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Richard's Tax Updates: August
Richard has had over 25 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’ over the last month…
- New Trust Bill introduced
- Greater sharing of information
- 2017 Deemed Rate of Return set
- Final decisions on BEPS proposals released
- Tax Avoidance IS review
- Sharing of information agreements signed
- 2017-18 public rulings work programme released
- Feedback sought on options to trim employer PAYE costs
- Other useful tiblets
- Income equalisation deposits and refunds
- NZ/China DTA to be updated
- Tax secrecy provision reviewed
- Full or partial disposal
- GST warranties
- Employment-related remedial payments
- Employment-related remedial payments IS
- Correct GST treatment – timing of notification
- Foreign Trust’s financial statements
New Trust Bill introduced
While not itself containing a taxation flavour of any significance (if at all in fact), nevertheless I thought its introduction worthy of a mention, since once passed, it will be the first significant change to NZ trust law in over 60 years.
The Bill, aptly named the Trusts Bill (one could presume to follow an intent of the new legislation to be clear and simple), will replace the Trustees Act 1956 and the Perpetuities Act 1964 and will attempt to clarify and simplify core trust principles, so those in charge (the trustees) will have a clearer understanding (and more accessibility in this regard) of the way trusts are supposed to operate.
Key features of the new law, will include:
- a description of the key features of an express trust;
- defining mandatory (those applicable to all express trusts) and default trustee duties (optional in/out per the terms of the trust deed);
- setting out requirements for managing trust information and disclosing it to beneficiaries of the trust (including a presumption that trustees must provide basic information to beneficiaries);
- defining the circumstances in which trustees must, or may, be removed, and options for removing and appointing trustees out of court;
- provision of clear rules to assist with the variation and termination of trusts (including a clear-cut maximum duration period for trusts of 125 years – presently 80 years under PA64).
The Bill will apply to all express trusts, including trusts that existed before enactment. It is proposed that there will be an 18-month transition period from the date of commencement of the new legislation (the law will come into force 18 months post the date of Royal assent), for existing trusts, which will allow time for those involved in trusts to review and consider the application of the Bill to their trusts if they wish.
Greater Sharing of Information
An information sharing agreement between IR and MSD comes into force on 31st August, authorising in accordance with provisions of the Privacy Act 1993, the sharing of relevant information held by each party, that could assist either with assessing entitlements to benefits and subsidies, assessing and enforcing tax obligations and obligations related to benefits and subsidies (including the recovery of any associated debt), registering new customers, and updating contact and identifying information.
A copy of the agreement can be obtained directly from the respective websites of both organisations.
2017 Deemed Rate of Return Set
For those of you whose use the deemed rate of return calculation method for computing your client’s FIF income, the 2017 rate has now been set at 6.28%. This is a reduced rate from the 6.77% set for the 2015-16 income year.
Final Decisions on BEPS Proposals Released
Budgeted to increase Government coffers by an estimated $200million (only time will tell how accurate those estimations are), the final decision on the proposals to address base erosion and profit shifting mechanisms utilised by multi-nationals has been made, with legislation containing the new measures expected to be introduced in a Bill prior to the end of this year, and enacted by July next year at the latest.
The aim of the proposals are to ensure multinationals are taxed fairly, and on the basis of their actual level of economic activity in New Zealand. In combination the new measures will:
- stop foreign parents charging NZ subsidiaries high interest rates to reduce their taxable profits in NZ.
- stop multinationals using artificial arrangements to avoid having a taxable presence in NZ.
- ensure multinationals are taxed in accordance with the economic substance of their activities in NZ.
- counter strategies that multinationals have used to exploit gaps and mismatches in different countries’ domestic tax rules to avoid paying tax anywhere in the world.
- make it easier for IR to investigate uncooperative multinational companies.
For the devil in the detail, papers can be found at www.taxpolicy.ird.govt.nz.
Tax Avoidance IS Review
What do the words “Ben Nevis” mean to you? No, it’s not the 1959 Charlton Heston classic film (itself a remake of the 1925 silent film), but in my opinion the case that changed the face of IR’s approach to tax avoidance cases, due to the birth of a new phrase, “parliamentary contemplation”.
