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Richard’s October-November 2021 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
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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.
- SOP commentary released, 18 October
- Changes to Covid 19 support payments, 26 October
- New reporting requirements for domestic trusts, 26 October
- Technical decision summaries, 26 October
- All quiet on the home front, 1 November
- Digital taxation reforms given green light, 8 November
- Specified period for RSP amended, 8 November
- GST & finance leases, 15 November
- QWBA on Public Funds, 15 November
- RSP 5th payment Amendment Order, 15 November
- GST & deferred payment terms, 22 November
- Student loan repayment threshold to rise, 22 November
- Increased support for lower income families, 29 November
- Applications for 6th RSP now open, 29 November
- Meal expenses fact sheet, 29 November
SOP Commentary released
AWIR’s 4th of October edition mentioned the addition of a SOP to the current tax Bill, the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill (65-1), to include the proposed interest deduction limitation rules and amendments to the bright-line rules. The accompanying narrative to the SOP included reference to a detailed commentary document being issued within the next few weeks and this has now occurred.
I promised you all a more detailed article on the proposed changes once the commentary was released and having now skimmed through the 129 page document (ok, it was a little slower than a skim), the following is my summary of the proposed changes as they developed their way into draft legislation:
- We have a few new terms which will no doubt become everyday language soon – “disallowed residential property” (DRP), “interposed residential property holder” (IRP holder), “excepted residential land”, and “transitional residential interest” – no acronym given to the latter two sadly.
- DRP will be defined as land in New Zealand (remembering that the interest deduction limitations do not apply to residential land outside of New Zealand) to the extent (important words!!) 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.
- A proposed new Schedule 15 will contain the list of excepted residential land, which naturally will be excluded from the DRP definition.
- The rules will apply to most close companies (five or fewer shareholders own >50%) that own DRP as well as non-close companies that are “residential land companies” or “residential land wholly-owned group members” (basically DRP >50% of total assets).
- An exemption (land business exemption) from the rules would apply to interest incurred for land held by property developers, subdividers, dealers and builders for a land-related business described in section CB 7.
- A development exemption will apply to land involved in one-off projects which are likely to be taxed under section CB 12 (minor subdivision rules). The development, building, or subdivision would have to have the purpose of creating new build land, otherwise the exemption will not apply. Interest would be claimable from the commencement of the undertaking or scheme.
- No doubt the key exemption for investors is the “new build land” exemption – let’s call it ‘NBL’ since it has no given acronym and there will be a few bullet points here. ‘NBL’ will be land to the extent (there’s those important words again) to which it has a place configured as a self-contained residence or abode, where a code compliance certificate (CCC) has been issued on or after 27 March 2020, evidencing that the new build has been added to the land. Also land for which there is an agreement that a place configured as a self-contained residence or abode will be added to the land and a CCC will be issued on or after 27 March 2020 evidencing that the place was added to the land, and land where a hotel or motel was converted into self-contained residences or abodes, provided the conversion was completed on or after 27 March 2020 and the conversion is recorded by a local authority or building consent authority.
- ‘NBL’ will naturally include the land exclusively used by the residents of the new build, plus a reasonable proportion of any shared areas.
- ‘NBL’ exemption will apply for 20 years from date of issue of CCC, and all owners of the land within that time period will qualify.
- ‘NBL’ exemption will extend to off-the-plans acquisitions provided taxpayer could deduct the interest under existing deductibility rules.
- Remember there are no proposed changes to the existing residential rental loss ring-fencing rules, so even if you qualify for the ‘NBL’, your interest deductions may still be subject to ring-fencing.
- Transitional residential interest is in relation to the so-called grand parented loans – New Zealand Dollar loans on DRP drawn down prior to 27th March 2021, subject to a phase out period through until 31st March 2025. There are a number of specific calculation rules in relation to tracing issues, use of variable balance loans and roll-over relief provided for certain land transfers during the phase out period etc.
