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Richard's Jan-Feb 2021 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.
- Unconditional gifts IS, 11 January
- Application of DTA’s to trusts, 11 January
- Tax avoidance items issued for comment, 11 January
- Clarification of role of tax agents and others released, 18 January
- Crypto-asset binding rulings release, 18 January
- Deadline extension to Tax Avoidance papers, 25 January
- Is bloodstock breeding your next investment? 2 February
- Eligibility criteria for SBCS updated, 9 February
- Specified livestock values released, 9 February
- Non-resident suppliers GST registration IS, 15 February
- GST and agency IS finalised, 15 February
- Management of NZ foreign trusts in myIR, 15 February
Unconditional gifts IS
IS 20/09 was released by IR just prior to Christmas, and provides commentary on the subject of unconditional gifts and GST. Determining whether a payment made to a non-profit body is an unconditional gift is important from the non-profit body’s perspective, both in establishing whether the payment is subject to GST as consideration for a supply of goods or services (for a GST registered non-profit body), or whether an unregistered non-profit body should in fact be GST registered due to exceeding the registration threshold.
A payment made to a non-profit body is an ‘unconditional gift’ where:
- the payment is voluntarily made for the carrying on or carrying out of the non-profit body’s purposes; and,
- no ‘identifiable direct valuable benefit’ in the form of a supply of goods and services to the payer (or an associated person) arises or may arise in respect of the payment.
Where a statutory or legal obligation to make the payment exists, it is unlikely that the payment would be considered to have been made voluntarily.
In relation to whether there is an ‘identifiable direct valuable benefit’ arising from the payment, IS 20/09 defines this to mean an advantage or gain in the form of a supply of goods or services to the payer (or an associate of the payer) which is:
- clearly able to be defined or identified;
- sufficiently closely connected to the payment;
- useful, important and of real value;
- capable of being valued; and,
- not of only nominal worth.
Note that the benefit need not arise when the payment is made, and instead the benefit can arise in the future or be contingent on a future event or action occurring after the payment is made.
Amounts can also be donated to a non-profit body for a specified purpose with stipulations as to how the funds are to be used and still qualify as unconditional gifts, provided no identifiable direct valuable benefit arises or may arise in the form of a supply of goods and services for the payer (or an associated person).
Finally, a payment made by the Crown or a public authority to a non-profit body is not an unconditional gift.
Application of DTA’s to trusts
For those of you who deal with client’s trusts which have cross-border connections (e.g. trustees/beneficiaries resident in more than one jurisdiction), then the recent release of a draft issues paper on the topic of ‘Income tax – trusts and the Australian–New Zealand Double Tax Agreement’ will no doubt be of interest to you.
Referenced IRRUIP15, the document has been released in response to questions to IR to clarify the tax treatment of trusts under the network of double tax treaties that New Zealand has entered into with other countries. What better place to start therefore, with the NZ/AUS DTA considering the number of kiwi’s who presently live on our fourth island.
The Issues Paper addresses seven specific questions being:
- What is the taxable entity in a trust context?
- Is it the residence of the trustee or the settlor, or both, that determines eligibility to the benefits of the Aus–NZ DTA?
- Does the Aus–NZ DTA require that a trustee be treated in a separate capacity from their personal or private capacity?
- How does the residency tie-breaker provision deal with two or more trustees of mixed residency and is the test only that for non-natural persons?
- What is the scope of the requirement to recognise income derived by or through a trust that is treated as resident in one country as the income of a beneficiary who is taxable on it in the other country?
- How does the obligation in the question above sit with the rights of each country to tax its own residents?
- What is the extent of the obligation to grant a tax credit for tax paid in the other country by either the trustee or a beneficiary?
IRRUIP15 is 74 pages in length, so potentially a good pre-bedtime read, and if you are still awake at the end and wish to make any comments to those responsible for its drafting, then you should do so no later than 1st March 2021.
Tax avoidance items issued for comment
IR has released three items for comment which have tax avoidance as their subject matter.