Prior to Ben Nevis, often when tax planning for clients, if you could show that you had followed the letter of the law, then you could be relatively confident that your advice was likely to survive IR scrutiny, unless of course you had been over aggressive in your interpretations, but even then, you knew the quality of the soil underneath you and the likelihood of an earthquake at some point.
Post Ben Nevis, it was clear that IR had developed a new weapon and that there was no Donald Trump to stop them. IR risk review and audit letters were suddenly containing the parliamentary contemplation phase – “well yes you may consider that your client has correctly applied the law as it is written, however we consider that parliament can never have contemplated that the law would have been used this way, and consequently your client has engaged in tax avoidance – subject to a 100% tax shortfall penalty, although go quietly and we may only consider imposing 20% for an unacceptable tax position”. Sound familiar?
Overnight the tax advisory landscape was changed forever (considering the principle was espoused from the highest court in the land), and once confident advisors now had to pepper their recommendations to clients’ with a warning about IR’s newfound arsenal. All was not lost however, or so IR would claim, as they attempted to quell taxpayers fears via the release of IS 13/01 in June 2013 – the Commissioner’s views on Tax Avoidance and the interpretation of section BG 1 and GA 1 of the ITA07, particularly post reflection of the Ben Nevis decision.
It has now been four years post the release of IS 13/01, and it is therefore timely in IR’s view, to reflect on the previous interpretation statement, and whether, based on feedback from the public at large, it should be updated to take into consideration practical experience resulting from the application of its content, comments on its usefulness and any refinements necessary to the Parliamentary contemplation test as a result of any subsequent judicial decisions. Consequently PUB00305 (Review of Interpretation Statement on Tax Avoidance) has been released for comment, with a response deadline set of 15th September 2017.
Sharing of Information Agreements signed
In continuing efforts to combat global tax evasion, two Orders in Council have recently been signed.
The first is with respect to amending NZ’s existing DTA with India, to update the exchange of information provisions and to add a new Article relating to assistance in the collection of taxes.
The second is with respect to entering into a tax information exchange agreement with the Republic of San Marino, to implement the current international standard for exchange of information between the two countries.
Both agreements will come into force once diplomatic formalities have been completed in each jurisdiction.
2017-18 Public Rulings Work Programme released
Recently released and located on IR’s website – http://www.ird.govt.nz/resources/d/8/d8f72fdf-19ad-4013-b984-fa8c06ae25ff/2017-18+Public++Rulings+Work+Programme+.pdf.
Towards the end of each financial year, IR prepares a draft programme of priority work for the coming year. Once released, the programme is updated monthly to advise on progress. Some of the new items which I suggest may be of interest to the majority when released for comment include:
- GST & Income tax – short term accommodation which will provide guidance for taxpayers providing short term accommodation through websites such as Airbnb.com.
- Income tax – deductions for bad debts to modernise the previous statement clarifying when a deduction can be claimed for a bad debt.
- Income tax – excessive payments to spouses to provide guidance on the types of records needed to justify salaries paid to spouses for work performed in small business situations.
- Income tax – income attribution to provide guidance on the rules for income attribution, including clarification of the meaning of “significant business assets”.
- Income tax – several items associated with the land tax provisions contained in sections CB 6A to CB 23, including guidance on the main home exemption under the bright line test as it applies to lifestyle blocks or bare land subdivided from a person’s main home, the meaning of “premises” in the business premises exclusion, and when a pattern of activity will amount to a business relating to land.
Feedback sought on options to trim employer PAYE costs
An issues paper considering options on how PAYE errors may be corrected and adjustments made, with a view to reduce an employer’s administration costs has been released for public submissions.
Legislation contained in the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Bill currently before Parliament, proposes changes to the administration of PAYE, including a new payday basis for providing employment income information (no more employer monthly schedules) and the ability to file information directly to IR from the employers payroll system.
