We are recognised as authorities in our specialised fields. We publish newsletters with informed opinions that are free for you to subscribe to.
Richard’s Tax Updates: June
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…
- Horse Racing – for love or for money
- YouTube receipts taxable?
- Start-up companies and employee share schemes
- Budget legislation enacted
- Tax treatment of NZ patents
- New treaty signed
- US to give more…
- Reportable jurisdictions list published
- Court of Appeal upholds Base Price Adjustment decision
- Motor vehicle “availability”
- Making tax simpler
- Tax debt threshold set
- “Key Man” insurance
- Non-cash dividends and withholding taxes
- IR public rulings unit work programme
- Hong Kong DTA updated
Horse Racing – for love or for money…
IR has released a QWBA (17/04) on the issue of whether a horse racing syndicate can be a registered person for GST purposes.
The discussion is limited in scope to scenarios where horse racing is a standalone activity and is not a component of wider activities, such as breeding and training.
The analysis is focussed on the taxable activity definition found in section 6 of the GST Act 1985, which in itself expressly excludes from the definition, any activity carried on essentially as a private recreational pursuit or hobby. Where it is determined therefore that a syndicate is undertaking the latter, no taxable activity will be “being carried on”, and consequently the syndicate should not be GST registered.
The Commissioner’s view is that a taxable activity is likely to exist where:
- The syndicate is formed not for the personal interest or pleasure of the participants, but for the purpose of making a profit from the activity, and it is operated in that manner;
- The activity of the syndicate is organised to achieve a pecuniary profit, and it operates in a systematic fashion that, on an objective assessment, appears to materially reduce the element that luck plays in whether any prize-money is won; and
- A significant amount of time is involved in performing the activity undertaken by the manager of the syndicate (including acquiring and managing the horses that are assisting in meeting financial imperatives and disposing of horses that are not).
Having dabbled in a horse racing syndicate myself not so long ago, I’m not sure “pleasure” could ever be the right term to describe the “investment” however that’s another story.
For those syndicates who, based on the conclusions reached in the QWBA, should not be GST registered, accompanying the QWBA release, is the Commissioner’s operational position with respect to incorrectly registered syndicates. The Commissioner does not expect syndicates to retrospectively deregister, instead permitting any required deregistration to be effective on or before 30th June 2017. To assist in this process and in an attempt to minimise compliance costs, the operational statement outlines three acceptable
methods for determining the market value of the horse at deregistration date – any taxpayer deregistering from GST being required to account for 3/23rd’s of the market value of any assets retained at the time of cessation of their registration.
YouTube Receipts taxable??
For all you wannabe internet stars, spending all of your spare time perfecting those YouTube clips that are going to make you your millions and take you away from the daily grind of what you are really good at, IR has decided to release QWBA 17/05, to ensure that you are fully aware of your tax obligations with respect to any monies you receive from your new found fame.
While most of us understand that when we undertake any project (including YouTube activities) in a business-like way, any receipts received from the business undertaking are taxable, not so well understood (perhaps “awareness of” is a better term) is two other provisions within the income tax legislation which will still subject the YouTube (and similar type) receipts to taxation, even where a business activity is not being carried on.
In this regard, receipts can also be subject to taxation where they are determined to be “income under ordinary concepts” or where they have been derived as the result of any “profit-making” undertaking or scheme. The latter is often easier to determine than the former, a dominant profit making purpose needed to be exhibited before the taxing provision will apply. As there is also a profit focus, it may also be easier to see a series of activities with a certain level of co-ordination being undertaken by the person in order to achieve the desired result.
What is “income under ordinary concepts” is not itself defined in the legislation, its meaning instead having been developed over a number of years as a result of various court decisions on the issue. The 1985 Court of Appeal case of Reid v CIR is often referred to in this regard, suggesting the following factors are indicative:
- Income is something that comes in.
- Income imports the notions of periodicity, recurrence and regularity.
- Whether a particular receipt is income depends upon its quality in the hands of the recipient.
QWBA 17/05 also provides several examples to assist with understanding when receipts are likely to be taxable.