- If a DRP disposal is taxable (say under bright-line), then previously disallowed interest would be deductible in the year of sale. Note however, that if bright-line taxation applies, then to ensure the anti-arbitrage provision is catered for (bright-line losses only offset against taxable land sale gains), the interest will be treated as if it is part of the original cost of the DRP. Where bright-line does not apply, then the amount will retain its interest character however likely then subject to the residential rental loss ring-fencing rules.
- ‘NBL’ qualifies for a five-year bright-line period provided the owner bought the NBL within 12 months of the CCC for the new build being issued, or they acquired the land with an agreement in place to construct a new build, or the owner constructs a new build on the land themselves, and critically, the new build remains on the land when the land is sold.
- Where the land contains both a new build and an old build, then two bright-line periods will apply – five years for the new build and 10 years for the old build.
- The bright-line period does not restart when the new build is added to the land, so if for example, you added a new build to bare land three years post purchasing in August 2021, the bright-line period commencement date remains August 2021 and you could then dispose of the land free of bright-line taxation anytime post August 2026, provided the new build still existed on the land at the time of disposal.
- The main home exclusion rules have changed, but essentially the main home should never be taxed itself (unless used for non-main home purposes for periods in excess of 12 months), however apportionment issues will arise if the main home takes up less than half the land area.
- Roll-over relief will apply for the bright-line rules in relation to certain transfers of residential land that occur during the bright-line period – the transferee will simply step into the shoes of the transferor and be deemed to have the same acquisition date and cost for the land. These rules will have application to transfers occurring post date of the Bill’s enactment.
- Transfers to family trusts where each transferor of the land is also a beneficiary of the trust, at least one of the transferors of the land is also a principal settlor of the trust, and each beneficiary (except for principal settlor beneficiaries) has a family connection with a principal settlor (within four blood degrees), is a company controlled by a family member beneficiary or is a charity. Note that no roll-over relief applies where the transfer is from the family trust to a principal settlor or beneficiary. Also any transfer amount must not exceed the original cost of the land to the transferor.
- Transfers to or from LTC’s and partnership provided that the persons transferring the residential land to the LTC or partnership (or acquiring it from the LTC or partnership) have ownership interests in the LTC or partnership interests in the partnership in proportion to their individual interests in the land, and their cost base relative to the total cost base in the land. Once again the transfer consideration cannot exceed the original cost of the land to the transferor.
Remember that if you would like to make a submission to the FEC to have your say on any of the proposals in the latest tax Bill, you must do so no later than 9th November.
There were a couple of other tax related releases during the past week, but nothing earth shattering and due to this extended article I will leave to cover off next week.
Changes to Covid-19 support payments
I expect that by now all of you are aware of the Government’s new traffic light system for managing Covid in the community. This red/orange/green framework will replace the existing four level system, and for Auckland, will come into effect as soon as 90% of the eligible population in each of the city’s three DHBs is fully vaccinated (three to four weeks if the weekend’s predictions become the reality).
Alongside the new framework announcement, there has also been a boost to the payments that are available to support businesses, primarily with respect to the resurgence support payment (RSP) which in essence will become a weekly payment although available in fortnightly instalments – presently the RSP is a three-weekly payment.
Effective from a first payment date of 12th November 2021 and remaining in place until Auckland moves to the new lighting system, a business will be able to claim $3,000 plus $800 per FTE, up to 50 employees – so a maximum claim of $43,000 per fortnight.
New reporting requirements for domestic trusts
Well, they did warn us that it was going to happen, to ensure that family trusts were not used as a vehicle to shelter incomes from exposure to the increased top personal marginal tax rate of 39% which was introduced effective 1st April 2021.
Released for review and feedback is draft Operational Statement ED0235 – “Reporting requirements for
domestic trusts”. It’s a 46-page document which sets out how the Commissioner proposes to use her new trust information gathering powers, which are set out in section 59BA of the TAA, and were introduced with effect for the 2021-22 and later income years.
Going forward, the information you are likely to have to provide each year will include:
- A statement of profit or loss and a statement of financial position,
- Settlor & settlement details,
- Beneficiary & distribution details,
- Persons with powers of appointment; and,
- Trustee details.
