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 December 2021- February 2022 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.
- 7th RSP available but a little different, 6 December
- Charities & donee organisations Operational Statement, 6 December
- Non-resident employers’ obligations, 6 December
- Tax issues for board members, 13 December
- Transition support payment now available, 13 December
- Final AWIR for 2021, 20 December
- Covid-related payments – tax returns and ACC, 20 December
- ASC record keeping requirements, 20 December
- Commercial building deprecation elections, 20 December
- MNE’s minimum global tax rate, 1 February
- OECD transfer pricing guidelines, 1 February
- Proposed income insurance scheme, 8 February
- The digital world and tax, 14 February
- Covid-19 related costs & deductibility issues, 21 February
- Clean car discount, 21 February
- Budget 2022, 21 February
7th RSP available but a little different
First the technical – the Covid-19 Resurgence Support Payments Scheme (August 2021) Amendment Order (No 7) 2021 (SL 2021/407) comes into force on 10th December 2021 and amends the Covid-19 Resurgence Support Payments Scheme (August 2021) Order 2021 to provide for a 7th grant payment.
The specified period for this 7th grant payment commences on or after 3rd October 2021 and ends 9th November 2021. However, while the 5th and 6th grant payments comprised components of a lump sum payment of $3,000 plus $800 per FTE (which were double the amounts of earlier grants), the 7th RSP is a $4,000 lump sum with $400 per FTE.
The Order also provides that the resurgence support payments scheme (August 2021) ends six weeks after the first date on which any area of New Zealand moves to the Covid-19 Protection Framework – so by my calculation, the 14th January the RSP scheme will come to an end.
Charities & donee organisations Operational Statement
Appreciating that most of you will shortly have some spare time on your hands as you take a much-needed break over the Christmas period, and will be looking for something exciting and fulfilling to do in your downtime, well look no further than IR’s 105-page draft OS on charities and donee organisations.
The OS sets out to explain the Commissioner’s view of the tax treatment and obligations that apply to these entities and how she will apply the law accordingly. And just to help you to be able to draw yourself away to spend five minutes playing with the kids, grab a refreshment, or do whatever you need to do to ready yourself for the excitement to come, the document is broken into two separate parts. Part one is dedicated to charities, with part two focused on donee organisations. You could even get adventurous and mix things up by reading part two first.
Now if you do get to the end and feel that you need to have your say, feedback is requested to be provided no later than February 28th 2022.
The document reference is ED0238, with the respective parts ED0238a for charities and ED0238b for donee organisations. Happy reading!
Non-resident employers’ obligations
Now this document size is more to my preference, a 10-page Operational Statement setting out the Commissioner’s views as to the PAYE, FBT and ESCT obligations for non-resident employers in cross-border employment situations.
Those of you with a good memory may recall my AWIR article on the draft OS when it was released, and I cannot see any major changes in the finalised version from the original draft. In essence, if you have a non-resident employer approach you for advice on their New Zealand filing obligations, you should ask yourself two questions in determining the advice you provide in return:
- Has the employer made themselves subject to New Zealand tax law by having a sufficient presence in New Zealand? And,
- Are the services performed by the employee properly attributable to the employer’s New Zealand presence?
Usually, the FBT and ESCT obligations will follow your PAYE determination.
If your answer to both questions is yes, then the non-resident employer is likely to have New Zealand PAYE (and therefore FBT and ESCT) reporting and filing obligations, although do not forget to check whether an exemption may apply either, because the employment income is non-residents foreign sourced income, the domestic tax exemption in s.CW 19 applies, or the provision of a relevant DTA applies to relieve the non-residents New Zealand source taxation exposures.
In terms of answering the first question, the fact that New Zealand based employees of the non-resident employer exist, does not automatically correlate to the non-resident having created a ‘sufficient’ presence in New Zealand, particularly in a scenario where the employee chooses (as a matter of personal preference) to undertake their employment activities in New Zealand, where those activities have no necessary connection to New Zealand, and where this is the non-resident employers’ only connection with New Zealand. Over the past 18 months or so, I have certainly seen a huge growth in the use of remote employees by non-resident employers due to Covid, and often the non-resident employer has no connection to New Zealand other than the employee, whose preference has been to return home and to work from New Zealand.
