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Richard’s September-October 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
- Tax opinions
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- 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.
- Update to Tax Counsel Office work programme, 20 September
- Second round of RSP, 20 September
- Depreciating commercial buildings, or not, 27 September
- Tax Bill first reading done and dusted, 27 September
- Business debt hibernation, 27 September
- Accounting for wage subsidies and leave payments, 27 September
- A new owner or not?, 4 October
- Interest deductibility rules SOP added to Tax Bill, 4 October
- Content creators tax issues, 4 October
- Covid-19 variation for GST taxable periods, 4 October
- Further Covid support payments available, 11 October
- Cross-border worker issues paper, 11 October
- GST filing date extended, 11 October
Update to Tax Counsel Office work programme
Well, I am sorry to say, that this week’s edition is probably going to seem like a bore in comparison to last week’s epic thriller of a post which canvassed the introduction of a new tax Bill (can you tell that I’m still excited?).
First up, the latest update to the Tax Counsel Office work programme has been released, which you should be able to locate here.
This time around they have used colour coding to reflect the new items added (very useful!), and a few of the newbies which I am certainly interested in seeing the results of are:
- GST – Section 8(4) – Non-residents registering under s 51
- GST – Taxable activity – Subdivisions and small-scale property development – Update of item in TIB Vol 7, No.2 (August 1995)
- GST – Court awards and out of court settlements – Update of IS3387
- Income tax – Land – Deductibility of holding costs of land
- Income tax – Investing in Australian unit trusts
Now all the items I have selected are currently not being worked on, so I suspect it will be well into 2022 before I have some extra reading to do.
Second round of RSP
On Friday 17th September, applications for the second round of the Resurgence Support Payment opened.
This time around you will need to show a 30% or more drop in revenue in a seven-day period from 8th September until immediately before all of New Zealand returns to Alert Level 1, compared to a typical seven-day period in the six weeks before 17 August 2021.
The quantum of payment remains as $1,500 plus $400 per full-time equivalent (FTE) employee up to a maximum of 50 FTEs, or four times the actual revenue decline experienced by the applicant, whichever is less.
Now remember that you can claim this payment in addition to any support you received from the first round of the RSP, and that there will be plenty of time to lodge your claim, applications for both rounds of payment to remain open until one month post all of New Zealand returning to Alert Level 1 (won’t that be a nice place to return to again!).
Depreciating commercial buildings, or not
Many of you will already be aware that the Covid-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020, reinstated the previous depreciation rates for commercial buildings of 2% or 1.5%, which had been reduced to 0% for the 2012 income year onwards.
Now, I also hope that most of you are aware of the mandatory requirement to claim deprecation for an asset, and that you will be deemed to have claimed even if you have not, which naturally has consequences when you subsequently dispose of the relevant asset (depreciation recovery income or loss on sale).
This mandatory requirement can, however, be removed if you make a formal election to IR not to claim deprecation for the relevant asset, either at the time the asset is acquired, or retrospectively, but in this respect, only when there has previously been no deprecation claimed on the asset.
The reinstatement of the ability to claim depreciation for commercial buildings from the 2021 income year onwards, has triggered IR to issue draft QWBA ED0233 titled ‘Elections not to depreciate commercial buildings’, to provide guidance in respect of the mandatory requirements to claim deprecation unless the requisite opt-out election has been filed, and how the rules operate in respect of an asset who published rates have moved from 2%/1.5% to 0% to 2%/1.5% again.
So here’s the basic ABC’s:
- If you have filed an opt-out notice, it’s irrevocable, so the 2021 income year changes are just white noise for you. i.e., you can’t now commence claiming in the 2021 income year.
- Caution however, just not claiming no deprecation in a tax return does not correlate to a formal opt-out notice. You actually need to attach a formal note to the tax return or send a separate email/web message to IR, advising of the opt-out, and don’t panic if you haven’t to date, the retrospective election can be made at any time, including post the disposal of the relevant asset, provided depreciation has never been claimed on the particular asset.
- Equally however, if you were claiming depreciation on the asset up until the commencement of the 2012 income year, the change of rates from 2021 onwards is not a chance to reset your prior choice. The mandatory claiming requirement has continued between 2011 and 2021, just the rate was set at 0%. Consequently you will be deemed to have claimed post the 2021 income year onwards even if you do not actually make a claim.