To ensure the compliance costs relating to the provision of additional information by the trustees are not overly burdensome on small trusts (income and expenses both <$30k; Total assets <$2m), an exemption from having to use accrual accounting will be available (so cash accounting can be used) and prior year comparable figures will not need to be reflected in the financial statements (material cost savings I question?).
The commentary in ED0235 goes through each of the above bulleted items in quite some detail, to outline what the Commissioner will expect to be able to see in the information provided by the trustees.
And last but not least, under her new information gathering powers, the Commissioner will be able to make retrospective information requests, for the same details to be provided in relation to the 2014-15 income years onwards.
If you would like to have your say on ED0235, the deadline for comment is 30th November 2021.
Technical decision summaries
Now to end this week’s AWIR on a positive note, and news that certainly got me excited (which post reading this many of you may say – “it clearly doesn’t take much!”), IR have finally decided to publish for all to read, technical decision summaries (TDS) of adjudications (from mid-2021) and private rulings (for applications received on or after 1 January 2022). These TDS in my view, will provide some valuable insight into IR’s present interpretation of various issues that come before them, which naturally can then become a guidance yardstick when you are advising your own clients.
I’ve read the first couple which are now posted in IR’s Tax Technical section of their website and found both the format and content to be well worth the read. For those of you that may not be aware, the Adjudications Unit (AU) is basically the gatekeeper to IR pursuing the case to court – an ‘independent’ unit that takes a final look at the dispute and issues a ruling as to whether the IR team (which usually comprises the investigator and their legal rep who have been on the job from day one) have got it right or not. If the AU rules in favour of the taxpayer, then their decision is binding on IR, and the dispute ends there. However, if IR is seen to be on the right path, then AU’s decision of course is not binding on the taxpayer, who can then decide to take the dispute that next step to the courts.
Naturally therefore there will be numerous disputes which come to an end post the AU review, and having some insight into what the issue was and how the AU ruled, will be invaluable to any advisor trying to counsel their own client as to the likely response to their own issue by IR – which is usually one of the client’s first questions to us all.
Any TDS that I come across that I think will be of use to you all, I will certainly make note of in AWIR.
All quiet on the home front
Not a lot to report on in the last week, after a few weeks of some fairly heavy reading to get through.
If you’re interested, the latest update to the Public Guidance Work Programme from the Tax Counsel Office has been released. For those of you who have not viewed this previously, the updates set out various tax issues that
IR have their eyes on, with progress on topics ranging from ‘Item not currently being work on’ to ‘Items where external consultation has closed’ – the latter indicative that IR may be releasing a draft document of ‘some nature for discussion in the not-too-distant future. Also listed are ‘Items on hold’ and ‘Completed items since XX date’.
Topics of interest to me on the present agenda include:
- Income tax – Tax credits – Segmentation of foreign-sourced income
- Income tax – Land – Meaning of ‘disposal’ in the land sale rules
- Income tax – Trusts – New Zealand – Australia DTA
- Income tax – Partnerships – Taxation of partnerships
- GST – Court awards and out of court settlements – Update of IS3387
- GST – Leases – Difference between hire purchase agreements and agreements to hire; and,
- GST – Taxable activity – Subdivisions and small-scale property development – Update of item in TIB Vol 7, No.2 (August 1995)
You should be able to find the latest update within IR’s Tax Technical section on their website.
Digital taxation reforms given green light
If you follow the tax-related news that is regularly released on the OECD (Organisation for Economic Co-operation and Development) website, or alternatively, have at least heard a whisper of something referred to as the BEPS (base erosion and profit shifting) project, then you may have already heard about the recent meeting of the minds of the 136 member jurisdictions (representing >94% of global GDP) on the “Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy”.
Post news of this historic agreement having been released, G20 leaders attending a summit in Rome have called for the swift development of the model rules and multilateral instruments, to enable the agreement to come into effect globally in 2023.
