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Richard’s May-June 2021 tax updates
Richard has had over 30 years’ experience with New Zealand and International taxation. His team provide services including:
- Q&A service for accountants
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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.
- Limited partnership an ‘overseas person’?, 31 May
- 2021 square metre rate adjustment, 31 May
- Specified livestock NAMV, 31 May
- Registering for GST under section 54B, 8 June
- GST – resident definition, 8 June
- Finally it’s arrived!, 14 June
- Commercial accommodation expense apportionment, 14 June
- FIF deemed rate of return for 2021, 14 June
- Tax Counsel Office work programme, 14 June
- 15% global minimum corporate tax rate?, 14 June
Limited partnership an ‘overseas person’?
The Overseas Investment Amendment Act 2021 (No 17 of 2021) received the Royal assent on 24 May 2021. It is the second of two omnibus bills introduced in 2020 to amend the Overseas Investment Act 2005. The bills have come from the Government’s Phase Two Reform of the Overseas Investment Act. They aim to ensure that risks posed by foreign investment can be managed effectively, including heightened risks during the ongoing economic fallout from Covid-19. They also aim to ensure that high quality, productive investment could more easily proceed.
From a taxation perspective, the new legislation makes an amendment to the definition of ‘offshore person’ in s 3(1) of the Tax Administration Act 1994, due to concerns that the Overseas Investment Act did not address whether limited partnerships were covered by the definition of an overseas person. This lack of clarity was causing significant uncertainty about whether limited partnerships were partnerships for the purposes of the Act, which in turn could result in non-compliance with the Act, because an overseas person may not be aware they were covered by the relevant definitions.
The amendment stipulates that a limited partnership would be an overseas person if it is an overseas limited partnership within the meaning set out in section 4 of the Limited Partnerships Act 2008. Additionally, the amendment stipulates that any other limited partnership registered under that same Act would be considered an overseas person where:
- a general partner of the limited partnership is an overseas person
- more than 25 percent of the persons having the right to control the composition of the governing body of the limited partnership are overseas persons
- more than 25 percent of the partnership interest is held by an overseas person; or,
- an overseas person can control more than 25 percent of the voting at a meeting of the partners of the limited partnership.
2021 square metre rate adjustment
You may recall that the passing of the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act 2017 saw the introduction of new section DB 18AA into the Income Tax Act 2007, which provided taxpayers with a more simplified method for the calculation of deductions for premises that are used for both business and personal purposes.
Undoubtedly, all of us have clients who use their private residence for both business and private purposes. This business use may give rise to deductions that can be claimed by the business owner, however we all appreciate the associated compliance cost burden of having to tally up all the numerous individual expense items that need to be recorded and apportioned between business and personal use, when considering the amount of tax at stake.
In this regard, the square metre rate option provided a simplified process, setting a fixed utility cost rate per metre (electricity, gas, home and contents insurance, telephone, mobile and internet charges), to which your client only needed to then calculate and add their premise costs (mortgage interest, rates, and rent). The square metre rate is set by using information obtained from Statistics NZ, which IR then uses to calculate the national average, annual cost of utilities for the average sized New Zealand household.
IR has advised that the square metre rate for the 2021 income year (1 April 2020 to 31 March 2021) is set at $44.75. You can find more information on the use of the square metre rate option, by referring to Operational statement OS 19/03, ‘Square metre rate for the dual use of premises’.
Specified livestock NAMV
If you are in this space, then you are likely to be interested that IR has just published the ‘National Average Market Values of Specified Livestock Determination 2021’. The determination is made in terms of section EC 15 of the Income Tax Act 2007 and applies to specified livestock on hand at the end of the 2020–21 income year.
The national average values are used by taxpayers that are in the business of livestock farming to value their livestock on hand, where the taxpayer has elected to use the herd scheme to value livestock in the income year. You can search IR’s website for ‘National Average Market Values of Specified Livestock Determination 2021’ to ascertain all the juicy bits.