The issues paper follows on from proposed information filing changes, to ensure that due to the more frequent provision of information, employers are not unduly burdened with unnecessary compliance costs when the information filed is found to be incorrect. Proposed options include providing for adjustments to
be automated, particularly via the employers payroll software which can generate the information required to amend an already filed return, and enabling employers to be able to access already filed returns via MyIR to be able to self-correct an incorrect return (within acceptable monetary thresholds).
The closing date for submissions is 15th September 2017.
Other Useful Tiblets
Not tax, but certainly an item I thought would be useful mentioning – a Supreme Court ruling recently considered the issue of the solvency test question – “unable to pay due debts” and the width of the term “due”. The finding – first that the term “debt” should encompass both present and contingent debts; and second, that future debts should be taken into account if they are reasonably temporally proximate (which means what I can hear you say?) – in other words – where a reasonable and prudent business person would be satisfied that there is sufficient certainty that a contingent debt will, within that relevant period, become legally due then it must be taken into account.
Also not tax, but potentially affecting all of us (accountants that is – just in case you are not in that capacity), is the recent passing of the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) Amendment Bill which extends the current AML/CFT regime to lawyers, conveyancers, accountants, real estate agents, sports and racing betting and businesses that deal in certain high value goods. The Anti-Money Laundering and Countering Financing of Terrorism Act 2009 presently applies risk assessment, monitoring, customer due diligence and reporting obligations on banks, casinos and financial institutions, and these requirements, although to a lesser extent on occasion, will now apply to these additional sectors as well.
Do not panic however, as accountants will not be bound by the provisions until 1st October 2018, so you do have some time to get yourself up to speed as to what you obligations will be.
Income Equalisation Deposits & Refunds
Introduced in 1965 (I wasn’t even thought of), the income equalisation scheme was introduced to assist farmers with their cash flow and tax payments due to the variability in their annual incomes. The introduction of the use of money interest regime in the 1998 income year, further enhanced the benefits of the income equalisation regime, providing farmers with an opportunity to reduce their exposure to interest costs, particularly when many did not receive the bulk of their incomes until near the end of the tax year, and as a consequence, were not in a position to know their likely year-end financial position, until well after the interest clock had started ticking.
Both deposits into a scheme and requests for refunds out of, must be made by the taxpayer within a “specified period”. The Commissioner does however have a discretion to accept both deposits and refund requests outside of the “specified period”, and IR has recently released SPS 17/01 to set out how the Commissioner will exercise her discretion in this regard. SPS 17/01 replaces the previous SPS 05/09 on the same issue.
NZ/China DTA to be updated
The 1986 Double Tax Treaty Agreement with China is in the process of being updated, NZ tax officials meeting with Chinese officials in Beijing recently to discuss the terms of a new treaty, particularly with a focus on including agreed measures to deal with base erosion and profit shifting.
Since China is NZ’s largest trading partner in goods, and is the second largest in trading in services, having an up to date agreement, that followed best practice was essential.
Tax Secrecy Provision Reviewed
In 2011, section 81BA was introduced into the Tax Administration Act 1994. The aim of the provision was to create more flexibility for IR to share information with other government departments, thereby leading to increased efficiencies in service provision and reducing the need for individuals to communicate similar
information to multiple agencies. Presently IR has information sharing agreements in place with MSD and ACC.
The new legislation also contain a built-in review requirement and IR has just released a report in this regard, commenting on the operation of section 81BA, it’s impact, and whether as a result of the review, amendments were recommended, which could include the removal of the provision entirely.
The report concludes that section 81BA be retained for the time being, while awaiting the outcome a more global review of the Tax Administration Act’s confidentiality framework, although it does recommend that section 81BA(6) is unnecessary (overrides Privacy Act, yet Privacy Act permits such information sharing agreements) and should therefore be removed as part of the global review process.
Full or Partial Disposal?
IR has released PUB00258, which is a draft QWBA on the issue of whether a partner who contributes an asset that they own to a partnership as a capital contribution, makes a full or partial disposal of the asset. IR has been advised that there is confusion over the issue, due to section HG 2 which deems the same person, as a partner in the partnership, to still have an interest in the asset, proportionate to the person’s partnership share.
