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Richard’s June-July 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.
- Depreciation on commercial buildings, 28 June
- GST and debt factoring, 28 June
- Cryptoasset QWBA’s finalised, 28 June
- Purchase price allocation rules, 5 July
- R&D tax incentive due date extensions, 5 July
- Covid-19 deductions IS finalised, 5 July
- Non-cash dividends IS finalised, 13 July
- Self-employed meal expenses IS finalised, 13 July
Depreciation on commercial buildings
With last week’s A Week in Review solely focussed on residential accommodation (interest limitation proposals), let’s begin this week’s AWIR looking in the other direction – accommodation more of the commercial type – hotel, motel or boarding houses – and apportioning expenditure when the operator of the accommodation also lives on site.
The passing of the Covid-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 (the Amendment Act) re-introduced the entitlement for owners of commercial buildings to claim depreciation on the building itself.
Apparently, however, there has been some confusion as to the effective date of the legislative change, and in case you were not quite sure, IR’s release of the four page QB 21/05 titled ‘The application date for the depreciation of commercial buildings’, will now leave you in no doubt as to whether the date you can commence claiming deprecation on commercial buildings is 1st April 2020 or the beginning of the 2020-2021 income year.
Clearly if all your client’s have standard 31st March balance dates, then you can save yourself that one non-chargeable unit of time and move on to something more productive. However, if your clients are non-standard, then all you need to know is that the relevant date is the first day of their 2021 income year – so a December balance date and the new rule is effective 1st January 2020.
GST and debt factoring
IR has released Public Ruling BR Pub 21/03 – Debt factoring arrangements, which in essence addresses the question of whether or not you can claim a GST input tax deduction for the difference between the face value of the debt and amount you receive from the Factor. For example, you made a taxable supply for $100 and you have sold the debt now owing to a Factor for $80 – can you claim GST input tax on the $20 difference?
Historically it was argued that the $20 could be claimed under the bad debt provisions contained in s.26 of the GSTA, and the Revenue accepted this positon in both a PIB and its technical rulings. However this position was overturned by good old Judge Barber, who concluded that s.26 could not be used to claim GST input tax deductions in these scenarios, because there was not a bad debt at the time the debt was sold to the Factor.
Factors can operate on both a recourse and a non-recourse basis. With the latter, once the debt is sold to the Factor, they cannot then come back to you with their hands out, should it later transpire to them that the debt is doubtful or uncollectable. With the former however, the Factor will often pass the debt back to you, take some money back, and then leave you to chase your customer for payment.
So, in the non-recourse scenario, it is unlikely you will ever obtain a bad debt deduction under s.26, unless you can show that the debt was ‘bad’ (which is a separate topic in itself) and had been written off in full prior to sale to the Factor (perhaps to a Factor who acquires bad debts as part of its business model). In this situation, you would claim the full amount of the debt as an input tax deduction under s.26, but then return output tax with respect to any amount received from the Factor.
In the recourse scenario, again likely to be no claim under s.26 at the time the debt is sold to the Factor (because it is not ‘bad’ at that point), however a claim under s.26 could subsequently arise, if the Factor passes a doubtful/uncollectable debt back to you, and you eventually end up writing it off as bad.
Finally, just a trap for the unwary – for payments basis registered persons who sell the debt to a Factor (and are yet to have accounted for any output tax on the supply since no payments have been received), while most will appreciate the need to account for output tax on the payment received from the Factor, be mindful also of s.26A, which also requires GST output tax to be paid on the remaining book value of the debt when the debt is factored – i.e. the $20 difference in my above example.
The Income Tax (Deemed Rate of Return on Attributing Interests in Foreign Investment Funds, 2020–21 Income Year) Order 2021 (LI 2021/154) has been notified in the New Zealand Gazette.
The Order sets, for the 2020–21 income year, the deemed rate of return used to calculate FIF income under the deemed rate of return calculation method set out in section EX 55 ITA07. The Order comes into force on 18 June 2021.
The Order sets the deemed rate of return for the 2020–21 income year at 4.43%. The deemed rate of return set for the 2019–20 income year was 5.05%.
The deemed rate of return method is the backup method to the comparative value method which is applicable when there is insufficient market value information about the FIF – usually in relation to non-ordinary shares.
Cryptoasset QWBA’s finalised
In a previous AWIR, I have mentioned IR’s QB 21/06 and QB 21/07, which respectively addresses the tax treatment of cryptoassets received from airdrops and hard forks. Both of these QB’s have now been finalised.
The initial receipt of airdrops (QB 21/06) is likely to be taxable where the person has a cryptoasset business, has acquired the cryptoassets as part of a profit-making undertaking or scheme, has provided services to receive the airdrop (and the cryptoassets are payment for the services provided) or they receive airdrops regularly and the receipt has hallmarks of income. Not falling into one of these boxes means that your receipt is unlikely to be taxable. Further, a subsequent disposal of the cryptoasset is likely to be taxable where either you fell into one of the first three aforementioned boxes, or you acquired the cryptoassets with a purpose or intent of disposal.