Registering for GST under section 54B
This week’s AWIR is dedicated solely to GST, as well as two interpretation statements, one finalised and one released in draft form, the latter of which covers a critical element of the former. The finalised interpretation statement is IS 21/03 GST – Registration of non-residents under section 54B.
Section 54B was introduced in 2013, as a mechanism to remove the economic cost for non-resident businesses who were acquiring goods and/or services in New Zealand, for the purpose of making supplies outside of New Zealand. While the non-resident business could potentially register for New Zealand GST under section 51 (standard registration), the ability to recover the GST input tax incurred was limited, because the legislation only allows a deduction for input tax for goods or services to the extent that those goods or services are used for, or available for use, in making taxable supplies – being supplies made in New Zealand.
IR’s basis for releasing IS 21/03, is due to an awareness that the eligibility criteria to register under section 54B is not well understood.
To assist in this regard, IR suggests there are seven components to the section 54B criteria that you need to walk-through (although increased to nine components depending on the answers to a couple of the components):
- The person must be a non-resident for GST purposes,
- The person is not liable to be registered under section 51,
- The person is registered for a consumption tax in the country or territory in which they are resident, or the level of their taxable activity would require them to register in New Zealand if they were carrying on that activity in New Zealand,
- The amount of the person’s input tax exceeds $500, or the person is likely to be liable for tax levied under section 12(1) in relation to imported goods received by another person or that are to be delivered to another person,
- The person’s taxable activity does not involve the performance of services where those services will be received by an end-user in New Zealand,
- The person is not making or intending to make taxable supplies in New Zealand, or the person is not making supplies to an unregistered person that would be taxable supplies if the supplier was registered; and,
- The person is not a member, or intending to become a member, of a group of companies that make supplies in New Zealand.
IS 21/03 works its way through each of the components, although with not a lot of detailed analysis I would suggest, often referring to other IR publications you will then have to track down, and with some fairly basic examples. There are a few flowcharts throughout the document which may certainly assist in at least pointing you in the right direction to obtain the right answer for your client.
My take-outs for you:
- Understand the ‘person is not liable to be registered under section 51’ component, which in the first instance suggests if your clients New Zealand supplies are less than the $60,000 compulsory registration threshold, then they could utilise section 54B, with the ‘person is not making supplies to an unregistered person that would be taxable supplies if the supplier were registered’ component, which will act to negate such utilisation. So here your client would instead need to voluntarily register under section 51 and charge GST on the supplies to the unregistered persons to recover their New Zealand GST input tax costs.
- Be wary of the New Zealand Customs GST issue. If your client is importing the goods into New Zealand for delivery to another person, and incurring the GST charged by New Zealand Customs accordingly, there are deeming rules which state that it is the recipient of the imported goods that has incurred the Customs GST and not your client for the purpose of section 54B. Consequently, your client would need to register under section 51 instead and then have an agreement with the New Zealand GST registered customer that the supply of the goods and services will still be deemed to be made in New Zealand – subject to New Zealand GST.
- Ensure you understand the exact contractual arrangements entered into and identify exactly what is being supplied. Who is making the supply and who is receiving the supply is required to determine where a supply is treated as being made. For example, your non-resident client could be making a supply to another non-resident client, but the goods relating to that supply could be in New Zealand, or services performed in relation to that supply could be supplied by another person who is in New Zealand, at the time of supply, thereby deeming the supply to actually have been made in New Zealand, which could instead trigger a requirement of your client to register under section 51.
GST – resident definition
The GST draft interpretation statement which has been released by IR, and one that now ties in very nicely with the first component of IS 21/03, is PUB00390 – GST – Definition of a resident.
The key take-out of this article, is gaining an appreciation (if you do not already have it) that the definition of a resident for GST purposes, is not the same as the income tax residency definition. In this regard, there are three distinct differences.
