Richard's August 2020 tax updates

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.

• Here we go again, 17 August 2020
• New “minor work” IS, 17 August 2020
• Covid-19 Wage Subsidy Extension, 24 August 2020
• Employer payments for ‘home costs’ Determination variation, 24 August 2020
• New Covid-19 variation, 24 August 2020
• Time is running out, 31 August 2020

Here we go again…

Early last week I was reflecting on the fourth anniversary of AWIR, how quickly that time seemed to have passed and how different the world is now, particularly in respect of everything that has developed over the past eight months.

Then the announcement came regarding the community spread and less than 24 hours later we were back in lock-down, although for the relief of a number of businesses I expect, only at level three, and only in Auckland in that regard.

We then had Friday’s afternoon announcement – remaining in level three until the 21^st at least, but most likely to midnight on the 26^th August.

The main purpose of this blurb, and yes perhaps slyly blowing my own trumpet about still writing this publication four years on, is to make an initial mention of the further financial relief measures announcement, full details of which should be included in next week’s AWIR.

There will be:

• An extension to the wage subsidy

• Modifications to the Covid-19 sick leave scheme to make it more accessible

• A likely extension to the mortgage deferral scheme.

Watch this space for all the detail next week.

New “minor work” IS

IR has released Interpretation Statement IS 20/08, “Income tax – when is development or division work minor?”

The statement has application to section CB 12 of the Income Tax Act 2007, which is the land taxing provision which is potentially triggered, when any person acquires land and then commences an undertaking or scheme to develop and/or subdivide the land, within 10 years of the acquisition date.

Most of the wording of section CB 12 is black and white in terms of its interpretation, but the one requisite that is relatively cloudy and will potentially lead to the most disputes between IR and the taxpayer, is whether the work involved in completing the scheme, is more than minor. If the answer is no, then CB 12 is of no application.

For those of you who have some experience in this area, you will already appreciate that various decisions of the Courts over the years, has shown that not a lot is required to breach the minor works threshold, to the extent, that unless the subdivision is fairly basic, then it is most likely to be caught by section CB 12, and you will then need to consider the four exclusions that are linked to the taxing section, and whether any of those may negate otherwise taxation of the disposal gain.

IS 20/08 is in essence, a rewrite of IG0010, a 2005 guidance document issued by IR on the same topic. The IS commences with an acknowledgement that the main conclusions reached in the present statement remain unchanged from the previous, it simply being updated to provide clarity and to account for changes in legislation over the past 15 years. IS 20/08 does however reflect the conclusions reached in two 2015 IR published items, “QB 15/04: Income tax — whether it is possible that the disposal of land that is part of an undertaking or scheme involving development or division will not give rise to income, even if no exclusion applies”, and “QB 15/02: Income tax – major development or division – what is ‘significant expenditure’ for section CB 13 purposes?”

One notable difference between IG0010 and IS 20/08, is that IR has included a couple of safe harbours – less than $50,000 in absolute costs, and relative costs of less than 5% of the value of the land at the commencement of the scheme. If you are under both thresholds, then you have a good chance of avoiding section CB 12 application, however both thresholds must be considered, as exceeding either one will likely negate the safe harbour.

If you would like some assistance with understanding the potential application of section CB 12 to a particular land transaction (or any of the other land taxing provisions in fact), then please do not hesitate to contact me as I do write numerous detailed opinions on this topic.

Covid-19 Wage Subsidy Extension

Further to last week’s AWIR brief mention, details of the extension to the wage subsidy as a result of the latest lock-down has now been released.

The latest criteria:

• A business must have had, or is predicting to have, a revenue drop due to Covid-19 of at least 40%; and,

• The revenue drop applies for any consecutive period of at least 14 days within 12 August 2020 and 10 September 2020 compared to last year.

The extension is set to last for the period that Auckland remains at level three, presently a two-week period therefore, assuming Auckland comes out of level three at midnight on the 26^th August (I’m not overly confident in that regard).

Applications for the extension opened on Friday 21^st August.

Along with the wage subsidy extension, also announced was:

• The removal of the revenue drop test for the Covid-19 Leave Support Scheme; and,

• The extension of the mortgage deferral scheme from its current end date of 27 September 2020, to 31 March 2021, with further details to be made available by the Reserve Bank and the retail banks.

Employer payments for ‘home costs’ Determination variation

You may recall Determination EE002 issued in April during the last lock-down, which was in essence Inland Revenue’s acknowledgement that numerous employers were now likely to be making payments to their employees who were now working from home, to compensate the employee for the additional costs they would be exposed to as a result of doing so.

