – IS 18/03. For those of you who may not be aware of the rules, essentially it applies once certain thresholds are exceeded, when an individual (the working person), who performs personal services, is associated with an entity (the associated entity) that provides personal services to a third person (the buyer).

The threshold test can basically be called the 80% rule – earn 80% or more of PSI from one buyer (includes their associates) and do 80% or more of the work yourself (including your relatives) and do not use “substantial business assets” for earning the PSI, then where your net income for the year would exceed $70,000 if including the PSI attribution, you potentially have an attribution issue. The exemptions from the rules are limited, the prime one being where the amount of PSI to be attributed is less than $5,000.

The associated entity does not have to be a company, the rules having equal application to trust and partnership arrangements.

Whether the associated entity is considered to use substantial business assets to derive the PSI, is determined by application of a threshold test, being the lesser of depreciable property costing $75,000 or at least 25% of the entities PSI for the relevant income year. Note the private use of assets qualifications here however, to ensure you are still entitled to claim the carve-out.

As a final note, the rules are an annual test, so while attribution may apply one income year, it may not the next, and so on.

BEPS Guidance – have your say

For those of you who follow BEPS (Base Erosion Profit Shifting), you will be aware of the legislative changes enacted in June 2018, containing various measures to counter BEPS strategies used by multi-national enterprises – artificially high interest rates, PE avoidance, hybrid mismatch arrangements etc.

Further to the new legislation passing, IR has issued draft guidance documentation covering the new rules on interest limitation, hybrid mismatch arrangements, transfer pricing, permanent establishment avoidance and administrative measures.

Public feedback is now being sought on the guidance material, and should you wish to make a submission, the closing date is 28th September 2018, with plans to issue the finalised version early in 2019.

GST Zero-rating of Land Related Services

Effective from 1st April 2017, were amendments to the GST legislation (s.11A(1)(e) & (k)) to clarify when a NZ GST registered supplier of services related to land (both within and outside NZ) could zero-rate the supply.

Critical in this regard is the presence of the non-resident recipient of the services, who must be outside NZ at the time the services are performed, and once qualified, whether then the services are directly in connection to the land, or simply in connection with the land, intending to enable or assist a change in the physical condition, ownership or other legal status of the land.

Further to the legislative change (old rules only considered the “directly in connection” aspect), IR has now issued draft interpretation statement PUB00299, which sets out the Commissioners interpretation of the new provisions.

The item discusses the meaning of the terms – “non-resident”, “outside of NZ at time services performed”, “types of land interests”, “directly in connection with land” and if not, application of the remaining connection with land provisions.

Without having to read the devil in the detail, the prime takeaway to appreciate from this article, is the potential widening of the standard-rated GST application to a number of service providers including accountants, construction & earthworks contractors, surveyors, real estate agents and valuers.

Should you wish to comment on PUB00299, the deadline is 12th October 2018.

Sale of lifestyle blocks – bright-line?

IR has released a draft QWBA (PUB00314), which provides the Commissioner’s initial views on the question – When is the sale of a lifestyle block sold within the bright-line period excluded from the bright-line test?

The answer lies with whether either the exclusion for farmland or the exclusion for the “main home” of the seller can be applied. Being the more complex of the two exclusions, most of the commentary in the draft QWBA is surrounding the definition of farmland, and whether the land in question could satisfy a number of objective tests to show that either the land owner has been working the land in a farming or agricultural business being carried on by them, or because of the land’s area and nature, it would be capable as being worked as a farming or agricultural business.

It is the Commissioner’s initial view, that the majority of lifestyle blocks would not qualify for the farmland exclusion, simply due to the fact that either the owner would not be able to satisfy the “carrying on of a business” test themselves, or that due to the area and nature of the land, there would be a limit to the scale of operations that could be carried on from the land to satisfy a farming or agricultural business argument (particularly where not capable of producing a profit).

Eliminate the farmland exclusion due to the aforementioned factors, and you are left with the “main home” exclusion, which most of you will no doubt be aware of by now, requires the satisfaction of two limbs (in addition to being able to show the lifestyle block contained your “main home”) – more than 50% of the land has been used for a dwelling that was the main home of the seller, and the seller has used the land for this purpose for more than 50% of the time they have owned the land.

