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.
- Overseas Hunters – GST Implications
- QWBA on Employee Contributions
- Crypto-Assets – and another…
- “Exclusion” QWBA finalised
- IR Acknowledge 2018 Error
- Cheques a thing of the past
- Potential Changes to Land Taxing Rules
- Guernsey TIEA Amendment Signed
- Reckless Trading – Legitimate Risk Trading
- Removal of Two Expansion Barriers
Overseas Hunters – GST Implications
IR has released draft interpretation statement PUB00307 for comment. The IS espouses the Revenue’s view of the GST treatment that should be applied by NZ hunting outfitters (NZ hunting outfitters and guides who provide hunting experiences for overseas hunters visiting NZ are referred to collectively as “outfitters”) and taxidermists, with respect to goods and services provided to overseas hunters coming to NZ for a “hunt” experience, which may or may not include subsequently taking their “trophies” home with them.
Now before you turn away and proceed to read the next “exciting” article instead, I appreciate that while most of you, like me, has never had an outfitter/taxidermist client in your lifetime, and arguably may foresee never having one going forward due to your own values of principle, I find an IS like this is still a good read, if only for the sole purpose of gaining further insight to the Revenue’s thought patterns when dealing with a scenario such as this, where a core issue to be determined, will be whether the supply should be standard-rated or zero-rated for GST purposes because the customer is a non-resident.
I would suggest there is also additional learning to be obtained from the commentary, due to the variable contractual arrangements that may exist between the parties, and the questions of a single composite supply versus two separate supplies. For example, is the hunter simply looking for the experience of shooting that prized Stag from the relative “safety” of the helicopter cabin and then leaving Mother Nature to clean up afterwards, or alternatively the full package of being able to parade the success of the hunt on their dining room wall back home to all who visit for Thanksgiving dinner.
The commentary therefore explores some techniques which can be used by advisors to determine the true nature of their clients supplies, which as I have earlier suggested can equally be used in cases external to the scenario PUB00307 is actually targeted towards. Such analysis can lead to a single supply conclusion, fully standard-rated or zero-rated, or alternatively, deemed separate supply components where there may be a mix of standard-rating and zero-rating treatment.
The deadline for comment is 9th October 2019.
QWBA on Employee Contributions
The release of QB 19/12 provides IR’s answer to a “question we’ve been asked” on the FBT, GST and income tax consequences arising as a result of an employee (including a shareholder employee) making a cost contribution towards a fringe benefit their employer is providing them with.
The employee could be making either a partial or a full contribution, and the contribution could be made to either the employer or a third party.
QB 19/12 advises:
- For FBT purposes, the taxable value of the fringe benefit is reduced by the amount of the employee contribution, to the extent that a full cost contribution by the employee will result in no FBT liability for the employer.
- For GST purposes, there are two aspects to the scenario. Firstly, to the extent that some taxable value remains post the employee contribution, GST will be imposed on the remaining taxable value, assessed and paid in the relevant FBT return by the employer. Secondly, a contribution made to the employer is consideration for a supply by the employer and must be accounted for in the employer’s GST return. A contribution made direct to a third party by the employee however, will not be consideration for a supply by the employer.
- For income tax purposes, a contribution made to the employer is income of the employer and must be included in the employer’s income tax return, net of GST. The employer may then claim relevant deductions relating to the fringe benefit. However a contribution to a third party directly by the employee, will not be income of the employer.
Crypto-Assets – and another…
Following hard on the heels of the following first three Public Rulings of a Crypto-Asset flavour, IR has now released BR Pub 19/04: “Income tax — application of the employee share scheme rules to employer issued crypto-assets provided to an employee”.
The first three rulings were:
- BR Pub 19/01: “Income tax — salary and wages paid in crypto-assets”
- BR Pub 19/02: “Income tax — bonuses paid in crypto-assets”, and
- BR Pub 19/03: “Income tax — employer issued crypto-assets provided to an employee”.
The arrangement to which the Ruling applies is the provision of crypto-assets by an employer to an employee in connection with their employment in circumstances where:
- the employer is issuing crypto-assets, e.g. through an Initial Coin Offering;
- the crypto-asset is a “share” as defined in s YA 1;
- the employee is not required to pay market value for the crypto-assets; and,
- the crypto-assets are not provided under an exempt ESS as described in s CW 26C.
