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Richard's Tax Updates: December & January
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…
- Private Rulings – “Material Difference”
- Full or Partial Disposal of Asset?
- BEPS Bill Introduced
- Where are they up to…
- Bright-line, an Afterthought…
- Latest Work Programme Update
- Cornerstone 100-day Plan Promise Gains Traction
- Budget Policy Statement (“BPS”) Released
- EU Releases Tax Haven Blacklist…
- Relief for Chatfield’s Finally…
- Group Insurance Policies
- Group Loss Offsets
- Could be NZ’s Warmest Month on Record
- First Public Rulings Work Programme Update for 2018…
- IR Updates PPL Content on Website
- Proposed ERA amendments
- Time to put on your thinking cap…
Private Rulings – “Material Difference”
When a taxpayer is considering entering into an arrangement but is uncertain as to the taxation outcomes that may arise for them as a result, there is the ability to seek a private ruling from the Commissioner under the provisions of section 91E of the Tax Administration Act 1994 (“TAA”).
Once issued, the Commissioner will usually be bound by the terms of the private ruling, and must apply the taxation law in relation to the applicant, the tax type and the arrangement covered by the ruling (s.91EA(1) TAA).
The Commissioner will not be so bound however, where any one of the carve-outs in section 91EB(2) apply, the first of those being where the arrangement is materially different from the arrangement identified in the ruling.
Guidance has been sought over what is meant by the term “materially different” and IR has responded with the release of draft QWBA PUB00319. Naturally each case will be fact dependent, and the narrative of the draft suggests it is not possible therefore to list all the factors that will be taken into account by the Commissioner in assessing the issue, however in general terms, where the difference between the revised arrangement and the ruling arrangement is capable of affecting the tax outcome referred to in the ruling, then section 91EB(2) is likely to have application.
PUB00319 contains a number of examples to illustrate the point. So apply for a ruling for an arrangement that intends to utilise a limited partnership structure but end up using a look through company structure instead, and you are likely to discover that your costly private ruling is no longer of any benefit to you due to section 91EB(2). Conversely, seek a ruling on the deductibility of interest in relation to funds borrowed from ASB, where the only difference is that you eventually borrow from the BNZ, and you can probably sleep easy.
Should you wish to comment of PUB00319, the deadline for submissions is 31st January 2018.
Full or Partial Disposal of Asset?
Back in August, I commented on the release of PUB00258, which was a draft QWBA on the issue of whether a person’s contribution of an asset owned by them, to a general or limited partnership as a capital contribution, was seen to be a full or partial disposal of the asset. Naturally the answer to the question will usually only be of significance to the person, if they previously held that asset as an item of depreciable property or as revenue account property – the transfer of ownership to the partnership triggering potential tax implications for the person – deprecation recovery income for example.
IR have now finalised their view and have issued QB 17/09 – the position unchanged from draft PUB00258 – that there is a full disposal of the asset, primarily because there is a fundamental change in the legal ownership of the asset, and consequently the person’s interest in the asset, from sole ownership to joint ownership. The draft QWBA had considered arguments that there was only a partial disposal of the asset, because the person at all times (pre and post contribution to the partnership) retained “some” ownership interest in the asset.
As with most interpretative views issued by IR, there is some detailed narrative contained in QB 17/09 on why contrary arguments are considered to be an incorrect interpretation of the relevant taxing provisions, in the present case, this being an analysis of the income tax legislation’s partnership rules contained in section HG 2 to HG 12. While the separate legal person status of a limited partnership appears to provide a more black and white answer (disposal of an asset from one separate legal person to another), the murkier waters surrounding the legal status of general partnerships has required IR to discount a partial disposal argument using the following rationale:
- The legal ownership of the asset, its juristic character, and the person’s interest in the asset, all fundamentally change.
- Before disposal, the person is the owner of the asset. Once the person has introduced an asset into a partnership as a capital contribution, the asset ceases to be the person’s property. It belongs to the partners of the partnership and becomes partnership property.