In this regard, the employer would be looking to treat the payments as tax free for the employee, relying on section CW 17(2) – exempt income of the employee to the extent that the employee could directly have claimed a tax deduction for the costs incurred, had the employment limitation not existed.

Determination EE002 was issued as a cost compliance reduction tool for employers, setting out certain payment thresholds, which if the amounts paid were below, the employer could have confidence that treating the amounts paid as tax-free was the correct treatment.

As Determination EE002 was in essence a Covid-19 response mechanism, it had a limited application period, from 17^th March 2020 to 17^th September 2020.

Appreciating now the potential for rolling lock-downs to continue to occur for the foreseeable future, and with more employees likely to be working from home as a result, Determination EE002A has now been issued, to extend the application period through until 31^st March 2021. The Determination also removes all references to the employee needing to be working from home as a result of Covid-19, which was a requisite to applying the original Determination.

New Covid-19 variation

COV 20/09 has been released by Inland Revenue. It has application to sections 52(3) & 52(4) of the GST Act 1985. These two sections govern the obligations of a GST registered person who has ceased their taxable activity, requiring them to notify Inland Revenue within 21 days of the event, and also to state whether they expect to carry on a taxable activity again within the following 12 months. If this is the case, then Inland Revenue will not cancel the persons GST registration at this time, which would have had the potential cost exposure for the taxpayer, of having to account for GST output tax on the market value of any assets of the taxable activity still held by the person at the time of cessation.

COV 20/09 is essentially targeted at those registered persons who sole taxable activity may have been a short-stay accommodation activity, Airbnb for example, and to recognise that those people may now have changed their activity due to the impact of Covid-19 – e.g. ceasing the Airbnb activity in favour of taking on a long-term residential tenant.

The latter activity would amount to the provision of exempt supplies, and if this was the sole activity of the registered person, then they would be deemed to no longer be carrying on a taxable activity – applying section 6(3)(d), thereby triggering the 21 day notification obligation and potential GST output tax exposures.

COV 20/09 acts to extend the period within which the taxpayer reasonably expects to carry on a taxable activity again, from 12 to 18 months, appreciating one would hope that we are on top of this virus sometime next year, and consequently the short-stay accommodation market, particularly in some of our tourist hotspots, will have recovered, encouraging the registered person to revert to that type of activity again.

In order to rely on COV 20/09, a person having triggered the 21 day notice period, expecting to be back to their original activity within the 18 month time period, should firstly use a specific email address – STRdisclosures@ird.govt.nz, to disclose the taxable activity cessation, and secondly be able to show that the reason that they have ceased their taxable activity of supplying accommodation, was due to the impact of Covid-19.

Note that the usual annual change of use adjustments will still need to be attended to, in order to reflect the non-taxable use of the asset, over the period that only exempt supplies are being generated.

Time is running out

The Resurgence Wage Subsidy (aptly named by some creative person within the Powers that Be) is the recent two week extension to the original wage subsidy, triggered by Auckland’s return to Level 3, and the rest of New Zealand to Level 2.

The new subsidy covers a two-week period which commences on the date of application, and for those that have not applied yet, time is fast running out as the application period closes at 11.59pm on the 3^rd September.

For those employers looking to claim, they must have seen, or expect to see, a revenue drop of at least 40% over a 14-day period between 12 August and 10 September 2020 when compared to a similar period last year.

The eligibility criteria that applied to earlier subsidies such as mitigating steps and retaining subsidised employees, continue to apply.

Also, a reminder about two other Covid-19 relief packages –

The Leave Support Scheme eligibility criteria changed effective 1pm on the 21^st August, no longer requiring claimants to have to show a decline in actual or predicted revenue, and further, that those employees for whom the scheme would cover, now included self-isolating employees who either:

• Tested positive for Covid-19.

• Came into contact with another infected person.

• Are vulnerable, or,

• Live with vulnerable persons.

There has also been tinkering with the Business Finance Guarantee Scheme, with the 80% State backed bank loans now:

• Extending to medium-sized businesses having annual revenue up to $200m.

• Including grants up to $5m for five years.

• Permitting the loan funds to be used to refinance existing loans, and/or for capital investments.

• Allowing the banks to act outside of ordinary loan policies and processes (let’s see how this one works in practice!).

• Enabling the State to pay loans that were not personally guaranteed, and,

• Extending the application period until 31 December 2020.

Participating banks include ANZ, ASB, BNZ, Heartland Bank, Kiwibank, SBS Bank, TSB, Bank of China and Westpac.

Good luck! 

If you would like to receive these articles and updates as they happen, please sign up for the weekly mail out here.