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 July – August 2022 tax updates
Richard has had over 30 years’ experience with New Zealand and International taxation. His team provide tax 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.
- We’re coming for you…, 4 July
- Covid variation for R&D tax-loss credit filings, 4 July
- Paying shareholders interest, 11 July
- Second Covid-19 variation for R&D credits, 11 July
- Grants & subsidies issues paper, 11 July
- Overseas travel back on the agenda, 11 July
- GST and directors fees, 18 July
- 15% global minimum corporate tax rate on track, 18 July
- IR’s public guidance work programme update, 18 July
- Loss carry-forward IS reissued, 25 July
- Cost of living payments, 1 August
- Technical decision summaries, 8 August
- Developers of long-term rentals to obtain tax concession,15 August
- Company tax losses IS,15 August
- UOMI rate change, 22 August
- Private school payments, 22 August
- Interest deduction limitation recap, 29 August
We’re coming for you…
Well, they’re not really, but certainly if you are investing offshore as a New Zealand tax resident, which usually means that you should be paying New Zealand taxes on your worldwide income, then it’s certainly prudent that you understand entirely your New Zealand tax obligations with respect to those offshore investments.
Recently Inland Revenue (IR) has released its compliance focus on offshore transparency, together with guidance to assist tax agents in complying with the international rules.
The compliance focus highlights the extensive international exchanges of information taking place, as well as the new intelligence tools being used in tracking down people who do not pay their fair share of tax. Clearly, the world is not as large as it once used to be, and it’s ‘investor beware’ if you think it still is.
IR has an ongoing monitoring programme to ensure people return their overseas income as they should, and it will verify customer records against additional information received from treaty partners for later years. We have certainly received a number of “please explain” letters in recent times, where there has been a mismatch between what the client has disclosed in their New Zealand income tax return and what IR thinks they should have returned.
Often our response is quite straightforward, our client is presently a transitional resident and consequently, the foreign income is still exempt from New Zealand taxation, but it’s not always the case.
If you’re looking for further guidance on the topic, then you can refer to IR’s website link – where they have placed four guides to assist you and your clients with obtaining an appreciation of their present filing obligations.
Covid variation for R&D tax-loss credit filings
IR has issued Determination COV 22/18, ‘Variation in relation to s 70C of the Tax Administration Act 1994 to extend deadline for filing statements in relation to R&D loss tax credits’.
The variation provides extra time to file the statements required by section 70C of the Tax Administration Act, in relation to R&D loss tax credits and R&D repayment tax for the 2021 tax year, when the statements were unable to be filed on time due to Covid-19 response measures or as a consequence of Covid-19.
For the 2021 tax year, the time within which a statement must be filed has been extended to 31 August 2022.
The variation applies from 1 April 2022 to 31 August 2022.
Paying shareholders interest
Inland Revenue (IR) has issued a draft QWBA referenced PUB00415, which asks the following question: Can a close company deduct interest on a shareholder advance where the amount is not known until after balance date?
Now I expect the majority of you will quickly answer, “yes, of course, it can”, just because in practice, that’s simply what you do.
Well, just a word of warning based on the current draft item, as you may face a few questions going forward that you historically haven’t during an IR interaction. Being asked to prove that the company was, firstly, legally obligated to make the payment of the interest pre the relevant balance date (so you can’t simply decide post balance date to pay interest) and having established that it was. Secondly, the method of calculating the interest was also in place prior to balance date.
The QWBA updates a 1984 PIB (if you’re young enough not to know the acronym, lucky you!) ‘Deductibility of interest, the quantum of which has not been determined at balance date’.
IR’s draft view, is that to obtain a deduction, the company must show that:
- it has incurred the interest on or before balance date; and,
- the amount is calculated based on a previously agreed formula or method.
With respect to the first criteria, a company incurs interest when it pays, agrees to pay, or becomes definitively committed to the interest. This means that a company must have an existing legal obligation to pay the interest. A legal obligation can exist even if the obligation to pay the interest has a condition attached or the obligation can be changed.
IR expects that records should be available to reflect that a legal obligation existed at the appropriate time, which may include written agreements, meeting minutes, director resolutions, correspondence with shareholders, or other written confirmation that the company agrees to pay interest on shareholder advances. The legal obligation must be to pay interest, not just to repay the loan.