The first is PUB00305 titled ‘Tax avoidance and the interpretation of the general anti-avoidance provisions sections BG 1 and GA 1 of the Income Tax Act 2007’ which sets out to explain the Commissioner’s view of the law on tax avoidance in NZ, and upon finalisation will replace the current interpretation statement IS 13/01 – ‘Tax avoidance and the interpretation of ss BG 1 and GA 1 of the Income Tax Act 2007’.
You may also recall a number of QWBA’s issued by IR in 2014/2015 which commented on various scenarios and whether IR considered that tax avoidance arrangements were in existence. Once PUB00305 is finalised, QB 14/11, QB 15/01 and QB 15/11 will also be withdrawn, on the basis that they either no longer reflect the Commissioners approach or subsequent legislative changes have now outdated the original QB.
However to the extent that the previous scenarios still have relevance, the QB’s have now been updated and also released for comment as drafts:
- PUB00305 QB 1: ‘Income tax: scenarios on tax avoidance – reissue of QB 14/11 scenarios 1 and QB 15/11 – scenario 2’; and,
- PUB00305 QB 1: ‘Income tax: scenarios on tax avoidance – reissue of QB 15/11 – scenarios 1 and 3’.
It should be noted that the scenario updates have not resulted in any changes to the previous conclusions reached by IR.
Should you wish to make a submission with respect to any of the 3 items, 18th February 2021 is the cut-off.
And just as a side, if you keenly follow tax avoidance cases through the Courts, the Supreme Court has granted both Frucor and the Commissioner leave to appeal the Court of Appeal’s decisions, so it’s not over yet.
Clarification of role of tax agents and others released
IR has issued an update to clarify how tax agents and other intermediaries can co-exist. In a nutshell:
Tax agents can link to most account types with the exception of child support accounts, KiwiSaver and paid parental leave. A client authority is required to enable the agent to act, and only tax agents qualify for EOT arrangements to file income tax returns. Tax agents can also choose where client mail and refunds are sent for linked account types. They can also link to a customer master link that gives them access to a client’s customer level mail.
Bookkeepers and other representatives can link to the same account types as tax agents. However, they cannot choose where client mail and refunds are sent.
PAYE intermediaries and payroll bureaus can only link to payroll accounts and register clients as an employer. Client mail and refunds for PAYE intermediaries are sent to the intermediary as they are legally responsible for filing and paying employer taxes. Client mail and refunds for payroll bureaus are sent to the client. Customers can have many intermediaries acting on their behalf, but they cannot have more than one intermediary of the same type linked to the same account at any time. All intermediaries must keep a signed authority to act so Inland Revenue can be satisfied that information is being released to the correct parties.
You can refer to IR’s website for the full article.
Crypto-asset binding rulings re-released
The previous binding rulings on the topic of salary, wages and bonuses paid in crypto-assets (BR Pub 19/01 & BR Pub 19/02) have been replaced via the issue of BR Pub 21/01: Income tax — salary and wages paid in crypto-assets, and BR Pub 21/02: Income tax — bonuses paid in crypto-assets.
reached previously in the earlier rulings remain unchanged in the latest
versions, with the exception of inconsistencies with the Wages Protection Act
1983 and the Minimum Wage Act 1983 that had arisen which have now been remedied
in the latest versions.
The income tax treatment of crypto-assets payments of this nature, is that they are PAYE income payments in accordance with section RD 3 of the Income Tax Act 2007, and consequently subject to the PAYE rules.
BR Pub 19/01 and BR Pub 19/02 are being withdrawn on 28 February 2021. Again, you can source copies of the new Rulings directly from IR’s website.
Deadline extension to Tax Avoidance papers
In my first AWIR for 2021, I mentioned the release for discussion and feedback, of three documents which provide the Commissioners view on the correct interpretation of the general anti-avoidance provisions contained in sections BG 1 and GA 1 of the Income Tax Act 2007, and then some commentary as to those provisions’ application to a number of specific scenarios.
All three documents are in essence an updated version to earlier releases, with the previous conclusions reached unchanged. Out-of-date legislative references have been amended naturally.
The original deadline for comment was 18th February 2021, however this date has now been extended to 31st March 2021.