The second limb is arguably quite black and white in its analysis – have you used the land for the required purpose for more than half the time you have owned it – yes or no?  However the first limb is where most of the likely disputes between the IR reviewer and the taxpayer will arise. This is because the Commissioner accepts that “dwelling use” is not simply limited to the land upon which the physical dwelling is situated, nor just to the surrounding curtilage, but to any land that the seller can show has been used frequently, repeatedly or customarily in connection with or for the benefit of the dwelling. This can include land for grazing the family pets, growing domestic crops or simply to enhance the enjoyment or aesthetic value of the dwelling – such as a covenanted native bush.

Once you are over the line however, establishing potential application of the “main home” exclusion, you are just left with checking that neither of the exceptions to the “main home” exclusion apply – already claimed twice in the two year period preceding the bright-line date or you have a regular pattern of acquiring and disposing of “main homes”.

Comment on PUB00314 is requested no later than 12^th October 2018.

Sale of subdivided land – bright-line?

Released at the same time as PUB00314 is another draft QWBA which considers the question – When is the sale of a section subdivided from a residential property sold within the bright-line period excluded from the bright-line test?

PUB00315 is somewhat shorter in length than its predecessor, with commentary only required on the potential application of the “main home” exclusion to the sale of subdivided land.

Once again we see discussion on the two limbs requiring consideration for any “main home” exclusion claim by the seller – predominant actual use of the land as a “main home” dwelling by the seller, and in that respect, predominantly for most of the time the whole land has been owned by the seller.

It should be noted in the first instance, that the legislation recognises the bright-line period as that commencing on a date when the undivided land was registered in the name of the seller (noting there may be other commencement dates when title registration does not occur), and not that when the subdivided section title is first registered.

In relation to the first limb of the exclusion test, again land that is “used… for a dwelling” is not limited to the land on which the dwelling is situated or to the surrounding curtilage (like a yard and garden). Land used for a dwelling can also include other areas the seller uses frequently, repeatedly or customarily in connection with or for the benefit of the dwelling.

So satisfy the 50% or more actual use requirement of the first limb, and you then just need to ensure you have used the land in this way for more than 50% of the time you have owned it, which in the case of subdivided land, will be from the date the undivided land title was registered in your name, until you enter into a binding agreement to sell the subdivided land title. In this regard, you will need to consider what happened to the new title of land post subdivision (did you construct a new dwelling etc which will naturally change the use of this piece of land now), and the time factors involved pre and post the subdivision activity.

Importantly, you should take note, that even if you can get across the “main home” exclusion threshold, the relevance of the two exceptions to the ability to claim the “main home” exclusion is highly dependent on the number of new titles that you have created from the undivided land. This is due to the Commissioner’s draft view that each new land title equates to one claim of the “main home” exclusion, so if you have created more than three sections (including the original dwelling section) and then dispose of all three titles, only two of the sales can qualify for the “main home” exclusion due to the “no more than two previous claims in the preceding two year period” restriction.

Comments are requested no later than 12^th October 2018.

R&D documents released

In case you are interested, IR has now released various documents that were used in the drafting of the recent discussion paper that was issued for public feedback on the proposals for introducing a new R&D tax credit.

You will note that numerous parts of the various documents have been blacked out for sensitivity reasons, however there is sufficient narrative to still provide you with a good level of insight into the Official’s discussion on the proposals.

The documents can be found here – http://taxpolicy.ird.govt.nz/publications/2018-other-r-and-d-reports/overview.

Debit or credit card fees – GST?

IR has released QB 18/14, which is a QWBA providing the Commissioner’s view on the GST implications for suppliers associated with the fees they may charge their customers to recover the cost of providing a card processing facility.

QB 18/14 covers 3 scenario’s and the GST treatment for the supplier where:

• the supplier provides the payment facility directly to the customer
• the supplier has arranged for an agent to provide the payment facility to the customer on the supplier’s behalf, and
• the supplier contracts with a third party to provide a payment facility to the customer.

It is the Commissioner’s view, that in all three cases, where the supply for which the customer uses their debit or credit card to pay for the transaction is itself subject to GST, then the card fees charged by the supplier are simply part of the overall consideration for the supply, and consequently are also subject to GST.

