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Richard's Tax Updates: March
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’…
- Earthquake Support Subsidy – GST Concessions Extended
- Special Reports following enactment of new legislation
- Patents Draft Interpretation Statement
- BEPS Consultation Documents released
- Age of Entitlement Increasing
- Beneficiaries Right to Disclosure
- Minister of Revenue EMA Speech
- Omnibus Tax Bill Update
- Management Fees – Substance??
- Small Amendment to SPS
- Tax Relief for Coromandel Farmers
- Trustee Lacking Capacity to Act
- Second Major Tax Bill Passed
- Farmhouse Expenses Deductibility
- YouTube Receipts Taxable
Earthquake Support Subsidy – GST Concessions Extended
The concessions, which applied to ensure support subsidy payments received in respect of the Kaikoura and Hurunui earthquakes were not treated as taxable grants or subsidies for the purpose of s.5(6D) of the GST Act, have now been extended until 26th May 2017 (were due to expire 28th February 2017).
Special Reports following enactment of new legislation
With the recent passing of the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act 2017, IR has released two special reports, with a third relating to the new Foreign Trust disclosure rules to be issued shortly.
The first report deals with the G20/OECD global initiative for the automatic exchange of information (AEOI), and explains the recent changes (at a high level) to NZ tax legislation to incorporate the AEOI standard into NZ’s domestic law. You may recall from an earlier update, IR’s release in December 2016 of draft comprehensive guidance to implementation of AEOI, submissions to which were requested to be filed by 28th February 2017.
The second report, and that with more interest for the majority, deals with the raft of recent changes to business tax rules, including provisional tax and use of money amendments (safe harbour increased to $60k RIT and all taxpayers; UOMI only applying from 3rd instalment where standard uplift method used), introducing great flexibility in the schedular payment rules (election of individual rates; option to elect into regime) and modernising the way IR communicates with taxpayers where appropriate (permitting verbal communication where information required under a prescribed form).
Copies of the reports can be obtained from here: http://taxpolicy.ird.govt.nz/news/2017-02-28-specialreports-new-legislation
Patents Draft Interpretation Statement
Released to reflect the updates to legislation since 2006, PUB00262 deals with the income tax treatment of NZ patents. For those of you that are not already aware, patents have their own specific taxing provision which deems, under s.CB 30, any amount derived from the disposal of a patent application (with a complete specification) or of patent rights, as income of the person.
The IS reflects two main changes in the Commissioners previously published position:
- renewal fees are now considered to be revenue expenditure and deductible in the year incurred (the previous statement treated renewal fees as part of the depreciable cost of the patent)
- expenditure for underlying intangible items after asset recognition, which are now considered to be depreciable.
Those wishing to make submissions on PUB00262, should have their comments filed no later than 11th April 2017.
BEPS Consultation Documents released
Some of you may have been aware, that Queenstown hosted the International Fiscal Association Conference on 3rd March, during which our Ministers of Finance and Revenue jointly released three consultation documents which propose measures to strengthen New Zealand’s rules for taxing large multinationals:
- Transfer pricing and permanent establishment avoidance, which outlines a package of proposed measures to counter certain BEPS activities by large multinationals in NZ.
- Strengthening NZ’s interest limitation rules, detailing proposals aimed at preventing multinationals using interest payments to shift profits offshore.
- New Zealand’s implementation of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS, also known as the MLI. This document seeks feedback NZ’s implementation of the MLI, which will be an instrument used to modify a number of NZ’s existing double tax agreements in order to bring them into line with OECD recommendations.
Submissions on the MLI document are requested to be filed no later than 7th April 2017, with submissions on the first two documents requested by 18th April 2017.
Age of Entitlement Increasing
Hard to miss with all the media hype, but for those that did, the Government announced the gradual increase in the age of eligibility for National Superannuation from 65 to 67, commencing in 2037, with a six monthly increment, reaching the new threshold in 2040.
Access to KiwiSaver at age 65 will remain unchanged, as will the present universal entitlement without means testing.
It is also proposed to double the present residency requirements so that a person must have lived in NZ for at least 20 years, with 5 of those post the age of 50.