In relation to the second criteria, the method of calculation must be agreed upon in the year for which the deduction is sought, that is, before balance date. The method of calculation must also be certain, not just a guess. Methods of calculating the amount of interest payable could be based on the terms of an agreement that provides a method of calculating the interest, a bank rate at a given date, or interest rates used in previous years. The aforementioned records would also be appropriate for reflecting the interest calculation methodology.
And if the company is paying interest to its shareholders, then do not overlook potential RWT deduction obligations, which are also covered briefly in the commentary.
The draft QWBA provides a number of examples to illustrate the main points of the item, and if you would like to have a say prior to the draft being finalised, then the closing date of submissions is 9th August.
Second Covid-19 variation for R&D credits
Relatively hot on the heels of the extension of the deadline for filing statements in relation to R&D loss tax credits, IR has now issued Determination COV 22/19, ‘Variation to section 68CB(2) of the Tax Administration Act 1994’.
The variation applies to a person who is seeking IR’s approval of their R&D activities by filing a general approval application for the 2021–22 income year under s.68CB of the TAA94.
The variation recognises that the impact of Covid-19 means the planning or conduct of R&D or the ability to obtain information, seek advice, and formulate an application or complete a return, has been materially delayed for some taxpayers.
The variation extends from 7 August 2022 to 30 September 2022, the time by which a person with a 30 June balance date, to be entitled to R&D tax credits under s.LY 1 of the ITA07, must apply for a general approval for the 2021–22 income year. The variation applies from 6 July 2022 to 30 September 2022.
Grants & subsidies issues paper
IR has released for consultation, an issues paper titled, ‘IRRUIP16: Income Tax – Government payments to businesses (grants and subsidies)’. The commentary within the issues paper considers when and how the government grant provisions in the ITA07 may apply to grants and subsidies received by businesses. Where the government grant provisions apply, a grant or subsidy paid by a local or public authority to a business is excluded income and the expense funded by the grant is non-deductible. The relevant sections of the legislation are s.CX 47 and s.DF 1.
A key principle to remember when it comes to dealing with government grants and subsidies, is that of tax neutrality – so usually expenditure/depreciation losses funded by the payment are going to be denied a deduction to the extent the payment received is treated as being excluded income.
However, not all grants and subsidies are excluded income (some for example are income top-ups that do not relate to any expenditure), and consequently, the amounts received may be taxed under ordinary principles.
The focus of the 40-page document is on:
- which grants are captured by the government grant provisions (if no specific expenditure is identified, then do the provisions apply? – so the key is the relationship between the grant and a deductible expense);
- when a grant is derived (what if conditions are attached to the grant – is derivation upon receipt or delayed until conditions satisfied?);
- when does an expense need to be incurred? (what if incurred in a different income year to the receipt of the grant?); and,
- when does a grant become excluded income?
With respect to the first item, IR’s preferred view is that where the intended use of the payment, as identified by the grantor, is for deductible expenditure generally, then the grant provisions will apply. This means an exact expense does not need to be specified by the grantor, but the grant must be for deductible expenditure. Therefore the government grant provisions do not apply to grants or subsidies that are not linked in any way by the grantor to a deductible expense. For example, a subsidy paid to compensate a business for lost income does not correspond to any deductible expenditure. IR expects that the terms and conditions of a grant, or the fund from which the grant is paid, should indicate what the intended use of the grant or subsidy is.
In relation to the second item, IR considers that the government grant provisions contained within s.EX 47 does not alter the ordinary principles of derivation and that a grant will be derived when it has been earned (for example, depending on the terms of the grant, when a recipient has satisfied any conditions).
On the issue of expense incurred timing, IR’s view is that the government grant provisions could apply regardless of the timing of the expense; that is, the expense could be incurred before or after the payment of the grant.
Finally, in terms of how to treat a grant amount that is effectively unexpired by income year-end (not matched by an equivalent amount of expenditure), IR’s tentative position is that a grant becomes excluded income on derivation, provided it is intended to be used on deductible expenditure. The recipient needs to show what the grant was spent on and that deductions for the corresponding expense were denied. So you would reflect the full amount of the grant as excluded income in the income year of derivation, and then the onus would be on you to show that the appropriate level of expenditure (or depreciation loss) had been treated as non-deductible, when incurred in subsequent income years.
Naturally, IR has included various examples throughout the issues paper to illustrate its commentary, and if you would like to make any submissions, you should do so no later than 11th August.