The commentary in QB 18/14, expands on that already provided in IS 17/03 – Goods and Services Tax – single supply or multiple supplies, the issue in essence being whether the fee forms part of the consideration for the goods or services being supplied (so there is a single composite supply of the goods or services and the payment facility) or whether the fee is a separate supply of a payment facility.

Valuing employer provided accommodation

In a previous Commissioner’s Statement (CS 16/02), guidance was provided with respect to methods that IR would accept as being a reasonable basis for determining the market value of employer provided accommodation to employees. The provision of such a benefit to an employee, falls within the definition of being a PAYE income payment in accordance with s.RD 3(1)(a)(i) of the Income Tax Act 2007 (included as part of a person’s salary or wages – s.RD 5(8)), and consequently the value determined will be subject to PAYE deductions.

CS 16/02 establishes that the starting point for determining the taxable value of all employer provided accommodation, is the market rental value of the particular accommodation, and in this regard, it was considered acceptable to use an estimate based on the use of comparable property data contained on internet sites that advertise rental properties, such as Trade Me, to compute the taxable amount from which PAYE was required to be deducted.

While CS 16/02 was issued on 24^th November 2016, applying to periods commencing on or after 1^st April 2015, recently released is a more narrowly focussed CS 18/02, which deals with the subject of employees of boarding schools. CS 18/02 has been issued to recognise that the market value of employer provided accommodation in these circumstances, particularly where that accommodation is provided on-site, is likely to be subject to a reduced valuation to comparable off-site accommodation, however that this discount may not be readily quantifiable by the employer. The Commissioner is looking to aid the employer therefore, by quantifying the level of discount that may be applied by an employer once they have determined the comparable off-site market rental value of their type of accommodation. The discount ranges from 20% where the accommodation is within the school grounds but separate from the school with direct off-site access, to 50% where the accommodation is embedded within the student accommodation (should be at least 100% in my view!).

CS 18/02 has the same application dates as CS 16/02.

Re-issued IS 17/03

You may recall in last week’s edition, I commented on the issue of QB 18/14, which dealt with the subject of fees charged by suppliers to customers using their debit or credit cards to pay for a supply, and whether this component of the supply, the fee, should be subject to GST.

Within the QB 18/14 commentary, IR referred to an example previously provided in IS 17/03 (Goods & Services Tax – single supply or multiple supplies), that suggested that a credit card surcharge would always be a separate supply, being an exempt supply of financial services. It was now considered however, that the example provided could be confusing and may not actually be the correct position in lieu of the reasoning outlined in QB 18/14 with regard to the various fees charged by suppliers, and consequently it was stated that IS 17/03 would be re-issued to correct and clarify the IS 17/03 example, and that such surcharges would not always be an exempt supply of financial services.

The re-issued commentary is contained in IS 18/04.

Repatriating human body remains

Yes, you have read the heading correctly, and to end this edition on a somewhat morbid note, somebody has actually asked IR the question, of what is the correct treatment from a GST perspective in relation to goods and/or services provided by a NZ supplier to repatriate human remains located overseas back to NZ.

Draft QWBA PUB00324 considers examples of NZ cremation and embalming services, as well as the exporting of caskets and urns offshore to facilitate the eventual repatriation.

The Commissioner’s initial published view, is that provided the services are provided to a non-resident who is outside NZ at the time the services are performed, and that the remains themselves will not be received by a third party in NZ (clearly similar to the classic education services example which resulted in a legislative amendment), including a “not reasonably foreseeable” test, then zero-rating should apply to the supply.

The exporting of caskets and urns overseas, should qualify for zero-rating by the supplier.

Interestingly, the item is not as new as one might think, originally published not long post the introduction of GST, as a PIB topic in January 1988.

Deadline comment is 29^th October 2018.

Interim TWG report – to be or not to be??

Towards the week end, the much awaited, and arguably much anticipated, interim report of the Tax Working Group was released.

While the TWG were considering a number of areas of taxation within the scope of their terms of reference, clearly of interest to most, was going to be their interim thoughts/recommendations, on whether NZ should introduce a capital gains tax (CGT) regime. The interim conclusion – “there is still much work to do”.

So in summary, the TWG is yet to provide a firm recommendation with respect to any extension to the taxing of capital income, instead acknowledging that they are presently working through (in substantial detail) the policy choices involved in the design of any such potential extension. In this regard, the TWG is considering two main options – existing tax net extension (taxing gains on assets not already taxed) and a deemed return type taxation (aka risk free rate of return taxing mechanism).