- The asset belongs to the partnership – not in the sense that each partner individually owns a separately identifiable part of the asset, but in the sense that the partners are the joint owners of the whole asset.
- Following disposal, the person ceases to have any beneficial interest in the asset that is qualitatively different to that of the person’s co-partners, and the asset must be used by the partners exclusively for the purposes of the partnership.
Alongside QB 17/09, IR has also issued a Commissioner’s operational position, to recognise that her position has changed as a result of the release of QB 17/09 (both disposal positions were previously accepted). For those taxpayers who have used a partial disposal approach prior to the date of publication of QB 17/09, and where the asset is still held by the partnership, the status quo can continue, provided the person notes the partial disposal in their accounts each year until the asset is disposed of by the partnership, and upon the partnership disposing of the asset, the person accounts for any applicable tax liabilities with respect to the retained part of the asset.
BEPS Bill Introduced
Four specific BEPS (Base Erosion Profit Shifting) areas will be targeted under legislation recently introduced into Parliament.
The OECD/G20 Action Plan has seen the development of 15 actions which are aimed towards assisting countries in combatting strategies used, predominantly by multinationals, to erode their taxes bases via the shifting of profits from one taxing jurisdiction to another, the latter usually being a low/no tax state.
While the latest proposals are tailored specifically for NZ’s environment, they are still broadly consistent with the OCED/G20 guidance.
The Taxation (Neutralising Base Erosion and Profit Shifting) Bill contains measures to:
- prevent the use of artificially high interest rates on loans from related parties to shift profits out of NZ (interest limitation rules);
- prevent the use of hybrid mismatch arrangements that exploit differences between countries’ tax rules to achieve an advantageous tax position;
- counter artificial arrangements which attempt to avoid having a taxable presence (a permanent establishment) in NZ; and
- prevent the use of related-party transactions (transfer pricing) to shift profits into offshore group members in a manner that does not reflect the actual economic activities undertaken in NZ and offshore.
While each provision has its own commencement date specified in the Bill, most will have application to income years beginning on or after 1st July 2018.
Full commentary on the new Bill can be found here – http://taxpolicy.ird.govt.nz/sites/default/files/2017-commentary-nbeps-bill.pdf
Where are they up to…
Just in case you were losing sleep over it:
The Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Bill (249-1): (which is an omnibus Bill containing amendments aimed at modernising and improving the settings for the administration of the tax system, and at improving the current tax settings within a broad-base, low rate framework), received its first reading on 24 May 2017, was reinstated into Parliament on 8 November 2017, and is now awaiting the FEC’s report, which is due on 29th March 2018.
Trusts Bill (290-1): (which proposes replacing the Trustee Act 1956 and the Perpetuities Act 1964 to make trust law more accessible to everyday users by clarifying and simplifying core trust principles and essential obligations for trustees to improve understanding about how trusts operate), received its first reading on 5th December 2017 and now awaits a report from Justice Committee, which is due by 5th June 2018.
Bright-line, an afterthought…
While clearly at the forefront of one’s mind simply due to the continued Press it has received since its introduction, remember not to overlook the fact that the Bright-line rules contained in section CB 6A (ITA07), only apply where the existing taxing provisions in sections CB 6 to CB 12 do not.
With Bright-line recognised as being a very black and white provision (particularly if the owner of the land has never resided on it, so the main home exemption is clearly unavailable), you might ask, what is the point therefore, of considering the potentially more grey application of sections CB 6 to CB 12, which naturally will take more time and therefore add potential cost to your client’s file, if an ultimate taxable outcome has already been determined.
The answer is because taxation under non-Bright-line provisions may provide a more favourable outcome to your client in terms of their overall taxation position. For example, deductions for residential land expenditure under Bright-line are capped and ring-fenced (s.DB 18A – bright-line income + land net income), whereas no such limitations exist where the applicable taxing provision is CB 6 to CB 12.