Once implemented, this Two Pillar Solution will attempt to reallocate more than $125 billion USD of profits from around 100 of the world’s largest and most profitable MNE’s, to those countries where the MNE’s actually have a presence and generate profits. One consequence of this profit reallocation mechanism, will be the establishment of a global minimum corporate tax rate for the MNE’s of 15%.
Under Pillar One:
- Taxing rights over 25% of the residual profit of the largest and most profitable MNEs would be re-allocated to the jurisdictions where the customers and users of those MNEs are located.
- Tax certainty through mandatory and binding dispute resolution, with an elective regime to accommodate certain low-capacity countries.
- Removal and standstill of Digital Services Taxes and other relevant, similar measures; and,
- The establishment of a simplified and streamlined approach to the application of the arm’s length principle in specific circumstances, with a particular focus on the needs of low capacity countries.
Then under Pillar Two:
- GloBE rules provide a global minimum tax of 15% on all MNEs with annual revenue over 750 million Euros.
- Requirement for all jurisdictions that apply a nominal corporate income tax rate below 9% to interest, royalties and a defined set of other payments to implement the ‘Subject to Tax Rule’ into their bilateral treaties with developing Inclusive Framework members when requested to, so that their tax treaties cannot be abused; and,
- Carve-out to accommodate tax incentives for substantial business activities.
I note that there are 140 member jurisdictions, so who are the missing four? No detail in the linked PDF, and I’m not bored enough yet to go searching, but you do have to wonder…
And for those of you who are keen for a little more reading, here is the link.
Will be interesting to see how the theory works in practice.
Specified period for RSP amended
The Covid-19 Resurgence Support Payments Scheme (August 2021) Order 2021 (the August Order) contained the following criteria for any person to be eligible for an RSP payment:
- Must have experienced a minimum 30% decline in revenue in relation to a business or organisation during a nominated seven-day period, and
- The nominated seven-day period must be during the specified period for that grant.
The referenced ‘specified period’ in accordance with the August Order, was a period that ended immediately before all areas of New Zealand returned to Covid alert level one. Clearly Delta in the community has now ensured that alert level one is a thing of the past for the historians to write about (that switch will never be flicked again), and consequently an amendment to the ‘specified period’ was required.
Introducing therefore the Covid-19 Resurgence Support Payments Scheme (August 2021) Amendment Order (No 4) 2021 (LI 2021/341), which now provides that the specified periods for each of the first, second, and third grants end at the close of 1 November 2021.
GST & finance leases
IR has recently released draft interpretation statement PUB00357 titled “GST and finance leases” for review and feedback.
The draft IS is a 51-page document that sets out to provide the Commissioner’s views on how one should classify finance leases for the purposes of the time of supply and value of supply rules for GST.
With respect to the first element, being the time of supply rules, the first step in the process is to establish whether a particular finance lease is an agreement to hire, a hire purchase agreement, or something else (a third category agreement).
When the finance lease is an agreement to hire, successive supplies are deemed to occur, with each successive supply treated as taking place at the earlier of when a payment becomes due or is received. When however, the finance lease is a hire purchase agreement, the time of supply will be when the agreement is entered into. Finally, for a third category agreement, usually the general time of supply rule will apply, being the earlier of the time a supplier issues an invoice or receives a payment in relation to the supply.
In most cases, a finance lease will not be an agreement to hire where either, the lessee is the end user of the goods, and the lessor gives the lessee an option to purchase; or property in the goods passes upfront or will definitely pass under the terms of the agreement.
PUB00357 contains a useful flowchart to assist with determining the correct classification for a particular finance lease and it should be noted that both parties to the agreement should be applying the same classification.
The draft IS then proceeds to discuss ‘value of supply’ issues, and at the core of this element, is whether or not the finance lease is considered to be a credit contract. If it is, then one will need to ascertain the ‘cash price’ of the goods (which will usually be specified within the agreement itself), with the balance of any payments due under the contract relating to interest or finance charges.
Naturally with interest and finance charges being considered financial services and therefore exempt supplies, GST is only payable on the ‘cash price’ of the goods.
