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Richard's Tax Updates: November
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…
- OECD report on VAT/GST collection
- AIM determinations used
- Draft QWBA’s
- Review of the PRA – dealing with trusts
- Reinstatement of Tax Bill
- OECD Transfer Pricing Rate
- Watch this space – GST on low value goods
- Cash dividends – when derived
- New Revenue Minister’s address to CANZ
- TWG Terms of Reference
- There really is no helping some people
ECD report on VAT/GST collection
Further to the 2015 Final Report on BEPS Action 1 – addressing the tax challenges of the digital economy, the OECD has released new implementation guidance to promote the effective collection of consumption taxes on cross-border trade.
The focus of the guidance is on dealing with suppliers of services and intangibles who are not resident in the jurisdiction of taxation, providing affected Revenue authorities with a set of internationally agreed standards, which is aimed to promote consistent and coherent implementation of collection regimes across jurisdictions, thereby facilitating international administrative co-operation.
The report comprises three main components, providing chapters on key policy decisions and design issues, implementation of “registration-based collection regimes” (VAT/GST collection regimes based on requirement of foreign suppliers to register and remit tax in jurisdiction of taxation) and guidance on the design and practical operation of a “simplified registration and compliance regime”.
You can obtain a full copy of the report from the OECD’s website.
AIM determinations issued
With the new method for calculating provisional tax (Accounting Income Method) having application to the 2018-19 and later income years, IR has now issued various technical determinations which detail the tax adjustments required under AIM and IR’s information requirements in this regard.
The introduction of AIM will provide taxpayers with four potential calculation methods to use when determining yearly provisional tax payment obligations, the latest method utilising upgraded software (an AIM-capable accounting system) to compute provisional tax based on current year accounting information.
While the technical determinations are essentially being issued by IR for use by software developers (as they detail the minimum tax adjustments required within the software), they will also act as a guide for taxpayers and their agents – each determination including examples as interpretation aids.
Presently there have been ten determinations issued, covering adjustments for private expenditure, trading stock, accounts receivable/payable, losses, livestock and depreciation.
All of the determinations will be included in the November 2017 TIB, although naturally they can be obtained directly from IR’s website.
Two draft QWBA’s (questions we’ve been asked) have recently been released by IR for comment.
PUB00306 considers the question of whether a GST registered person can issue a combined tax invoice and credit note. IR’s proposed answer – yes, provided the two components relate to separate supplies. Should only one supply be involved however, then a single document cannot be used for the joint purpose, and this is on the basis that a credit note is only permitted to be issued after a tax invoice has been issued in respect of the relevant supply – not contemporaneously with the issue of the relevant tax invoice therefore.
The deadline for comment in respect of PUB00306 is 8th December 2017.
PUB00318 examines binding rulings and the effect of the Commissioner changing her mind with respect to the application of s.BG 1. It considers whether the Commissioner can apply a new interpretation of the anti-avoidance provision when a ruling period expires in relation to an ongoing arrangement. IR’s proposed answer is yes, provided that the application of the new interpretation does not have the effect of reversing the tax outcomes in the period covered by the ruling.
The deadline for comment is 20th December 2017.
Review of the PRA – dealing with trusts
While not of a pure taxation flavour, I thought the issue would still be very topical to the majority of you.
The Law Commission has released an issues paper – Dividing Relationship Property – Time for Change? One big question is whether the legislation should be amended to deal with assets in trusts (which are usually not subject to PRA rules of division), structuring which is often seen to undermine the policy of just division and the principle that all property central to a relationship ought to be divided equally. Consequently the issues paper seeks feedback on whether rules should be amended so that there is a single, accessible and comprehensive statute that will regulate the division of property at the end of a relationship. This could also see the repeal of section 182 of the Family Proceedings Act 1980, which is also often used as a strategic weapon to attack nuptial settlements where the PRA is of little use to the claimant due to the jurisdictional issues surrounding trust structures.
The submission deadline is 7th February 2018.