Now clearly for 9 out of 10 transactions (if not 9.9) it will not make the slightest difference, however I just wanted to draw attention to the issue, because we all can be such habitual beasts at times, getting stuck in the routine rut, and sometimes overlooking what may just be sitting on the side of the road waiting for us to use to our advantage (or more importantly, our client’s).
Latest Work Programme Update
IR has published their latest update to the 2017-18 Public Rulings Work Programme.
With all the recent publicity, I am eagerly awaiting the release of IR’s views on the income tax and GST treatment of crypto-currencies – will those significant gains on Bitcoin be taxable? A number of jurisdictions have already issued a view that Bitcoin is not a currency (effectively removing it from taxation under the financial arrangement rules), instead concluding it is an asset, which then usually reverts to the general taxing principle of determining what was the taxpayer’s intention when they acquired it – for resale versus long-term hold?
However the distinction for those foreign tax authorities is not as important as it is in the NZ context, since most have capital gains tax regimes to capture any profits made on disposal regardless. Will we see IR go down the same track as their recently released policy with respect to gains on disposal of gold bullion (taxable unless you can prove otherwise)?
Other interesting agenda items in my view include:
- GST – Supplies of dwellings & other real property – to provide further guidance on the application of s.5(15) which in essence deems there to be two separate supplies of land when a dwelling is sold with other real property.
- GST & Income Tax – short term accommodation – to provide guidance and clarity with respect to the taxation issues associated with taxpayers offering property for rent on a short term basis via websites like Airbnb.com.
- Income Tax – income attribution – to provide guidance on the application of the personal services income attribution rules with a particularly focus around the meaning of “significant business assets”.
- Income Tax – application of Bright-line rules to land disposals, with a couple of items to focus on aspects of the “main home exemption”.
The full update can be located here http://www.ird.govt.nz/resources/9/7/975eb8fc-3a00-4b90-af8f-5be17b2cc061/2017-12-07+Public+Rulings+Work+Programme.pdf.
Cornerstone 100-day plan promise gains traction
Well it is about to become a reality, as the Families Package (Income Tax and Benefits) Bill (4-1) has been introduced into the House (under urgency, supposedly to have its third and final reading by 15th December!), implementing the removal of National’s 2018 tax cuts package.
Additionally the Bill looks to:
- reinstate the independent earner tax credit and repeal Working for Families tax credit changes legislated as part of the Budget 2017 Family Incomes Package;
- increase payments of family tax credits and raises the Working for Families tax credit abatement threshold;
- increase financial assistance provided to caregivers receiving Orphan’s Benefit and Unsupported Child’s Benefit;
- introduce a Best Start tax credit to help families with costs in a child’s early years;
- introduce a Winter Energy Payment to help older New Zealanders and those in receipt of a main benefit to heat their homes over winter ($450p.a single, $700p.a. couples), and;
- implement changes to the Accommodation Supplement.
The cost of all of the proposed changes are covered by the savings generated from cancelling the tax cuts package – apparently….
Budget Policy Statement (“BPS”) Released
Released with a view to setting the groundwork for the 2018 Budget (broad fiscal parameters & Government priorities), the BPS discusses the significant progress already made towards completing the Government’s 100-day plan, which includes:
- first year of post-secondary education or training will be fees-free from 1 January 2018;
- student allowances and living cost loans will increase by $50 a week from 1 January 2018;
- the Healthy Homes Guarantee Act 2017 has passed, requiring all rentals to be warm and dry;
- contributions to the New Zealand Superannuation Fund will resume on 15 December 2017, and;
- the minimum wage will increase to $16.50 an hour from 1 April 2018.
Included in Budget 2018 priorities are:
- building & improving access to quality public services for all New Zealanders;
- taking action on child poverty and homelessness;
- supporting families to get ahead and sharing the wealth generated by our economy with a wide range of New Zealanders;
- sustainable economic development and supporting the regions, and;
- managing New Zealand’s natural resources and taking action against environmental challenges, such as climate change.