In the GST definition of ‘resident’:
- It is extended to include a person who has a ‘fixed or permanent’ place in New Zealand, where that place is related to a taxable activity carried on by the person in New Zealand,
- For unincorporated bodies, it provides for a residence test based on its centre of administrative management; and,
- For individuals, the definition differs for the commencement and end dates of residency when applying the day-count test.
The definition of ‘resident’ for GST purposes is essential to understand, when you appreciate that the legislation then deems all supplies made by a resident to ‘be made in New Zealand’, and equally all supplies made by a non-resident to ‘be made outside of New Zealand’.
For a non-resident client, the starting position of all supplies ‘being made outside of New Zealand’, then has a number of subsequent legislative provisions which may ultimately change that starting position, to a scenario where the supply is deemed to ‘be made in New Zealand’ – with the obvious potential consequences for your client. Akin to the previously discussed IS, this one also steps its way through each of the three bulleted items.
In relation to the first difference between the residency tests, note that ‘fixed or permanent’ place in New Zealand contains a ‘taxable activity’ or ‘other activity’ analysis requirement, also a ‘to the extent that’ phrase. So, you need to consider all activities being undertaken in New Zealand by your client, and it is possible for your client to be considered both ‘resident’ and ‘non-resident’ for GST purposes.
With respect to the unincorporated bodies definition, the ‘centre of administrative management’ test is a factual enquiry that focuses on where the day-to-day management of the unincorporated body is carried out. The Commissioner’s view is that this has a similar focus to the ‘centre of management’ test applied in s YD 2(1)(c) of the ITA 2007 when considering the residency of a company for income tax purposes.
Finally, under the individual’s day count test, it is simply that GST residency or non-residency applies from the 184th day or 326th day (as appropriate) – I would suggest for obvious reasons.
PUB00390 is a 19-page document, the final six pages containing examples to explain the commentary. Should you wish to have your say, the deadline for comment is 9th July 2021.
Finally it’s arrived!
I appreciate that many of you wouldn’t have slept much last night, waiting in eager anticipation for today’s AWIR and a succinct commentary on the Government’s recently released discussion document titled ‘Design of the interest limitation rule and additional bright-line rules’
Well, I’ve managed to read through the lengthy 144 pages, although I started to get a little bored during the anti-avoidance commentary and then how the Revenue were proposing to administer the rules (good luck!), so I may have to revisit those sections just to ensure I didn’t miss anything too important.
As the title suggests, the document not only discusses the proposed ‘interest limitation rules’, but it also provides commentary surrounding some proposed additional bright-line rules. Before I get into the nuts and bolts of the proposals, it would be useful for the reader I expect, to provide some definitions in advance:
Close company – company where five or fewer natural persons or trustees directly or indirectly hold more than 50 per cent of the company.
Residential investment property-rich companies – being a company where value of residential investment property divided by value of total assets, is greater than 50%.
‘Tracing’ approach – the value of the borrowed funds are traced to the value of any asset acquired using those funds or, if the funds have been applied to an expense, the cost of that expense.
New build – includes ‘simple new build’ (adding a dwelling to bare land or replacing an existing dwelling with one or more dwellings), ‘complex new build’ (adding a standalone dwelling; attaching a new dwelling to an existing dwelling; or splitting an existing dwelling into multiple dwellings) commercial to residential conversions.
Early owners – a person who acquires a new build off the plans (before a CCC is issued for the new build); acquires an already constructed new build no later than 12 months after the new build’s CCC is issued; adds a new build to bare land; or adds a complex new build to land; or completes a commercial-residential conversion.
Subsequent purchasers – generally be defined as a person who acquires a new build more than 12 months after a CCC for the new build is issued.
‘Continued investment rule’ – the requirement for a new build to only be used for investment income purposes (not owner-occupied) in order to retain its new build status.
Ok, so with an understanding of those terms now on board, let’s consider the proposed interest limitation rules first.
