Richard's Feb-Mar 2021 tax updates

Richard has had over 30 years’ experience with New Zealand and International taxation. His team provide services including:

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Below are articles from Richard’s weekly email ‘A Week in Review’ over the last month. You can sign up for his ‘A Week in Review’ newsletter here and get the updates weekly, directly to your inbox.

Tax treaties and Covid-19

If you undertake a little bit of cross-border advisory work in your day to day, or you just like to keep abreast of what’s happening in the international tax community because that’s the type of person you are (a.k.a you have too much time on your hands), then I would suggest signing yourself up for the OECD tax updates (it’s free!).

Last week I found a very useful article had just been released, which analysed and reported on what action a number of jurisdictions, including New Zealand, had undertaken with respect to interpreting various articles within their tax treaty agreements, which the effects of Covid-19 potentially now called into question.

Early in April 2020, the OECD Secretariat issued a guidance statement on the application of international treaty rules in circumstances where cross-border workers or individuals were stranded in a jurisdiction that was not their jurisdiction of residence. The latest article is not only an update to the earlier guidance, but as I aforementioned, a commentary of individual jurisdictions action taken to provide guidance to taxpayers and their advisers, post the April 2020 release.

The article covers the topics of permanent establishment triggers, tax residency issues for both entities (in older treaties often based on the ‘centre of effective management’ test) and individuals, and income from employment issues (stranded workers, teleworking from abroad (a.k.a working remotely).

The full article can be located here – click to read.

Payments for employees working from home

You may recall in the early days of the pandemic (doesn’t that seem like forever ago now?), the release by IR of Determination EE002, ‘Payments to employees for working from home costs during the Covid-19 pandemic’. The Determination provided guidance on the extent to which payments made to employees who were now working from home due to Covid-19, could be paid tax free.

Determination EE002 was to apply to payments made to employees through 17th March 2020 until 17th September 2020, however once IR appreciated that Covid-19 was not going to simply be an overnight stay, Determination EE002A was released to extend the payment period through until 17th March 2021.

Now Determination EE002B provides a further extension to the original version, the Commissioner’s policy able to be used for any payments made to employees through until 30th September 2021.

The original requirements of Determination EE002 remain unchanged, being:

  • an employer must make a payment to an employee
  • the payment must be for expenditure or a loss incurred (or likely to be incurred) by the employee
  • the expenditure or loss must be incurred by the employee in deriving their employment income and not be private or capital in nature (the capital limitation does not apply to an amount of depreciation loss)
  • the payment must be made because the employee is doing their job and the employee must be deriving employment income from performing their job, and
  • the expenditure or loss must be necessary in the performance of the employee’s job.

Excluded from the determination are:

  • expenditure on account of an employee
  • any payments made for a period after an employee ceases to work from home
  • all amounts paid under a salary sacrifice arrangement, and
  • payments made to an employee to compensate the employee for the conditions of their service.

As always with most IR guidance documents, you are entitled to completely ignore the Determinations, and instead in this case to use the provisions of section CW 17 to pay employees what you consider are fair and reasonable amounts tax free.

Resurgence support payment

Hot on the heels of the latest mini lockdown for Auckland, the Government has passed under urgency the Taxation (Covid-19 Resurgence Support Payments and Other Matters) Act 2021, which provides for a new resurgence support payment for any business affected by a resurgence of Covid-19.

The RSP as it will be known, kicks in when there is a move to Level Two or higher anywhere in New Zealand, and where that higher level remains in place for seven days or more. Businesses who have experienced a reduction in revenue over a seven-day period of at least 30% compared to the typical weekly earnings in the six-week period preceding the change in alert levels, will be entitled to apply for the RSP (seasonal businesses must show a 30% revenue drop compared with a similar week the previous year). A business located anywhere in New Zealand who meets the qualifying criteria will be able to apply (so the RSP is not regionally based), and businesses will be able to apply each time there is an alert level change from Level One to a higher level, and the higher level lasts more than seven days.

Pre-revenue businesses who have experienced at least a 30% reduction in their capital raising abilities over a seven-day period post an alert level increase, may also apply for the RSP.