Moving on to hard forks (QB 21/07) now, the initial receipt likely to be taxable where the person has a cryptoasset business or acquired the cryptoassets as part of a profit-making undertaking or scheme, with the subsequent disposal likely to be taxable where the person has a cryptoasset business, disposed of the cryptoassets as part of a profit-making undertaking or scheme, acquired the cryptoassets for their disposal or acquired the original cryptoassets for the purpose of disposing of them (where the person receives the new cryptoassets through an exchange). IR suggests in both QB’s that subsequent disposals are likely to be taxable, so I would suggest it is prudent to use this as your starting position and then investigate what’s different in your scenario which could lead to an alternative conclusion
Purchase price allocation rules
Well the G7 have agreed to it, in an attempt to ensure the largest multinational tech giants will pay their fair share of tax in the countries in which they operate. The proposal is to make companies pay more tax in the countries where they are selling their products or services, rather than wherever they end up declaring their profits – presently in countries with relatively lower corporate tax rates where the MNE just happens to have established a local branch.
Just a reminder that the new purchase price allocation rules came into effect from July 1st 2021. Under the rules, the purchaser and the vendor have to use the same price allocation in their respective tax filing positions, and there is a set process to follow, which determines how the price allocation will be fixed.
The following classes of property require an allocation of a portion of the purchase price (where more than one type of property class is included in the transaction):
- trading stock other than timber or a right to take timber;
- timber or a right to take timber;
- depreciable property, other than buildings;
- buildings that are depreciable property;
- financial arrangements; and,
- purchased property for which the disposal does not give rise to assessable income for person A (the vendor) or deductions for person B (the purchaser).
The first rung of the price allocation ladder is for the parties themselves to agree and document prior to the first tax return in relation to the transaction being filed, the appropriate allocations. Both parties must then file according to the agreed allocation.
The second rung of the ladder is for the vendor to make a unilateral allocation within three months of the change of ownership of the property, and to notify such allocation to the purchaser and IR. Such unilateral allocation is then binding on both parties.
The third rung of the ladder is for the purchaser to make a unilateral allocation if the vendor fails to do so within the first three months, within the following three months (so by no later than six months post the change of ownership of the property), and to notify such allocation to the vendor and IR. Once again, this unilateral allocation is binding on both parties.
The final rung of the process ladder if no purchase price allocation is made within 6 months of the change of ownership of the property, is for IR to make the allocation and until this occurs, the purchaser is not entitled to claim any deductions in relation to the purchased property.
Unilateral allocations do not need to be made however, where either the total consideration for the purchased property is less than $1m, or where the only purchased property is residential land (including residential buildings) together with chattels, with a total purchase consideration of less than $7.5m.
IR can also challenge allocations, however, not where there is an allocation to an item of depreciable property with an original cost less than $10,000, the total amount allocated to the item and any identical items is less than $1 million, and the amount allocated to the item is no less than its tax book value and no greater than its original cost.
R&D tax incentive due date extensions
The Minister of Revenue has agreed to extend due dates for year one (2019–20 income year) and year two (2020–21 income year) R&D tax incentives, to give businesses more time to consider how the R&D tax incentive eligibility criteria applies to their activities and to make an application.
The due date extension to 31 August 2021 will be included in the next tax Bill for:
- year one (2019–20 income year) supplementary returns, and
- year two (2020–21 income year) general approvals and criteria and methodologies (CAM) approvals.
Covid-19 deductions IS finalised
IR has finalised IS 21/04 ‘Income tax and GST deductions for businesses disrupted by the Covid-19 pandemic’.
The IS concludes that for income tax purposes, provided that the general permission is still satisfied and none of the general limitations apply, a business that has either downscaled or ceased operating temporarily will still be able to claim its deductions, whereas this will not be the case where the business has ceased completely, even if there is a possibility that the business may restart again at some point in the future.
The same considerations apply in a GST context, with a taxpayer who is determined to have ceased their taxable activity likely to be required to deregister from GST, which can of course trigger output taxes payable in relation to assets held by the taxpayer at the date of cessation.
There are numerous examples in the IS to assist in explaining IR’s position.
Non-cash dividends IS finalised
IR has now released its final version of IS 21/05 titled ‘non-cash dividends’.
The statement considers when a transfer of company value from a company to a shareholder is treated as a dividend for tax purposes. It focuses on the types of non-cash transactions that are often entered into between small and medium-sized companies and their shareholders.
A good starting point I find is useful, which is reinforced in the statement, is to ask yourself in scenarios where there has been a transfer of value from the company to a person – what is the reason for the transfer, and in this respect, how are the company and the person connected?
