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Richard's December 2020 tax updates
Richard has had over 30 years’ experience with New Zealand and International taxation. His team provide services including:
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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.
- OECD Philanthropy Report, 7 December
- MoR speech to CAANZ conference, 7 December
- Bill to increase top personal tax rate introduced, 7 December
- Employer provided accommodation, 7 December
- Application of charities business exemption explained, 14 December
- Hard forks and airdrops – confused yet?, 14 December
- If you binked, you would have missed it! 14 December
- Taking that first step, 21 December
- 2020 Kilometre rates confirmed, 21 December
- Covid support announcements, 21 December
OECD Philanthropy Report
A recent decision of the High Court, coupled with a case I am presently involved in with IR, is a timely reminder of the need to keep proper accounting records.
The OECD has recently released a report which comments on the tax treatment of philanthropic entities and charitable donations in 40 countries across the globe.
Acknowledging that in some countries, the non-profit sector accounts for up to 5% of GDP, the report recognises the need for the right balance to be maintained by jurisdictions Governments, to ensure the integrity of the tax system is retained while at the same time supporting the philanthropic sector existing within their communities.
The report concludes with the following recommendations for Government policy makers:
- Reassess the activities eligible for tax support and ensure that favourable treatment is limited to those areas consistent with underlying policy goals
- Consider providing tax credits rather than deductions and fiscal caps to ensure that tax support does not disproportionately benefit higher income taxpayers
- Reassess the extent of tax exemptions for commercial income of philanthropic entities to minimise the risk of putting for-profit businesses at a competitive disadvantage
- Reduce the complexity of tax laws that disproportionately affect low-income donors and smaller philanthropic entities
- Improve oversight and boost transparency to safeguard public trust in the sector and ensure that tax concessions used to boost philanthropy are not abused through tax avoidance and evasion schemes
- Reassess restrictions currently imposed on cross-border philanthropic activity.
If you would like to read more, a full copy of the report can be obtained from the OECD’s website.
MoR speech to CAANZ conference
In case you did not attend this year’s CAANZ tax conference, the traditional Minister of Revenue’s keynote address to the audience included the following comments:
- There is priority towards getting the flexi-wage scheme up and running by the end of 2020. This is essentially a wage subsidy programme that assists employers to hire and help people with training or mentoring to gain the skills for a job
- The 39% top personal tax rate on income above $180k will kick in from April 1st – more on this below
- Significant international concerns regarding the under-taxation of digital MNE’s will hopefully be lessened by an OECD-led multilateral solution to be announced mid-2021. The alternative, less preferred option presently for NZ, is to go it alone and address the issue with its own digital services tax (DST)
- Two taxation Bills are presently in the pipeline, both likely to be passed pre-31 March 2021 – the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Bill, and the Child Support Amendment Bill
- The final stage of IR’s business transformation program was nearing completion, to launch in March 2021 and deliver improvements to paid parental leave, child support, unclaimed monies, duties, and foreign trusts activity.
Bill to increase top personal tax rate introduced
Just in case your Santa stocking was looking a little empty, the recent release of the Taxation (Income Tax Rate and Other Amendments) Bill (2-1) is just the thing for you to print out, fill the gap in your sack, and provide you with some enthralling reading post the usual overeating that occurs every December 25th, regardless of how many times before you’ve told yourself you’ll never do it again.
So settling down for your much deserved afternoon nap post an industrial morning of helping the kids put together their new lego sets that Santa has kindly delivered, you can drift off reading that in 2021:
- A new top personal tax rate of 39% will apply to incomes in excess of $180k from the commencement of the 2021-22 and later income years, which for the majority of us will be April 1st. A number of tax rules will be amended to accommodate the new rate, including those related to PAYE, FBT, RWT on interest, ESCT, RLWT, RSCT, and the taxable Māori authority distributions non-declaration rate, although note that the RWT rate changes will not come into effect until 1st October 2021 to ensure that interest payers are able to implement the required systems changes
- To mitigate the game-players amongst us who may attempt to use trust structures to save 6%, increased information disclosures will be required for trustees’ annual returns for the 2021-22 and later income years. Trustees would be required to provide financial statements (primarily a P&L and balance sheet), details of distributions and identifying information for those receiving beneficiaries, details of settlements during the year and identifying information regarding the settlor, and details of other relevant persons, particularly those who have a power to appoint or dismiss a trustee, to add or remove a beneficiary, or to amend the trust deed
- IR’s information gathering powers will be clarified to make it clear that you can be required to provide any information IR considers that it needs solely for the purpose of tax policy development
- The minimum family tax credit (MFTC) threshold for 2020-21 would increase to $29,432 per annum ($566 per week) from $27,768 per annum ($534 per week). The purpose of the MFTC is to ensure that the incomes of families who work full-time (defined as 20 hours for sole parents and 30 hours for couples) and do not receive a benefit are always higher than what their income would be if they continued to receive a benefit.