Businesses with more than 50 employees will also be eligible to apply for the RSP however any claim will be capped at 50 employees.

The RSP is calculated as the lesser of:

  • $1,500 plus $400 per FTE employee up to 50 employee max; or,
  • 4x the actual revenue drop experienced by the applicant.

The RSP is not subject to income tax, which naturally has the consequence that any expenditure funded by the RSP will be non-deductible. GST will however apply to the payments, which equally means GST input tax remains claimable on RSP funded expenditure.

Applications for the RSP will be able to be made from 23rd February, and an application period will close one month post the date of return to Level One. IR will manage the RSP regime, targeting to have the payments released to the applicant’s bank account within five working days. Tax agents with the requisite authority will be able to apply on behalf of clients.

And a final note, the RSP is an additional Covid-19 support package announced by the Government, with existing support packages such as the Small Business Cashflow Scheme and the Leave Support Scheme remaining available to businesses as well.   

TRA case confirms IR’s ‘one project’ approach

A recent decision of the TRA confirmed IR’s ‘one project’ approach when considering work undertaken by the taxpayer on a property that they owned.

For those of you lucky enough to have read IR’s 2012 R&M interpretation statement IS 12/03, you will be well aware of IR’s view on this particular issue. How many of you have experienced a client coming to you in respect of work they are undertaking on an asset, questioning whether they can break the expenditure incurred down into separate categories of R&M (revenue) and improvements (capital).

While the question from your client may appear to be quite reasonable, paragraph 22 of the aforementioned IS and further from paragraph 185, along with this latest TRA decision, confirms that repairs and maintenance work that forms part of one overall project to reconstruct, replace or renew an asset, or substantially the whole of an asset, or to change that asset’s character will likely take its nature from that project. This is regardless of whether that project concerns work done on a single asset or a group of assets. Consequently where the overall project is considered to be of a capital nature, then the entirety of the expenditure involved will be tainted with the capital flavour brush and therefore be non-deductible.

Taxation Review Authority, [2020] NZTRA 2, 3 December 2020 is the case reference, and not only did the Court confirm the ‘one project’ approach, but the judge also felt that this was not a case where reasonable minds could have differed in the interpretation of the expenditure and consequently upheld IR’s shortfall penalty imposition for an unacceptable tax position as well.

Covid-19 resurgence support payments scheme now in force

Very topical at the moment considering most of us in Auckland are probably hunkered down in the home office again this morning, the Covid-19 Resurgence Support Payments Scheme (February 2021) Order 2021 (LI 2021/12) (the Order) came into force on 23 February 2021 and activates the Covid-19 resurgence support payments scheme (the CRSP scheme).

With the increase in alert levels announced on Saturday night being for a seven-day period from the outset, eligible businesses (nationwide) can make a CRSP application. To ascertain an entitlement to claim, businesses will of course need to wait the full seven days, to determine whether as a result in the alert level change, they experience at least a 30% reduction in their revenues over that seven day period, compared to their typical weekly revenues in a six week period pre the alert level shift.

It should be noted in this regard, that the size of the revenue decrease declared on the CRSP application will also determine the level of the grant, as the payment entitlement will be calculated based on the lower of four times the revenue decline, or $1,500 plus $400 per FTE.

Following announcement of the CRSP package, IR on the 23rd February released a Special Report, which you can locate here – click to read.

Finally, the wage subsidy scheme will also be available to affected businesses due to the seven-day period of the latest alert level change. Further details regarding this are proposed to be on Work & Income’s website which had not yet been updated at the time of writing this article.

Reportable jurisdictions list updated

For those of you who are not aware, as part of implementing the Common Reporting Standard (CRS) for Automatic Exchange of Financial Account Information in Tax Matters (commonly referred to as AEOI), NZ is required to publish a list of territories (reportable jurisdictions) to which IR may provide certain information about non-residents it has obtained from NZ financial institutions.

Our list of reportable jurisdictions was updated on 22 February 2021, adding New Caledonia to the existing list of 96 reportable jurisdictions. New Caledonia is now a reportable jurisdiction for reporting periods beginning on or after 1 April 2020.

