Richard's tax updates: July/August

Richard has had over 30 years’ experience with New Zealand and International taxation. His team provide services including:

  • Q&A service for accountants
  • Tax opinions
  • IRD risk reviews and audits
  • IRD arrears
  • International tax advice

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.

Personal tax liability exposure clarified

IR has released BR Pub 20/06, ‘Income Tax and Goods and Services Tax – Director’s liability and the COVID-19 ‘safe harbour’ in schedule 12 to the Companies Act 1993’. The binding ruling publicises the Commissioner’s view of whether either section HD 15 of the Income Tax Act 2007 (ITA) or s 61 of the Goods and Services Tax Act 1985 (GSTA), could apply to a director who has relied on the Covid-19 ‘safe harbour’ in schedule 12 of the Companies Act 1993.

You should all be aware, that any director of a company, must not:

  • Agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.
  • Cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.
  • Agree to the company incurring an obligation, unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so.

A director that fails to abide by the above duties, can be made personal liable for the loss caused to others as a result of their breach. Covid-19 has of course changed the landscape dramatically for many businesses, and has seen the need to introduce the ‘safe harbour’ to allow director’s acting in good faith to continue to trade, when without the concession, they would have been exposed to the risk of personal liability for their actions in doing so.

A director can rely on the safe harbour where:

  • The directors consider in good faith that the company is facing or is likely to face significant liquidity problems in the next six months because of the impact of Covid-19 on the company or its creditors.
  • The company was able to pay its debts as they fell due on 31 December 2019 (or the company was incorporated on or after 1 January 2020 but before 3 April 2020).
  • The directors consider in good faith that it is more likely than not that the company will be able to pay its debts as they fall due within 18 months (for example, because trading conditions are likely to improve or the company is likely to able to reach an accommodation with its creditors).

The ‘safe harbour’ can be used be directors during the ‘safe harbour period’, which presently runs from 3rd April 2020 to 30th September 2020 (and which may be extended).

Naturally, even with the benefit of the ‘safe harbour’, companies are still going to fail due to the impact of Covid-19, and insolvency will have the likely consequence that the companies income tax and GST liabilities will not be paid.

In this regard, section HD 15 of the ITA (asset stripping of companies) permits income tax owing by a company to be recovered from the company’s directors and shareholders where an arrangement has been entered into that has an effect that the company cannot meet a tax liability. Section 61 of the GSTA provides that section HD 15 applies as if ‘income tax’ and ‘tax’ read ‘goods and services tax’.

BR Pub 20/06 confirms that section HD 15 of the ITA or section 61 of the GSTA will not apply to a company that is unable to pay a tax obligation where:

  • The directors of a company facing significant liquidity problems because of the effects of Covid-19 and the resulting economic climate, decide in good faith to rely on the safe harbour and continue carrying on business.
  • As a result of the directors’ decision to rely on the safe harbour, the company continues carrying on business and trading or incurs new obligations on ordinary commercial business terms (for example, bank loans or sales at credit).

The one exception to the Commissioner’s stated position in BR Pub 20/06, is where an opinion is formed that section HD 15 or section 61 would have applied to the arrangement regardless, notwithstanding that it was entered into during the ‘safe harbour period’.

BR Pub 20/06 contains a detailed discussion on the application of section HD 15 (so a useful read in any event to understand its potential application to your clients) and a couple of examples to illustrate the rulings application.

Updated SPS on tax payment timing

Earlier this year, AWIR covered the issue of SPS 20/01 – Tax payments received in time. However due to IR’s transformation programme and changes to payment methods and related processes introduced accordingly, IR has now updated SPS 20/01 via the release of SPS 20/04.

The standard practice statement sets out the various payment options and the type of information you will need to possess should you wish to elect to use a certain method, and then proceeds to confirm when a payment made under a respective option, will be treated by IR as having been received in time.

The primary take-outs from SPS 20/04 in my view:

  • You can use your debit/credit card to pay your tax, but unless it is a child support payment or a student loan repayment made from overseas, you will incur a 1.42% fee for the convenience.
  • If you are making an over the counter payment at Westpac or via a Smart ATM, from 1st July 2020 you are now required to provide a barcode (obtained from your IR correspondence or you need to create one via IR’s website).
  • You can no longer make payment by cheque unless you have obtained pre-approval from IR.
  • Payment due dates falling on weekends and public holidays are due the next working day.

You must consult…

While not tax related, having seen the recent commencement of the publishing of employment law decisions arising from actions taken by disgruntled employees against their employers as a consequence of Covid-19 related decisions made by those employers, it is important that you remind your clients, that Covid-19 has not in any way negated your clients obligations to consult with their employees and to reach agreement, prior to any reduction in the employees ordinary wage.

We ourselves had a number of clients when the wage subsidies were first announced back in March, advising that they had claimed the subsidy and questioning that did this mean that they now only had to pay their employees 80% of their normal pay. The answer – only post consultation and agreement with the affected employee can you make a reduction.