Now, you can essentially establish these core principles simply by reading the first four pages of the IS, which then begs the question as to what content the remaining 47-pages of the draft document contains. Well, it’s in those remaining pages that one locates the juicy detail relating to all of the aforementioned, and I suspect that if you manage to make it to the end (almost as much of a struggle as watching a Lord of the Rings movie), you’ll be an expert on finance leases and the associated time of supply and value of supply issues.
QWBA on Public Funds
Ever considered establishing and maintaining a ‘public fund’, donations to which a person may then be entitled to receive a donations tax credit or a deduction? Well if this is you, and you have unanswered questions, then I suspect that exposure draft PUB00372 titled “What is required to establish and maintain a ‘public fund’ under s LD 3(2)(d) of the Income Tax Act 2007?” is just what you have been waiting for.
I won’t spend too much time on the draft QWBA (as I suspect the majority on a Monday morning will simply yawn when they see this), but in essence it is a 23-page document that sets out on a journey to provide an answer in the Commissioner’s eyes, as to the key elements any person(s) looking to establish such a fund will need to satisfy, to ensure that the person (and their fund) can be registered as a donee organisation with the Department of Internal Affairs’ Charities Services, and can then appear on the list of donee organisations the Commissioner publishes for a donor to receive a donations tax credit or deduction.
Ok, so enough is enough, I can hear the snores, but for those that need it, you can at least go in search of more with the PUB reference number.
RSP 5th payment Amendment Order
At this stage likely to continue until at least Christmas I would expect (and potentially for quite some time post), the trigger of the next round (5th) of the RSP has also required a further amendment order to the Covid-19 Resurgence Support Payments Scheme (August 2021) Order 2021 (the August Order), to update the ‘specified period’ for the latest payment.
Consequently, the Covid-19 Resurgence Support Payments Scheme (August 2021) Amendment Order (No 5) 2021 came into force on 12 November 2021, and amends the specified period for the fifth grant to commence on or after 5 November 2021, and to end immediately before all areas of New Zealand either return to Covid-19 alert level one, or are at ‘orange’ or ‘green’ under the Covid-19 Protection Framework (the latter being why I think at least Auckland will see the RSP being in place for some time to come yet, as I suspect we will be in ‘red’ for a number of months).
As a reminder, although I am sure it’s probably no longer required, to be eligible for the RSP:
- The person must have experienced a minimum 30% decline in revenue in relation to a business or organisation during a nominated seven-day period, and
- the nominated seven-day period must be during the specified period for that grant.
GST & deferred payment terms
IR has issued PUB00330, a draft QWBA which looks to provide an answer to the question of when a person registered for GST on a payments basis can claim an input tax deduction for goods purchased on deferred payment terms.
I expect the most of you will already have an appreciation, that where a person is registered for GST on a payments basis, generally any input tax deduction claims are limited to the extent that a payment has actually been made in relation to the relevant supply, during the particular GST period.
The answer provided in the draft QWBA commences down this path, but then hits a crossroad where the type of agreement involved in the supply is either a hire purchase agreement or a lay-by agreement.
A hire-purchase agreement requires you to turn right and take that path, and obtain the unexpected benefit that even though you are registered on a payments basis, in this instance, you can actually make a full input tax claim in the taxable period within which the hire purchase agreement was entered into.
A lay-by agreement on the other hand, requires you to turn left, where you discover a few steps down the path, that even though you have made a couple of payments during the taxable period which under the general rule would entitle you to claim the input tax with respect to the payments made, you suddenly find yourself standing before an impenetrable wall, which prevents you from making any input tax claims in respect of the payments you have made. Only once you have made the final payment and the goods have been transferred to you, does a ladder magically appear before you, enabling you to now scramble over the wall and access the full input tax credit claim that’s waiting for you beyond the wall, in the taxable period within which title to the goods has passed to you.