In case you missed my first edition for the year, the three documents are:
- PUB00305: Tax avoidance and the interpretation of the general anti-avoidance provisions ss BG 1 and GA 1 of the Income Tax Act 2007 – explains the Commissioner’s view of the law on tax avoidance in New Zealand and when finalised will replace the current interpretation statement IS 13/01, “Tax avoidance and the interpretation of sections BG 1 and GA 1 of the Income Tax Act 2007”.
- PUB00305 QB 1: Income tax: scenarios on tax avoidance — reissue of QB 14/11 scenario 1 and QB 15/11 scenario 2: This QWBA addresses the scenarios of ‘interest deductions where shareholder loans are replaced’ – a family trust has in essence made interest free and upon demand advances to a wholly owned company over the years, those advances used by the company for the purpose of deriving assessable income, the trust demands repayment of the advances which has the consequence of the company borrowing from a third-party lender and claiming interest deductions in respect of the interest paid on the new debt, while the family trust uses the repaid funds to acquire a holiday home for the use of the trust beneficiaries, and, ‘interest deductions and use of a PIE’ – individual taxpayer on a 33% marginal tax rate borrows funds from a bank to invest in its PIE, PIE income then used by bank to satisfy interest obligations, PIE income taxed at 28% while taxpayer claims the interest deductions against their other income sources which are subject to the 33% tax rate.
- PUB00305 QB 2: Income tax: scenarios on tax avoidance — reissue of QB 15/11 — scenarios 1 and 3: This QWBA addresses the scenarios of ‘use of a limited partnership’ – a scenario where a tax loss company wholly owns a profit company, the tax loss company forms a limited partnership with an unassociated company, and the profit company subsidiary then proceeds to sell its business to the limited partnership, thereby paving the way for the loss company to now receive 50% of the profits to offset its tax losses, and ‘use of a discretionary trust’ – a useful read in my view if you are wanting to allocate beneficiary income to a client’s tax loss company and you are nervous of upsetting the Revenue should they ever review the file.
Is bloodstock breeding your next investment?
Not a lot to talk about this week, not unsurprising I suggest, considering we are still suffering from post-holiday blues, although hard to believe the first month of 2021 is now behind us!
IR has released guidance for those of you interested in investing in standout yearlings (both thoroughbred and standardbred) which have been purchased with an intention to breed for future profit as if you were operating an existing bloodstock breeding business.
The guidance provides commentary as to your eligibility for income tax deductions, and includes discussion on purchase criteria and cost thresholds, what info to provide when notifying the Commissioner of a breeding for profit intention and equally info to provide when advising of a change of intention subsequently.
Investors will naturally be subject to taxation if the standout yearling is subsequently sold for a profit.
The guidance can be located on IR’s website, using the search term – ‘Standout yearlings at Karaka or Christchurch 2021’.
Eligibility criteria for SBCS updated
Due to the extension of the Small Business Cashflow (Loan) Scheme application period until the end of 2023, the eligibility criteria has now been updated, with the amendments effective 28th January 2021.
There are four primary changes to the eligibility rules:
- Business establishment date: business or organisation must have been in operation for at least six months pre application date, and all employees must be working legally in New Zealand.
- Revenue decline: In the six months prior to application, there must have been a 30% decline in revenues over a fourteen-day period compared to the same fourteen-day period in the previous twelve months, and there must be evidence held to verify that the decline was Covid-19 related. The business must be viable and have a plan to ensure that it remains so.
- Employee number test: Business must have 50 or fewer FTE employees, and if part of a commonly owned group, then it is the group that must have the 50 or fewer FTE’s.
- Re-borrowing: If a loan is repaid prior to the end of 2023, then the business can apply for one more loan. However, any business that has defaulted on a loan will not be eligible to re-borrow.
Specified livestock values released
IR has released the latest livestock values determination – “National standard costs for specified livestock determination 2021”.
The determination is made in accordance with section EC 23 of the Income Tax Act 2007 and applies to any specified livestock that the taxpayer has on hand at the end of the 2020-21 income year, and where the taxpayer elects to value their livestock under the national standard cost scheme for the 2020-21 income year.
Non-resident suppliers GST registration IS
IR has issued draft interpretation statement PUB00354, titled “GST – Registration of non-residents under section 54B.”