The commentary to the Bill is only 11 pages, so you may need to couple it with the OECD’s philanthropic report to get you really snoring.
Employer provided accommodation
IR has released draft operational statement ED0227, ‘Income tax treatment of accommodation provided to employees’.
Discussed within the commentary is:
- The definition of ‘accommodation’, exploring the types of accommodation that are specifically excluded from the definition such as a room, berth or other lodging provided on a mobile workplace such as a ship, a truck or an oil rig, or accommodation provided in a remote location outside New Zealand
- The application of any of the available exclusions if the accommodation is not excluded (i.e. out-of-town secondments and projects, ongoing multiple workplaces, meetings, conferences, and training courses)
- Valuing the accommodation benefit.
A good starting point for dealing with any employer provided accommodation questions from your clients, is to commence with the premise that PAYE should be withheld by the employer on the value of what their employee receives. Then proceed to examine the accommodation type and whether it is excluded from the definition, and if not, whether a specific exclusion from an otherwise taxable benefit may be applied.
The deadline for comment on ED0227 is 1st February 2021.
Application of charities business exemption explained
IR has issued two draft QWBA’s on application of the charities business exemption contained within section CW 42 of the Income Tax Act 2007 (‘the Act’).
The first QWBA is referenced PUB00359a, with the title – Charities business exemption – when must it be used. The commentary considers when a charity needs to apply section CW 42 as opposed to section CW 41 in respect of determining the exempt income status or not of income the charity has derived during the year.
As presently drafted – “A charitable entity must use the business income exemption test in s CW 42 to work out whether income it derives from a business is exempt if:
- the charitable entity is carrying on the business; or,
- another charitable entity (the operating entity) is carrying on the business “for, or for the benefit of” the charitable entity (the controlling entity).”
The commentary then confirms that a business will be carried on by an operating entity for, or for the benefit of a controlling entity if all the rights to the income and capital of the business held by the operating entity are held for the benefit of the controlling entity.
The remainder of the draft QWBA comments primarily on the scenario of the business being carried on by a separate charitable entity (which may or may not be owned by the “parent” charitable entity – e.g., a charitable trust wholly owning an operating company which itself is a registered charity) and concludes with some narrative of how to treat the different sources of income (business and other income), applying either section CW 41 or section CW 42 accordingly.
The deadline for comment on PUB00359a is 1st February 2021.
The second QWBA
is referenced PUB00359b, with the title – Charities business exemption –
business carried on in partnership. Slightly shorter in length than PUB00359a,
the primary focus of the QWBA, is whether the fact that a charity may carry on
the business in partnership with a non-charity, may then negate the charities
ability to claim the section CW 42 business income exemption.
The present view provided by the draft QWBA, is that section CW 42 remains available to the charity, because the income and capital of the business is allocated in accordance with each partner’s partnership share. Consequently, each taxpayer to the partnership, then separately determines the application of the Act to its share of the business income.
In this last regard, the reader is then referred to the first QWBA, from the perspective of whether the business income is derived directly or indirectly (via a separate operating charitable entity) by the charity considering the section CW 42 exemption.
As with the first draft QWBA, PUB00359b also has a comment deadline of February 1st.
Hard forks and airdrops – confused yet?
If you have clients who dabble in the cryptoasset space, then the above terms potentially do not create a somewhat blank expression on your face when you hear them.