And finally, a fiscal strategy that will ensure:
- Delivery of a sustainable operating surplus across an economic cycle;
- Reduction in the level of net core Crown debt to 20% of GDP within five years of taking office;
- Prioritising investments to address the long-term financial and sustainability challenges facing New Zealand;
- A prudent approach is taken to ensure expenditure is phased, controlled and directed to maximise its benefits. The Government will maintain its expenditure to within the recent historical range of spending to GDP ratio, and;
- The existence of a progressive taxation system that is fair, balanced and promotes the long-term sustainability and productivity of the economy.
The full BPS can be found at http://www.treasury.govt.nz/budget/forecasts/hyefu2017.
EU releases tax haven Blacklist….
Seen as “non-cooperative jurisdictions for tax purposes” (failed to respond in the light of the repeated requests in terms of transparency), the first EU Blacklist contains 17 territories – American Samoa, Bahrain, Barbados, Grenada, Guam, South Korea, Macau, Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Samoa, Trinidad and Tobago, Tunisia and the United Arab Emirates.
Not to go un-noticed, another 47 (that’s right – 47!) countries have been “grey listed” as not compliant with EU tax standards, but who are committed to change their rules by the end of 2018, or 2019 for developing countries, to avoid a colour upgrade (or downgrade depending on one’s view of the world).
It is with little surprise that the list has already been criticised about the absence of certain countries.
Relief for Chatfield’s finally…
Some of you may have been following the Chatfield & Co case (“Chatfield”), which concerned the issue of s.17 notices in 2014 by the Commissioner pursuant to a request for assistance she had received from the Korean National Tax Service (“NTS”). The sole reason for issuing the s.17 notices, was to obtain the information requested by NTS and there was no NZ tax revenue in issue.
Chatfield challenged the legality of the s.17 notices, commencing proceedings with respect to the Commissioner’s decision to issue, and concurrently seeking a disclosure order for the Commissioner to provide full details of “any and all” exchanges between the Commissioner and NTS with respect to the request made by NTS under the DTA.
The disclosure order aspect of the case was finally brought to a close, when Chatfield was declined leave to appeal various decisions to the Supreme Court in late 2017. Chatfield then continued to advance the original legality question and sought judicial review of the Commissioner’s decision to issue the s.17 notices on the basis that they were issued pursuant to mistakes of fact and that the Commissioner failed to apply independent judgment or independently exercise her discretion in issuing the notices. The Commissioner claimed the defence of justiciability (the decision to issue the notices could not be one subject to judicial review), and in the alternative, that Chatfield had not established that she had exercised her statutory powers or duties unlawfully.
The High Court found in favour of Chatfield and quashed the 2014 s.17 notices. The legality of the Commissioner’s actions in issuing notices under s 17 and its related provision, s 16, can be the subject of judicial review proceedings, in this case, the DTA being part of NZ domestic law and consequently within the Courts of NZ jurisdiction – therefore making an assessment of whether or not statutory requirements contained in the domestic legislation had been met.
In this regard, on the basis of the “limited evidence” available, the Court was not satisfied appropriate enquiries had been made by the Commissioner (that the information was in regard to income tax, corporation tax, or inhabitant tax, or fiscal evasion; that any information exchanged under the DTA would only be used in relation to those taxes; and that the NTS had been unable to obtain the information in Korea) – note the judge’s comment – that the Commissioner had not been as candid in her conduct of this case as might have been expected (she had the relevant facts and supporting documents in her possession, yet has not produced the evidence required).
Since the Court was not satisfied that the Commissioner correctly interpreted or applied either art 2 or art 25 of the DTA, or that she properly scrutinised the NTS’ request as required by law, it was appropriate to grant judicial review to Chatfield.