Start-up companies and employee share schemes
IR has released an issues paper seeking submissions on proposals to introduce a deferral scheme for start-up companies with employee share schemes, the rules looking to defer the taxing point for employees while at the same time deferring the employer deduction. The proposals follow on from the recent introduction of new legislation (Taxation (Annual Rates for 2017–18, Investment and Employment Income, and Remedial Matters) Bill) which proposes to change the way employee share schemes in general are taxed.
The issues paper seeks to determine through consultation, whether a fair deferral regime can be developed and includes discussion on:
- the scope of the deferral measure,
- the nature and timing of the election,
- when the tax impost should arise under the deferral scheme,
- timing of deductions for the employer, and;
- matters of administration and compliance.
Closing date for submissions is 12th July 2017.
Budget Legislation enacted
Further to last week’s update re the passing of Budget 2017 legislation, the Taxation (Budget Measures: Family Incomes Package) Act 2017 (No 22 of 2017) received the Royal assent on 29 May 2017.
Tax treatment of NZ Patent’s
IR has released IS 17/05, an interpretation statement covering the income tax treatment of NZ patents. The statement updates and replaces the 2006 version, and includes several changes of Commissioner’s view due to the legislative amendments in the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016, which addressed “black hole” expenditure.
In particular, the Commissioner has changed her view with respect to:
- renewal fees, which 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); and,
- expenditure for underlying intangible items after asset recognition, which are now considered to be depreciable.
For those of you who may not be aware, disposals of patent applications (with a complete specification) or the sale of patent rights, have a specific taxing provision to deem any amount received as income – s.CB 30. This is in spite of the disposal being what would otherwise have been considered the sale of a capital item.
Since any amount received is assessable income, the legislation contains a number of deduction provisions, predominantly subpart EE, where the legal, administrative and some other costs incurred in applying for a patent, determine the depreciable cost base for the patent asset.
IS 17/05 also confirms:
- Patent renewal and maintenance fees are revenue in nature and deductible for income tax purposes in the year they are incurred,
- Legal expenses incurred in defending or attacking a patent are generally revenue in nature, so are deductible, and;
- Where a patent application is refused or withdrawn or not lodged, the taxpayer may be allowed a deduction for expenditure they have incurred in relation to the application or intended application. This is in terms of s DB 37, which applies only if the taxpayer is not allowed a deduction for the expenditure under another provision.
The statement includes several comprehensive examples to assist with understanding the legislation as it applies to NZ patents. It should be noted that the statement does not cover the income tax treatment of patents filed outside of NZ.
New Treaty Signed
NZ has signed the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (known as the Multilateral Instrument). The media release accompanying the signing states:
“Many BEPS techniques involve tax treaty abuse. The Multilateral Instrument allows a worldwide network of several thousand tax treaties to be quickly updated to adopt recommendations from the OECD’s BEPS Action Plan.”
“Renegotiating all these tax treaties bilaterally to include the OECD recommendations would be too time-consuming to be practical. The Multilateral Instrument is an innovative solution, which allows these treaties to be rapidly updated.”
“The Multilateral Instrument includes articles on “permanent establishment” avoidance, treaty abuse, dispute resolution and hybrid mismatches. These address the key treaty-related BEPS issues. The extent to which these provisions are incorporated into New Zealand’s treaties will depend on the final positions of both New Zealand and our treaty partners.”
“Once both parties have signed and ratified the Multilateral Instrument, it will prospectively modify most of New Zealand’s existing bilateral treaties. It is likely that New Zealand’s treaties will begin to be modified from 2019.”
US to give more…..
While some may have thought FATCA was somewhat one sided, it will be interesting to see how a recently signed bilateral arrangement with the IRS will work in practice. The sharing of country-by-country reports will commence in 2018, an annual exchange providing each revenue authority more information about the others multinationals operating in the respective jurisdictions.