Now a subset of standard sales agreements which you may be encountering a lot more frequently, are buy now, pay later agreements – common examples being Afterpay, Humm and Zip. Under such agreements, the purchaser gets immediate possession and ownership of the goods and pays for them in instalments. The terms are often interest-free, but other charges likely apply. The retailer receives payment from the ‘buy now, pay later’ provider, and that provider assumes all the risks should the purchaser fail to make any payments. When it comes to the claiming of the input tax credits for a person registered on a payments basis, you can continue on the path straight ahead of you at the crossroads, and make you input a tax claim under the general rule, provided you are confident that the ‘buy now, pay later’ agreement does not fall into either the hire purchase or lay-by agreement categories.
If you are not sure of what defines whether an agreement is a hire purchase agreement, or a lay-by agreement, and consequently whether a special time of supply rule may apply, then page five of the QWBA provides a definition of the former and page seven the latter.
Helpful as always (well usually in most cases), are the examples provided in the QWBA to illustrate the key points of the narrative.
If you wish to have your say, then Christmas Eve is your deadline. Hard to believe it’s not that far away now – where did 2021 suddenly go?!
Student loan repayment threshold to rise
For those of you with student loan debt (or were silly enough like me when your kids were young teenagers, to suggest you’d pay for their higher level education and they’re now holding you to it – so it’s like you have a student loan debt, yet you haven’t studied for 20 years!), you’ll potentially have a few more pennies in your pocket from April 1st 2022, when the student loan repayment threshold increases from $20,280 to $21,268.
Increased support for lower income families
Last week saw the passing of The Taxation (COVID-19 Support Payments and Working for Families Tax Credits) Bill, legislation which only took two days from date of introduction to date of enactment.
The desired outcome of the Bill was to increase the incomes of those who receive the Family Tax Credit, the Best Start Tax Credit and the Minimum Family Tax credit, which is attained by not only increasing payment quantum, but also by adjusting the abatement rate and income thresholds.
The nuts and bolts:
- An increase in the Family Tax Credit by almost $15.00 per week for the eldest child in a family and around $13.00 per week for subsequent children from 1 April 2022.
- Provides for a scheduled CPI indexed increase to Best Start from $60.00 to $65.00 per week from 1 April 2022.
- An increase in the abatement rate for the Family Tax Credit and the In-Work Tax Credit from 25% to 27% from 1 April 2022; and,
- An increase in the Minimum Family Tax Credit threshold from $31,096 to $32,864 from 1 April 2022.
The passing of the Bill has also seen the removal of the requirement for a change in Alert levels for activating the Resurgence Support Payment under the new COVID-19 Protection Framework – an amendment to ensure that future Covid support payments schemes are more flexible and are no longer dependent on a change to alert levels to trigger them.
Applications for 6th RSP now open
It’s becoming an almost weekly event, with the passing of the COVID-19 Resurgence Support Payments Scheme (August 2021) Amendment Order (No 6) 2021 (SL 2021/374), which mainly came into force on 23 November 2021 and amends the COVID-19 Resurgence Support Payments Scheme (August 2021) Order 2021 to provide for a sixth grant payment.
The specified period for the sixth grant starts on or after 19 November 2021.
The latest order also brings forward the time when the specified periods for the fourth, fifth, and sixth grants end, being on the earlier of the following:
- The close of the day before any area of New Zealand moves to the COVID-19 Protection Framework, or
- Immediately before all areas of New Zealand return to COVID-19 alert level 1.
Finally, take note that applications for the first, second and third RSP close on 1 December 2021.
Meal expenses fact sheet
Now if your memory is better than mine (not hard!), you may recall the AWIR article a few weeks back about IS 21/06, an interpretation statement that covers the income tax and GST treatment of meal expenses incurred by self-employed persons. It also discusses the treatment of meal allowances paid to employees to illustrate the differences with the treatment of self-employed persons, and also the treatment of entertainment expenditure for the same reason.
Well almost like a quick reference guide, IR has now released IS 21/06 FS1, which is a four-page cheat sheet if you like, which provides at a glance the most likely income tax treatment of meal expenses under certain scenarios. However, if you’re not convinced by the suggested answer with respect to your specific scenario, then you can always refer to the detailed analysis contained in the 37-page original document.
Both the original IS and the fact sheet can be located within IR’s Tax Technical section of their website here.
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