Where the transfer of value is caused by an employment relationship, the transfer will usually be taxed either as employment income, or as a fringe benefit, and usually not as a dividend. However, in some cases where the non-cash benefit is provided to an employee who is also a shareholder, FBT rules either require that the benefit be treated as a dividend and not as a fringe benefit, or allow the company to choose whether to treat the benefit as a fringe benefit or a dividend.
IS 21/05 is focussed on those scenarios where the transfer of value is not caused by an employment relationship, or the fringe benefit rules allow the company to choose, or require the company to treat the transfer as a dividend.
The commentary commences with a discussion on section CD 4, which considers transfers of company value generally – a dividend is a transfer of company value from a company to a person, if the cause of the transfer is a shareholding in the company; and none of the exclusions in subpart CD apply.
Next there is a discussion on section CD 5, which provides more clarification on the meaning of the term ‘transfer of company value’ (with a number of simple examples), which then leads into a discussion on section CD 6 (with more simple examples), of whether the transfer of value would be seen to have been caused by a shareholding relationship with the company – remembering that the recipient of the value transfer does not actually have to be a shareholder in the company. A couple of pages of IS 21/05 are then dedicated to some specific transactions that would be treated as dividends and some that would not, before then moving on to commentary surrounding how to calculate the value of the benefit – the general formula provided under section CD 38 in this regard, being value from company minus value from person.
Now from a timing perspective, it is important to note that in most cases a dividend will be treated as having been paid on the date the transfer of value arises, with the exception being where the dividend relates to a scenario where the company has made property available to a person – the timing of the dividend deemed to have been paid six months after the end of the company’s income year, unless the company gives the shareholder earlier notice of the amount of the dividend.
In relation to the dividend timing, commentary is also provided in IS 21/05 regarding the potential negative impact on the company’s imputation credit account, where it is discovered in hindsight that a non-cash dividend has arisen, and fully imputed dividends have been paid by the company post that deemed date of payment. This is due to the application of the benchmark dividend rules, which will apply where a company pays more than one dividend during any tax year (including a non-cash dividend). Under those rules the first dividend of the year is the benchmark dividend, and the imputation ratio of all dividends paid during the year must match the benchmark dividend. This means that if an unimputed non-cash dividend is the first dividend paid in a tax year, no other dividends paid in that year can be imputed.
The negative imputation credit account impact is due to the benchmark dividend rules requiring that any dividend paid after the benchmark dividend that is not imputed at the same rate as the benchmark dividend (including a non-cash dividend), will result in a debit to the imputation credit account. This will occur despite no imputation credits having been attached to the dividend. Now the debiting of the ICA can be avoided by filing a ratio change declaration to IR, however to be effective, this needs to be done prior to the payment of the subsequent fully imputed dividends – often of no assistance therefore to non-cash dividends discovered at a later date.
The statement commentary concludes with some paragraphs on employment income, fringe benefits, LTC’s and qualifying companies.
As a final note on IS 21/05, it does only cover the basics of non-cash dividends in its 23 pages, so don’t expect any answers to any complex scenarios you may have in front of you, nor any commentary surrounding your administrative obligations – disclosures, requirements to provide dividend statements, withholding tax obligations etc
Self-employed meal expenses IS finalised
IR has also released its finalised version of IS 21/06, titled ‘Income tax and GST – treatment of meal expenses’.
The main focus of the IS is the deductibility of meal expenses by a self-employed taxpayer, with IR recognising that there is a distinct difference in the deductibility rules between self-employed taxpayers who trade on their own account versus those who decide to incorporate and trade via the company form, and employees.
In this regard, IR concludes that most self-employed taxpayers will have neither an income tax deduction nor a GST input tax credit entitlement in relation to the cost of meals they incur during their work activities. The only exceptions may be where the person can show that they incurred ‘extra meal costs’ – those in excess of the usual cost to feed themselves (which is considered being of a private or domestic nature, therefore subject to the private limitation), due to being at a remote working location or unusual working hours.
The first 15 pages of the commentary (out of a 36 page total) is in essence a regurgitation of the case law on the subject – it could be considered interesting if you have the time to read – otherwise do not pass go and head immediately to page 15 for the summary conclusion.
Post that conclusion, there is then some useful narrative on the payment of allowances to employees and the application of a number of section CW 17 provisions to these types of payments. There is then a brief discussion on closely held companies, before the commentary moves to the entertainment regime and the potential application of section DD 1.
GST is up for discussion next – basically just follow your income tax determination – if the expenditure is considered of a private and domestic nature, then you’re not exactly going to be entitled to a GST input tax claim now are you.
Finally, there are seven pages of examples, by the end of which, hopefully all of your questions on the topic will have been answered. Happy reading!
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