As a guiding principle, I suggest it is helpful to acknowledge the Government’s reference to ‘in-scope residential property’, which includes property in use as long-term residential accommodation, or property that is easily substitutable for long-term residential accommodation. At the simplest level, it should include a house or apartment, regardless of whether it is used to provide long-term or short-stay accommodation, and a key question should be whether the property is of a type that would normally be available for owner-occupiers. If your property fits within the ‘in-scope residential property’ category, then you are certainly in the firing line for the Government’s interest limitation proposals.
Lesson number one: The new rules will apply from 1st October 2021. Pre 27th March 2021 borrowings will be subject to a phase out, reductions commencing October 1st, with no further deductions from 1 April 2025, while 27th March and subsequent borrowings will be non-deductible from October 1st.
Lesson number two: Overseas properties are excluded from the limitation rules. So the interest you are paying on your London apartment remains fully deductible post October 1st.
Lesson number three: If you are renting out a room of your home (not including a separate dwelling on your home title) to a flatmate, border, or Airbnb, your interest deduction entitlement is not affected by the new limitation rules.
When it comes to interest deductions for a company, most of you are probably aware of section DB 7 of the ITA07, which provides an automatic deduction for interest – in other words, tracing is not required to establish the requisite linking between borrowing and income production to generate a tax deduction. Under the proposals however, section DB 7 will be overridden in respect of residential investment properties owned by either close companies or residential investment property-rich companies. For these entities, tracing will now be required, and where the borrowings are traced to residential investment property purposes, the interest deduction limitations will apply.
Lesson number four: Companies that are neither close companies nor residential investment property-rich companies, are not affected by the new interest limitation rules.
Lesson number five: Where the close company/residential investment property-rich company is a developer, it is proposed that residential property under development should still be considered ‘residential investment property’ for purposes of the ‘residential investment property-rich’ threshold. However the company is likely to qualify for the ‘development exemption’ discussed below, and consequently only true rental properties it owns (unlikely but possible) would be subject to the interest limitations.
For non-company taxpayers, the interest tracing approach will be used, so if borrowings have been used for residential investment purposes, interest deductions on those borrowings will no longer be deductible (subject to exemptions such as for new builds and developers, and the phase out rules for pre 27th March borrowings). Borrowings for residential investment purposes include not just the borrowings to fund the purchase of a residential investment property, but also borrowings to fund expenses incurred in deriving rental income – rates, repairs & maintenance etc.
Lesson number six: There is a proposed exception for refinancing pre-27 March loans which apply to property held (or acquired) before 27 March 2021. When a residential rental property owner draws down a new loan to repay a pre-27 March loan, it is proposed that the treatment of interest on the existing loan will carry through to the new loan (therefore most likely subject to phase out). Naturally, any additional lending will be subject to the tracing approach.
The tracing approach does have potential difficulties for those who previously had no requirement to trace (so may not hold sufficient records) or who have facilities such as revolving credit or other variable loan types. The Government has outlined what it considers are workable solutions in this regard, including the potential use of a ‘high water mark’ rule, however your feedback has been requested as to whether there may be a better mechanism to achieve the desired outcome.
Lesson number seven: Foreign currency loans to finance a residential rental property in New Zealand are out from October 1st, regardless of whether the borrowing is pre or post 27th March – so no phase out for interest on foreign currency loans full stop. However, there will be a concession provided for where you convert that foreign loan into a NZD loan at any time post 27th March, the interest on the NZD loan becoming subject to phase out once in place.
Lesson number eight: Two main exclusions from the new limitation rules – the development exemption and the new build exemption.
The Government’s position is that the development exemption should be wide enough in scope to encompass development activity which may result in the construction of a new build. If a development meets the requirements of the exemption, the exemption will apply whether or not the person holds their property on revenue account (taxable on sale). The exemption will apply on a property basis, rather than on a taxpayer basis. The exemption is intended to cover land being developed by persons in the business of developing or dealing land or erecting buildings (captured under section CB 7 ITA07), and other developments which may not be covered under section CB 7 but contribute to the creation of a new build – one-off developments to sell or hold to rent.
