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Richard's Tax Updates: September
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…
- FBT & Motor Vehicles
- Using Electronic Signatures on IRD Documents
- Bright-line Revisited
- Mortgagee Sales & GST
- Common Reporting Standard – Are You There Yet?
- GST CZR Interpretation Statement Finalised
- Investing in Gold may not be that Golden…
FBT & Motor Vehicles
In my 7th April 2017 edition, I referred to the release of PUB00249 by IR, a document to update and consolidate a number of previous statements issued by IR, with respect to exposure to fringe benefit tax on motor vehicle benefits and the application of the various exemptions.
Further to consideration of public submissions, IS 17/07 provides the Commissioner’s finalised position on the issue. Key points to note:
- Benefit provided must be in connection with an employment relationship
- A key element is availability for private use – actual use is not required
- Ensure “work-related vehicles” satisfy all the legislative criteria:
- Signwriting predominantly and permanently displayed
- Is not a “car” under the s.YA 1 definition
- Not “available” for private use other than home to work travel
- Leaving a motor vehicle at the airport is not automatically an exempt day
I have included this last key point, as many of you historically would have treated motor vehicles left at the airport while the employee was out of town, as an exempt day from FBT, on the basis it was not available for the employees use since they were out of town (so clearly it could not be used for private use either). In my experience, this position was one accepted by IR staff as well.
However IS 17/07 now makes it clear, that motor vehicles left at the airport are still exposed to FBT, unless the employer has specifically withdrawn the employee’s access to the motor vehicle while they are away, e.g. the employee has been sent overseas by the employer to attend a business conference. Otherwise the motor vehicle continues to remain available to the employee for their private use, and a trip of their own choosing out of town, is of no consequence to the s.CX 6(1)(a) premise upon which an FBT exposure will arise – “a motor vehicle is made available to an employee for their private use”. Whether the motor vehicle is left at home or at the airport carpark, is therefore irrelevant from the perspective of answering the legislative question.
As a final point, note that where the only benefit provided by a close company is a motor vehicle to a shareholder employee, there is the option now to elect to apply the motor vehicle expenditure rules in subpart DE, rather than the FBT rules.
IS 17/07 is full of useful examples, and includes a detailed section on how to calculate the fringe benefit payable on a motor vehicle benefit, once it has been established that such a liability exists.
Using Electronic Signatures on IR Documents
IR has issued a Standard to provide guidance with respect to accepting electronic signatures on documents and information provided to it.
The Standard provides that an electronic signature will be accepted wherever a conventional signature would usually suffice, as long as the option to use an electronic signature is specified in the relevant document or its associated guidelines.
Any electronic signature used must comply with the secured authority definition contain in section 209 of the Contract and Commercial Law Act 2017, and that when used, the signatory must accept that they cannot later deny having affirmed the document or information provided IR. This latter aspect is on the basis that the signatory is solely responsible for safeguarding their authentication credentials and the management of any delegations to use the signature that they authorise.
An electronic signature is deemed to be the person’s verification of the authenticity and accuracy of the information or documentation submitted to Inland Revenue.
The Election is almost upon us, and once again the air is rife with whispers of the words “capital gains tax”, and whether certain Parties will introduce one, should they win the Vote.
I thought it might be timely therefore to revisit the Bright-line test, which some would argue is already a quasi-capital gains tax, because of the way it indiscriminately taxes any gain made on a disposal of residential land within two years of its acquisition date, unless the vendor can claim the “main home” exemption.
It is hard to believe that in just over a fortnight, it will be two years since the new rules were introduced, Bright-line potentially applying to any residential land which a person first acquired an estate or interest in, post 1st October 2015.
The taxing provision itself is contained in section CB 6A of the Income Tax Act 2007 (”the Act”), essentially as a supplement to the existing section CB 6, which itself requires income tax to be paid on any gain arising on the disposal of any land, where a purpose or intention of acquiring the land, was to dispose of it.
Section CB 6 has existed for many years, and will continue to take precedence over section CB 6A (which only applies where sections CB 6 to CB 12 do not), however it relies on a subjective analysis of what the taxpayers intentions were when they acquired the land. While the onus has always been on the taxpayer to mount a challenge to IR’s submission a disposal intention or purpose existed (which included the usual “deep pockets” appreciation by our clients), I have usually found over the years that IR still wants to be pretty certain of their position prior to moving to a NOPA/assessment phase. This has often lead to lengthy delays and frustrated clients as a consequence (who just wanted their cases finalised in some way), while IR internally struggled to make up their mind whether their case was strong enough.