Reportable Jurisdictions list published
In previous issues I have discussed NZ’s involvement in the Standard for Automatic Exchange of Financial Account Information in Tax Matters (AEOI) – an OECD development. Part of AEOI is the Common Standard on Reporting and Due Diligence for Financial Account Information (CRS). Under the CRS, each signatory country will provide a list of reportable jurisdictions – in NZ’s case – territories to which IR will provide certain information on non-residents that is reported to the IRD by financial institutions in accordance with the CRS applied standard.
To comply with NZ’s obligations, the Tax Administration (Reportable Jurisdictions for Application of CRS Standard) Regulations 2017 (LI 2017/122), which come into force on 1 July 2017, has been published, which provides for 58 territories to be reportable jurisdictions.
CoA Upholds BPA Decision
The Court of Appeal (“CoA”) has upheld a 2016 High Court decision in favour of the taxpayer, with respect to a credit to a shareholders current not being deemed the last payment in a financial arrangement and thereby triggering a base price adjustment (“BPA”).
Briefly, the taxpayer (a company) owed over $2.6m to the BNZ, which the taxpayer’s shareholder had assigned to him in return for a one-off payment of $90k. At the commencement of the 2005 income year, the $2.6m was credited to his shareholder current account to reflect the debt assignment.
IR assessed the taxpayer for $2.5m of accrual income in the 2005 income year, on the basis that the crediting to the shareholder current account was the maturity of the financial arrangement, thereby triggering a BPA calculation. IR’s position was founded on the definition in section EH 4 (1994 Act) that a financial arrangement was deemed to mature on the date on which the last payment contingent upon the financial arrangement was made, and that in the present scenario, a credit of the amount to the shareholder current account satisfied this requirement.
The taxpayer’s position was essentially that a BPA was not triggered, because the final payment under the financial arrangement had not been made, since the credit to the shareholder current account was of a larger amount than the company had available in its bank accounts at that time, to pay to the shareholder.
CoA held that:
- A crediting to an account where the date upon which it is possible to draw down on the funds is postponed for some reason, is properly analysed as a crediting subject to a condition precedent. In such a scenario, payment is not made until the condition precedent is either fulfilled or waived.
- Payment in full was not made in this case until the full amount was unconditionally available to be drawn down. That did not occur in the 2005 tax year.
- Consequently, the crediting to the shareholder’s account of an amount greater than the funds then available to the company was not the last payment contingent on the financial arrangement.
Hence the arrangement had not matured and a base price adjustment was not triggered.
Motor Vehicle “Availability”
If you have not had a chance to read yet (or have no desire to) IR’s draft interpretation statement (“IS”) on the issue of motor vehicles and fringe benefit tax (PUB00249), there are a couple of key points you should be considering when either completing your client’s FBT returns, or answering their questions when they are attending to the task themselves.
Firstly, when considering whether a client’s motor vehicle has a potential FBT exposure, an important first step is to acknowledge the wording of section CX 6 – Private use of a motor vehicle (when fringe benefit arises), and that a fringe benefit is deemed to arise when a motor vehicle is made available to an employee for their private use. In this regard, the key words in the provision are “made available”, and I have extracted the following three statements from within the draft IS to highlight this point:
- If the employee has used the motor vehicle for private use when the motor vehicle has not been “made available” by their employer for such use, this unlawful use (as the Court phrased it), does not create an FBT liability for the employer. Naturally IR would expect to see disciplinary action of some sort taken by the employer against the employee, to show that any private use restrictions that had been put in place, were actually “of substance”.
- For those of you, like me, that have been around long enough, it has been accepted practice by IR over the years, that when an employee (including shareholder employees) has gone overseas and parked the employer’s car at the airport, you could claim the days that the employee was away, as not being subject to FBT. The IS reflects a change in the Commissioner’s position in this regard. Based on the “made available” concept, flying overseas and leaving the vehicle parked at the airport, does not alter the fact that an employer has made available a motor vehicle for the private use of an employee and consequently the vehicle is still subject to FBT during the employees absence. A distinction will be made however, where the employer has required the employee to travel overseas for a business purpose, because in these circumstances IR considers that the employer has temporarily withdrawn the employee’s access to the motor vehicle by requiring them to fly away on business. Such periods of absence will still qualify for the exemption therefore.