Therefore, what you should be looking for instead is whether the non-resident employer has a trading presence in New Zealand, such as carrying on operations and employing a workforce for the purpose of trade, do they have a permanent establishment in New Zealand, a branch, or are there contracts that have been entered into in New Zealand and they are then performing those contracts in New Zealand via NZ based employees?
In terms of the second question, having determined that a non-resident employer has created a sufficient presence in New Zealand, it is then a matter of weighing up whether the particular employees activities are properly attributable to that presence and note that reporting and filing obligations could be triggered both in relation to New Zealand based employees and those based outside of New Zealand.
Now if the non-resident employer has not created a sufficient presence in New Zealand, your advice should be that the employee themselves will have an obligation to register as an IR56 taxpayer and account for PAYE payments on a monthly basis themselves. Although I often find when I suggest this option to the non-resident employer, they still wish to manage the process for their New Zealand based employee and consequently register with IR voluntarily.
My reference above in relation to a possible s.CW 19 exemption, is the 92 day rule and applies where:
- The visit is for 92 or fewer days (counting the day of arrival and departure as whole days),
- The person is present in New Zealand for 92 days or fewer in total in each 12- month period that includes the period of the visit,
- The services are performed for or on behalf of a person (which could include an employer) who is not a resident in New Zealand; and,
- The income is chargeable with income tax in the country in which the person is resident.
Alternatively, the DTA (tax treaty) reference was in relation to the 183 day rule contained in most of our treaty’s, where New Zealand will only gain a source taxing right over the employment income, if the employee is present in New Zealand for more than 183 days in a 12-month period, unless the period of presence is less than 183 days and the remuneration is borne by and deductible in determining the profits attributable to a permanent establishment which the employer has in New Zealand.
Finally, the reference to non-residents foreign sourced income, is where the New Zealand employer is paying a non-resident employee for work performed overseas. In this regard, it is the Commissioners view that the New Zealand resident employer does not have any obligation to withhold PAYE from a PAYE income payment that is ‘non-residents’ foreign sourced income simply because the Core Provisions indicate that the purpose of the Act is to tax assessable income, and income tax is generally not intended to apply to non-residents.
The document reference is OS 21/04 and contains a number of examples to illustrate the key points.
Tax issues for board members
IR has issued GA 21/01 which is titled “Tax on any fees paid to a member of a board, committee, panel, review group or task force.”
While the commentary is targeted towards board members, I would suggest that it’s potential application equally to a person who accepts a directorship position either with the company they work for or as an independent, makes it a useful read in any event – and it’s only eight pages!
The first step is to determine who is actually receiving the income – the person in their individual capacity or on behalf of an entity that the person has a connection with – for example, a company which has been contracted to provide a board member and the person is an employee of that company.
If the person is contracting in their own capacity, then the payment will be a schedular payment subject to a withholding tax deduction of 33%, unless the person has either an exemption certificate, a special tax rate certificate or the person has elected their own rate – which can be as low as 10%. From a GST perspective, usually section 6(3)(c)(iii) will exclude the activities of the person from the taxable activity definition and consequently the payments they receive will not be subject to GST (note the section 6(5) proviso of course).
If the person is already providing employment related services to the payer, then any fees paid to the person for their directorship duties and the like, will simply be defined as a payment of salary, wages or an extra pay, and be subject to PAYE deductions accordingly.
However, if the person is required to account for the payments received to another entity, such as their employer or a partnership of which they are a partner for example, then the income is likely to belong to the entity (note IR’s “Connection” commentary) and not the person. Under this scenario, both the withholding tax and GST implications will be determined by the status of the entity. For example, if the income belongs to a partnership, then likely that withholding tax deductions are required unless the partnership has either an exemption certificate or a special tax rate certificate, which it can provide to the payer. If the entity is a company however, then the payments are exempt from withholding tax deductions.
You can locate GA 21/01 within IR’s Tax Technical section of their website.
Transition support payment now available
Applications for the TSP can now be made, via a businesses’ MyIR account.
This one-off payment is at a higher rate than the previous RSP payments – a lump sum of $4,000 plus $400 per FTE, capped at 50 FTE employees which equates to a maximum payment of $24,000.
The same 30% revenue drop criteria as that which exists for the RSP applies, the affected revenue period set as being between 3rd October and 9th November and must be compared with a typical week in the six-week period prior to August 17th.