Loss continuity rules to change

Well, it has taken almost a year since the suggestion was first made (admittedly there have been some distractions) however, the proposed changes to the loss continuity rules, which will see the introduction of a ‘same or similar business’ test, are about to be legislated.

You will all be aware, that the present rules require a shareholding continuity test of 49% to be satisfied for a company to retain its accumulated tax losses and carry them forward to the following income year. So, to put it in plain English speak, 49% of those who owned the company in the income year that the loss was made, still have to be around in the income year that the company wishes to claim that loss against profits now derived – the continuity period. Breach the continuity rules (which has been known to occur when your client does things without talking to you first!) and the losses are forfeited – plain and simple.

For as long as I can remember, our cousins to the west of us, have used a ‘same or similar business’ test to determine a company’s ability to carry forward losses to subsequent income years. Our powers that we had been considering for a little while already as to whether we should adopt a similar approach, and certainly the arrival of Covid on our shores early in 2020 provided the necessary motivation to progress any proposed change with more urgency.

Consequently, in April 2020, recognising the risk to corporate taxpayers that the pandemic may have, with the need for companies to be able to source new capital urgently and that such share restructuring may result in loss forfeiture as continuity thresholds were breached in order to ensure the survival of the entity, the Government announced that the continuity rules would be changed and that the amendments would be in place in respect of the 2020/21 income year.

As they say, there’s nothing like leaving things to the last minute, however legislation will be introduced in a supplementary order paper to the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Bill, which itself was just reported back to Parliament last week.

So under the new rules, provided the underlying business of the company continues post the shareholding change, the ability to continue to carry forward accumulated tax losses will be unaffected. Naturally I am sure that once the legislation is in place, we will see some narrative from the Revenue as to the meaning of the term ‘same or similar’, however in the first instance you can obtain some guidance from the Q&A fact sheet that was released in conjunction with the Minister’s statement.

Note that the existing 49% continuity rule will not be replaced by the new business continuity test (BCT as it will be known), instead the two rules will work in tandem, in practice the BCT not requiring further consideration unless the company has clearly progressed an ownership change of more than 49%.

Also some take-outs from the fact sheet (its only three pages so you can probably spare the time to read it yourself):

  • No similar change proposed to the group loss-offset rules (so still based on 66% shareholding commonality)
  • No change to the imputation credit shareholder continuity requirements
  • BCT must be maintained until end of income year 5 years post breach in shareholding continuity
  • Only losses incurred from 2013-14 year onwards will be able to be carried forward under the BCT

Finally, no word yet (that I’ve seen at least) on the loss carry-back rules and the plan to make this regime more permanent, however I guess they do have more time to play around on this issue. 

Foreign trust remedials feedback sought

Tax Policy is requesting your feedback in relation to some remedial work is it proposing in respect of the foreign trust disclosure rules which were enacted in the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act 2017.

Since the enactment, a number a legislative errors or unintended consequences have been discovered, including:

  • The definition of ‘foreign trust’ is not aligned with the requirements for the foreign-sourced income exemption in ss CW 54 and HC 26 of the Income Tax Act 2007
  • A power to deregister trusts does not exist
  • The term ‘in the business of providing trustee services’ is not defined and may be confusing
  • Certain information may not be required for new settlors of, or beneficiaries with fixed or final interests in, a foreign trust
  • There is no requirement to update annual return information when it changes
  • Testamentary trusts do not have trust deeds and cannot qualify for the foreign-sourced income exemption in s CW 54
  • The foreign trust disclosure rules in the TAA are not included in the Income Tax Act definition of ‘trust rules’
  • The Commissioner has no discretion to allow the foreign-sourced income exemption where the foreign trust was not registered at the relevant time
  • The penalties have not been updated to reflect the 2017 requirements and are not fit for purpose
  • References to a minor beneficiary’s age should instead refer to their date of birth

Again it is a relatively brief document (eight pages) if you would like a better understanding behind the anomalies identified, and if you would like to have your say, the deadline from comment is 23rd March 2021.

