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Richard's Tax Updates: April
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’…
- New foreign Trust disclosure regime
- Storing business records offshore
- AEOI reportable jurisdictions
- UOMI rate change
- Act receives royal assent
- GST special report
- Bright-line rule commencement date
- Taxpayer loses PPOA argument
- Motor vehicles and FBT – time for an update
- New tax bill
- Court lacks jurisdiction to approve payment proposal
- Two interpretation statements issued by IR
- Useful product ruling
- Further special reports issued
- Tax relief for taxpayers affected by flooding
- Public rulings – alteration of rights
- Draft QWBA – key-person insurance
New Foreign Trust Disclosure Regime
The recent passing of the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act 2017, implemented changes to the disclosures required by foreign trusts, to essentially reflect that the NZ government was taking some affirmative action in response to “finger pointing” at NZ being a potential tax haven, outlined in the Panama Papers. In conjunction with the legislative changes, IR has released a special report that provides early information on the amended disclosure regime.
The increased disclosure requirements for foreign trusts with NZ-resident trustees include new IR registration requirements (incl. a fee) and annual disclosure returns (incl. a fee). Other NZ government agencies will also be permitted access to the information held by IR.
Should the resident trustee of the foreign trust fail to comply with the new requirements, the trust will no longer qualify for the exemption from tax on foreign-sourced income.
Existing trusts are required to apply for registration by 30 June 2017. Foreign trusts that are formed after the enactment of the amendments (21 February 2017) have 30 days to apply for registration.
IR has developed a new webpage to assist trustees of foreign trusts complying with their new obligations – www.ird.govt.nz/international/exchange/foreign-trusts/
Storing Business Records Offshore
The Tax Administration Act 1994 (“TAA”) permits taxpayers to store their records offshore electronically, where consent to do so has been granted by IR. Alternatively, taxpayers can use a pre-approved third party to store their information without having to seek individual approval.
IR has just released a list of third party pre-approved organisations for storing taxpayers records electronically offshore with can be obtained for their website.
Naturally, even though a taxpayer may use a third party provider, ultimately they remain responsible for all of their tax obligations, including retaining business records for the retention period (usually seven years) required under the TAA.
AEOI Reportable Jurisdictions
Previously I have alerted you to the new global common reporting standard (“CRS”) to which NZ, along with a 100 or so other jurisdictions, is a signatory. The CRS implements a mechanism for the automatic exchange of financial account information in tax matters (“AEOI”) between jurisdictions and NZ’s obligations under the CRS will commence from 1st July 2017.
Under the CRS, IR is required to publish a list of jurisdictions (“reportable jurisdictions”) that IR will exchange CRS information with, and it is planning to release its initial list, via an Order in Council, by the end of May.
The Government is now seeking submissions from the public, with respect to any jurisdictions that should NOT be included on NZ’s list of reportable jurisdictions. The submission deadline is 14th April 2017.
UOMI Rate Change
Decreases to both the taxpayer’s and Commissioner’s paying rates will come into effect on 8th May 2017. UOMI payable by the taxpayer will decrease from its present rate of 8.27% to 8.22%, and the rate of UOMI a taxpayer receives from the Commissioner will decrease from 1.62% to 1.02%.
Act receives Royal Assent
Further to last week’s update that the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (No 14 of 2017) had passed its third and final reading, Royal Assent to the new legislation was received on 30th March 2017.
GST Special Report
Recent legislative changes have, from 1st April 2017, broadened the scope of the type of services that will be considered to be in connection with land situated in NZ for the purpose of the GST zero-rating rules.
Where a NZ GST registered person provides services to a non-resident who is outside NZ at the time the services are performed, the GST charged on the supply can usually be reduced to a rate of 0% (“zero-rated”). One proviso to the zero-rating rule however, is where the services are in respect of land situated in NZ (“directly connected”).
The “directly connected to NZ land” test was a relatively narrow one, for example, a lawyer performing a conveyancing service for a non-resident to effect a sale or purchase, was able to zero-rate the supply, because the service was seen to be at least one step removed (essentially not directly connected) from the NZ land.
The new rules will now include an additional test, removing the ability of the NZ GST registered person to be able to zero-rate the supply to the non-resident, where the services provided are “intended to enable or assist a change in the physical condition, or ownership or other legal status” of the land.