Reinstatement of Tax Bill
With the new Parliament recently opening its doors for business, the 8th November saw the reinstatement of the Taxation (Annual Rates for 2017-18, Employment and Investment Income, and Remedial Matters) Bill. This was the Bill introduced on 6 April 2017, which contained measures relating to collecting employment and investment income information, reforms to the taxation of employee share schemes and was to set the annual tax rates for 2017–18.
Interestingly, the Income-Sharing Tax Credit Bill (one permitting taxation on the basis of family income as opposed to as separate individuals), introduced in August 2010, was not reinstated.
OECD Transfer Pricing Update
The OECD has updated its transfer pricing country profiles (TPCP) recently. The TPCP reflects the current transfer pricing legislation and practices of 31 participating countries (including NZ), based on information provided by those countries (to ensure accuracy of information).
Users of the information will be able to see domestic application of transfer pricing rules including the jurisdictions practices with respect to the arm’s length principle, various transfer pricing methods, documentation requirements and administrative approaches to resolving disputes, as well as other key aspects relating to transfer pricing.
The information contained in the TPCP is intended to clearly reflect the current stage of countries’ legislation and to indicate to what extent their rules follow the OECD Transfer Pricing Guidelines. Full details can be found on the OECD website.
Watch This Space – GST on Low Value Goods
Usually in the GST space, it is a case of our trans-Tasman cousins watching what we do and then following suit. However in an area which in recent times has received much attention, particularly as a result of ever- increasing groaning from local suppliers that the playing field with overseas suppliers of low value goods is far from level, Australia has broken the ice first.
From 1st July 2018, and similar to both jurisdictions recently implemented “remote services” regimes, a new “point of sale” GST charging mechanism will apply to non-border imports of low value goods (border imports being those goods accompanying passengers/crew of ship or aircraft when they arrive in Australia – existing $1,000 customs value threshold will still apply to these goods). Goods imported in a consignment over $AUD1,000 will still be subject to the existing border processes of having the customs duty, GST and clearance fees charged to the importer at the time of entry into Australia.
Non-resident suppliers (including within that definition, operators of electronic distribution platforms and re-deliverers (goods initially delivered to place outside Australia and then re-deliverer assists with delivery into Australia)) meeting the AUD$75k GST registration threshold will need to register for GST, charge GST on sales of low value imported goods and lodge returns with the ATO. As with the “remote services” regime, a simplified registration and reporting system will be available for the non-residents, and there will be provisions in the new legislation to prevent double taxation.
Currently listed on our Governments 2016-17 tax policy work programme, a June 2016 public statement identified intentions to:
- move to a de minimis defined by the value of the consignment
- potentially make a reduction to the de minimis in future, and
- undertake further work with industry to develop new collection mechanisms.
Since the release of this statement, the NZ Customs Service has continued work to support the development of a regime to collect GST on low-value imported goods (presently exempt where less than $60 GST and/or duty payable on the import (the de minimis rule which equates to roughly $400 of value) and the item does
not attract both duty and GST – for example clothing and shoes (where charges may be payable where value of import exceeds approximately $225).
Watch this space therefore as NZ looks to follow Australia’s lead this time, as I feel it’s only a matter of “when”, not “if”, new taxing rules will be introduced – particularly in an environment where the growth of on-line sales from international sites continues to increase.
Cash Dividends – When Derived
IR has released a draft QWBA (PUB00296) on the issue of when income from a cash dividend (as opposed to a non-cash dividend) paid on ordinary shares is derived.
The commentary provided in the QWBA distinguishes between those taxpayers who return income on a cash basis, and those who use an accrual basis to report income, and also between dividends paid by listed companies and those paid by closely held companies.
The simple answer for those shareholders who account on a cash basis (usually salary & wage taxpayers and some professionals) is that the dividend will be taxable to them in the income year during which the amount is actually paid to them, unless it is credited for their benefit at an earlier date – for example by way of a journal credit to their shareholder current account.