Should the above scenario exist, then:
- The provision of the crypto-assets by the employer to the employees is an “employee share scheme” as defined in s CE 7.
- Section CE 2 will apply to determine the value of the taxable benefit received by the employees.
- The amount of the taxable benefit will be the employees’ employment income under s CE 1(1)(d).
The ruling uses the term “crypto-asset” to cover digital assets that use cryptography and blockchain technology to regulate their generation and verify transfers. The ruling also uses the term “equity token” to cover a specific subset of crypto-asset.
The ruling applies for a period of three years beginning on 1 December 2019.
“Exclusion” QWBA finalised
In a recent edition of AWIR, I commented on a draft QWBA that IR had issued, providing the Revenue’s view of how the business premises exclusion applied to exclude a taxpayer from taxation upon a disposal of land under either sections CB 6 to CB 11, or under the bright-line rules – section CB 6A.
The exclusions apply slightly differently under the aforementioned taxing provisions, and consequently IR has issued to QWBA’s, QB 19/13 (which has narrower scope for application of the provision because the land must have been used predominantly for the specified purpose and for most of the time the taxpayer has owned it) which applies to a taxing event triggered by the application of section CB 6A, and QB 19/14, which has wider potential application to a taxing event triggered by the application of sections CB 6 to CB 11.
IR Acknowledge 2018 Error
Just in case you did not receive a letter from IR last week, be aware that they have discovered an error in the way their old system was calculating late payment penalties and use of money interest in respect of the 2018 income year.
The “confession” blames the mistake on a legislative change that brought into effect new rules for calculating use of money interest for the 2018 income year onwards – section 120KBB of the Tax Administration Act 1994 to be precise.
Under the new rules, a taxpayer’s exposure to use of money interest costs can effectively be eliminated, by firstly ensuring that instalments 1 & 2 of the coming years provisional tax payment obligations are calculated under the “standard uplift method” and are paid in time, and secondly, once this has occurred, any remaining income tax that will be payable for that income year once the final assessment is issued, is paid no later than the final instalment date – usually 7th May for a standard balance date of 31 March.
In this regard, as the final instalment date now occurs some 5 weeks post the end of the income year to which it relates, those taxpayers with a reasonable accounting system should have sufficient time to calculate with a relatively high level of accuracy what their final instalment payment should be, in order to avoid any interest costs for the income year.
At the very least, under the new rules, even if the taxpayer gets their final calculation wrong, or alternatively their record keeping systems are simply not up to the requisite level to enable timely wash-up calculations to be performed, at least by having paid instalments 1 & 2 as required under the standard uplift method by their respective due dates, now has the consequence that any use of money interest will only be calculated on any short-paid 3 instalment, from the day post that instalments due date (8th May for standard balance dates).
IR advises that you do not need to do anything with respect to the error that has been identified (although I would suggest that you do not perhaps just “sit back and relax”, considering experiences of old), with the assurance that they will automatically correct the assessments of those affected taxpayers over the coming months.
From the Revenue’s PR perspective (do you remember the old slogan “It’s our job to be fair” which suddenly disappeared into the abyss when it was appreciated that most of the time that sentiment could not be lived up to when one is dealing with the niceties of tax legislation??), it was pleasing
however to see them reassuring taxpayers who have already met their 2018 tax obligations, that where the correction has the consequence of either under-charged debit interest or over-paid credit interest, the taxpayer will not be required to compensate the Revenue, and instead these balances will immediately be written off.
Taxpayers who have not met their 2018 tax obligations will continue to be charged debit use of money interest on their outstanding balances.
Cheques a thing of the past
I’m certain that I do have a cheque book somewhere in my drawer if I ever happened to need to use one, however do not ask me to tell you the last time that I actually did fill one out.
Perhaps not the case though, for those taxpayers who were in the “exclusive” group of cheque payers during 2018, where IR received some 5% of all payments during the year via this method.
This “exclusive” group of cheque payers has been declining over recent years however, to the extent that IR has now issued notice, that effective from 1st March 2020, cheque payments will only be accepted where the taxpayer has no other payment option available to them (although there is no mention in the publication exactly how IR proposes to ascertain this).