Final AWIR for 2021
This will be the final edition of AWIR for 2021. I do hope that you have enjoyed the weekly updates throughout 2021, which has indeed been a somewhat challenging year for a lot of people, and may we all experience calmer waters during 2022.
All going to plan, we are off on a family camping holiday mid-January, so it’s likely that the first edition for AWIR in 2022 will be in the first week of February.
I wish you all a very Merry Christmas, some well-deserved downtime with your families, and safe travels over the holiday break.
Covid-related payments – tax returns and ACC
Just a reminder for those who have received wage subsidy and/or leave support payments from MSD which have not passed through the PAYE system – predominantly self-employed taxpayers, but also including non-PAYE shareholder-employees, partners and LTC owners. Do not forget to include the amounts received in your personal income tax returns.
From a GST perspective, the amounts are not subject to GST and consequently should not be included in GST returns.
On the ACC front, sole traders do not pay ACC levies on the amounts received, however where a company with non-PAYE shareholder employees has paid the amounts out as shareholder salaries, ACC levies will be assessed on the salaries paid.
While on the topic of ACC, it should be noted that there have been several recent changes to take effect in April 2022:
- Average Work levies paid by employers and self-employed people will decrease from 67 cents to 63 cents per $100.00 of liable earnings and remain at this rate until 2025.
- Average Motor Vehicle levies, which include the annual licence levy and petrol levy, will remain at $113.94. Electric vehicles will continue to receive a subsidised levy.
- Earners’ levies paid through PAYE (or invoiced directly through ACC for self-employed people) will increase from $1.21 per $100.00 to $1.27 in April 2022, $1.33 in 2023 and $1.39 in 2024.
ASC record keeping requirements
Now I’m sure there are more pressing matters that IR could be issuing operational statements in respect of, although perhaps due to the time of year, its promoted as a Christmas gift to you all via the issue of a short document on what I would have thought was a topic that basically restates the obvious – we all appreciate that the onus is on our clients (often through ourselves) to be able to support tax positions taken, and it’s going to be difficult to do that, to say the least, if you have failed to maintain sufficient records accordingly.
Anyhow, the topic is “Available Subscribed Capital record keeping requirements”, a four-page (three pages in essence discounting the title page) draft operational statement with the reference ED0239.
You may already appreciate the ability of a company to make tax free payments to shareholders (otherwise classified as taxable dividends) on two specific occasions – during its lifetime, the company is making a payment to a shareholder to repurchase their shares, or upon its death (once the company has completed its first step and is now ‘in liquidation’) when distributing the surplus assets.
In both of these scenarios, where the amount paid to the shareholder does not exceed their ASC per share, it is exempt from taxation. Any excess above their ASC amount however (with the exception of capital gains in a liquidation scenario), will be a taxable dividend in the shareholders hands.
Since there is an ability for a tax-free payment to be received by the shareholder, IR is naturally conscious of the risk to the revenue base that exists as a consequence, and has therefore used ED0239 to remind taxpayers that the onus will be on them to prove the ASC balance if necessary, and that this may extend to them having to retain records that are more than seven years old. Where IR forms a view that the record keeping is insufficient, then they are likely to dispute the tax-free nature of the shareholder payment.
So you’ve been warned…
Commercial building deprecation elections
In a previous edition of AWIR, I covered IR’s release of a draft QBWA on elections not to depreciate commercial buildings.
QB 21/11 has now been finalised. It’s a nine-page document, the main focus of its commentary being the reinstatement of depreciation on commercial buildings effective from the 2021 income year, and answering the question as to what are the consequences for taxpayers who elected, before the 2012 income year, to treat their commercial building as not being depreciable property and so not claim the relevant depreciation loss?
The answer in this regard is three pronged:
- Where a taxpayer makes an election to treat their commercial building as not being depreciable property, that election is irrevocable, and the taxpayer is bound by that election until the building is disposed of. For the election to be effective, the taxpayer must make it ‘in writing’.
- A taxpayer who does not make an election and who claims a depreciation loss for their commercial building must continue to depreciate that building at the rate the Commissioner has set.
- A taxpayer who does not make a written election and has never claimed a deduction for a depreciation loss on their commercial building may make a retrospective election not to depreciate that building. The retrospective election will apply from the date the taxpayer acquired the building.