Overseas travel back on the agenda
And finally, a topic that I expect most of us have not had to consider a great deal over the past two years, but one which the floodgates have been finally reopened for and may have triggered IR’s release of its QWBA referenced PUB00360, titled ‘Deductibility of overseas expenses’.
The item is relatively short at 14 pages in length, and the question being answered is whether income tax deductions can be claimed for overseas travel costs (other than meal costs)?
I’d suggest firstly, that most of you would already fully appreciate IR’s opening comments, that income tax deductions cannot be claimed for any part of the costs that are of a private or domestic nature, of a capital nature, or incurred in deriving exempt income or income from employment, and that if the costs need to be apportioned between deductible and non-deductible amounts, then this must be done on a basis that is reasonable in the circumstances. No rocket science here in my view.
The QWBA neither comments on a companions travel costs (refer instead to QB 13/05), nor on the deductibility of meal expenses (refer IS 21/06).
Equally, the QWBA is fairly light on any real analysis on the topic, and instead provides a brief overview on the issues of satisfying the general permission, and the four general limitations that could potentially apply to deny a deduction claim that has satisfied the former – private expenditure, capital expenditure, exempt income and employment.
The QWBA also provides a timely reminder of the prepayment considerations (>$14k or > six months post balance date) which may require a year-end add-back, and apportionment issues.
Then it’s into a myriad of case law (simple brief summaries) and examples. Enjoy!
GST & Directors’ fees
Inland Revenue (IR) has issued three draft rulings for comment, collectively referenced PUB00424, with a focus on directors’ and board members’ fees and the associated GST considerations.
The three separate rulings combined in the single document are titled:
- Goods and Services Tax — Directors’ fees
- Goods and Services Tax — Fees of Board Members not appointed by the Governor-General or Governor-General in Council
- Goods and Services Tax — Fees of Board Members appointed by the Governor-General or Governor-General in Council.
The first ruling in essence examines the contractual relationship between the person (director) and the company receiving the directorship services, which could range from the director contracting in their own right in the course or furtherance of a taxable activity carried on by them, through to a scenario where the person (director) has contracted directly with the company, but they are in an employment relationship where they must account to their employer for any directorship service fees received by them (the Act then deeming the employer and not the employee to be providing the directorship services to the company).
I’d suggest that the main point of the commentary is simply understanding the relationship of the parties in the scenario you’re examining and then the GST implications follow accordingly. So just be mindful of the deeming rule in the above paragraph, or of situations where the person may be a partner in a partnership and acting in that capacity, then it’s the partnership deemed to be providing the directorship services and not the partner in their personal capacity.
The second ruling is then effectively a repeat of the first ruling, but replacing the term “person” (director) with the term “board member” throughout. However, do note that the second ruling does not apply if the board member has been appointed by the Governor-General or Governor-General in Council.
This then leads to the third ruling where the board member has been appointed by the Governor-General or Governor-General in Council. In this case, the appointment will usually be evidenced by a warrant, an Order in Council, or a notice published in the New Zealand Gazette.
Under the third ruling, the only scenario where GST output tax is likely to be chargeable to the Organisation (consequently generating an input tax deduction claim), is where the board member is a partner of a partnership and is obliged to account to the partnership for the fees received.
PUB00424 contains an easy-to-follow flow chart in Appendix one, which covers rulings one and two.
If you’d prefer not to read the 40-page rulings document, IR has also issued a four-page fact sheet that effectively tells you the same thing, absent all the analysis details.
The deadline for any comment is 17th August.
15% global minimum corporate tax rate on track
For those of you who like to follow the OECD’s international tax reform, which now includes a proposal to introduce a 15% global minimum corporate tax rate which will allow market jurisdictions to tax profits from some of the largest multinational enterprises, you will be aware of the terms Pillar One and Pillar Two (the latter the implementation document for the minimum 15% tax).
Just released before the G20 finance ministers and central bank governors meeting in Indonesia, is the OECD Secretary-General’s Tax Report, which includes a new Progress Report on Pillar One, presenting a comprehensive draft of the technical model rules to implement the new taxing right. This report will now be subject to public consultation through mid-August. The inclusive framework will then aim to finalise a new Multilateral Convention by mid-2023 for entry into force in 2024.