- The issue surrounding shareholder employees has always been a contentious argument, because even though the private use restriction concept should be no different to other employees, often shareholder employees have a measure of control over the employer (often also being directors), which naturally calls into question the actual substance of any private use restrictions. It is not surprising in this regard, that the Courts have been left on numerous occasions, to determine the issue – the result being a number of decisions in the taxpayers favour, which has developed the following non-exhaustive list of evidential requirements:
– Evidence relating to the company’s intentions as to what the vehicle would be available for (for example, letters from directors or evidence of the anticipated business use).
– Evidence concerning the actual use of the vehicle, including log books and taxpayer statements.
– Evidence that the shareholder-employees have access to an alternate vehicle for private use.
IR, per the IS, agrees with the Court’s list, and consequently I would suggest, particularly in respect of the third item on the list, that where all the formalities of the restriction requirements have been ticked off (restricted use letters, periodic checks of premises, work-related vehicle definition satisfied where required etc), shareholder employee motor vehicles should qualify for exemption just as non-shareholder employee motor vehicles would.
Secondly, is the new rules available to close companies, which can be applied to motor vehicles acquired post the commencement of the 2017-18 income year, or in respect of pre-existing motor vehicles, which are first used in the employers business post that date. Where the only fringe benefit the close company provides is motor vehicles to a shareholder employee, the company can elect to use the motor vehicle expenditure rules in subpart DE rather than the FBT rules – the result being calculations for motor vehicle expenditure being based on the proportion of actual business use of the vehicle (the same basis sole traders/partnerships presently use) and the removal of the need to account for FBT based on any private use availability.
I will update further when the finalised IS is released, particularly if as a result of any submissions, IR changes its draft views.
Making Tax Simpler…
Conspiracy theorists would say it is all about the Government’s attempts to lessen the involvement of professional advisers (aka accountants) and their meddling in taxpayers’ affairs to ensure they get every deduction they are entitled to, and pay not one cent more tax than they need to.
IR would argue it’s no more than their continuous improvement project, which any well run business enterprise undertakes, to ensure their “customers” get the best shopping experience.
Clearly the recent release of the consultation document “Better administration of individuals’ income tax” stresses the latter goal, with proposals to reduce the number of taxpayers’ required to file an end of year income tax return, and the provision of more timely information (a progression from reactive to proactive interaction by IR) to enable taxpayers to pay the right amount of tax at the right time.
The proposals in the consultation document coincide with legislative changes promulgated in the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Bill (249-1), which was introduced to Parliament in April 2017 (and passed through its first reading on 24th May 2017). The enactment of this Bill, would see investment income information provided to IR by payers of interest, dividends and taxable Maori authority distributions, by the 20th of the month following the month in which the income was paid, commencing 1st April 2020 (although voluntary application from 1st April 2019).
With IR obtaining more timely income information, and from third party sources, taxpayers:
- whose only income is from “reportable income sources” (salary & wages and investment income that is tax paid) would no longer be required to file an end of year income tax return; and,
- who are effectively being overtaxed, perhaps due to the investment income being taxed at a higher marginal rate (dividends are usually 33% tax paid for example), could be contacted by IR sooner and recommended to apply for a special tax code, removing the need to wait until post the end of the income year to receive a refund of the excess tax paid.
The consultation document suggests that IR will have set thresholds upon which calculated refunds or tax to pay assessments (based on the information IR already holds) will automatically be issued to taxpayers.
Presently these thresholds are $5 for refunds and $20 for tax to pay, and IR has requested feedback from the taxpaying community in this regard.
It is also proposed that individuals will be able to upload donation receipts throughout the year, again providing IR with more timely information about an individuals’ tax position.
Consultation is open until 28th July 2017, post which the Government will refine the proposals and consider what items to proceed with.