So in essence, if you’ve already made a written election not to depreciate pre-2012, then you’re stuck with that prior decision, and equally, if you were depreciating up to 2012, then the intervening hiatus does by no means now allow you to decide to no longer depreciate.
MNE’s minimum global tax rate
For those of you who follow the activities of the OECD, you will already be aware of the agreement reached in October 2021 by its 137 member countries/jurisdictions, to ensure that certain Multinational Enterprises (MNE’s) be subject to a minimum 15% tax rate from 2023.
The October 2021 agreement was followed by the release in December 2021, of The Pillar Two model rules, which provide governments with a precise template for taking forward the two-pillar solution to address the tax challenges arising from digitalisation and globalisation of the economy.
The Pillar Two model rules will:
- Define the MNEs within the scope of the minimum tax.
- Set out a mechanism for calculating an MNE’s effective tax rate on a jurisdictional basis, and for determining the amount of top-up tax payable under the rules.
- Impose the top-up tax on a member of the MNE group in accordance with an agreed rule order.
- Address the treatment of acquisitions and disposals of group members.
- Contain specific rules to deal with particular holding structures and tax neutrality regimes; and,
- Cover administrative aspects, including information filing requirements, and provide for transitional rules for MNEs that become subject to the global minimum tax.
OECD transfer pricing guidelines
For those of you who are involved in cross-border dealings between associated entities, the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations provide guidance on the application of the ‘arm’s length principle’ which is the international consensus on transfer pricing, ie on the valuation for tax purposes of cross-border transactions between associated enterprises.
The January 2022 edition of the OECD Transfer Pricing Guidelines has now been released and includes the revised guidance on the application of the transactional profit method, and the guidance for tax administrations on the application of the approach to hard-to-value intangibles agreed in 2018, as well as the new transfer pricing guidance on financial transactions approved in 2020.
Proposed income insurance scheme
The only real highlight in the world of tax last week (although hardly a highlight and arguably not a tax), was the announcement by our esteemed finance Minister Grant Robertson, regarding the proposal to introduce a New Zealand income insurance scheme.
The scheme has been jointly designed by the Government, Business New Zealand and the New Zealand Council of Trade Unions. It would provide workers who had either been made redundant, laid off, or who have had to stop working because of a health condition or disability, with a payment equating to 80% of their usual salary for up to seven months. The proposal also includes up to 12 months of support for re-training.
Key features of the new scheme are:
- Broad coverage for different working arrangements,
- Coverage for job losses due to redundancy, layoffs and health conditions and disabilities,
- A four-week notice period and four-week payment at 80% of salary, from employers,
- A further six months of financial support from the scheme at 80% of wages or a salary.,
- Option to extend support for up to 12 months for training and rehabilitation,
- A case management service to support people’s return to work,
- Administered by ACC,
- Funded by levies on wages and salaries, with both workers and employers paying an estimated 1.39% each; and,
- Workers eligible after six months of levy contributions in the previous 18 months.
If you would like to have your say on the new proposals, the closing date for submissions is 26th April 2022.
The digital world and tax
Not surprising with a couple of short weeks and a whole lot of other ‘stuff’ going on presently, it’s been relatively quiet on the tax front. The only release of note (and some may argue that view) being IR’s officials’ issue paper seeking your feedback on digitising the tax system.
Titled ‘Tax administration in a digital world’, the paper explores IR’s potential role in a world where more businesses are operating in a digital environment, using software to run their business, particularly to manage their financial record keeping, invoicing and calculation of tax obligations. These businesses are spending less time on the more routine aspects of accounting and tax, and are freed up to focus more on running their business. The shift of business management into digital channels means tax calculations can be embedded in the software businesses use. This is referred to as tax occurring in the business’s natural systems.
You should all be aware of IR’s business transformation program (unless you had your head in the sand during a number of their major software updates when all systems were unavailable for nearly a week), and how the changes made have strengthened its ability to deliver services based on core information, involving collection and payment of money and processing at scale. More tailored services, which increasingly the public expects in the digital environment, are likely to come from private sector entities. For example, integrating financial management with tax management for a small business or providing budgeting assistance for someone with debt. Digital channels provide the opportunity for private sector entities to deliver customised services that can more effectively and efficiently meet taxpayers’ needs. The impact of these developments is that for these taxpayers IR will act more as an enabler and the customer-facing parts of tax compliance would be delivered by private sector entities.