Technical work under Pillar Two is largely complete, with an implementation framework to be released later this year to facilitate implementation and coordination between tax administrations and taxpayers. All G7 countries, the European Union, several G20 countries, and many other economies have now scheduled plans to introduce the global minimum tax rules.
If you would like to read the latest updates yourself, they can be found here.
IR’s public guidance work programme update
IR’s Tax Council Office publishes monthly, its draft programmes of priority work. The monthly update as of 30th June can now be found here.
Within the next month, you should expect to see IR’s release for consultation, items on:
- Income tax – Land – Deductibility of holding costs of land
- Income tax – Losses – Loss offsets between group companies; and,
- Income tax – Loss continuity rules (re-consultation)
Loss carry-forward IS reissued
Back in May, Inland Revenue (IR) issued a draft interpretation statement to explain the main aspects of the new business continuity test and its application to the loss carry-forward rules. Post that issue, however, several legislative remedial changes were implemented in the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022, which has resulted in IR reissuing the draft IS, with the reference PUB00376, ‘Loss carry-forward – continuity of business activities’.
It’s certainly a meatier document than perhaps one would suspect by its title, being 54 pages in length, which is due to there being two questions of the ten that are covered in the document, which demand quite a bit of detailed analysis – the questions of “What is a major change in the nature of those activities?” (9 pages), and “What are the permitted major changes?” (18 pages).
Now if you want to skip all the goss and go direct to finding the answer to your present scenario, then you could jump straight to page 46 of the IS, which contains a relatively useful flowchart to guide you through the application of the new test – I say relatively useful because I suggest that there are questions within the flowchart itself, which will require you to revert back to the main commentary to understand exactly what is being asked before you can take another step.
The new business continuity test rule itself is contained in section IB 3 of the ITA07, and provides that a tax loss may be carried forward despite an ownership continuity breach, if no major change in the nature of the business activities carried on by the company occurs during the business continuity period, unless the change is a permitted major change.
The business continuity period is defined as being the period starting immediately before the ownership continuity breach and ending on the earlier of:
- the last day of the income year in which the tax loss component in question is used; and,
- the last day of the income year in which the fifth anniversary of the ownership continuity breach falls.
When considering the “nature of the business activities carried on by the company” and therefore whether there might have been a major change, reference should be made to the following (which is not an exhaustive list):
- its core business processes (eg, farming, manufacturing, development, construction, distribution, retailing, services);
- the type (i.e., category) of products or services produced or provided;
- significant assets utilised (e.g., premises, plant, and machinery, livestock, intellectual property, goodwill);
- where relevant, significant suppliers or other inputs (e.g., key staff);
- (e.g., approximate turnover or size); and,
- the main markets supplied to (e.g., retail/wholesale, local/national/specific territories).
The weighting of each of the above will depend on the particular facts in question, and a change will be major if it is of greater importance when comparing the nature of the company’s business activities before and after the ownership continuity breach.
With respect to permitted major changes, there are four, which are changes:
- made to increase the efficiency of a business activity;
- made to keep up to date with advances in technology relating to a business activity;
- caused by an increase in the scale of a business activity; and,
- caused by a change in the type of products or services produced or provided.
Finally, losses incurred prior to the 2014 income year cannot be carried forward under the new test, and the company cannot have ceased its business activities during the business continuity period.
If you would like to have your say on the draft IS, the deadline for comment is 1st September 2022.
Cost of living payments
The first round of the Government’s cost of living payments (administered by Inland Revenue (IR)) is paid on August 1st (August 2nd for Credit union customers according to IR’s 29th July Tax Intermediaries Update). The first payment among three of $116.67 will be automatically paid to those eligible to receive it.
To accompany the first round of payments, IR has also released a 14-page special report titled ‘Taxation (Cost of Living Payments) Act 2022’. Note that when I last checked, the report was not showing in the Tax Policy section of IR’s website as indicated, however, if you just type the words “cost of living” in the search box, then you should be able to locate it.
As the report clearly points out, the payment is aimed at low to middle-income New Zealanders to help them with the increased cost of living. It is a temporary payment of $350 in total, spread over August, September and October.
You are eligible to receive the payment if you:
- had net income during the period 1 April 2021 to 31 March 2022 of $70,000 or less;
- are not eligible to receive a qualifying benefit for the Winter Energy Payment (WEP) (sole parent support, supported living payment, jobseeker support, jobseeker support student hardship, emergency benefit, emergency maintenance allowance, youth payment, young parent payment, New Zealand superannuation, or veteran’s pension) during the payment period for each of the three monthly instalments;
- are aged 18 or over;
- are both a New Zealand tax resident and present in New Zealand; and,
- not in prison.