Child support amendment Bill finally reported back

It’s been a long time coming, first introduced to Parliament on 11th March 2020, however the proposed legislation has gained traction again, being reported back on 4th March.

The Bill is aimed at reducing complexity, improving fairness, increasing compliance with the Child Support Act 1991, and improving IR’s administration of the scheme. Facilitating the changes is arguably the move of child support to IR’s new systems and processes as part of IR’s Business Transformation programme – certainly time will tell in this respect.

The main proposals contained in the Bill are:

  • Simplifying the penalty rules
  • Introducing automatic deductions of financial support from source deduction payments made by employers to newly liable parents
  • Introducing a time bar of four years on reassessments of child support for past years
  • Including interest and dividends in child support assessments for salary and wage earners, and moving from taxable income to net income which will prevent carried forward tax losses lowering income for child support purposes
  • Making technical amendments to assist with the administration of the scheme

Income Tax Bill reported back

Last week also saw the Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill (273-2) being reported back to Parliament by the Finance and Expenditure Committee.

The Bill has as its primary focus the topics of:

  • Feasibility expenditure
  • Land
  • Purchase price allocation
  • Unclaimed monies
  • Other policy changes
  • Remedial measures
  • Miscellaneous matters

No doubt once the legislation is passed, we will see some sort of special report issued by the Revenue, however since a lot of water has passed under the bridge since it was first introduced in June last year, just a brief narrative as a reminder to you all of some of the changes which will be introduced.

The feasibility expenditure changes are all targeted to removing potential ‘black hole’ type expenditure, where not all such expenditure is currently fully deductible (the Trustpower case certainly highlighted this point recently) and could therefore act as a disincentive for businesses to invest. Under the amendments, expenditure incurred in developing assets where no completed asset eventuates, will be able to be spread over a five-year period, unless the quantum involved is less than $10k, in which case an immediate deduction will be available.

For those of you who regularly deal with the land taxing provisions, you will appreciate that when it comes to relying on the residence exclusion, there is a carve-out where a person has a regular pattern of buying and selling land (‘regular pattern restriction’). Up until now however, the scope of the carve-out was relatively narrow, to the extent it could be avoided by using either a different owner or what was done to the land argument, which then broke the ‘pattern’ element. The amendments will certainly widen the carve-out, to include ‘groups of persons’, who have ‘significant involvement’ with each other.

Finally, with respect to sales of commercial property, businesses, and other bundles of assets entered into on or after 1 April 2021, new purchase allocation rules will apply. The purpose of the proposal is to require a buyer and seller to make the same allocation of the total purchase price to the different assets (or classes of assets) sold. For example, in a purchase of commercial property, the proposal requires that the seller and buyer allocate the same amount to the land, the building, and the fit-out. The proposal requires parties who agree an allocation between themselves to follow that allocation in their respective tax returns. If they do not agree, the vendor may notify an allocation to the buyer and the Commissioner. The allocation binds both the vendor and the purchaser. If the vendor does not make an allocation within two months of the transaction, the purchaser can notify an allocation, which binds both the purchaser and the vendor.   

Adverse event assistance

For those of you with farming, growers or orchardist clients in the South Island who may have been financially affected by December’s hail storms, IR has released a reminder regarding the Income Equalisation Scheme (IES) discretions.

The IES regime provides an opportunity for those affected by an adverse weather event, to self-assess the impact of the adverse event, and then make application to use the IES discretions, which can provide for the early release of refunds.

IR advises that they will look favourably on such self-assessment applications although naturally they may still seek to clarify aspects of an individual applicants circumstances.

Income tax return acknowledgement

Based on taxpayer feedback, IR will now be issuing a Return acknowledgement notice, in circumstances where the tax return filed has been accepted without changes being made by IR. The new acknowledgement will in e­ssence be confirmation of receipt of the tax return (without change) and will be sent to tax agents where a redirect is in place, and/or will be available in myIR in the ‘all client mail report’.

A notice of assessment as opposed to a return acknowledgement will continue to be issued for those tax returns filed, where IR does amended the filed figures.

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