To ensure that taxpayers and their agents are also fully aware of the various payment options available, the tax update lists the following potential methods:
- MyIR – either by direct debit or via use of a debit card/credit card, securely through the MyIR online portal, which can be located at – www.ird.govt.nz;
- Online banking- using your own bankson-line payment portal, most of which already have IR set-up as a potential payee;
- Credit or debit card – directly via IR’s website (www.ird.govt.nz) without using the MyIR portal and instead via the link – www.ird.govt.nz/pay;
- In person at Westpac – whereyou can make payments either by way of EFTPOS or cash, and via a teller (for an actual personal experience) or via a Smart ATM; and,
- Money transfer – for those overseas you can pay IR using a money transfer service. Search for “make a payment” on their website for more information – www.ird.govt.nz.
Potential Changes to Land Taxing Rules
Did your heart skip a beat when you read the title?
Mine did when I was checking my emails for the nth time on the weekend (as most of us do in this modern tech era I suspect, rather than completely switching off from work as we did back in the good old days), and an IR update glared back at me with the title “Feedback sought on rules for taxing certain land sales.”
Ignoring the family grumbles in the background (because this was really important to read right then and there!), the heart rate soon normalised as a quick skim read of the commentary in the article attachment, confirmed that IR were simply looking to tinker with the rules surrounding the proviso contained within the main home, residence and business premises exclusions, which limits the claiming of the exemption where the taxpayer exhibits a pattern of “habitual buying & selling of land.”
The problem which has been identified by IR with respect to the present legislative drafting, is the ability for taxpayers to structure themselves around the regular pattern restrictions, achieved by either using associated persons to carry out separate transactions or by varying each transaction so that there is effectively no pattern. This structuring opportunity is provided as a result of the narrow wording used in the legislation, where when considering the existence of a pattern or not, it is only the activities of the single person that are able to be taken into account.
To illustrate this point, in a scenario where the person acquires the first piece of land, has their wife acquire the second, their family trust acquire the third and then they again acquire the fourth, there presently exists no legislative pattern, as the person themselves has only undertaken 2 transactions (noting IR’s present view that a person must have had at least 3 prior transactions before the 4th will be considered reflective of a pattern).
IR’s proposed solution to the issue, is to amend the law to ensure that the regular pattern restrictions apply where a person, or a group of people or entities has a regular pattern of buying and selling land that has been:
- occupied by the person or group of people as their main home, residence or business premises (as applicable); or
- occupied as a main home, residence or business premises (as applicable) by the person or group of people that controls the entity or entities that own the land.
To ensure the effect of the change does not have a wider reach than intended however, it will be necessary that the same person or group of people or entities all occupy each of the properties.
In addition to the associated parties’ issue, IR has also expressed concerns that the “pattern restriction” in both sections CB 16 & CB 19, has been interpreted too narrowly to apply only where there is a similarity or likeness between the transactions. For example, two scenarios will not be considered as being part of a pattern, where in the first, the property is bought, lived in and sold, but in the second, the property is also renovated while it is lived in and sold.
Consequently, to address this potential shortcoming in the existing drafting, IR is suggesting that an amendment be made to broaden the scope of the regular pattern restrictions in these two sections, to ensure they apply to all patterns of buying and selling land used as a residence or business premises.
Finally, IR are interested in your views, as to whether the existing restriction contained in the main home exclusion for the bright-line rules, which limits the use of the exclusion where it has already been used twice within the two year period prior to the current sale, should also be extended to be included in the section CB 16 & CB 19 exclusions.
The deadline for comment is 18th October 2019.
Guernsey TIEA Amendment Signed
Most of you will probably be aware, that along with the numerous double tax treaty agreements (DTA) that NZ has with foreign taxing jurisdictions (which usually already contain mutual exchange of information articles), we also now have a reasonable number of tax information exchange agreements (TIEA) with various non-DTA countries.
TIEA’s are devoted solely to information exchanges, and are more detailed in that respect, and we have seen a proliferation of these bilateral documents in recent years, amid a growing concern espoused by the G20 countries over the loss of tax revenue to tax havens. Those concerns resulted in the creation of an OECD black list of jurisdictions, who were considered to have engaged in harmful tax practices. For those unfortunate enough to make the List and desirous to create a cleaner image for themselves, they could qualify for removal from the list by entering into at least 12 TIEA’s.