It should be noted that eligibility for the payment is determined upon a person’s 2022 finalised tax assessment, so if this process has not been completed by August 1st (or even October 3rd for that matter), perhaps because the person is an IR3 filer and has an extension of time for filing their 2022 income tax return as a consequence of the use of a tax agent, then the payment will be made post the finalising of the assessment. However, the final payment approval date for eligibility will be 31 March 2023, so if a 2022 income tax return with a tax agent’s extension of time is filed late, then the person will not be eligible to receive the cost of living payment.
A person may also not be entitled to receive the first payment, but then due to a change of circumstances (they turn 18 on 25th August for example), they will become entitled to receive one (or both) of the latter two payments.
The Cost of Living payment is tax exempt, so will not be included in a person’s income tax assessment. The payment will also not be included as income for Working for Families tax credits, child support, student loan repayments, student allowances or other welfare support. You can also not use the payment to pay off any debt or overdue money owed to IR, which includes not being able to request the payments be transferred to pay an existing debt with IR, or other social policy obligation. The payments must be paid directly to the individual.
Technical decision summaries
For those of you who have been unfortunate enough to have endured a long dispute with Inland Revenue (IR), you will no doubt appreciate that throughout your journey, you are essentially dealing with the same person who commenced the initial review of your client’s tax filing positions.
Added to that mix of personnel will be the investigator’s team leader, and at least at the Notice of response (NOR)/Notice of proposed adjustment (NOPA) (if not before), a member of IR’s legal team. In my experience, and no doubt you’ll have your own views based on your own experiences, once this team of IR personnel has formed their view as to your client’s correct tax filing position, it is extremely difficult to change the mindset, no matter how compelling your alternative arguments might be.
It’s then a case of deep pockets syndrome, your client having to personally fund their dispute costs (hopefully with the assistance of Accountancy Insurance to somewhat ease that burden in the first couple of rounds of the dispute), versus the IR personnel who have the benefit of using the taxpayer purse instead of their own, and consequently feel no monetary pain directly.
As advisers guiding our clients through what will often be a fairly traumatic process for them (having IR camped on their doorstep), we have to try to remove the emotions from the equation, and counsel our clients that no matter how strongly they feel that they have done nothing wrong, and that the tax position they have taken is correct, it’s basically a question of economics – how much tax is involved in the dispute versus what cost (both financially and emotionally) will it take to get the desired outcome.
I consistently preach to clients that first impressions count, so do not provide any response to IR initial review enquiries (or for that matter any questions which could trigger a review), without seeking advice upfront. I say this, because going back to my earlier comment, once the IR team has formed a view, you will essentially find yourself having two choices.
Option one is that you will attempt to bring the review to a conclusion by conceding to IR’s taken position, simply because your tax cost/fight cost analysis dictates that this is the most prudence course of action for you – numerous times over the years I’ve found myself drafting a concession letter based purely on the economics of the situation, and not the correct application of the law itself. However I do try and make myself feel a little better by ensuring that I always include a statement within the letter, that we don’t actually agree with you, it’s purely a concession based on our client’s cost exposures.
The second option is that we’re in for the long haul – I advise my client that we are unlikely to see the IR personnel have a change of heart throughout the various stages of the disputes process (because unfortunately, that’s just human nature – those IR personnel involved not wanting to admit that they may have been wrong (am I being too harsh?)), but our one bright light of opportunity is their case being sent to the Adjudication Unit prior to heading off to court, where a fresh set of eyes will review the dispute at hand and rule accordingly. If the AU rules for your client, then that decision is binding on the Commissioner and the dispute ends then and there. However, if the AU rules in favour of the Commissioner, then your client can then still pursue the dispute through the hierarchy of the courts should they so wish.
Due predominantly to the economic equation, historically I have only had two cases reach the AU (and both for the same client on two different issues), where we won the first case (which gives you some hope as to the true independence of the AU) but lost the second. I’ve recently just lodged a third case, and potentially have a fourth on the way (still in the early stages but this client is prepared “to go all the way”).