IR’s conclusion, and one that makes logical sense in my view, is that there is a full disposal of the asset to the partnership by the person as sole owner in the first instance, and then post the transfer, the asset ceases to be the person’s sole property and becomes an asset of the partnership, jointly owned by the partners of the partnership, each having a beneficial interest in the whole of the asset.
The deadline for comment is 27th September 2017.
A useful High Court decision in respect of a warranty provided by the vendor in respect of their GST registration status, when executing an agreement for the sale and purchase of land.
It should be noted in the first instance that the parties had decided to use their “private dictionary” and in doing so had adopted the terminology of the GST Act, particularly in relation to the term “registered person” – defined in the Act to mean “a person who is registered or is liable to be registered under the Act” (although the Court also noted that regardless of this adoption, the statement “registered under the GST Act” meant registration in terms of the statutory definition – so the decision is not so “limited to its facts”).
The vendor indicated on the front page of the agreement, by circling “no”, that she was not registered for GST in respect of the land sale. However in doing so, and the parties having adopted the GST Act terminology, she was also declaring that she was not required to be so registered.
The purchaser filed a second-hand goods claim (some $300k), which IR rejected post considering the vendor’s situation and concluding that she should have been registered in respect of carrying on a taxable activity of buying and selling land. As a consequence, IR backdated the vendors GST registration which meant that the sale was now subject to CZR (I have assumed here, not yet having read the full text of the case (YL NZ Investment Ltd v Ling), that the vendor did not dispute IR’s determination (possibly because from a pure tax perspective the application of CZR meant there was no actual financial implication for her)).
The purchaser sued the vendor for a loss resulting from a breach of warranties, equating to the GST amount, some interest and professional advisors costs.
The Court found for the purchaser and awarded the quantum of loss claimed. In the Court’s view, the circumstances of the case clearly showed that the vendor was carrying on a taxable activity in respect of the land, and consequently should have known she was required to be registered even though she was not.
The take-out from the decision I would suggest, is that if you are acting for clients who are selling land and they are telling you that they are not registered for GST in respect of the sale, you might just want to check that there is in fact no obligation for them to be so registered, to eliminate any subsequent exposure from being sued for a breach of warranty, should IR form a different view as to their registration status.
As an interesting aside, one of the defences raised by the vendor, was that as the purchasing company failed to have a NZ resident director at all times, the company was not legally entitled to register for GST. The Court dismissed such claims however, stating that even if the company had not fully complied with section 10 of the Companies Act 1993, GST registration was required whether it had a NZ resident director or not.
Employment-Related Remedial Payments
Effective from 18th August, the Income Tax (Employment-related Remedial Payments) Regulations 2017 declare that a remedial payment made to correct the underpayment of employment related entitlements (such as annual holiday pay), is defined as being an extra pay, and not as a payment of salary or wages – consequently the deduction rate will be different from the standard salary/wage deduction rates.
Employment-Related Remedial Payments IS
Further to last week’s update regarding the Income Tax (Employment-related Remedial Payments) Regulations 2017, which came into effect on the 18th August 2017, IR has now released CS 17/02, to provide guidance to employers on how a backdated remedial payment of holiday pay is to be treated for tax purposes.
You may or may not recall, various media releases in 2016, suggesting the underpayment of a significant numbers of employees, due to their employers payroll systems incorrectly calculating holiday pay payments – the most common error being calculations which were simply based on the worker’s standard hourly rate, when consideration was also required to be given to the worker’s average weekly earnings over the past year, and the worker then having their holiday pay entitlement calculated based on the higher of the two amounts.
IR is aware that several employers have been making lump sum payments to their employees to remedy the error, and that prior to the new Regulation, the Commissioners view was that the tax treatment of the lump sum should have followed the tax treatment that would have applied to the original payment, had it been paid correctly. However since the Regulation coming into effect, any amount paid to correct past calculation errors, will now fall within the employment-related remedial payment definition, and as a consequence, should be treated as an extra pay and taxed as such.