Those on an accrual basis of accounting, will derive the dividend income when a debt in their favour is deemed to have been established and it should be noted that this could be, particularly in the case of closely held company dividends, as early as the date the dividend is declared (irrespective of when the journal entry to record the dividend is actually processed). This could occur for example where a director’s resolution declares a dividend payable to shareholders of the company as at the date of the resolution, payable by way of credit to the shareholders current account. The debt in favour of the shareholder under this scenario (and therefore the income derivation trigger) is created at the date of the resolution – the subsequent entry in the books at a later date simply evidencing the prior decision of the Board.
With respect to dividends paid by listed companies, usually the “record date” will be the applicable date for shareholders reporting their income on an accrual basis, as it is only on this date that identification of the shareholders entitled to receive the dividend will be determined.
The deadline for comment on PUB00296 is 22nd December 2017.
New Revenue Minister’s Address to CAANZ
The Honourable Stuart Nash made the opening address of the annual CAANZ tax conference held on 16/17th November.
The speech focused on three key aspects;
- the 100 day plan,
- future challenges
- and IR’s business transformation project.
With respect to the new Government’s 100 day plan, priorities in the tax space will see the repeal of National’s planned tax cuts, legislation to pass the Families Package (Winter Energy Payment, Best Start and Paid Parental Leave increases) and establishment of the Tax Working Group. The proposed initial question for the TWG to answer, will be “is our tax system fit for the future?” We should expect to see terms of reference and membership of the TWG pre-Xmas.
On future challenges, Minister Nash referred to first understanding “what is the future of work?” and having 21st century solutions to 21st century problems, which can only occur by appreciating new technology and the way if changes how businesses operate and consumers behave, and what other disruptive technologies may be on the horizon.
Finally, albeit it briefly (since the Commissioner of IR was next up with her own update), were some comments re IR’s use of digital services to increase certainty in the tax system, reduce compliance costs and simplify tax administration. Interesting I thought was the comment on how as a result of the transformation project, businesses will be able to spend more time on running their businesses, with tax as a secondary consideration. I would suggest the majority of SME’s out there will never experience such a feeling, however I may be proved wrong…
TWG Terms of Reference
While it certainly received plenty of media attention, in case you did not hear it, the terms of reference for the Tax Working Group were made public, as was the fact that Sir Michael Cullen was to be the TWG’s chair.
Outside the scope of the TWG review, are any increase to the rates of income tax, the GST rate, an inheritance tax or any taxation that would apply to the family home or the land beneath it.
The TWG is however to focus on the apparent present unfairness of the tax system (a subjective view I would suggest, depending upon which fencepost one is sitting on), and what changes can be implemented to bring more balance and equity to the table.
Clearly the narrative of the media release singles out income from land transactions, or perhaps more correctly, the lack of it in speculator type scenarios, as leading the way in creating an unbalanced tax system, particularly when compared to the way income from work is taxed.
I would beg to differ however. Presently there is a robust set of provisions in the income tax legislation, recently strengthened by the 2015 introduction of the bright-line rule (itself already under fire by the new Government to increase the automatic taxation period from 2 years to 5), specifically aimed at ensuring gains from the disposal of land are subject to taxation in numerous situations. Acquire a piece of land with the purpose or intention of resale, to use the words of the Minister’s themselves – “income from speculation in housing”, and it is taxable whenever sold. Certainly there are difficulties in this respect in determining the taxpayers subjective “purpose or intention” at acquisition date, which one could argue could be problematic for the Commissioner if the onus was on her to prove the case, however this is not so (onus resting with the taxpayer), and she is now further assisted by any sale of residential land within a two year period being automatically subject to tax.
Sure a taxpayer can attempt to claim a personal residence or main home exemption from taxation under these various provisions, however carve-outs are already in place to deal with “transaction patterns” and one often forgets that IR always has the benefit of hindsight, coupled with extremely wide information gathering powers – so if you’re going to do it, ignore the urge to tell anyone else about it, as chances are, that innocent conversation may one day come back to bite you.