Legislation is proposed to be introduced post the election.
Beneficiaries Rights to Disclosure
While not strictly tax related, I appreciate that many of you act for clients who will have a family trust, and may in some cases also act as trustee for your client’s trust. No doubt like myself therefore, you have been asked on a number of occasions about trustees obligations to disclose information regarding the trust to beneficiaries when requested.
The recent Supreme Court decision in the somewhat high profile Erceg case, provides useful guidance in this respect. Not happy with the petty sum of $95 million he had received directly from his bother Michael’s estate, Ivan (not even a named beneficiary of either trust) had sought disclosure from the trustees, of various documents and information held by them, post having not received any distributions from either trust when they were wound up in 2010. Directions from the Court had been sought when the trustees refused to make the requested disclosures.
The Supreme Court found in favour of the trustees and denied Ivan’s disclosure requests for a number of reasons, including the protection of other beneficiaries from his somewhat litigious nature, and in making their decision outlined a list of ten factors they thought should be evaluated in respect of any application for disclosure of trust documents, which included:
- The context for the request and the objective of the beneficiary in making the request.
- The nature of the interests held by the beneficiary seeking access.
- Whether there are issues of personal or commercial confidentiality.
- The likely impact on the trustee and the other beneficiaries if disclosure is made.
Paragraph 56 of the decision contain the full list – Erceg v Erceg  NZSC 28
Minister of Revenue EMA Speech
The annual Employers and Manufacturers Association payroll conference during the week included in its program an update from the Minister on the PAYE proposals that were released in November last year. The speech focussed on four keys areas of the proposal document:
- “Payday” reporting of employee information will come into effect from 1 April 2019, replacing the requirement for an employer monthly schedule. Employers using payroll software, payroll intermediaries and those above the electronic filing threshold will report within 2 days of payday, while those below the electronic filing threshold and not using software will have 7 days to report.
- A new threshold of $50,000 a year of PAYE and ESCT for compulsory electronic filing of PAYE information (reduced from $100,000) will come into effect – although an exemption from electronic filing will be available for any employers who cannot access digital services.
- The proposal to have PAYE paid to IR at the same time employees pay their staff has been dropped.
- As a result of the more widespread use of electronic services, the current payroll subsidy will cease to exist from 1 April 2018. The subsidy was being offered in an effort to improve the quality of PAYE information transmitted to IR, by encouraging employers to use listed payroll intermediaries.
Omnibus Tax Bill Update
The second of two fairly significant tax Bills (the first enacted last month) passed through its second reading during the week and I would expect to see it enacted within the next fortnight. The Bill contains changes to various closely held company rules and makes several key changes to the existing NRWT and AIL regimes. I will provide a few more details once the Bill passes its final reading.
Management Fees – Substance??
A recent Court of Appeal decision is a timely reminder that management fees cannot be used as an income stripping mechanism and that taxpayers expose themselves to significant shortfall penalties where it is clear that the circumstances under which the management fees were charged were contrived and artificial.
The taxpayer owned a number of companies, ultimately via a trust, which itself owned a profitable commercial rental property. One of the group companies had losses, so the taxpayer had the loss company charge management fees to the trust. IR reviewed and disallowed the deduction claimed by the trust for the fees paid on the basis there was insufficient evidence that any actual management services had been provided.
It was certainly not helpful to the taxpayer’s case that the level of management fees charged just happened to equate to the before tax profit of the trust (circa $1.1m) and consequently the effect of the arrangement was to reduce the trust profit to zero with no corresponding tax payable by the recipient company due to its existing tax losses. The CoA agreed with the lower Courts:
- Insufficient evidence of actual services provided meant s.BD 2 nexus test failed,
- Even if nexus test could be satisfied, s.BG 1 would have applied to deem a tax avoidance arrangement in place as the entire purpose and effect of the arrangement was the eliminating of income tax
otherwise payable, and;
- The arrangement effectively amounted to a loss offset between a company and a trust which was not permitted under the legislation.