To assist with understanding the breath of the new rules, IR has now released a special report on the GST changes to services connected with land. The report can be accessed here – http://taxpolicy.ird.govt.nz/sites/default/files/2017-sr-gst-services-land.pdf
Bright-line Rule Commencement Date
IR has released QB 17/02 which deals with questions surrounding the date of acquisition of land for a number of the land tax provisions, including section CB 6A, for the purpose of determining the start date for the 2-year bright-line test.
QB 17/02 updates the Commissioner’s previously published views on two particular issues, namely that:
While the date that someone acquires their first estate or interest in land (relevant to whether the bright-line legislation potentially applies to them) is usually the same as when they acquire land under section CB 15B, there are some exceptions.
The bright-line test will not apply to nomination situations as there is no disposal of the land by the nominator.
Taxpayer loses PPOA argument
For those of you providing advice for your client’s with respect to their NZ tax residency status, Taxation Review Authority  NZTRA 01 is probably worthy of a read. One of the first residency cases I have seen since the release of the Diamond decision in 2015, although in my view, here it was always going to be a clear win to the Commissioner, considering this taxpayers clear linkage to a NZ property, one which he returned to on average twice a year throughout the disputed period.
The taxpayer also attempted to claim that an interest in a foreign superannuation fund to which his employer solely contributed, was not subject to taxation under the FIF rules, because the cost of the investment was below the $50,000 de minimis exception, since he had never personally contributed to the fund. The TRA ruled against the taxpayer, and held that “cost” was not restricted to cost or expenditure incurred by the person or by a party acting as agent of that person, and the employer contributions were included under section CG 15(2)(d) – (ITA1994).
Finally, to round off a not so good day for the taxpayer, he was also slapped for an unacceptable tax position penalty, failing to meet the standard of being “about as likely as not to be correct”.
Motor Vehicles & FBT – Time for an update
Well that’s what IR thinks anyway, releasing draft interpretation statement PUB00249 for comment. One of the stated aims of the document, is to update and consolidate all previous IR statements on FBT and motor vehicles. Consequently, PUB00249 explains when IR considers a motor vehicle fringe benefit may arise and the potential application of the three available exemptions accordingly. Examples are naturally included to assist IR in explaining its views.
Deadline for comment is 19th May 2017.
New Tax Bill
The Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Bill (249-1) has been introduced in Parliament, one of the main components of the Bill being the proposed changes to the way employee shares schemes are taxed, with particular focus on when benefits provided under the scheme should be taxed. Refer here for the Bill commentary – http://taxpolicy.ird.govt.nz/sites/default/files/2017-commentary-areiirm-bill.pdf
Court Lacks Jurisdiction to Approve Payment Proposal
The taxpayer had twice had his payment proposal declined by IR, which was made after the Commissioner had obtained judgement against him for GST arrears and had subsequently issued a bankruptcy notice on him. Prior to receiving the first response from the Commissioner, the taxpayer also applied to the High Court to have his payment proposal approved and the bankruptcy notice set aside. The High Court hearings occurred post both notices of decline having been given by the Commissioner. The High Court approved the payment proposal, which resulted in the Commissioner appealing the case to the Court of Appeal.
The Court of Appeal found in the Commissioner’s favour, stating that “where the debtor is a taxpayer seeking to compromise a debt owed to the Commissioner, the debtor must do so by applying for financial relief in terms of sections 177 to 177B of the Tax Administration Act 1994.” The Court does not have an inherent jurisdiction to approve a payment proposal by a debtor when the creditor has rejected the proposal. If the taxpayer wished to challenge the Commissioner’s decision to reject his payment proposal then his remedy was to apply for judicial review of the Commissioner’s decision.
Two Interpretation Statements Issued by IR
Following on from the consultation item, PUB00228, IR’s finalised position on the issue of single or multiple supplies for GST purposes has been released. The IS explains how to determine whether the different elements contained in a transaction should be treated as a single composite supply or multiple separate supplies. The statement also considers some situations where specific deeming provisions apply to override the ordinary principles and specify how the supply must be treated.
Determining the nature of the supply becomes important where boundary issues may arise which could result in some elements of the supply being subject to GST at the standard rate, while other elements may either be zero-rated, exempt or not subject to GST at all. IR’s view is that asking questions such as whether it is reasonable to sever the elements into separate supplies or what is the true and substantial nature of what is supplied to the recipient for their payment, may assist in arriving at the answer of whether single or multiple supplies are involved.