Well IR (along with numerous taxing authorities around the globe) is certainly in catch-up mode as the use of cryptoassets and distributed ledger technology (blockchain) becomes increasingly common, and taxpayers seek clarification from the Revenue as to the tax treatment of various types of cryptoasset transactions and arrangements.
In this regard, IR has recently released Issues Paper 14 – Income tax – tax treatment of cryptoassets received from blockchain forks and airdrops.
When it comes to cryptoassets transactions and arrangements, the starting point to remember I would suggest, is that at this point in time, there are no special tax rules – so it’s just working with what you already know in terms of revenue recognition concepts, expense deductibility criteria etc.
The biggest challenge I find, is getting your head around the new terminology and understanding exactly what is the nature, or character, of the ‘thing’ your client has, or is about to, receive, and then how to place a value on that ‘thing’ in order to reflect an amount in the tax return.
The Issues Paper refers to a ‘hard fork’ as a change to protocol code, to in essence create a new version of the blockchain and therefore a new ‘token’, which operates under the rules of the amended protocol while the original token continues to operate under the existing protocol – as simple as learning you’re ABC’s isn’t it.
An ‘airdrop’ is the other new term for me, and no, it has nothing to do with sharing photos on your mobile phone! In the world of cryptoassets, an airdrop is the distribution of tokens without compensation, i.e., for free, generally undertaken with a view to increasing awareness of a new token, particularly amongst ‘influencers’, and to increase liquidity in the early stages of a new token project.
Issue Paper 14 has three focus areas:
- The tax consequences of receiving cryptoassets from a blockchain hard fork or airdrop.
- The tax consequences of disposing of cryptoassets received from a hard fork or airdrop.
- The cost of the cryptoassets for deductibility purposes.
In conclusion, very briefly, as the Issues Paper is 55 pages in length:
The receipt of new cryptoassets from a hard fork or airdrop will not be income to the recipient in many cases. However, the receipt of new cryptoassets may be income of the recipient if they:
- have a cryptoasset business (such as a dealing or mining business),
- have a profit-making undertaking or scheme involving acquisitions of airdropped or forked cryptoassets,
- receive airdropped cryptoassets as payment for services provided, or
- receive airdropped cryptoassets on a regular basis such that the receipts have the hallmarks of income.
Whether amounts received from disposing of these cryptoassets are taxable depends on the person’s circumstances – cryptoasset business, section CB 3 or CB 4 considerations.
No deductions are generally available for the cost of the cryptoassets received from a hard fork or an airdrop, as the person has not incurred any expenditure in acquiring them. However, transaction fees incurred may be included as part of the cost of acquiring such cryptoassets.
The deadline for comment on IRRUIP14 is 1st February 2021.
If you blinked, you would have missed it!
For those of you yet to come to terms with the Taxation (Income Tax Rate and Other Amendments) Act 2020 (No 65 of 2020) Bill introduced to Parliament on 1st December 2020, the age old saying of ‘you snooze, you lose’ rings true, considering the Bill passed under urgency and received Royal assent on the 7th December.
As I highlighted in AWIR last week (refer back if you want all the goss), the Act sees:
- A new top personal income tax rate of 39%
- Increased disclosure requirement for trusts
- Increased Minimum Family Tax Credit threshold for the 2020–21 tax year, and
- Clarification that Inland Revenue can request information solely for tax policy development purposes.
Taking that first step
IR has now finalised its QWBA on the question of what is the first step legally necessary to achieve liquidation when a liquidator is appointed. Understanding the Commissioner’s position in this regard is important, because distributing capital gains to shareholders outside of the ‘on liquidation’ period for a company, converts that capital gain into a taxable dividend, often with the inability to attach imputation credits subsequently due to timing restrictions.
QB 20/03 is also useful, because while it is targeted towards long-form liquidations (that where a liquidator is actually engaged to complete a formal liquidation process), it also provides commentary on short-form liquidations (arguably of more interest to most of us I would suggest) in order to point out potential differences in timing triggers between the two options.
Most of you are hopefully aware by now, post the previous release of BR Pub 14/09, that in respect to a short-form liquidation, you simply need to have your client’s sign a resolution that their company will:
- Cease business
- Pay all creditors
- Distribute surplus assets, and then,
- Request removal from the register of companies.