- Finally, if you have not previously claimed depreciation on the commercial building, and mistakenly thought that simply filing the income tax return was the filing of the requisite opt-out notice, then a change of heart now could see you commence claiming deprecation from the 2021 income year onwards. You would then request IR to reassess back year returns (because you are deemed to have claimed in any event), however be mindful of the statute bar limitations (you may eventually have to declare deprecation recovery income for depreciation claims you have never actually received the benefit of).
Should you wish to make a comment on ED0233, the deadline is Guy Fawkes Day (can’t wait…not!).
Tax Bill first reading done and dusted
The Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill (65-1) has passed its first reading and was referred to the FEC. The Committee’s report is due on 23 March 2022 (can’t wait to see that!).
Business debt hibernation
Just a reminder for your clients of this available regime for those who may be struggling to manage their debts, particularly due to the recent lock-down.
The basics of the scheme are:
- An arrangement is set up for the existing debts, e.g. paying creditors only a percentage of what the business owes them on time and delaying the rest.
- A business can get up to a month of protection while it sets up the arrangement. This means that most creditors cannot enforce their debts, e.g. applying for the business to be liquidated.
- If the creditors agree, a business can get a further 6 months of protection.
Now the business will still need to pay off its debts in full, and the scheme only covers existing debts and not any new ones incurred, and it does not cover obligations such as employee wages and secured creditors with GSA’s.
Accounting for wage subsidies and leave payments
IR has issued a reminder for self-employed persons and individuals who may have received the wage subsidy and/or other Covid leave payments, that the amounts received are compensation payments under s.CG 5B of
the ITA07, and consequently need to be included in the income tax returns filed – in the ‘Other income’ box for the 2020 year, and in the ‘Government Subsidies’ box from the 2021 year onwards.
You can find more details here.
A new owner or not?
IR has issued a draft interpretation statement titled ‘Income tax – application of the land sale rules to changes to co-ownership, subdivisions, and changes of trustees.’ So, what my title to this article was attempting to allude to (just in case you hadn’t managed to guess for yourself), was whether certain ownership title changes would trigger a disposal under the land sale rules, with the obvious potential consequences (particularly during a bright-line period which could be up to ten years now!)
As the title to the IS suggests, the focus of the commentary is on co-ownership scenarios (predominantly changes from joint tenancy to tenants in common and vice versa), subdivisions and whether there is a disposal event when existing owners receive one of the new titles issued, and the impacts of trustee changes (although I expect most of us already appreciate this scenario due to the ‘single person’ status of trustees, and the IS throws up no surprises in this regard).
The document is 58 pages in length, the initial 33 pages walking you through an understanding of the three transactions being considered, the potential different forms of co-ownership, and the disposal definition – with some case law thrown in for good measure. Then you finally get to what we’re always looking for – the conclusions (although admittedly these are set out of the very beginning in the Summary with accompanying Table 1) – where specific scenarios are discussed, each item then broken into two parts – is there a disposal for land sales purposes? and is the bright-line clock reset as a result of the transfer?
So, the main takeaways from the IS:
- Where your proportionate interest in the land remains the same post the transfer (so for example, two joint tenants with deemed 50/50 interest transfer to 50/50 tenants in common), then no disposal for land sales purposes, however, the bright-line clock does restart (although proposed amendment in current tax Bill to provide rollover relief).
- Change the proportionate interest however, and the person reducing their interest has a disposal taking place which could trigger land sales taxation (this includes scenarios where co-owners are added or removed). Remember in this regard, that even where no consideration changes hands between the owners, section GC 1 applies to deem a market value amount to arise where any disposal would produce income under any of sections CB 6A to CB 15 and CZ 39. The bright-line clock is also reset as a result of the transfer.
- When a person subdivides land and receives all the new titles (same owner), there is no disposal for land sales purposes and nor is the bright-line clock reset due to an existing carve-out exception in the bright-line rules.
- However, naturally if one of the new titles goes to a new owner, there is clearly a disposal and then that persons bright-line clock commences from the date of transfer.