One decision confirmed by the TWG however, is that there will be no recommendation to introduce any sort of wealth or land tax.

Other interim conclusions/recommendations by the TWG were:

• Identification of opportunities to make retirement savings fairer and encourage low/middle-income earners to save more, however, with an interlinkage with the treatment of capital income, further consideration of final recommendations still required.
• Still an open question as to whether housing affordability will be affected materially by any sort of CGT introduction, the real causation actually a simple supply versus demand issue.
• There is significant scope within the tax system to increase its role in sustaining and enhancing NZ’s natural capital.
• Taxation as a corrective tool (change of human behaviour) is just one potential policy response to dealing with public health issues such as alcohol, tobacco and sugar use. However the TWG does see a need to simplify the existing schedule of alcohol excise rates, and expressed concern over the distributional impact of further tobacco excise increases.
• No recommendation to either reduce the GST rate or introduce new exceptions (food/drink concessions for low income families for example). Instead, increases to welfare transfers and adjustments to personal tax rates/thresholds are seen as a more effective mechanism to assist low-middle income families. Additionally, no recommendation to introduce a financial transactions tax.
• Recommendation to expand the use of the withholding tax regime to increase compliance of the self-employed (including digital platform providers such as Uber).
• Conclusion that current taxation of business largely sound and no recommendation therefore to reduce the company tax rate or introduce any progressive scale, suggesting instead that compliance cost reductions are a better mechanism to assist small businesses. In this last respect, the TWG is still formulating its recommendations.
• Recommendation to improve the integrity of the tax system by IRD strengthening enforcement around use of shareholder current accounts in closely-held companies (recognising top personal tax rate/company rate different, so using overdrawn current accounts & paying higher company tax provides opportunity to avoid higher personal taxes on larger shareholder salaries), and introduction of more measures to reduce extent of hidden economy (e.g. removal of tax deductibility on payments where payer has failed to comply with withholding tax regime). Additionally, a recommendation to consider making directors personally liable for company GST and PAYE arrears, and the establishment of a single Crown debt collection agency.
• Conclusion that the rules around private charitable foundations and trusts appear to be unusually loose, however recognition that the Government is presently reviewing the Charities Act 2005 and consequently that some of the TWG’s concerns could be addressed accordingly upon finalisation of this review.
• Recommendation to improve the resolution of tax disputes by establishing a taxpayer advocate service and by ensuring the Office of the Ombudsman is adequately resourced in respect to its tax function.

Public feedback is welcomed and encouraged with respect to the interim report. In this regard, submissions can be made until 1^st November 2018. The final report is still due for publication in February 2019.

Corporate tax rate well above average

While the TWG has suggested in its interim report that there will be no recommendation to either reduce NZ’s corporate tax rate or to introduce any sort of progressive scale, an OECD report released around the same time as the TWG report, reflects the NZ rate of 28% to be somewhat above the OECD average.

“Tax Policy Reforms 2018” has been prepared and released by the OECD to reflect on the various tax reforms that have been undertaken by some of the 35 member countries involved in the review, and reports that a number have used corporate tax rate reductions to boost local investment, consumption and labour market participation.

The average corporate income tax rate across the OECD has dropped over the past 18 years, from being 32.5% in 2000, to 23.9% in 2018. One may question therefore the TWG’s interim view, and question how NZ can remain competitive on the international stage, with a corporate tax rate that is arguably higher than many of the markets it competes with, to attract foreign direct investment into NZ. In making this statement however, I must concede that I have only looked at the raw numbers themselves, and there are no doubt numerous other variables that still make NZ an attractive place to invest, even with a higher tax impost on profits derived from the jurisdiction (and to be fair, the TWG does provide a reasonably sound basis for their view).

Reducing personal tax rates has also been a popular tool to assist those low and middle income earners, as has the use of excise taxes to attempt to curb what is considered, by the powers that be, harmful consumption, the focus not only on the old favourites of tobacco and alcohol, but more jurisdictions (Ireland, South Africa and the UK recently) also looking to target the health risks associated with high sugar consumption.

If you would like to read more of the OECD report, you should be able to read it online via this link – https://read.oecd-ilibrary.org/taxation/tax-policy-reforms-2018_9789264304468-en#page1