The taxpayer entities were charged a 50% shortfall penalty for taking an abusive tax position, which was also upheld by the CoA.
Small Amendment to SPS
Due to the recent passing of the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act 2017, IR has announced the amendment of SPS 16/01, which deals with requests to amend assessments, to factor in the increase from 1 April 2017, of the monetary threshold for the correction of minor errors from $500 to $1,000.
Tax Relief for Coromandel Farmers
It seems to be a common theme of late (and perhaps evidence of increasing adverse weather events around the globe) as IR has announced tax relief for farmers in the greater Coromandel area (Franklin Ward, Hauraki District and Thames-Coromandel District) due to recent flooding damage. The relief is targeted towards the income equalisation scheme by allowing late 2016 income tax year deposits to be made up to 30th April 2017 regardless of when the 2016 tax return is filed or is due to be filed. Applications for early refunds will also be permitted under the relief package measures.
Trustee Lacking Capacity to Act
Not tax related, but I thought might be of interest to some of you, a recent High Court decision confirmed that a person holding a EPA (enduring power of attorney) could not use that power to effect the resignation of a trustee who lacked the capacity to continue in that position, in this case due to dementia. The husband in the case, holding the EPA over his wife, had attempted to retire her as a trustee via the use of the EPA powers.
While Part 9 of the Protection of Personal Property Rights Act 1988 (PPPRA) provides that the donor of an EPA can authorise the attorney ‘to act generally in relation to the whole or a specified part of the donor’s affairs in relation to his or her property’, the property the donor holds on trust (in their trustee capacity) is not included in ‘his or her property’ and, as such, trustee powers are not exercisable by a donee of an EPA.
The proper process for effecting a removal is to seek an order from the Court.
Second Major tax Bill Passed
Now just awaiting Royal Assent, the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Bill passed its 3rd reading on 23rd March. Major provisions in the Bill include:
- Changes to certain look-through company (LTC) rules and the dividend rules as they apply to closely held companies, including narrowing the associated party capital gains definition; permitting
shareholders to receive a mix of PAYE salary and shareholder salaries; and removal of the deduction limitation rule.
- changes to the non-resident withholding tax (NRWT) and approved issuer levy (AIL) rules, including imposing NRWT where 3rd party interposed in order to access AIL; correcting timing mismatches between interest deductions & NRWT payment triggers; and introducing an “acting together” test which will impose NRWT where non-associated parties acting together to fund a NZ resident, and;
- changes to several provisions in the Goods and Services Tax Act 1985, including permitting taxpayers to claim back the GST incurred on their costs of capital raising (usually seen as a financial service and therefore an exempt supply); expansion of the current test of when a service provided to a nonresident in respect of NZ land will be taxable (as opposed to zero-rated); and ensuring limited partnerships are able to comprise members of a GST group with companies.
Farmhouse Expenses Deductibility
IS 17/02 representing IR’s finalised views on the issue has been released. The statement confirms that deductions for farmhouse expenses are available only to the extent that they are incurred in carrying on the farming business (although a compliance cost measure is included where the value of the farmhouse is 20% or less of the total value of the farm). Previously, the Commissioner has permitted full-time farmers to claim full deductions for both rates and interest payable on farm mortgages, and has allowed all farmers to claim 25% deductions on expenses relating to the farmhouse. The Commissioner now considers that the deductions allowed for those items are no longer appropriate and the general rules of deductibility and apportionment will apply from the commencement of a taxpayer’s 2017/18 income year.
YouTube Receipts Taxable
Well it had to happen sooner or later for all of you out there making your millions from the home movie clips you are posting on YouTube every day. IR has now released a draft QWBA on the question: Do I need to pay tax on YouTube receipts? The draft view is yes, as in most cases, even if the receipts are not generated out of a business activity you are carrying on, they are still likely to be caught under two other legislative provisions – income under ordinary concepts or from a profit-making undertaking or scheme.
PUB00248 provides brief guidance on the application of these two provisions along with several examples, and is quite a brief read (for a government publication) being only three and a bit pages. Submissions on the draft are requested to be filed no later than 4th May 2017.