For those of your clients that did not consult, they should be on notice that all of the decisions I have seen to date, are finding in favour of the employee, requiring the employer to now paid them at least the difference between what the employee was paid, and the minimum wage for a 40 hour week (if not simply the quantum of the lost wages).

I suspect over the coming months we will see a spate of similar decisions being released by the ERA.

Non-resident employer’s operational statement

IR has released draft operational statement ED0223 titled – Non-resident employers’ obligations to deduct PAYE, FBT and ESCT in cross-border employment situations.

The stated purpose of ED0223 is to clarify the approach to take with regards to a non-resident employers’ obligations to deduct PAYE, FBT and ESCT in certain cross-border employment situations.

The key trigger-points are twofold:

  1. Firstly, establish whether the employer has made themselves subject to NZ tax law by having a ‘sufficient presence’ in New Zealand; and if so,
  2. Secondly, determine whether the services performed by the employee are properly attributable to that New Zealand ‘sufficient presence’.

In establishing whether the employer has a ‘sufficient presence’ in New Zealand, IR provides several guiding principles –

  • having a trading presence in New Zealand, such as carrying on operations and employing a workforce for the purpose of trade;
  • having a New Zealand permanent establishment (‘PE’), a New Zealand branch, contracts that are entered into in New Zealand and performing contracts in New Zealand with employees based here; or,
  • having a New Zealand address for service.

It should be noted that IR’s draft view is that just because the employee may be in New Zealand performing the service for the non-resident employer, will not alone subject the non-resident employer to PAYE, FBT or ESCT obligations, particularly where the ‘sufficient presence’ threshold has not been met.

Got your answer? If only life was that simple, because even if you have satisfied the two components, before you proceed to register your non-resident employer with IR, you then need to check:

  • where non-resident employees are involved, will the amounts received by them from the employer be deemed to be an amount of ‘non-residents foreign sourced income’ (income not treated as having a New Zealand source under section YD 4);
  • will the income be exempt from New Zealand tax under section CW 19 (visits less than 92 days); or,
  • will the income be exempt from New Zealand tax via application of a relevant DTA (often applicable where employee in New Zealand <184 days in any 12 month period).

FBT and ESCT payment obligations will usually follow the PAYE treatment, however as a general rule, if the non-resident employer has not made themselves subject to New Zealand’s taxing jurisdiction (due to lack of ‘sufficient presence’ in New Zealand, then they are unlikely to have any employer related New Zealand tax obligations.

Should you wish to make a comment on ED0223, the deadline is 1st September 2020.

All quiet on the taxation front…

After a flurry of activity since we went into level four lock-down (what now seems like an eternity ago), last week was eerily quiet in the world of tax.

With Covid-19 still very much the topic of conversation (although walking down Queen Street you could be fooled into thinking it was just a bad dream), I thought I would use this week’s edition just to draw your attention to the IRD’s tax agents Q&A on Covid-19 website link, in case you were not yet aware of its existence.

The link is updated as new topics arise (the latest version now 2nd July), with the useful ability to simply scan the dates in the right-hand column to quickly ascertain where the latest updates fit into the document.

The 2nd July edition now includes commentary around IR’s interpretation of ‘when travel is practically restricted’ in terms of applying the 183 day presence test to tax residency determinations of those persons who may have had their travel plans disrupted due to Covid-19. With numerous borders around the globe having closed, and with that, multiple airlines cancelling international flights, travellers have found themselves stuck in New Zealand for longer than intended, one consequence of which, was risk of now breaching the 183 day presence threshold, which would deem the person to be a New Zealand tax resident.

You may recall in this regard, that towards the end of April, IR issued a public statement, advising that if a person left New Zealand within a reasonable time after they were no longer practically restricted in travelling, then any extra ‘presence’ days, when the person was unable to leave, would be disregarded, for the purpose of the 183 day test calculation.

As borders in a number of jurisdictions have begun opening, and more flights have become available, IR has now clarified its earlier statement, by publishing what factors may be considered when deciding if a person is ‘practically restricted’ in travelling, to include:

  • Border controls or entry restrictions. A person is unable to practically leave New Zealand if they cannot enter a country of which they are a citizen or permanent resident or visa holder; and,
  • The availability of commercial flights.

It should be noted that it is IR’s view that personal considerations or preferences are not factors that impact on whether a person is practically restricted in travelling.

Once there is no practical restriction on travel, then deciding to remain in New Zealand does not prevent days from being counted for the residence day tests. It does not matter whether the person decides to stay in New Zealand because of the level of Covid-19 infection in their home country, or for other reasons. This includes wanting to go to a different country where entry restrictions still exist. Choosing to stay in New Zealand will result in the person becoming tax resident under the ordinary application of the day tests.

In this regard, I had a person call me last week as a result of reading an article I had previously published on determining New Zealand tax residency, who did not want to leave New Zealand to go home to the United States, because of how bad things were there presently. I advised that while I could sympathise with their position, they needed to be on notice that IR would now consider their extra days in New Zealand to be one of personal choice as opposed to enforced restrictions, and consequently they were likely to be deemed a New Zealand tax resident, having now exceeded the 183 day threshold.