Correct GST Treatment – Timing of Notification
I thought I should mention the following recent decision of the Supreme Court, which in my view from the outside looking in, completely lacks any logical sense, from the perspective of how this dispute ever managed to progress so far through our judicial system (were the vendors simply trying to make some moral point, simply just trying to find a way out of the agreement, or were their lawyers just barking completely up the wrong tree??). However, as illogical as it may seem, the case actually identified a potential anomaly in the drafting of clause 15.5 of the 9th Edition of the Real Estate Institutes/ADLS standard Agreement for Sale and Purchase of Real Estate, when considering the statutory requirements of section 78F of the Goods and Services Tax Act 1985.
The background to the case was the sale of four properties on a plus GST (if any) basis. The initial agreement for sale and purchase indicated that the purchaser would not be registered for GST at settlement date and consequently that they were not acquiring the properties with the intention of making taxable supplies. No problem so far, the purchaser would simply pay GST in addition to the agreed sale price of $2.4m.
The day before settlement, the purchaser’s solicitor (verbally) advised the vendor’s solicitor that their client was now GST registered, and requested an amended settlement statement (which was provided) reflecting GST being charged at zero percent. Ok, again no problem right, vendor now just compulsory zero-rates – no risk for them as any GST risk lies with the purchaser should IR determine post settlement the compulsory zero-rating treatment was incorrect.
WRONG – the vendor refused to settle on the basis that clause 15.5 of the agreement required no less than two working days notice pre-settlement, of any alteration in the particulars previously stated by the purchaser (and that such alterations had not been provided for in writing). An amended settlement statement requiring GST to be paid was issued, followed by settlement notices with a 12 working days timeframe.
Failing to resolve the dispute via several emails, the purchaser lodged caveats on the title and then commenced summary judgement proceedings against the vendor for specific performance, as section 78F only required such notification be provided to the vendor at, or before, settlement date – which had occurred (albeit not in writing).
While the High Court would not grant specific performance due to holding a view that the statement of claim accompanying the summary of judgement application was inadequate on a number of grounds, it did uphold the request to sustain the caveats, awaiting the outcome of a trial. The vendor appealed the caveat decision to the Court of Appeal, which was declined, and then sought leave to the Supreme Court to appeal against that decision. The Supreme Court declined the granting of leave, seeing no reason why the proposed appeal should be heard, prior to determination of the proceedings for specific performance.
Reading between the lines, one could presume that had the purchaser put their statement in writing the day before settlement (and confirmed all the requisite section 11(1)(mb) criteria), and bearing in mind Parliament’s clear legislative intent to zero-rate such land transactions, the Court would have found for the purchaser in their application for specific performance, irrespective of the agreed terms of clause 15.5 not being adhered to.
I will look out for the eventual decision in the specific performance hearing and report accordingly.
Foreign Trust’s Financial Statements
Coming into effect on 2nd October 2017, the Tax Administration (Financial Statements — Foreign Trusts) Order 2017 (LI 2017/258) (“the Order”) prescribes that the minimum requirements for preparing financial statements are similar to those presently applying to certain companies under the Tax Administration (Financial Statements) Order 2014.
The enactment of the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Bill in February 2017, resulted in the introduction of a new registration and disclosure regime for foreign trusts. Under the new regime, once registered, the resident foreign trustee must file an annual disclosure return, within six months of the trust’s balance date (30 September if the trust does not have a balance date).
The annual disclosure return is required to include details about settlements and distributions made during the return year, as well as providing a copy of the trust’s financial statements for the return year.
The Order prescribes the following minimum requirements with respect to any financial statements to be prepared for the purpose of accompanying the annual disclosure return:
- a balance sheet (assets, liabilities & net assets)
- a profit & loss report (income derived & expenditure incurred)
- prepared applying accrual accounting
- certain accounting policy statements
- comparable figures for the prior year (if prepared for that year)
- statement of NZ taxable income in NZ dollars
- reconciliation of movements (line by line, opening to closing) of all settlor/beneficiary accounts (including loans) and net assets.
The financial statements are able to be prepared in any currency that is deemed appropriate having regard to the circumstances of the trust and its settlors and beneficiaries.