Tax Debt Threshold Set…
The enactment of the Taxation (Business Tax, Exchange of Information and Remedial Matters) Act 2017, saw the insertion of section 85N in the Tax Administration Act 1994 (“TAA”), which permits the Commissioner to disclose information about a taxpayer’s tax debts to approved credit reporting agencies, if certain preconditions are met. One of these preconditions is that the amount of the taxpayer’s reportable unpaid tax must be greater than the prescribed amount. Section 85N is effective from 1st April 2017.
The Taxation (Disclosure of Information to Approved Credit Reporting Agencies) Regulations 2017 (LI 2017/112) set the prescribed amount at $150,000 and comes into force on the 29th June 2017.
When determining whether to make a disclosure, IR must give consideration to section 85N(11), which defines “reportable unpaid tax”, as being amongst other things, that which:
- is not subject to a dispute or challenge under Part 4A (Disputes Procedures) or 8A (Challenges) of the TAA; and,
- is not subject to an instalment arrangement requested by the taxpayer and entered into by the Commissioner.
Presently section 85N will only apply to company taxpayers, and where IR is to make a disclosure, thirty days notice of the intended disclosure, must be given beforehand to the taxpayer.
Commonly referred to as key-man insurance, although I should perhaps have gender neutralised the term as I see IR now has, QB 17/06 has been released, which considers the income tax treatment of key-person insurance – although the consequences of passing a payment on to an employee is not discussed, apparently worthy of its own QB at some later date.
The item concludes that where the policy is taken out to compensate for a loss of business profits that would result from the death or incapacitation of the key person, the receipt of any payment by the employer will be business income under s.CB 1 (although note that taxation may be governed by s.CG 5B instead, where proof of loss needs to be shown by the employer in the first instance).
The premiums paid by the employer will also be tax deductible under s.DA 1, the required nexus test having been satisfied, with the payment of the insurance premium intended to insure against a loss of taxable income.
Where the key-person insurance policy has more than one purpose, also to secure the ability to repay a loan for example, then apportionment may be required, both in terms of the extent of any premium deduction claimed, and the amount of any subsequent pay-out receipt to be reflected as assessable income of the employer – the loan repayment portion in this instance being capital in nature.
For key-person insurance policies that satisfy the QB 17/06 criteria (i.e. no payment going to the employee etc), fringe benefit tax is not an issue, as there is no benefit provided to the employee.
Non-Cash Dividends & Withholding Taxes
In case you have been sitting at your desk, somewhat confused since the 2007 Act was enacted, over whether the income of a person receiving a non-cash dividend included any resident or non-resident withholding tax paid on the dividend, IR has clarified the issue once and for all in QB 17/07 (which just happens to coincide with the legislative clarifications being made as part of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Bill introduced to Parliament on 6 April 2017).
In the 2004 and earlier Acts, it was clear that the recipients income included any such credits, and while the 2007 Act was not worded the same way, there was no intended change to the legislation per Schedule 51.
Consequently QB 17/07 confirms that in respect of non-cash dividends paid to both resident recipients (resident passive income) and non-resident recipients (non-resident passive income), any RWT or NRWT paid in addition to the non-cash dividend (there are no taxes “withheld” as practically there are no monies paid in the first place in respect of non-cash dividends), are included in the recipients “income” for taxation purposes.
IR Public Rulings Unit Work Programme
A few useful items on the agenda which will no doubt assist in our interpretation of the specific issues, including:
- A discussion setting out the principles to apply to identify an item of depreciable property (following on from IS 10/01 on residential properties and IS 12/03 on R&M),
- Clarifying the timing of when a dividend is paid or derived, and;
- An updated commentary on the income tax treatment of payments derived from NZ by non-resident software suppliers.
Hong Kong DTA Updated
To comply with our international obligations under the G20 and OECD Automatic Exchange of Information global standard, the updated protocol will now provide for the automatic and spontaneous exchanges of tax information to take place. The existing DTA permitted an exchange of information however was limited to those made by formal requests.
Under the global standard, New Zealand financial institutions must review their accounts and compile information to be reported – commencing 1st July 2017. Refer to our recent website article by Yi Ping Ge for full details.