Now to finally come to the point of this article post my initial rambling. Over the years we’ve all had relatively easy access to the decisions of the various courts in tax cases, however, the decisions were usually in favour of the Commissioner, which should not have been unexpected if you take the cynics’ view that the Commissioner only takes to court those cases she expects to win. My frustration in this regard, was not having any insight into those cases that did not proceed to court, mostly due to the case reaching the AU phase, with a ruling outcome against the Commissioner.
That frustration has now been somewhat quashed, however, by the powers that be who decided in early 2021, that it would actually be helpful from a taxpayer education perspective at least, for AU to publish all of its decisions (absent naturally the taxpayer’s specific identification details). These publications are referred to as Technical Decision summaries (TDS by reference), and they can be located on IR’s website here.
So a recommended read, because firstly they do provide a good analysis behind the tax position that IR took and the reasons why AU either agreed or disagreed with that position. But secondly, because AU often comments on the taxpayer’s shortcomings from an evidential perspective which can be very useful for your own learnings in terms of educating your clients around the type of records they need to maintain if they wish to take a tax position, which could at some time in the future be contested by IR.
Developers of long-term rentals to obtain tax concession
The Government has announced that it wishes to incentivise developers by encouraging more build-to-rent projects, wherein the developer will receive an exemption from the new interest limitation rules, if the new homes are held as long-term rentals. The exemption will apply to both new and existing build-to-rent developments, which satisfy a new build-to-rent asset class definition:
- tenants must be offered a fixed-term tenancy of at least 10 years with the ability to give 56 days’ notice of termination, but they may agree to, or request other tenancy offers. (Note that to qualify as build-to-rent, a tenant does not have to accept a 10-year tenancy offer. A build-to-rent development will satisfy this requirement as long as a 10-year tenancy term is offered.);
- at least 20 dwellings in one or more buildings that comprise a single development, on either a single parcel of land or multiple contiguous parcels;
- the dwellings and any common land or facilities for those dwellings have a single owner;
- dwellings can be held in one or more titles;
- the building that a build-to-rent dwelling is in can include other dwellings or commercial premises that do not form part of the build-to-rent development (for example, an apartment block that has shops on the ground floor);
- the dwellings are used or available for rent under the Residential Tenancies Act 1986; and,
- explicit personalisation policies must be offered, over and above the Residential Tenancies Act 1986.
Now if you’re scratching your head wondering why these developments would not already qualify for exclusion from the new interest limitation rules under either the land business, development, or new build exemptions, well stop scratching.
I presume that everything will come out in the wash once we have more detail surrounding the proposal when the next omnibus tax Bill is supposedly released by month’s end (which will include the draft legislation). But my best interpretation (and it is still very early in the morning without any caffeine on board yet!), is that the only real benefactors of the change, are either those who hold existing build-to-rent products (so CCC issued pre 27th March 2020 – although yet to be clarified what they will need to do to qualify) who will see no phase-out of their interest claims now, or those who own the land 20+ years post the date of CCC issued (the exemption period not capped as it is for ‘new builds’).
Company tax losses IS
Inland Revenue (IR) has issued a fairly comprehensive draft interpretation on company tax losses, titled ‘Company losses – ownership continuity, sharing and measurement’, and referenced PUB00398.It’s 80 pages in length (so it’s likely to take longer than your average cuppa to read), and delves into the following issues:
- Explaining important concepts like a tax loss (essentially the total loss amount for the tax year that can be carried forward or shared) and a tax loss component (a tax loss is made up of tax loss components, e.g. a net loss from a previous tax year that has been carried forward to the current tax year is one component). The key requirements of the loss rules need to be tested for each tax loss component, which must also be used in the order in which they arose.
- Explaining the two continuity rules which permit a tax loss to be carried forward – at least 49% continuity in the ownership of the loss company (ownership continuity), or, continuity of the business activities of the loss company (business continuity). Continuity must be tested for each tax loss component and must be maintained for the continuity period applying to that component – essentially the period from the start of the income year in which the tax loss component arose to the end of the income year in which the loss is used.
- Explaining the requirements to be able to share a tax loss with another company, the two main criteria being that the loss company must satisfy one of the continuity requirements in the previous paragraph and that the ownership commonality requirement must be satisfied – essentially that there is a group of people who each hold ownership interests in the loss and profit companies and the total of each person’s lowest interest of the interests in the two companies (their common ownership interest) is at least 66%. This requirement must be tested for each tax loss component and be satisfied for the commonality period applying to that tax loss component.