Section CB 6A removes any question of subjective intention, automatically subjecting the disposal to taxation, if the residential land is sold within the two year Bright-line period. This is regardless of the reason behind the disposal. For example, there is no carve-out for financial hardship, where there may have been a clear intent at acquisition to hold the property long term (so it would not be taxable under section CB 6), but say the loss of a job may have resulted in the investment property having to be sold due to reduced cash flow to fund the debt payments.
A few things to note about section CB 6A:
- Even if you acquired the property pre 1st October 2015, if you transfer the title to an associated party post that date (say trustees to personal name or vice versa), you effectively reset the clock, as there is no time benefit for prior associated vendor ownership as there is for a number of the other land tax provisions.
- Section CB 6A applies to residential land wherever owned, so it does not just apply to NZ based land.
- Just because you sell the residential land on day 731, which essentially means it is no longer subject to Bright-line, does not mean that you are no longer exposed to being assessed for tax by IR on an intention or purpose of resale basis. Section CB 6 still exists (and as mentioned should be considered pre section CB 6A anyway, although if Bright-line applies, there may not be a need to think through the other taxing provisions, unless there is some benefit in doing so).
Mortgagee Sales & GST
IR has released operational statement 17/01 (“OS 17/01), which sets out the Commissioner’s position with respect to the entitlement of registered persons to make GST input tax deduction claims, in relation to costs of sale incurred in association with mortgage sales.
OS 17/01 applies from 6th September 2017 and is a replacement to OS 15/01 – although in essence the only change from the previous statement is with respect to suppliers under the B2B financial services rules, who have incurred costs of sale when exercising their mortgagee powers to force a sale of the secured asset. To dust the cobwebs off for those of you who cannot quite remember, effective 1st January 2005, B2B financial supplies (usually exempt supplies) were permitted to be zero-rated instead (by supplier election) provided the registered recipient had greater than 75% taxable supplies/total supplies in the prior 12 month period. This legislative change then enabled the supplier to claim any GST input tax incurred in making that B2B supply.
OS 17/01 contains the following conclusions:
- A mortgagee in a mortgagee sale cannot deduct the costs of sale before calculating the GST due under section 17 of the Goods and Services Tax Act 1985.
- A mortgagee cannot claim input tax for the costs associated with a mortgagee sale.
- A mortgagee who is a registered person and makes a mortgagee sale that is subject to the B2B supply of financial services rules is able to claim input tax for the costs associated with that mortgagee sale (differs from previous scenario because in these circumstances, mortgagee sale considered to be part of mortgagees money lending taxable activity).
- A mortgagor cannot claim input tax for the costs, incurred by the mortgagee, associated with a mortgagee sale.
IR acknowledges, that since the position outlined in OS 17/01 reflects a change from that outlined in OS 15/01, there will be a number of taxpayers, who previously relied on what is now considered to have been an incorrect position, who will have legitimate unclaimed input tax deductions as a consequence. Usually, because registered persons are entitled to recover missed claims in subsequent GST return periods (effective self-correction), the Commissioner’s general practice (SPS 16/01) is not to accept section 113 (TAA94) requests for amendment of previously filed positions. However in this instance, IR will be prepared to consider section 113 requests for amendments to prior taxable period returns, and will determine acceptance of such requests based on the merits of each case, but ignoring the self-correction facility already available.
Common Reporting Standard – Are You There Yet?
Unless you have been deep underground in your bunker preparing for North Korea’s pre-emptive attack on the world, you will be well aware of the Common Reporting Standard (“CRS”), which took effect in NZ from 1st July 2017.
There are three key steps for you to work through in determining whether CRS applies to either yourself or those you act for and provide advice to:
- Is the relevant entity a Financial Institution (“FI”)?
- If yes, is the FI then a NZFI?
- If yes, is the NZFI then a reporting NZFI?
Having said “no” in any of the above three steps, you are still exposed to CRS, due to various disclosures you now need to make whenever you open a new bank account, to assist your local bank with determining their own reporting obligations, since they are definitely reporting NZFI’s.
It is this last aspect I have decided to provide a brief commentary on, since in the past couple of months, several clients when opening new bank accounts for their family trusts, have had to complete the section on the bank account opening form which is titled “Account Holder Type For Tax Purposes”. The detail appears relatively generic across the various banks, broken into three components:
- Are you an exempt entity – “No” for most of us since those entities listed are essentially of a central bank, government, international organisation or publicly traded level (so go to question 2)
- Are you a FI – most likely “No”, however for our simple discretionary family trust it may depend on the type of investments the trustees have and who manages them (if no, then go to question 3)
- What type of other Non-Financial Entity (NFE) are you? – There is no opt out here so you actually need to make a decision – tick either Active NFE or Passive NFE (the latter obviously if you are not the former).