The development exemption would apply while the property is being developed until the earlier of when the property is sold (settlement date) or until the CCC for a new build is issued. If the property is being held for rental or sale after the CCC is issued, the developer may qualify for the new build exemption from the time the CCC is issued until the property is sold.
The second exclusion is the new build exemption – interest that would have been deductible absent the interest limitation rule will continue to be deductible for debt relating to new builds. This includes interest on borrowings to acquire residential land that a new build is on, to construct a new build, or to fund other expenses relating to a new build such as maintenance, rates, or insurance.
Lesson number nine: If a new build receives its code compliance certificate (‘CCC’), indicating that a new dwelling has been added to the land, on or after 27 March 2021 then the new build exemption applies to an early owner (and potentially also subsequent purchasers). Note that there is also a new build exemption transitional rule, for certain new builds acquired on or after 27 March 2021 that received their CCCs before 27 March 2021. For these new builds, the new build exemption will apply to an early owner provided the new build is acquired on or after 27 March 2021 and no later than 12 months after it received its CCC.
The exemption would apply to early owners of new builds. However interestingly (and my first thought here is that the Government is simply resetting the playing field), the new build exemption is also proposed to extend to subsequent purchasers (note the proposed ‘continued investment rule’ however), and could last for 20 years.
Lesson number ten: Therefore, provided the property is never owner-occupied for its first 20 years (if that is confirmed as the final ‘new build’ qualifying period), any owner of the property during this timeframe would qualify for the new build exemption and all interest on their borrowings to acquire the property would remain fully deductible. Note that the subsequent purchasers rule is proposed to only apply for new builds that receive their CCCs on or after 27 March 2021.
Rounding out the discussion on the interest limitation rule proposals, although coming somewhat towards the end of the document (post the bright-line discussion), is commentary on interposed entity rules – akin to the rules that already exist in relation to the residential rental ring-fenced deduction provisions – anti-avoidance mechanisms to prevent taxpayers structuring their borrowings in a way that would avoid application of the interest limitations, because the borrowings are not taken out by the residential rental property owner directly. So for example, the taxpayer borrows monies to acquire shares in a company, the company then using those funds (now capital) to acquire the residential rental property. Naturally, it is proposed that the interest limitation rules also contain these anti-avoidance measure.
Now I have just attempted to summarise 92 pages of commentary into two pages, so clearly a lot of the niceties surrounding the proposals are not covered here, such as apportionment issues (land containing both a new build and existing dwellings), disposals (should all interest then be deductible if land sale taxed) and different types of residential property that may or may not be affected (e.g. employee accommodation, serviced apartments) etc. However, you’re welcome to send me an email (firstname.lastname@example.org) with any question or concern and I’ll respond with my comments accordingly.
Arguably the most exciting component of this discussion document for me, is the commentary on the proposed additional bright-line rules. I suspect it certainly will not be a surprise for most (because the Government had already announced it), to see included in the proposals the new build bright-line test.
Lesson number eleven: The new build bright-line test is proposed to apply to all or part of a piece of residential land that has a ‘new build’ on it, but only if the land is acquired on or after 27 March 2021. The rules will only apply to early owners of new builds, and will see the retention of a five-year bright-line test for the new build land, as opposed to the general ten-year bright-line test now in play.
A CCC for the new build must be issued by the time the land is sold by the early owner, for the new build bright-line test to apply. The new build bright-line test could potentially apply to all residential land that has a new build on it, regardless of what the land is used for, unless an exclusion applies (such as the main home exclusion). It does not matter whether a new build is rented out long-term, left vacant, used as a second home or holiday home, or is rented out as short-stay accommodation. The Government proposes that apportionment rules would apply for complex cases, which are when a dwelling is added to residential land that has an existing dwelling on the same title – so a proportion of the land may still be taxed under bright-line if sold within ten years.