- Explaining how to measure ownership interests – there being two types – voting interests and market value interests. In most cases, it will be necessary to consider only voting interests. However, if there is a market value circumstance, it is necessary to measure both voting and market value interests.
- Explaining how the part-year rules work – which ensure that where a continuity breach occurs during an income year, certain losses can still be used in the relevant part-year periods. So generally, a tax loss component that relates to a pre-breach period can be used to reduce the loss company’s net income in the pre-breach period and, if sharing requirements are satisfied, an amount of the profit company’s net income. Equally, a tax loss component (a net loss) that relates to a part-year period following a continuity breach, or following the establishment of commonality between two companies (post-establishment period), can be carried forward by the loss company or shared with a profit company. The profit company can apply this part-year loss against an amount of its net income.
- Explaining what happens in amended assessment scenarios and consequential loss adjustments. For example, the amended assessments could result in a tax loss or net income being increased or decreased, and where there is a reduction in the tax loss, the need for the tax loss to be reallocated among multiple profit companies.
- Explaining some of the other rules that apply to tax losses within the legislation, for example in relation to look-through companies and qualifying companies, and with regard to the R&D tax loss cash out regime.
Happy reading, and if you’d like to make a submission on the draft, the deadline is 23rd September.
UOMI rate change
Perhaps not that surprising given the Reserve Bank’s recent enthusiasm to continue to increase interest rates and really deepen the pain for the average New Zealander already struggling to pay their mortgage with the present cost of living crisis, we’ve now seen IR move to also increase its UOMI rates, effective 30th August 2022.
The Taxation (Use of Money Interest Rates) Amendment Regulations (SL2022/233) were announced in the New Zealand Gazette on 18 August 2022, and will:
- increase the taxpayer’s paying rate of interest on unpaid tax from 7.28% to 7.96% per annum; and,
- increase the Commissioner’s paying rate of interest on overpaid tax from 0.0% to 1.22% per annum.
Private school payments
Two Questions We’ve Been Asked have recently been issued by IR, which look to explore and provide answers to the questions of:
- when a parent’s payment to their child’s private school will qualify for a donation tax credit; and,
- the GST treatment of payments parents make to private schools.
The QWBA’s are in two separate documents, although under the single reference of PUB00341.
With respect to the first question, a payment to a private school will qualify for a donation credit, being deemed to be a gift, when:
- the school is a donee organisation;
- the payment is $5 or more (and is money, rather than goods or services);
- the parent makes the payment voluntarily to benefit the school either generally or for a specific purpose or project; and,
- the parent or child gains no material benefit or advantage in return for making the payment.
With respect to the last bullet point, IR has previously issued Revenue Alert 14/01, following the discovery of situations where parents have made “donations” to private schools in substitution for paying no or low school fees. RA 14/01 confirmed that there are no donation tax credits for any payments paid by parents to private schools incorrectly described as “donations”.
Just as a refresher, an individual can claim a donation tax credit of one-third of the payment amount, but the sum of charitable or other public benefit gifts an individual taxpayer makes in a tax year must not exceed their taxable income for that year.
The 13-page QWBA in the main is dedicated to discussing the meaning of “gift”, which based on the case law has three basic criteria, being a payment of money of $5 or more:
- made voluntarily;
- made by way of benefaction (ie, made to benefit the donee organisation); and,
- where the payer receives no material benefit or advantage in return.
Post each of the three criteria being discussed in some detail, the QWBA concludes with seven examples to illustrate the commentary.
The answer to the second question is included in a slightly shorter document and concludes with the view that in most cases, a parent’s payment to their child’s private school will be subject to GST. The basis for this view is that private schools make taxable supplies of education and education-related goods and services to parents, and consequently, as the annual value of the school’s taxable supplies will likely exceed $60,000, schools will charge GST on these supplies at the standard rate of 15%.
There are however two exceptions to the standard rule, where:
- an “unconditional gift” a parent makes to their child’s private school is not subject to GST; or
- some of the boarding fees a parent pays to their child’s private school can be subject to GST at what is, in effect, a reduced rate of 9%.
With respect to the last bullet point, generally, for stays in a school boarding house that will be longer than four weeks, the value of the supply of “domestic goods and services” is reduced to 60% of the consideration paid for GST purposes. This effectively reduces the rate of GST the school charges for that portion of the boarding fees from 15% to 9%.
