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Introducing the first Tax Bill of 2022
Well, post the initial hiccups (arguably severe indigestion) arising from the proposal to subject services supplied by managers and investment managers to managed funds and retirement schemes to 15% GST, the first Tax Bill for 2022 has now been re-introduced into the House (post being withdrawn within 24 hours of its initial introduction!).
The major proposals contained within the Bill are:
Think Uber and Airbnb. Basically, electronic marketplaces connecting buyers with goods and services suppliers.
The Bill includes two proposals to ensure that New Zealand’s (NZ) tax settings remain fit for purpose in light of the platform economy and its expected growth. The first proposal is targeted at ensuring Inland Revenue (IR) has better access to information about income earned by sellers on digital platforms based in NZ and offshore. It will see the implementation of an OECD information and reporting exchange framework in NZ that would require NZ-based digital platforms to provide Inland Revenue with information annually about the consideration sellers on those platforms received from relevant activities. Inland Revenue would use that information in its administration of the tax system where the information related to NZ tax residents and would share information with foreign tax authorities where the information related to non-residents. Activities subject to the new requirements are the rental of immovable property (including commercial, short-stay, and visitor accommodation), personal services (including any time or task-based work, such as ridesharing, food and beverage delivery, graphic and web design services), the sale of goods, and vehicle rentals. The regime would commence in the 2024 calendar year with the first information reporting obligations (and exchange) occurring in early 2025.
The second proposal is targeted toward maintaining and promoting the sustainability of NZ’s broad-based GST system by requiring digital platforms to charge and collect GST on services provided through them in NZ. You will be aware of the categories of “Remote services” (2016) and “Low value imported goods” (2019), and proposed in the Bill is the introduction of a third category of “Listed services”. Within this new category will be “Taxable accommodation services”, which would include all forms of accommodation (such as commercial, short-stay, and visitor accommodation) other than exempt residential accommodation, and “Transportation services” which would be ridesharing, and beverage and food delivery. Other transportation services would not be included in this definition.
“Listed services” would also include services that are closely connected with the above services where these services are also available through the electronic marketplace. The marketplace operator of an electronic marketplace through which listed services are supplied would be treated as the supplier where they authorised the charge for the supply of the listed services to the recipient, and/or set a term or condition, whether directly or indirectly, under which the supply of listed services is made.
Where the marketplace operator was deemed to be the supplier, then they would charge 15% GST on the supply to the customers. The underlying supplier (say the Uber driver) would be deemed to make a zero-rated supply to the marketplace operator, with the consequence that they would no longer account for GST on the supply, but if GST registered themselves, would still be able to recover GST input tax incurred in making those supplies. With respect to determining when the marketplace operator should charge NZ GST on the supply, this would be required where the services are performed, provided, or received in NZ. It is also intended to introduce a new “Flat-rate credit scheme” for scenarios where the underlying supplier is not GST registered – the marketplace operator would receive a 8.5% (of the value of listed service) input tax credit to offset against the output tax payable on the supply, and would be expected to pass on this credit to the underlying supplier. The new rules would take effect on 1st April 2024.
The proposed amendments would acknowledge that employees working in NZ for a non-resident employer (whether as a remote worker, a business traveller, or on assignment to an NZ business) are in different compliance circumstances to employees of resident employers.
These different circumstances may mean a different administrative approach is justified that reduces the cost of compliance with the rules. There are two key proposals. Firstly, to enable a more flexible application of the PAYE, FBT, and ESCT rules in specific circumstances, by introducing a grace period that will apply in certain circumstances, by enabling IR to agree with an employer of cross-border employees to pay PAYE annually in special circumstances, and by repealing the PAYE bond provision, which is rarely used and anticipated that it will no longer be required. Secondly, to improve the clarity and integrity of the PAYE, FBT, and ESCT rules.
Under the first set of proposals, a new definition of cross-border employee would be introduced – an employee of a non-resident employer who provides services in NZ, or an NZ resident employee who provides services outside NZ. The flexibility enabled by the proposed amendments would apply to cross-border employees only.
A 60-day grace period would be introduced which would enable an employer to meet or correct their PAYE, FBT, and ESCT obligations within a 60-day grace period where they:
- have taken reasonable measures to manage their employment-related tax obligations, and the employee is present in NZ for a period during which the employee has breached a threshold for exemption under section CW 19 of the Income Tax Act;
- breached a threshold for exemption under a relevant double taxation agreement; or
- received extra pay.
A voluntary disclosure would be unnecessary where an employer or relevant cross-border employee meets or corrects the tax due within the grace period, and penalties and interest would not be imposed in respect of underpaid tax if the underpayment is corrected within the grace period.
The proposed amendments would generally take effect on 1 April 2023. Provisions that introduce flexible PAYE measures, including the introduction of the 60-day grace period and the repeal of the PAYE bond provision, would take effect on 1 April 2024.
Under the second set of proposals, effective from 1st April 2023, the amendments would make a safe harbour available to non-resident employers who wrongly assess their liability to the rules, where the conditions of the safe harbour are met, and provide that where a non-resident employer does not have an obligation under the rules, the employment-related tax obligations pass to the employee in the absence of other arrangements.
Effective from 1st April 2024, there will be a change to the interpretation of the schedular payment withholding thresholds as they apply to payments made to non-resident contractors from an ‘all circumstances’ view (considering all the non-resident contractor’s activity in NZ) to a ‘single payer’ view (considering matters only related to the contract with the payer). So, when considering either the 92-day or $15,000 de minimis rule, the payer would only need to consider their own contract with the non-resident contractor. However, to mitigate any integrity risk associated with this ‘single payer’ view, new reporting requirements would also be introduced for payers to provide payment information to Inland Revenue, who could in turn then identify non-resident contractor activities in NZ and monitor the thresholds and exemptions.
