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Richard’s Tax Updates: Aug/Sept
Richard has had over 25 years’ experience with NZ taxation, and particularly enjoys dealing with land tax issues and the GST regime. He deals with clients of all types and sizes and provides tax opinions on the appropriate treatment of items of income and expenditure, assists clients with IRD risk reviews and audits and can assist clients who are having difficulties meeting their tax payment obligations to make suitable repayment arrangements with the IRD.
Here are snippets from Richard’s weekly email ‘A Week in Review’…
- New Tax Bill
- Draft Interpretation Statement – When Income from Professional Services Derived
- Director Liable for GST Debt
- QWBA released on application of residential/main home exclusions
- Employee Share Scheme Proposals
- Settling IRD Disputes
- Hybrid Mismatch Arrangements
- No Accrual Income for Taxpayer
- IR Rulings Work Programme Updated
New Tax Bill
8th August 2016 saw the introduction of the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Bill, which proposes:
- a new way to pay provisional tax, the Accounting Income Method (“AIM”), commencing 2018/19 income year
- increasing the UOMI safe harbour threshold to $60k RIT and its application to all taxpayers not just natural persons, commencing 2018/19 income year
- eliminating UOMI exposure for first two instalment dates where standard uplift payment method used, all instalments paid as required and full provisional tax liability paid by third instalment date, commencing 2018/19 income year
- ability for contractors to elect own rate of withholding tax from 1 April 2017 (conditions apply, naturally)
- removal of 1% late payment incremental penalty on all new GST, income tax and WFTC debt from 1 April 2017
- allowing close companies to elect to use motor vehicle expenditure deduction rules presently available to sole traders/partnerships rather than paying FBT, on motor vehicles provided to shareholder-employees, commencing 2017/18 income year
- increasing minor errors correction threshold from $500 tax to $1000 tax commencing 1 April 2017
- simplifying rules for calculating deductions for dual use motor vehicles/home premises, commencing 2017/18 income year
- implementing changes to foreign trust disclosure rules including requirements for all foreign trusts to be registered with IR, pay a $270 registration fee, file an annual return and pay a $50 annual filing fee. Rules commencing date of enactment, with new trusts having 30 days to comply and existing trusts by 30 June 2017
Draft Interpretation Statement – When Income from Professional Services Derived
PUB00231 was released on 10th August 2016, with a deadline for comment of 22nd September 2016.
The draft IS is essentially the IR’s view of the appropriate accounting method a taxpayer should use to recognise income, distinguishing between the cash method and the accruals method.
The primary view taken by the Commissioner, is that the appropriate method to be used is a question of fact having regard to the nature of the business or the income earning activity, and should be a method which provides a substantially correct reflex of income. As a consequence, the structure used by the taxpayer to operate their business (e.g. a company) nor the type of business itself (e.g. a medical practice) is necessarily determinative of the appropriate method that should be used.
The accruals method is suggested to be appropriate for most businesses, although where the business is very small, there are no employees (or if there are, they only make a minor contribution to the income earning process e.g. the receptionist) and the expectation of payment of fees is low, a cash accounting method may be acceptable.
A cash accounting method reflects income purely upon receipt as opposed to an accrual accounting method which recognises income as it is earned. The IS includes some discussion on the concept of “earned”, referring to an “entitlement to bill” or to having “a recoverable debt” as the correct time to accrue an amount as income.
The IS is essentially an update to some very dated PIB articles (1966, 1987 & 1988 principally), however other than perhaps dispelling some myths such as companies must use the accrual basis or doctors can automatically use the cash basis, the commentary appears pretty much business as usual in terms of the way both IR and the accounting profession have historically dealt with the issue.
Director Liable for GST Debt
The recent High Court decision in Henderson v C of IR is a clear reminder that company directors cannot hide behind the corporate veil where a company has been unable to satisfy its GST debts due to an arrangement which has had the effect of depleting its assets to a point where insufficient funds remain to pay tax liabilities.
Section 61 of the GST Act 1985 refers to the application of section HD 15 of the Income Tax Act 2007 (replacing the term income tax with GST where applicable) to determine possible personal liability for directors and shareholders, for the debt where the company has been left with insufficient assets. To satisfy the provision, there must have been an arrangement entered into by the company, an effect of which was being unable to meet a tax liability (either arising at the time of the arrangement or after), with it being reasonable to conclude a purpose of the arrangement was to have that effect and that a director making reasonable enquiries at the time would have anticipated that a tax liability would or would likely be required to be met. There are a few exclusions from liability, such as where the director is not involved in the executive management of the company and had no knowledge of the arrangement, however for most SME’s this will not be the case, so the issue is certainly worthy of mention when advising clients who made be considering a “walk away” option. (Henderson v C of IR HC Christchurch (2016) NZHC 1987).
QWBA released on application of residential/main home exclusions
IR released a QWBA on 31st August providing its view on the inability to use the residential exclusion (CB 16) or main home exclusion (CB 16A) due to a regular pattern of acquiring and disposing or building and disposing. The focus of the QWBA is on what is meant by the phrase, a “regular pattern”.