The majority of the QWBA commentary surrounds the meaning of an unconditional gift, and then how supplies of domestic goods and services in a boarding house may be subject to a reduced rate of GST. The QWBA then concludes with six examples to illustrate the previous narrative.
If you would like to make a submission with respect to either QWBA, the closing date is 26th of September.
Interest deduction limitation recap
It was a fairly quiet last week in my tax world, so I thought I would take the opportunity in this week’s update, considering most of us are now well into our 2022 tax return preparation season, to provide a brief recap on the new interest deduction limitation rules which came into effect from 1st October 2021.
Firstly, three key points surrounding the new rules:
- All interest (including new borrowings post 27th March 2021) remains 100% deductible (assuming you satisfy the general permission) until 1st October 2021.
- From 1st October 2021, borrowings which were in place pre-27th March 2021, are grand-parented and subject to a phase out period, the deduction claim entitlement becoming 0% effective 1st April 2025. For the period 1st October 2021 to 31st March 2022, the claim entitlement will reduce to 75%.
- From 1st October 2021, interest on borrowings may retain full interest deductions, where one of the three exclusions (land business, land development or new build) comes into play.
Targeted by the new rules, are what are now referred to as disallowed residential property (DRP), which means land within New Zealand (so offshore residential land not subject to the new rules), to the extent to which:
- it has a place configured as a residence or abode;
- the owner has an arrangement to erect a residence or abode; or,
- it is bare land that could be used to erect a place configured as a residence or abode.
In essence, if your investment land is arguably substitutable for being a family home, then it’s likely to be exposed to the new rules, as it is this type of land that has been targeted by the Government. Equally, to ensure that certain types of residential land which the Government does not consider is putting upward pressure on the “family home” market is captured, a class of excepted residential land has been created.
Also exposed to the changes, are companies, particularly close companies (five or fewer natural persons or trustees the total of whose voting interests in the company is more than 50%), who qualify as being residential land company’s (DRP >50% of value of total assets). Most of you no doubt appreciate that companies usually get an automatic deduction for interest costs without having to satisfy the general permission. This will not be the case for a residential land company post 1st October 2021 – it will be subject to interest deduction limitations just like any other taxpayer.
Where land is not included within the class of excepted residential land, there are three exemptions which will apply to otherwise DRP, to ensure that the new limitation rules do not disincentivise investment in new housing supply:
- A land business exemption, which applies to interest incurred in relation to land held by taxpayers with professional property development, dealing, building or subdivision businesses under section CB 7.
- A development exemption, which applies to interest incurred in relation to land held by taxpayers who are undertaking activities on the land that contribute to new housing supply, but who are not professional property developers/builders so do not have a land business under section CB 7. Essentially, if a person does not qualify for the land business exemption but is developing land with an aim to create new housing, then the development exemption should apply to the person.
- A new build exemption, which applies once a new build has been added to the land, and in most cases applies for 20 years from the date the new build is completed. In most cases, the date a Code Compliance Certificate (CCC) was issued for a new build is used as a proxy for the date the new build was completed. As long as the CCC was issued post 27th March 2020, the land should qualify, and the exemption sits with the land for a 20-year period, thereby available to any subsequent purchaser of the land.
The exemption that is likely to be of most interest to your average property investor is the new build exemption. In basic terms, if you have added a new self-contained residence or abode to the land, with a CCC issued post 27th March 2020, then you are likely to retain full interest deductibility. Included within the self-contained residence category, is buildings that are converted into self-contained residences (such as office blocks converted into apartments, or large houses converted into multiple units), and existing buildings that are remediated for weathertightness or seismic issues.
Note the legislative wording uses the phrase “to the extent”, which thereby triggers potential apportionment issues. So, for example, if you add a new build to land already contained DRP, then your interest deduction is going to need to be apportioned between the respective uses of the land, only the new build allocation retaining 100% deductibility.
Finally, there are rules surrounding tracing the use of funds as 27th March 2021 for the purpose of the grand-parented interest deductions which will eventually be phased out, and these, as well as all the detailed discussion on the new legislation, can be found within Inland Revenue’s (IR) Special report on interest limitation and additional bright-line rules (issued 31st March 2022), which you can find located within the Public Policy section of IR’s website here.
If you would like to receive these updates directly to your mail inbox, you can subscribe by clicking here.