The issues paper is only 25 pages in length, containing six chapters with the third of these likely to interest the majority, where IR sets out its views on what the future could look like with a more digital tax system, what IR’s role could be, and what implications could be faced by taxpayers.
If you would like to have your say, submissions are requested to be forwarded no later than 31st March 2022.
Covid-19 related costs & deductibility issues
It’s an understatement to say that the past two years have been a tough ride for a number of businesses, and some will clearly have incurred types of expenditure which would be categorised as unusual or abnormal, in an attempt to survive the current environment.
Inland Revenue has now acknowledged the present scenario, and that some taxpayers may be uncertain as to their ability to claim these unusual/abnormal expenditure items as tax deductible in the year incurred. As a consequence, IR has been kind enough to release PUB00432, a draft interpretation statement titled ‘Income Tax – deductibility of costs incurred due to Covid-19’.
The most important thing I appreciate you’ll want to know, is that it’s only 24 pages in length, so not too taxing to get through (and yes the pun was intended).
When considering application of the general permission (pretty hard to cross the deduction line if you can’t satisfy the requirements of section DA 1 in the first instance), the statement sets out four key principles:
- It is important to consider how the business earns its income, and whether the cost relates to that process;
- The factual situation at the time the cost is incurred is relevant;
- A cost does not need to be linked to a particular amount of income, or even be incurred in the same year; and,
- Costs incurred to protect a business can be deductible.
Next there is a brief discussion on section DA 2 which contains the general limitations, with the primary focus (ok the sole focus) being on our good friend, the capital limitation.
Having now outlined the general principles of deductions and then how any entitlement to claim may be swept away by application of the capital limitation, the remainder of the commentary focuses on four specific types of costs:
Employee costs including:
- Relocating new or existing employees to New Zealand, including obtaining visas, exemptions, places at managed isolation and quarantine facilities and transport.
- Retaining teams in New Zealand where they may be unable to work (such as paying retainers to contractors) or keeping teams housed together in a bubble.
- Payments to employees such as vouchers for going back to the office, incentive payments for vaccinations or the provision of mental health and wellbeing services.
- Redundancy payments.
Contract and legal costs including:
- Costs for terminating contracts, including any settlement payments for breach of contract.
- Legal costs incurred in contractual or employment disputes.
Assets and equipment costs including:
- Repairs and maintenance on assets or equipment not being used due to Covid restrictions or a temporary reduction in business activities.
- Re-activating costs so equipment can be put back into use.
- Ongoing depreciation loss for depreciable assets that are not being used due to Covid restrictions or a temporary reduction in business activities.
- Security costs.
Premises expenses including:
- Payments made to terminate a lease (by the lessee).
- Incentive payments to encourage new tenants (by the lessor).
- Additional costs incurred to keep teams appropriately distanced within a workplace, including changes to relevant fit-out (such as erecting barriers).
I would suggest that the doc is a good read in terms of general principles surrounding the claiming of these types of expenses even in a non-Covid world (it’s getting harder to remember what that was like!).
The final four (and a bit) pages are dedicated to useful examples on applying the statement’s commentary.
If you’d like to make a comment and have your say prior to the document being finalised, then the closing date for submissions is 30th March 2022.
Clean car discount
Just in case the issue was keeping you awake at night, the Land Transport (Clean Vehicles) Amendment Bill has recently been passed, and amends the Income Tax Act 2007 by inserting a definition of the clean vehicle discount scheme into sYA 1. Schedule five (which deals with the fringe benefit values of motor vehicles) has been amended to clarify that, for fringe benefit tax purposes, the cost of the vehicle in relation to which a payment under the clean vehicle discount scheme is received by the owner, is net of the amount of the payment. The amendments to the Income Tax Act are deemed to have come into force on 1 July 2021.
Just for the ‘did you know? box’, apparently a full charge of a low/zero emission vehicle costs the equivalent of buying petrol at around 40 cents per litre – imagine that!
I can feel the excitement already building – Budget 2022 will be delivered on Thursday, 19 May 2022.
Our esteemed Minister of Finance has said that the Budget would include a focus on the Government’s health reforms and investing to meet New Zealand’s climate change goals.
No mention of any tax changes… yet…
If you would like to receive these updates directly to your mail inbox, you can subscribe by clicking here.