We now await the next chapter in this ongoing saga (whether IR will appeal), however I would suggest the decision is still useful to us all, considering the seeming ease and frequency the Commissioner is issuing s.17 notices of late…
Group Insurance Policies
IR has issued QB 17/10, a Question We’ve Been Asked, with respect to the income tax and FBT issues associated with group insurance policies taken out by an employer for the benefit of its employees.
The item covers term life and/or accident/medical cover insurance policies, where the employer owns the policy and pays the premiums, with any claim being paid to the employee, either directly or via the employer.
The premiums paid will generally be tax deductible for the employer but subject to FBT, with any subsequent claim pay-out not being income of the employer.
Whether the amount received by the employee is subject to taxation, will depend on whether it is a lump sum paid on the death of the employee, or a claim in respect of an accident/medical issue. The former is unlikely to ever constitute taxable income, whereas the latter will depend on whether the amount would be deemed income under ordinary concepts (s.CA 1(2)). If so, then the amount may still be exempt from tax under s.CW 34, if it relates to incapacitation for work and is not calculated with reference to loss of earnings.
Full text of QB 17/10 can be found here http://www.ird.govt.nz/resources/a/d/ad9ff7ce-97a6-46b1-b35a-7404fb9cd3c5/qb1710.pdf.
Group Loss Offsets
IR has issued SPS 17/03, a standard practice statement outlining acceptable group loss offset election practices. The statement comes with a disclaimer that it does not cover all aspects of Subpart IC of the ITA07, focussing instead on the consequences of specific events that can impact on a loss offset and how these should be addressed.
The main points of SPS 17/03 are:
- There are two methods for sharing losses – loss offsets via tax returns and loss offsets via subvention payment – the latter the Commissioner accepts that the term “payment” can mean more than just physical payment (e.g. the offset of an existing debt obligation the loss company has to the profit company).
- The loss amount to be offset does not need to be specified at the time of filing the election, but the amount must be fixed in a manner that binds the loss company when the election is filed, e.g. application of a formula.
- Late elections are permitted at the Commissioner’s discretion and in exercising this discretion she will be mindful of purpose of the loss offset regime and that a case need not be exceptional for the discretion to be granted.
- Part-year loss offsets are permitted provided the various requirements are satisfied, e.g. adequate part year accounts available for both entities.
- Subsequent amendments to loss/profit company tax positions can result in further loss offsets being permitted (loss/profit increased). Naturally it can also result in previous offsets being reduced if appropriate.
A full text of the SPS can be found here http://www.ird.govt.nz/resources/6/a/6a357132-b9e7-4161-9a4a-8b4dd55e2b8b/SPS+1703.pdf.
Could Be NZ’s Warmest Month on Record…
A Herald article over the weekend reflected that January 2018 is already the 3rd hottest month ever recorded since 1909, and if, in the remaining 9 days, the average temperature rises another half a degree, it will surpass the existing two hottest recorded days which are both February dates.
It is with little surprise that the hotter than usual climate has caused drought in several parts of the country, and IR has now responded with a relief package for farmers in affected areas, extending the timeframe for making 2016-2017 income year income equalisation payments, and permitting early refund applications.
Introduced in 1965, the income equalisation scheme enables farmers to level out income from year to year (counter unexpected fluctuations), by encouraging them to put aside part of their income in good years, and to use this money for farm development expenditure in years when farm income falls.
Initially promoted as a scheme to iron out tax rates by permitting income averaging, the Government later stressed that this was not the aim of the legislation, instead being a regime introduced to assist farmers by effectively allowing them to apply income equalisation deposits on farm-related development without those funds bearing income tax. In the absence of the scheme, the costs of farm-development work would come from after-tax income (by the time the expenditure was required, the funding source had already been taxed). As a consequence of the income equalisation scheme, farm programmes could be carried out with the least possible interference from the effects of fluctuating incomes.
In a basic sense, the farmer makes a deposit into an account in their name with IR, and the amount deposited is treated as a deduction from the farmer’s income for the relevant income year, thereby lowering their income subject to taxation for the income year. While in the account the farmer receives interest on the deposits (3%p.a.). Subsequent withdrawals of the deposits are treated as income in the year of withdrawal, although the income amount is then often offset by a deduction in respect of the farm-related expenditure the withdrawals fund.