Now in a practical sense, those persons who have been on a travelling holiday in New Zealand and have not actually derived any New Zealand sourced income while here, are unlikely to be overly concerned as to whether they trigger a New Zealand tax residency status or not, as overriding the domestic legislation will be the residency tie-breaker test contained in the double tax treaty agreement most travellers home countries will have with New Zealand, application of which will dictate that New Zealand obtains no taxing rights over the travellers income sourced from outside of New Zealand, upon a New Zealand tax residency status having been triggered.

The tax agents link can be found here.

Preserving your fair trial rights

Now one would hope, that not too many of us will ever be subject to criminal proceedings by IR, however just in case you are facing this, IR has recently issued Commissioner’s Statement CS 20/04, ‘The disputes resolution process and fair trial rights’.

CS 20/04 sets out how IR will approach a scenario where the taxpayer is subject to both potential prosecution as well as timing obligations to comply with the disputes resolution process. In this regard, IR has acknowledged the concerns, that a taxpayer may be compelled to disclose their defence to criminal proceedings in their disputes documents, which in turn could impact on their fair trial rights.

CS 20/04 now confirms that:

  • When criminal proceedings have commenced or are contemplated, the taxpayer will be advised of that position before they are required to issue a disputes document (such as a NOPA or NOR).
  • Taxpayers can already issue a response outside the response period in ‘exceptional circumstances’. IR will accept that preserving a taxpayer’s rights in current or potential criminal proceedings is an ‘exceptional circumstance’ which prevents a taxpayer from responding to the assessment or notice within the applicable response period.
  • Taxpayers can elect not to file an outstanding disputes document until the question of prosecution is resolved. This will delay the requirement to respond and therefore either delay the start or pause the disputes process.
  • Once the question of prosecution has been resolved, then the disputes process can resume (or in some cases commence) and IR will advise the taxpayer of this. The taxpayer will need to issue their outstanding disputes document by the later of two months from the date of this advice or the original due date for that outstanding disputes document.

CS 20/04 is effective from 22nd July 2020.

Covid-19 Response Bill introduced

The Covid-19 Response (Further Management Measures) Legislation Bill (No 2) (318-1) has been introduced into parliament, with a proposal to pass the Bill under urgency.

Broadly, the Bill amends:

  • expense deductibility and R&D tax credit rules to support the implementation of the recently introduced R&D loan scheme (so that it operates in similar fashion to the Small Business Cashflow Scheme). The amendments will ensure a deduction for expenditure or depreciation loss where the expenditure was funded by the R&D loan (usually denied under DF 1(2) & DF 1(4)), and that the same expenditure still qualifies for the R&D tax credit (usually denied via schedule 21B, part B, clause 21 of ITA07). The R&D loans will be administered by Callaghan Innovation and will only be available for the 2020−21 fiscal year;
  • qualification periods for the in-work tax credit, ensuring that a person’s entitlements to the credit is not impacted for a period of up to two weeks as they transition between jobs, are unpaid for a period or leave their employment. The amendment provides an exception to the “in employment” test for a person who previously met the test within the past fortnight, and provides that a person is deemed to meet the test if they do not derive income or otherwise do not meet the in employment test but have met the test within the last 14 days;
  • the existing increased flexibility muscle of IR (introduced as part of the initial Covid-19 response legislation in April 2020), to enable IR to vary a due date, deadline, time period or time frame to shorten or otherwise modify the time-related requirement. The amendments will provide IR with the ability to respond to some cases with appropriate flexibility by shortening timeframes, for example, by reducing the time before a taxpayer may choose a new approach, the time for an election to take effect, or before a taxpayer may benefit from a provision. For example, existing legislation may require the taxpayer to wait 12 months before they can amend a filing period again, whereas this amendment will allow IR to reduce the 12 month timeframe to say three months; and,
  • the potential remission of UOMI for provisional taxpayers, accrued on an amount of terminal tax payable for the 2020−21 tax year where the taxpayer failed to pay the relevant portions of the amount by the provisional tax dates because their ability to reasonably accurately forecast their residual income tax, has been significantly adversely affected by Covid-19. This amendment expands on the recent remission relief applying from 14th February 2020 to actual late payments caused by Covid-19, to also cover situations where UOMI is charged retrospectively, and the taxpayer satisfies the following criteria, they:
  • are a provisional taxpayer in the 2020−21 tax year;
  • estimate their provisional tax;
  • use the standard method and don’t pay the amount of the standard instalment on the final instalment;
  • would be a safe harbour taxpayer but they did not pay their instalments in full;
  • have residual income tax of $1 million or less; and,
  • the ability to make a reasonably accurate forecast of taxable income for the year has been significantly adversely affected by Covid-19 and that resulted in interest being charged.

IR must be satisfied that the taxpayer has asked for the relief as soon as practicable and made the payment of tax.

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