- Now the one that I presently do not agree with, and I will make a submission on, is where there are co-owners who have a defined share in the single title, and each co-owner then gets a new title issued to them which correlates to their original interest in the single title. IR’s draft view is that the co-owner is deemed to have sold the land (that arguably they never had an interest in (I do appreciate the legal niceties but let’s get logical!), to the other two co-owners, with potential taxing consequences (due to s.GC 1). So in IR’s Example 9, three co-owners owning a 1/3rd share in the land, dividing the land into three new titles – each co-owner deemed to have sold 2/3rd of the land to the other two owners. I would suggest that where it is clear that the co-owner had a clearly defined interest in the original land (1/3rd in this example), have then agreed to contribute 1/3rd of the costs to the subdivision project with the pre-agreed outcome with their co-owners that the newly issued title they receive equates to 1/3rd of the original land, then surely the correct outcome from a taxation perspective is that it is akin to a ‘transfer to self’ scenario (the taxpayers proportionate interest in the land has not changed), therefore with no disposal event taking place? Let’s see where this one ends up; and,
- A change of trustees neither amounts to a disposal, nor triggers a restart of the bright-line period.
The deadline for comment on PUB00411, is 9th November 2021.
Interest deductibility rules SOP added to Tax Bill
Being the eternal optimist that I am, I had some misguided notion that once the Government had seen all the negative submissions on their proposed interest deduction limitation rules for residential land, they would run for the hills to hide the proposals in some unchartered cave, never to be seen again.
However, that wishful thinking has certainly been demolished (I was trying to think of a strong descriptive word while still keeping it polite) by the SOP added last week to the latest Tax Bill presently before the House. The proposals still have the green light although somewhat surprisingly with an announced second opportunity for us all to voice concerns to the FEC no later than 9th November, who are due to report back in March 2022 (do I punish myself with a further bout of optimism?).
The key features of the proposals now are:
- The rules would apply to interest incurred on or after 1 October 2021.
- For pre-existing loans relating to property acquired before 27 March 2021, interest denial would be phased at 25% per year over four years.
- Loans drawn down on or after 27 March 2021 would be subject to full limitation from 1 October 2021, unless the property was acquired as a result of an offer made on or before 23 March 2021 that could not be withdrawn before 27 March 2021.
- Property developers would continue deducting interest expenses as incurred.
- New build properties would be exempt from the interest limitation rules.
- Interest deductions would be allowed when a taxable sale of residential property is made.
- I won’t comment too much more at this time, as a more detailed commentary on the SOP is due to be released in two weeks’ time, so post reading that document, I’ll dedicate a more in-depth AWIR article to the nightmare as it continues. Several information sheets were issued with the SOP however, so if you’re in desperate need of some bedtime reading to help you sleep, you can find these on IR’s website here.
Content creators tax issues
If you make some money from creating online content, then IS 21/08 may be just the read for you.
The interpretation statement provides guidance to those involved in the following activities and are fortunate enough to see their bank balances increase as a result:
Posting videos, images, or text on social media platforms such as YouTube
- Instagram and Facebook
- Competing in online gaming competitions
- Streaming game play on platforms such as Twitch, Facebook gaming and YouTube gaming
IR refers to you as being a content creator, and the topics likely to be of most interest to you in understanding your potential New Zealand taxation obligations include:
- Important factors in working out whether amounts are income
- ‘Gifts’ or ‘donations’ can be income
- Non-monetary items (or contra) can be income
- Deductions for expenses and depreciation losses
- Income earned by a New Zealand resident overseas
- Tax withheld by a payer
- Keeping good records
The key considerations for establishing whether the amounts you receive are likely to be income and therefore subject to tax, are the regularity of your receipts, your relationship with the payer and the reason you have been paid an amount.
IS 21/08 has a good level of detail (46 pages), with numerous examples throughout to help explain certain concepts.
Covid-19 variation for GST taxable periods
Essentially an updated variation due to the ongoing impact of the pandemic, with its previous versions being COV 20/03 and COV 20/11.