There are quite a number of proposals here.
First up, there is a new principal purpose test for goods or services acquired for $10,000 or less – the principal purpose is intended to have the same meaning as the reference to principal purpose used in the pre-2011 GST Act definition of “input tax” – the principal purpose is the main, primary, or fundamental purpose (which does not necessarily equate with more than 50% taxable use). Satisfy the principal purpose test, and a full input tax deduction could be claimed, with no subsequent apportionment adjustment calculations required. However, equally, if a supply of goods or services is not for a principal purpose of making taxable supplies, a registered person would not be able to either claim an input tax deduction for the acquisition of the good or service or apportion input tax for an adjustment period between their taxable and non-taxable use of the good or service. The new rules would apply to goods and services acquired on or after 1st April 2023.
Next, there will be a new election option, where GST-registered persons may elect to treat the supply of certain goods as an exempt supply. Under the proposal, registered persons would be able to elect to treat the supply of goods that were not acquired or used for the principal purpose of making taxable supplies as exempt. This proposal is intended to align the GST rules with current practices for GST-registered persons who may have some minor use of their goods, such as private dwellings, in the course and furtherance of their taxable activity (that is, their GST-registered business).
To qualify as an exempt supply under the proposed rule, the goods would have to satisfy the following requirements:
- no previous deductions claimed for the goods under section 20(3);
- the goods were not acquired for the principal purpose of making taxable supplies;
- the goods were not used for the principal purpose of making taxable supplies; and,
- the goods were not acquired as zero-rated supplies under sections 11(1)(m) or (mb).
There would be a transitional rule for goods acquired before 1st April 2023 (the proposed effective date), to enable you to repay any input tax claimed, so that your subsequent disposal of the asset would still qualify as being an exempt supply. Note that you would still be entitled to claim GST on overheads or operating costs that do not become an integral part of the goods themselves – for example, the GST portion of rates for a home office. There will be no requirement to formally notify Inland Revenue of your election, instead, you would simply not account for any GST on the asset (no deduction claims, no output tax paid on disposal).
The third proposal is an amendment to reduce the number of adjustment periods required for mixed use goods and services, particularly in relation to land, which currently is subject to unlimited adjustments. Under the proposal, the number of adjustment periods for land would be capped at ten. The threshold for two adjustments increases from $5,001 – $10,001 to $10,001 – $20,000, and the threshold for five adjustments from $10,001 – $500,000 to $20,001 – $500,000.
Fourth on the list, are proposed amendments to the wash-up rule contained within section 21FB. Firstly, there will be a new avoidance provision, enabling Inland Revenue to assess additional GST output tax, where it is considered you have removed an asset from the GST net via the wash-up adjustment (so claimed use had permanently changed to 0% taxable use for the requisite two adjustment periods) in contemplation of a future sale or cessation of the taxable activity. Under either of these latter scenarios, GST would have been payable on the present market value of the asset, whereas the use of section 21FB in essence allows you to simply repay the original GST claimed (or notional GST component if the purchase was zero-rated).
Secondly, you will no longer have to wait for the second adjustment period to make your wash-up adjustment. Presently, if you change the asset use to 100% taxable (or non-taxable), the 100% use must remain constant for the remaining portion of the annual adjustment period during which the change occurs, plus all the subsequent adjustment period. Under the proposed amendment, you will be entitled to make your wash-up adjustment at the end of the first adjustment period. Additionally, the wash-up rules will no longer apply to only 100% use changes, but to any permanent use change. So, for example, if your permanent change was to 80% business use, you could make a one-off wash-up adjustment at the end of the first adjustment period, resulting in no further adjustments being required for the asset (unless the use did happen to change again for some reason). All the amendments here would apply for adjustment periods beginning on or after 1st April 2023.
Finally, the present mixed-use asset rules contained in sections 20(3JB) and 20G will be repealed, with cases where GST apportionment continued to apply being dealt with using the same general GST apportionment rules that apply to other assets. These general rules would allow an apportionment percentage to be calculated based on days of taxable use. This is a similar method to the current formula in section 20G, but the calculation would be less prescriptive and would not be limited to the set of “mixed-use assets” described in section DG3 of the Income Tax Act. The proposed repeal of sections 20(3JB) and 20G would have effect on the registered person’s first adjustment period beginning on or after 1 April 2024.
A proposedamendment which would exempt from FBT, public transport fares that are subsidised by an employer mainly for the purpose of their employees travelling between their home and place of work. Provided the public transport is via a bus, train, ferry, tram, or cable car, the employer would not have to pay FBT on such benefits.The proposed amendments would have effect for fringe benefits provided on and after 1 April 2023.
Land tax provisions
Partitioning of land among co-owners. The proposed amendment would ensure that the allocation of subdivided land among the co-owners of the original undivided land does not constitute a disposal for the land sales provisions. This exclusion would apply to the extent that the value of the allocated properties under the partition aligns with the co-owners’ interests in the original undivided parcel of land and contributions to development and construction costs. Any difference in these proportions (including any wash-up payments between the parties) would continue to be subject to income tax where applicable, as this difference would represent an economic change in ownership and actual disposal. The proposed amendment would have effect for partitions occurring on or after 27 March 2021.
If you would like to discuss any of the proposals further, please do not hesitate to reach out to Richard.