The income equalisation scheme is also available to those carrying on a fishing or forestry business, where specified conditions are satisfied.
First Public Rulings Work Programme Update for 2018…
A useful aid for gaining a level of insight into exactly where IR are presently focussing their attention.
Published monthly, you can quickly gauge (without having to dig into the detail, which is included later in the publication should you wish to know more) what items are currently in progress, what is on the agenda but has not been started, and what has recently been completed (just in case you missed its publication).
“Not currently being worked on” but I would like to see commentary released at some point during 2018, are the items:
- GST & Income Tax – short-term accommodation issues;
- Income Tax – excessive payments to spouses; and,
- Income Tax – a number of “Land” related items.
The latest update can be found here – http://www.ird.govt.nz/resources/3/5/3552c4b0-9b98-4371-9c16-ea82d8ca6abc/2018-01-12+Public+Rulings+Work+Programme.pdf.
IR Updates PPL Content on Website
IR has recently updated its website with respect to paid parental leave (PPL) entitlements.
From 1st April 2016, entitled persons can claim PPL for up to 18 weeks, in respect of children born, or in some cases coming into their care, post that date. The payments are treated as ordinary income, as if the claimant had continued to receive their normal salary and wages or self-employed income, and as a consequence, the amounts paid are subject to tax and student loan deductions, at the entitled person’s applicable rate. A portion of the PPL payment can also be contributed to the recipients KiwiSaver account, although there is no obligation on the employer to match contributions during the period PPL is paid.
Presently, the maximum PPL is $538.55 before tax, entitlements calculated based on the average of the highest 26 of the last 52 weeks of pay for employees, or average weekly earnings for those self-employed (with a minimum entitlement of $157.50 per week before tax).
Legislation enacted late in 2017, has seen the introduction of incremental increases in the entitlement period, to 22 weeks from 1st July 2018 (where first entitlement arises post that date), and then to 26 weeks from 1st July 2020. However it is noticeable that even post the increase to 26 weeks, NZ somewhat lacks behind other OECD members, where the average PPL period is 48 weeks.
Proposed ERA amendments
While not exactly of a taxation flavour, and therefore essentially a space-filler for what otherwise could have been a very brief AWIR edition due to minimal newsworthy movements in the world of tax during the week, the Government has announced proposed changes to the Employment Relations Act, which are to be included in a Bill to be introduced into Parliament next month.
The main changes proposed are:
- Restoring statutory rest and meal breaks
- Limiting 90 day trials to employers with fewer than 20 employees
- Restoring reinstatement as the primary remedy to unfair dismissal
- Increasing protections for vulnerable workers such as cleaners and caterers, when a business is transferred or restructured
- Strengthening collective bargaining and union rights in the workplace.
Of interest to most I suspect, will be the amendment to the 90 day trial period. Having experienced the candidate who is a master of the interview process, but then sends along their identical twin, who clearly has been missing in action for a few years, to actually do the work, the “try before you buy” from an employer’s perspective has been quite useful…
Time to put on your thinking cap…
For a number of us, the January/early February period is often a somewhat quieter time (post realisation the world did not actually end on the 22nd December, and therefore what was all that pre-Xmas fuss all about), and consequently allows some reflection on the calendar year just completed, with an almost “fresh start” emotional sensation with respect to coming year.
It is also a good time to take stock of your client’s affairs, mindful that once that “there’s not enough hours in the day” feeling re-establishes itself, 1st April and the beginning of a new income year will be fast upon us.
Do you have clients wishing to elect into the LTC regime or requiring various exemption certificates for the new tax year, or have those clients who utilised the group loss offset provisions via the subvention payment mechanism in their 2017 filed positions, who need to ensure payment is made by 31 March? Now may be an opportune time to get the ball rolling….
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