Once this resolution is signed (and provided the company actually ceases to trade and does end up being removed from the register), then capital gain distributions can proceed and will retain their tax-free status, as the distribution will be deemed to have occurred ‘on the liquidation’ of the company.
However, as QB
20/03 points out, the taking of the same action under a long-form liquidation
process, will not necessarily trigger the commencement of the ‘on liquidation’
period. In this regard, a long-form liquidation of a solvent company generally
commences when the shareholders pass a special resolution to appoint a named
liquidator. From a timing perspective, this requires that the named liquidator has validly consented
in writing to be appointed prior to the shareholders passing the resolution.
Consequently, if the above resolution is signed prior to the liquidator having provided their written consent to act, then it does not trigger the commencement of the ‘on liquidation’ period. Equally, steps undertaken such as the holding of a special meeting of the shareholders to discuss the liquidation of the company, and/or obtaining the written consent of the liquidator, are considered to be only preparatory steps to a liquidation process, and it is not until the above resolution is signed post the receipt of the liquidators written consent, that the company will be considered by the Commissioner to have commenced the ‘on liquidation’ period. The shareholders for example, may not proceed to sign the resolution even though the liquidator has consented to act for the company, and consequently the liquidation never actually proceeds.
So be conscious of the timing issues, as with the requirement for imputation credits to be attached to a dividend at the time it is paid, subsequently discovering that your client’s capital gain distribution is now considered to be a taxable dividend, could be an expensive learning lesson!
2020 kilometre rates confirmed
Section DE 12(4) requires the Commissioner to annually set and publish motor vehicle kilometre rates, which can then be used by taxpayers to calculate expenditure claims for the business use of a motor vehicle, or alternatively used by employers as a reasonable estimate for reimbursement of expenditure incurred by employees for the use of a private motor vehicle for business purposes.
The rates to be used for the 2019/20 year are:
|Vehicle type||Tier One rate||Tier Two rate|
|Petrol or diesel||82 cents||28 cents|
|Petrol hybrid||82 cents||17 cents|
|Electric||82 cents||9 cents|
The increase in tier one reflects a slight increase in vehicle ownership costs, whereas the reductions in tier two are in essence tied to reductions in fuel costs.
Covid support announcements
A few Covid support package announcements were made during the week.
- A new resurgence support payment is being introduced to help businesses directly affected when there is a move to Alert Level 2 or above for a week or more. The package includes a one-off payment of $1,500 plus a $400 payment per employee up to a total of 50 FTEs. Businesses will need to declare a drop of 30% or more in income over a 14-day period as a result of an increase from Alert Level 1 to Alert Level 2 or higher. They must have been in business for at least six months in order to apply. Legislation containing the measure is expected to be introduced early next year.
- A commitment to the Wage Subsidy Scheme where there is a regional or national move to Alert Levels 3 and 4.
- Retention of the Leave Support Scheme, including the addition of a new short-term absence payment to cover eligible workers needing to stay at home while awaiting a Covid-19 test result. This will be a one-off payment of $350 to employers to pay workers who need to stay home while awaiting a test or while someone who is their dependent is doing so in accordance with public health advice.
- A reminder that the Business Finance Guarantee Scheme, has been extended to June 2021 with additional availability and flexibility.
- The Small Business Cashflow Scheme has been modified. Going forward:
- The eligibility criteria will be broadened to include new businesses. Businesses established after 1 April 2020 and which have existed for six months will now be eligible for a loan if they meet other eligibility criteria.
- There is a change to the 30% decline period – the new criteria is that businesses can demonstrate an actual drop in revenue of at least 30% because of Covid-19 over any 14-day period in the previous six months, compared with the same 14-day period a year ago. If the applicant was not in business a year ago, the 14-day period can be compared with the same or similar period in the previous month. Businesses must also declare that the drop in revenue was due to Covid-19 and have records to support this.
- Businesses will be able to draw down a second loan if they meet the eligibility criteria and have repaid the original loan in full.
- The purpose of the scheme will be extended and will enable borrowing for investment in new equipment and digital infrastructure.
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