For those of you that are not aware, section 54B provides a mechanism for those non-resident businesses who are not making supplies to end user consumers in New Zealand, but are incurring New Zealand GST costs for some reason (e.g. sending their team to New Zealand for a conference), to register for GST under a special regime to be able to recover the GST input tax paid.
The draft IS is a reasonable document in my view, to provide a basis understanding of the rules surrounding the eligibility of a non-resident to register under section 54B. The narrative walks the reader through the 7 requirements any prospective non-resident must satisfy before they are entitled to register under section 54B, provides several examples at each step, and a number of flow-charts throughout, to explain the content being discussed.
Some of the key take-aways in my opinion:
- It is really important to understand the contractual arrangement in play – exactly who is the recipient of the supply, where will the supply take place, and who has actually incurred the GST input tax.
- The first requirement is that the person is a non-resident as defined and just remember that the definition of ‘resident’ is wider for GST purposes than the income tax definition which most people are aware of.
- The recent introduction of the ‘distantly taxable goods’ and ‘remote services’ regimes has certainly reduced the number of non-residents who will be entitled to register under section 54B.
- If it is reasonably foreseeable that the end-user of any services provided by the non-resident will be in New Zealand, then I can tell you that it is also reasonably foreseeable that the non-resident will not be able to use section 54B to recover New Zealand GST costs.
- Section 54B is not a mechanism for your client to register for New Zealand GST in order to obtain a refund of New Zealand Customs GST levied on goods imported into New Zealand if the supply is to a New Zealand GST registered customer (the supply treated as made outside of New Zealand therefore by s.8(3)). Instead, your client will need to exercise s.8(4) with their customer and register for New Zealand GST under the standard regime.
PUB00354 concludes with a discussion on some administration issues – taxable periods, payment basis registration requirement, cessation adjustments etc.
If you would like to have your say, the deadline for comment is 12th March 2021.
GST and agency IS finalised
IR has issued IS 21/01, the finalised interpretation statement titled “GST and agency”.
The document explores the concept of whether a person is acting as an agent or as a principal for the purposes of the GST Act. In this regard, it is considered that there are two essential features in any agency relationship:
- Authority – the agent must be authorised to act on behalf of the principal to create/affect the legal relations between the principal and a third party, for the relevant supply.
- Consent – the agent and the principal must both have consented to the conferral of such authority on the agent.
It is considered that certain features will strongly support there being the existence of an agency relationship, including documentation, commission payments, property ownership (agent never obtains legal interest), assumption of risk (by the principal), contract enforceability (third party against principal), debt liability (agent has no exposure) and reimbursement (of agent for expenses).
The IS 21/01 commentary also suggests that the following features may support the existence of an agency relationship:
- Fiduciary obligations: fiduciary obligations may be owed by the agent to the principal.
- Tax: the parties account for tax in a way that is consistent with agency.
- Control: the principal has control over the agent.
- Use of property: the agent does not treat the principal’s goods as their own asset.
- Alteration of property: the agent does not alter/manipulate property obtained as agent.
- Sale price: the principal sets the sale price of goods.
- Notification of sale details: agent required to notify principal of sale price and customer identity.
- Separate funds: the agent keeps the principal’s money separate from its own.
- Appearance: the agent holds itself out as an agent.
The document is split into four parts, with the final part dedicated to providing worked examples which illustrate how to determine whether an agency relationship exists.
Management of NZ foreign trusts in myIR
From March 1st 2021, myIR will include a New Zealand foreign trust account. For those of you who look after foreign trusts for your clients, you will be able to:
- Manage account details online, including details of connected persons
- View previously provided NZFT information.
- File annual returns and make payments in myIR.
- Send messages to IR about an NZFT in myIR.
- Receive automatic reminders 20 days before the NZFT return is due.
- Register an IRD number then a “New Zealand foreign trust account” in myIR.
- Cease an NZFT registration.
You may have noted recently that your foreign trusts have been issued with New Zealand IRD numbers, and as a consequence they will no longer require a NZFT number.
Additional details on the new myIR feature can be obtained from IR’s website.