Well now for the biggie… (from my perspective anyway)
Since bright-line was introduced in October 2015, many of us have grumbled, that unlike many of the other land taxing provisions where a timeframe is important (for example s.CB 12 – commencing the scheme within ten years of acquisition date), the bright-line rules contained no concession for the ownership period of an associated vendor. Consequently an individual who had owned their land for 15 years, could not transfer that land to their family trust, without restarting the bright-line clock – the family trust now subject to taxation under bright-line if the land was sold within the applicable bright-line period, unless the main home exclusion could be applied. This was even though there has been no real change in the economic owner of the land.
Lesson number twelve: Rollover relief for family trusts, look-through companies, and partnerships will apply, so that bright-line rules are not triggered (or in fact brought into play, i.e. restart the clock scenarios) in relation to an intervening disposal between these associated parties, by treating the transfer as a disposal and acquisition for an amount that equals the total cost of the residential land to the transferor at the date of the transfer and with the recipient deemed to take on the transferor’s original date of acquisition. Note that the transfer must occur for no consideration in order for rollover relief to apply.
The proposed rollover relief will also apply for the interest limitation rules, both with respect to the interest phase out rules and for the new build exemption (the transferee will just step into the shoes of the transferor).
The discussion document commentary covers the various ownership vehicles the rollover relief is targeted towards – trusts, LTC’s and partnerships, and the types of issues that could arise under each scenario. For example, there is discussion around whether the association person definitions will require amendment to ensure the right beneficiaries are associated with the settlor to ensure the relief for family trusts applies as intended. There is also discussion surrounding joint owners of land, and the implications for both transfers into and out of the joint ownership.
Concluding the document are chapters on the interaction of the proposed interest limitation rules with the existing rental loss ring-fencing and mixed-used asset (residential property) regimes, and finally, administration of the new rules – how will Inland Revenue ensure it has sufficient data collected to be able to effectively monitor taxpayer compliance with the new rules.
If you would like to have your say on the proposals, submissions are required no later than 12th July 2021.
Commercial accommodation expense apportionment
With last week’s A Week in Review solely focused 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 topic is addressed in the latest QWBA issued by the Revenue, titled ‘If I run a hotel, motel or boarding house and live on site, what expenditure can I claim?’ The item is referenced PUB00391, and post last week’s 143-page monster, its 13 pages to read are a walk in the park – more so because I must say the content is not overly technical, and arguably simply the logical approach you would use to determine your client’s claim, even without the QWBA guidance.
Akin to the mixed-use asset rules, the first step in the process is working out what components of the annual expenses are 100% business related or 100% private related, with the balance being your mixed expenses – subject then to an apportionment calculation.
There is no exact science to the apportionment calculations, the Revenue simply expecting that the result is ‘fair and reasonable’ and that you have retained sufficient records to support your claim. With the present scenario however, the most commonly used methodology will be apportioning the mixed expenses on a ‘space and time’ basis – work out the relevant areas of the premises that are mixed use areas, and then consider what portion of time the respective areas are used for business and private use.
The Revenue’s stated position in PUB00391, is to accept 50% as a baseline for the amount of time mixed-use areas are used for business purposes where it is considered there is about equal business and private use.
You can, however, depart from the space and time methodology, if you consider you have a more accurate way of calculating the claims for certain types of expenditure – electricity the example provided in the QWBA, where separate meters on the property could be utilised to identify the power used by the various areas instead.
There are a couple of examples contained in the QWBA to illustrate the commentary, but unless you are relatively new to the world of apportionment, I would suggest it’s fairly basic stuff and you are likely to have better things to do with your time.
If you wish to make a submission on the QWBA, closing date is 30th July 2021.
FIF deemed rate of return for 2021
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.
Tax Counsel Office work programme
Just in case you like to follow exactly what’s happening (or not) behind the scenes in tax policy at the Revenue, the latest progress guidance has been updated, which you can locate here.
15% global minimum corporate tax rate?
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.
Next step is a discussion at the G20 meeting in July, so watch this space.
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