Clearly, as stated in most of IR’s published views, each case will be fact specific. Whether there will be a “regular pattern” will depend on the number of similar transactions and the intervals of time between them. IR suggests however that there is likely to be no such pattern unless there are at least three prior transactions (excluding therefore the present transaction being considered) and that there has to be similarity or likeness between the transactions. Once these criteria are satisfied, its then a matter of whether the transactions have occurred at sufficiently uniform or consistent intervals to consider the pattern is regular. Reason or purpose for each transaction is irrelevant in IR’s view.
As a final point, IR notes that the exclusion from the bright-line rules cannot be used even where you do not have a “regular pattern”, if you have already used the exclusion twice in the two-year period prior to the bright-line date for the land you are selling.
Employee Share Scheme Proposals
IR has released an update to their 12th May issues paper on the taxation of employee share scheme, further to submissions received to date. Other than the removal of a proposed timing deferral for start-up companies, there are no material changes to the previous document, the main focus being to ensure that the timing basis for taxing benefits received by employees under share schemes is equivalent to those used for taxing cash benefits. One arrangement which may be caught by the proposals is where the employee is issued shares which are held in trust until the employee has satisfied certain conditions (often simply remaining as an employee for a defined period), at which time full ownership of the shares is vested in the employee. Present rules tax these arrangements based on the value of the shares at the date of issue, not at the date of vesting (where it is envisaged the market value of the shares would have increased). Had an equivalent employee received a cash bonus upon achieving the same conditions (and equivalent to the market value of the shares on that date), they would have been taxed at a higher amount, an inequitable position which IR considers needs fixing. Further submissions on the updated proposals are requested to be made no later than 30th September.
Settling IRD Disputes
IR has issued an operational guideline setting out their approach to settling any dispute prior to litigation pursuant to section 6A of the Tax Administration Act 1994. The guideline acknowledges that while the starting point for any settlement is that the law should be applied correctly and IR should seek to recover all tax which is due, this is not possible in all cases. The guideline therefore provides a set of criteria which can be taken into account, depending on the particular case and establishes some principles as to how much weight should be applied to those criteria.
Hybrid Mismatch Arrangements
Further to the recent OECD publication on the issue, IR has released its own discussion document on the topic, expressing its views as to how NZ legislation may be amended to adopt the OECD recommendations and seeking feedback in this regard. As a recap, hybrid mismatch arrangements are used by multinationals to exploit differences in countries domestic tax rules, the result being to pay less tax. The OECD has recommended the use of linking rules which will change the usual tax treatment of a cross-border transaction to ensure that no advantage is gained. As the measures are essentially of an anti-avoidance nature, the OECD has recommended they are targeted at deliberate exploitation of hybrid mismatches, essentially related party transactions as well as unrelated parties where there has been a deliberate intention to structure an arrangement in a way that produces a hybrid mismatch advantage. IR requests that any submissions are made by 17th October 2016.
No Accrual Income for Taxpayer
The High Court was asked to consider an appeal by the taxpayer from a TRA decision which found a base price adjustment (“BPA”) was required when their shareholder current account had been credited with a sum of $2.5m, resulting in income of approximately the same amount for the taxpayer. In short, the taxpayer was a guarantor for his company’s debt to BNZ, the company had defaulted, the taxpayer was sued and in 1995 he had entered into a deed of settlement, which required him to pay a sum of $90k in full and final settlement. Upon the payment of the $90k, BNZ assigned the $2.5m debt to him, that sum now being due to him by his company. In the 2005 income year the company started trading again so the accountants credited his current account with the $2.5m assignment amount, which he drew down on over the next three years from the trading profits of the company. IR submitted that the credit of $2.5m to his current account amounted to full payment under the deed of assignment, thereby triggering a BPA calculation which resulted in assessable income to the taxpayer of $2.5m less the $90k he had paid to the BNZ. The High Court disagreed with the TRA decision, finding that the credit to the current account was simply recognition of an existing liability some 10 years after the debt had been assigned, there being no payment or cash sums made available to the taxpayer at the time of crediting (the company had no funds until it commenced making trading profits again). The financial arrangement had not matured as there was no sum of money to constitute a payment, there had simply been an assignment of debt, and consequently there had been no final payment under the financial arrangement which would trigger a BPA. It was acknowledged that a dividend or salary credit is an allocation of income or retained earnings to a shareholder which then becomes payable to them, however it is the dividend or salary that is the payment, with the crediting to the current account simply a means of effecting that payment.
IR Rulings Work Programme Updated
IR released their latest update position as at 5th September 2016. The publication sets out IR’s public rulings work programme for 2016-17, identifying items where better interpretation of IR’s position on various issues is seen to be useful for a cross-section of taxpayers and their advisors. Items are often selected for consideration as a result of recent court decisions (the recent Supreme Court Trustpower decision as one example) or due to a number of similar questions IR has received on the application of a specific piece of tax law. The update can be found at http://www.ird.govt.nz/resources/0/6/06e4a2b3-776b-46f6-9aa5-8bb3d70ae45d/pr-work-peerog-2016-17.pdf