Guernsey is one such jurisdiction, and NZ recently signed a protocol to amend the existing TIEA it has had with the region since 2009, to include model treaty provisions to prevent tax treaty abuse and improve dispute resolution as recommended by the OECD and G20. The agreement will come into force once both countries have given it legal effect.
Reckless Trading – Legitimate Risk Taking
I wanted to include a brief comment on this recent case law update I received, as while not tax related itself (although arguable considering it is often IR left out of pocket as a result), I appreciate that we often get asked questions by clients who have taken on the role of company director, as to what actions may or may not create a personal liability exposure for them, should their company get into financial difficulty at some point.
This particular case was a Court of Appeal decision, where the liquidator (in essence acting for IR who was the major creditor in respect of non-paid GST) was trying to take a personal action against the director for reckless trading, because he had made a decision to continue trading when the company was already in financial difficulties, to complete and sell four houses that his company had been building.
The decision of the Appeals court, confirmed the principle, that trading while insolvent does not automatically equate to a directors liability. The risk and loss to the company as a whole is relevant, not on a transaction by transaction basis. The terms “likely” and “substantial” which are used in the legislative provision, must be given weight, so too the section’s heading “reckless trading”. Risk must be considered alongside the potential advantage, and exercising hindsight judgment is cautioned against, as this does not “fully and realistically comprehend the difficult commercial choices facing the directors”.
In the present case, the Court held that the decision to complete the houses and sell them for fair market value was a sensible business decision. The alternative, walking away and leaving unfinished houses was the less sensible commercial option. Therefore, the Court concluded that the director did not act in bad faith and was not reckless.
Interestingly, the Court also observed that it was unclear whether IR in fact, suffered any loss from the director’s actions.
Removal of Two Expansion Barriers
The Government has just released its Economic Plan, supposedly a one-stop-shop for business and government agencies to view the Government’s long-term plan and see how different policies contribute to it. In the latest version, identified as economic shifts required for a more productive, sustainable and inclusive economy, included a need to:
- move the New Zealand economy from volume to value with Kiwi businesses, including SMEs, becoming more productive;
- make deeper pools of capital available to invest in infrastructure and to grow New Zealand’s productive assets;
- develop a sustainable and affordable energy system; and,
- utilise New Zealand’s land and resources to deliver greater value and to improve environmental outcomes.
To support its Economic Plan and the numerous shifts identified as now being required, accompanying the document release were two tax related, ‘removing barriers to expansion’, proposals.
The first has been kicked around a bit in the community already, public consultation recently having been sought on the present rules associated with the deductibility of feasibility expenditure, which are seen to potentially restrict investment in exploring new assets or business model due to the costs often being non-deductible for tax purposes.
As a result of
feedback received, particularly from infrastructure companies, it is proposed
(to be included in the next taxation Bill likely to be tabled in Parliament
early 2020) that qualifying expenditure totalling less than $10,000 would be
deductible immediately, or otherwise still be fully deductible but have a five
year spreading rule. The new rules would equally apply to expenditure incurred
on projects that did not end up going ahead.
The second proposal could effectively see a modification to the existing R&D tax loss cash-out rules applying usually to start-up companies, which were introduced to deal with the risk of tax loss forfeiture due to breach of shareholder continuity requirements as these entities brought new investors on-board to assist with much needed cash flow funding.
These shareholding continuity rules, which require a minimum 49% of shareholders who incurred the initial loss to still be present when the company wanted to use the losses in a future income year, have remained in place throughout the various phases of legislative tinkering, however all that may change soon, with the Government likely to commence consultation with business and tax experts before the end of the year, to determine how the continuity rules might be amended in order to facilitate the risk these start-ups face when attempting to attract new investment.
Depending on the outcome of the consultation process, changes to the shareholder continuity rules could potentially make the need for a tax loss cash-out regime redundant, and consequently we could see repeal or modification of those rules accordingly.
If you have any questions or would like a second opinion on any national or international tax issues, please contact me.
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