With that reflection from the writer now in mind, I would suggest that perhaps rather than using the phrase “at the moment the tax system appears unfair”, the Ministers could have instead directed the reader’s
attention to the need to improve the methods for identifying and collecting tax potentially already payable under existing provisions, which would not only then focus on the property market (which is clearly one close to most voters hearts), but to more wider concerns as well for IR (and therefore Government), such as the cash economy.
As always with these reviews, the ultimate proof will be in the taste of the pudding, so watch this space to see what develops, when final recommendations are made to the Ministers in February 2019 (yes it’s not a typo – like the Pike River re-entry review – the outcome is over a year away still!). Any significant legislative changes will then not come into force until the 2021 tax year.
In the coming weeks we will find out the other members of the TWG – a diverse range of tax and finance experts and representatives of the business and wider community.
Finally, there is a tinge of Green in the TWG terms of reference, the review to also focus on how the tax system can contribute to positive environmental outcomes and the impact of likely changes to the economic environment, demographics, technology and employment practices over the next decade.
There really is no helping some people….
I thought I would share a case decision I have just read, as it again brought home to me the age old understanding of there just being a certain group within the taxpayer community, who just can’t help themselves….
So enter the taxpayers, husband and wife, whose accountant was advised by IR in 2008, his clients were suspected of being involved in undisclosed property transactions, so perhaps they should file voluntary disclosures.
Naturally, as most prudent individuals would, knowing the game was finally up, voluntary disclosures were filed in respect of 16 buy/sell transactions over the October 2002 to March 2004 period. Good that they had taken the opportunity to come clean right?
Wrong – there was actually 40 undisclosed such transactions over the 2003 to 2007 income years (one wonders how many of those they tried to claim the personal residence exclusion for). Ok, so now IR has you for not only failure to disclose, but when actually provided with an opportunity to come clean, failure to make a full disclosure of all known events.
The audit was eventually finalised in November 2009, assessments for all outstanding taxes now having been issued.
Enter the IR collections team. Initially the taxpayer’s accountant offered a full and final settlement payment of $150k (on a debt exceeding $1.1m). The arrangement never proceeded however and judgement for the debts was obtained against the taxpayers in February 2011. Bankruptcy proceedings were commenced early 2012, but later withdrawn by IR, late 2012, to consider further documentation from the taxpayer (still no payments toward the debt made).
A formal relief application was made by the accountant in January 2014, IR countered offering to accept circa $650k and write-off the balance of the $1.75m debt (still no payments made and now some 4 years post assessments). Second formal relief application made late 2014 – now full and final offer reduced to $30k due
to “deteriorating financial position”. Third formal offer made January 2015 and fourth in March 2015. All declined by IR and bankruptcy proceedings now back on schedule (still no payments made).
The taxpayer’s then got the High Court involved in May 2015, seeking a judicial review of IR’s decision. Also sought an order requiring IR to reconsider decision, which IR actually agreed to do, therefore vacating the need for a hearing (still no payments and over 5 years now). The IR review was completed March 2016, recommending bankruptcy was the only course of action – a decision agreed with by the reviewer’s team leader and then the Collections manager.
The taxpayers were naturally dissatisfied with the outcome and commenced further judicial review proceedings which were dismissed by the Judge. The matter was then appealed to the Court of Appeal, who released its decision November 2017. Now over 10 years since the income year in which the last transaction occurred, still no payments made. Court of Appeal dismissed the appeal.
It is without surprise that one finding of the Court of Appeal was that not only had the taxpayers failed to meet their tax obligations, they also failed to take advantage of the many opportunities afforded to them by IR over a five-year period to provide proper and complete disclosure to support their repeated applications for financial relief. In this respect was notably a comment:
“the taxpayer had failed to overcome the overriding concern that they had not satisfactorily explained how they were meeting their living expenses based on their declared income. Further, none of the bank records provided evidenced the spending on basic living expenses necessary for a family of four adults. Even taking into account the mortgage arrears, the information provided suggested that the taxpayers must have been paying their other living expenses from undeclared income.”
Watch this space for an appeal to the Supreme Court, but as I said at the outset, some people simply cannot be helped and that there really are times in life to say “when”.
I hope they at least paid their accountant.