In the particular cases I have advised on to date, the answer was relatively simple, since the Trust’s in question were going to derive more than 50% of their income from passive sources, which in turn would be produced from greater than 50% of its total assets (essentially just being cash deposits) – so Passive NFE’s.
IR, in its September Business Tax Update (http://www.ird.govt.nz/resources/b/f/bfaec89c-fa2b-4e79-86e6-7188b32ed563/business-tax-update-september-2017.pdf), has again highlighted CRS, and referred readers to its own published guidance and support materials (www.ird.govt.nz/crs). Amongst the myriad of documents available, is a useful guide called “Family Trust obligations under the CRS” – (http://www.ird.govt.nz/resources/f/5/f554e5b8-1925-41d7-beb5-da30b85cb334/ir1053.pdf).
As a basic memory trigger, if you are aware that your client’s Trust has “managed fund type investments”, then before you can advise them to tick the Passive NFE box (if you are satisfied they are not an Active NFE), you will need to essentially investigate the materiality of these investments – if more than 50% of the income of the Trust is derived from these funds over the relevant period (generally preceding 3 periods), then there is potential exposure for the Trust satisfying the FI definition.
There are some reasonably significant civil and criminal penalty exposures for reporting NZFI’s that fail to comply with their CRS obligations, so it certainly would be prudent to update your annual checklists to ensure appropriate CRS questions are asked and ticked off.
GST CZR Interpretation Statement Finalised
Having considered public submissions on the issue since the release of PUB00255 back in May 2017, IR has now released IS 17/08: “GST — compulsory zero-rating of land rules (general application)”.
IS 17/08 is intended to simply assist vendors and purchasers in getting the GST position correct before any transaction including land settles, and provides a general overview of the compulsory zero-rating rules (“CZR”), which have applied since 1st April 2011.
My own experiences with CZR since introduction, would suggest the following key issues are kept in mind whenever you are advising your clients:
- The personal residence exclusion cannot apply where the purchasers are non-natural persons – however do not then overlook the requirement to make subsequent output tax adjustments post the initial CZR treatment, if your client is actually intending to reside on the land.
- Where a supply of land includes a dwelling, legislation deems there to be two separate supplies. Consequently even where a natural person purchaser intends to live in the dwelling, the remainder land (that not including the dwelling and reasonable curtilage) could still qualify for CZR. The dwelling land should be treated as an exempt supply in the majority of cases.
- If a transaction does not qualify CZR, it may still qualify for zero-rating under the going concern rules, which have remained in place since the introduction of CZR.
- Should a transaction erroneously be zero-rated by the vendor, unlike the rules pre 1st April 2011, the obligation now lies with the purchaser to correct the mistake, which may include having to sue the vendor for recovery of GST now payable to IRD, should the agreement have been transacted on a GST inclusive “if any” basis (i.e. the purchaser would never have paid a dollar more than what they did on settlement regardless of GST treatment). Note that the rules include a requirement for the purchaser to register for GST for the sole purpose of correcting the error where they are not registered, with the ability of IR to force register where this is not done.
IS 17/08 contains some practical examples as well as a useful flowchart.
Investing in Gold may not be that Golden….
It is probably an answer of no surprise to the majority, IR’s final position on its QWBA, whether proceeds from the sale of gold bullion should be taxable.
QWBA 17/08 has been released, and the item concludes that proceeds from the sale of gold bullion will give rise to taxable income under section CB 4, since in the majority of cases, such an investment asset can only have been purchased for one purpose – that of resale.
The approach is not that difficult to understand, considering anyone who acquires gold does not do so intending to derive a reasonable annual cash return from their investment, because there simply isn’t one. Instead the majority buy as a way of diversifying their overall investment portfolio, but the only return can be from disposing at a time when the sale price per ounce is more than the purchase price per ounce when they original acquired the gold.
IR does accept however that they may be cases where section CB 4 does not apply, where the taxpayer can show that the dominant purpose of acquisition was not that of resale e.g. circumstances where bullion is acquired for the dominant purpose of building up a diversified portfolio of property that the person will not necessarily realise, however the onus will always be on the taxpayer to prove such a position taken.
It should be noted that since IR expects most gains on the disposal of gold bullion to be subject to tax under section CB 4, then equally losses on disposal and the associated costs of holding the asset, such as storage costs, funding interest and insurance should be deductible.