The second interpretation statement, IS 17/04, is advised by IR to simply be an update of IS 16/01, due to the Supreme Court decision in Trustpower Ltd v CIR NZSC91, and the changes to the Commissioners position on the deductibility of feasibility expenditure as a result. The statement itself was initially released to provide the Commissioner’s views on the income tax issues associated with computer software acquired for use in a taxpayer’s business, limited in scope to taxpayers who purchase, lease, licence, develop, or commission software for use in a business carried on for the purposes of deriving assessable or excluded income.
Useful Product Ruling
IR has released BR Prd 17/02 which considers the use of the LogbookMe product by taxpayers to record their vehicle use and whether the use of the product will satisfy the record-keeping requirements of both section 75(3BA) of the GST Act 1985 and section DE 7 of the Income Tax Act 2007.
LogbookMe is a cloud-based online platform which uses an on-board electronic recording device to log data about a vehicles’ trip. The product can be used by NZ individuals and businesses to record all vehicle journeys. It allows the driver to classify and generate reports on the business use of the vehicle. This subsequently enables the calculation of a business use percentage.
BR Prd 17/02 confirms that provided the conditions stipulated by the Commissioner are adhered to (required fields accurately completed, device not removed from vehicle etc), the legislative record-keeping requirements of the above-mentioned sections will be satisfied.
Further Special Reports Issued
Following on from enactment of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017, two more special reports have been issued with respect to the legislative changes – NRWT: Related Party and branch lending (found here – http://taxpolicy.ird.govt.nz/sites/default/files/2017-sr-nrwt.pdf) and Closely held companies (found here – http://taxpolicy.ird.govt.nz/sites/default/files/2017-sr-chcs.pdf).
Tax relief for taxpayers affected by flooding
IR has responded to recent flooding events by announcing that taxpayers who have been affected by recent flooding events, which has resulted in them not being able to pay their taxes on time, will be able to seek relief from IR, in the form of having any use of money interest, late filing and late payment penalties waived.
IR will also have discretion with respect to farmers and fishers equalisation payments, by allowing them to make late deposits from the 2016 income year and to apply for early refunds – a mechanism to enable these taxpayers to average their taxable income over several years more easily.
The relief has been legislated for via the Tax Administration (April Flood Events) Order 2017 (LI 2017/66), which declares the April Flood Events to be emergency events for the purpose of section 183ABA of the Tax Administration Act 1994. An April Flooding Event means flooding the occurred between the period 3rd April 2017 and 18th April 2017. The Order came into force on 19th April 2017 and expires and is revoked on the close of 30th June 2017.
Public Rulings – alteration of rights
IR has recently finalised two public rulings which consider the application of section CB 4 of the Income Tax Act 2007, to shares whose rights have altered. Section CB 4 taxes personal property disposal gains where the personal property was originally acquired for the purpose of disposal.
BR Pub 17/04 discusses whether an alteration of rights triggers a deemed disposal of shares and the consequent application of section CB 4 where those shares were purchased with the intention of resale. The item concludes with a view that an alteration of rights does not constitute a deemed disposal.
BR Pub 17/05 considers the application of section CB 4 to a situation where the taxpayer, subsequent to an alteration to the rights of the shares they hold (which were originally acquired for a disposal intention), decides to dispose of some of the shares. While it is clear that section CB 4 applies to the share disposal, the ruling clarifies that the date of acquisition of the shares is the original date of acquisition and not the date when the alteration of rights occurred.
It should be noted that while an alteration of rights will not trigger a deemed disposal for the purpose of applying section CB, shareholder continuity issues should still be considered.
Both rulings apply from 1 April 2017.
Draft QWBA – Key-Person Insurance
You may or may not recall in 2015, IR issuing four QWBA’s which dealt with issues surrounding policies taken out by an employer for the benefit of an employee. Continuing the QWBA series in this regard, this item solely considers key-person insurance, and only where the insurance is linked to a person in an employee role. Key-person insurance, also referred to as key-man insurance, is an insurance policy taken out for the purpose of replacing lost business profits as a result of something happening to a key person in the business. That is, the policy protects the income of the business (the employer) as opposed to the income of the insured person (employee or sole trader) under an income protection policy.
The draft item presently concludes that a lump sum or a fixed periodic sum received under the policy is taxable income of the employer under section CB 1 of the Income Tax Act 2007, while the premium amounts paid are deductible under section DA 1. The exception to this general position is in situations where the policy has multiple purposes such as also providing for mortgage repayment protection or collateral for capital funding for example. In such case, apportionment of the premiums and claim amount may be required.
The deadline for comment on the draft QWBA is 23rd May 2017.
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