The updated version COV 21/03, operates for the period 1st October 2021 to 31st March 2022, and again enables a taxpayer presently registered on a six-monthly GST return filing basis to change to a monthly filing period to assist with their cash-flow (only likely relevant therefore if you’re hoping to receive a refund), without having to wait until 1st April 2022 for the monthly filing to take effect. Usually if you applied during the current six-month period, the change to the taxable period would not apply until the first day of the next taxable period. However, COV 21/03 allows you to request a change to become a monthly filer, anytime up until 31st March 2022, and your request will be approved effective 1st October 2021.
Should you elect a change of taxable period in accordance with COV 21/03 however, you must remain a monthly filer until at least 30th September 2022.
Further Covid support payments available
Applications for the third round of the resurgence support payment (RSP) can now be made. The RSP will support you with paying wages and fixed costs of the business, with an initial lump sum of $1,500, plus $400 for every FTE up to 50 employees – so a maximum payment of $21,500. The eligibility criteria remains the same – 30% decline in revenue/capital raising ability over a seven day period – which must commence on or after 1st October 2021. And don’t forget that all sole traders can make a claim for $1,900.
Also passed is the COVID-19 Resurgence Support Payments Scheme (August 2021) Amendment Order (No 3) 2021 (LI 2021/299) which amends the COVID-19 Resurgence Support Payments Scheme (August 2021) Order 2021 (August Order) and provides for the above third payment, as well as the fourth grant payment, where the seven-day period during which the 30% requisite decline must have occurred, must commence on or after 22nd October 2021.
Applications for the fourth round of the wage subsidy can be made now as well and you have until Thursday 14th October at 11.59pm to make your claim. No changes to the eligibility criteria, and the subsidy amounts are $600 per week per FTE and $359 per week for PTE’s.
Cross-border worker issues paper
Since Covid hit the world stage, I have noticed a trend of the increasing use of remote workers, particularly kiwi’s returning home to what was, at least until about eight weeks ago, a relatively Covid free environment, while still retaining employment with their offshore employer.
In July 2020, IR released ED0223, a draft Operational Statement on Non-resident employers’ obligations to deduct PAYE, FBT and ESCT in cross-border employment situations.
ED0223 has remained in its draft form for some time now, no doubt explained to some extent by the recent release of IR’s official issues paper – Cross-border workers: issues and options for reform. It’s a 40-page document which sets out to review the tax obligations that apply to the payers of cross-border workers to ensure they remain fit for purpose, and is essentially broken into a two-part discussion on the topics of:
- Employers are obliged to withhold tax under the Pay as You Earn (PAYE) system and pay fringe benefit tax (FBT) and employer’s superannuation contribution tax (ESCT), where applicable; and,
- Payers of non-resident contractors are obliged to withhold non-resident contractor’s tax (NRCT) from contract payments.
Within these two parts, five issues are discussed for which feedback is now sought:
- The current PAYE, FBT and ESCT system is inflexible
- It is not always clear when PAYE, FBT or ESCT obligations arise
- The NRCT withholding threshold tests require consideration of facts unconnected to the contract
- The current NRCT system is inflexible; and,
- The exemption process requires modernisation.
The document then ends with a discussion on some other technical or remedial changes which may be required to various rules within the Income Tax Act 2007 and the Tax Administration Act 1994.
Once submissions on the issues paper have been fully considered, any proposed changes will be included in a future tax bill. ED0223 will also be finalised.
If you would like to make any comments, the closing date for submissions is 19th November 2021.
GST filing date extended
In my humble opinion, in what would have to be one of the poorest planning exercises in the history of man, you are hopefully all aware by now of IR’s systems shut down for a week from 3pm Thursday 21st of October 2021 until start of business on Thursday 28th of October 2021, to progress their final Business Transformation release.
Someone clearly forgot to tell those planners (or they just didn’t care), that the 28th October just happens to be one of the busiest filing dates for GST returns on the annual tax calendar, with not only your usual monthly/two monthly returns due, but also quarterly returns under the remote services/low value imported goods regimes and six-monthly returns.
However, rather than move the planned shutdown a couple of weeks into November when things may be just a little bit quieter, the boffins in charge have decided to extend the filing due date to 4th November 2021 instead.
And please note that all drafts such as tax returns and secure mail will be deleted during the shut-down upgrade, so make sure that you complete everything that you don’t mind losing by 3pm on the 21st of October.
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