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Richard's Tax Updates: Dec/Jan
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’…
- Compensation for Live Organ Donors
- Relief Denied where Breach of Natural Justice
- BEPS Cabinet Paper
- GST Change of Use Adjustments
- Motor Vehicles & FBT
- Year End Housekeeping
- Increase in Minimum Wage
- IR Managing Change Document Released
- Replacement Trustee “Not the same taxpayer”
Compensation for Live Organ Donors
Legislation recently passed provides for financial assistance to be given to organ donors who forgo income during their period of recovery. The financial assistance available includes the payment of childcare assistance to those who require it. The new law has required amendments to the Income Tax Act 2007 to ensure the amounts are treated as income and also do not affect a person’s status as a fulltime earner for working for families’ tax credit calculation purposes.
Relief Denied where Breach of Natural Justice
The High Court has denied a taxpayer’s judicial review application in respect of the Commissioners decision to pursue recovery action for an amount of outstanding tax not written off. I thought the case was interesting to comment on, because it considered the issue of a law change occurring during the hardship application process, where the IR case manager was communicating with the taxpayer, was aware of the pending law change but did not inform the taxpayer that their application for relief would be considered differently under the new legislation and consequently it should be drafted accordingly.
The High Court found that while the Commissioner was not under a duty to inform the taxpayer of the legislative change, fairness to the taxpayer dictated that the Commissioner should have provided an opportunity for the taxpayer to make new submissions and failure in this regard would result in a reviewable decision. However, in the Court’s view, granting relief to the taxpayer would achieve nothing but delay essentially an inevitable conclusion. This was on the basis that even allowing a new submission to be made, the Commissioner would properly reach the same decision. Consequently, the application for relief was denied.
The case did highlight however the Court’s approach to fairness and natural justice for taxpayer’s and that the Commissioner should be mindful of this aspect during a negotiation process, when even though not under a strict legal obligation to inform taxpayers of the ramifications a pending law change may have for them, there was still an equitable obligation to do so.
BEPS Cabinet Paper
Released by Revenue minister, Michael Woodhouse, the paper outlines the BEPS measures presently being considered by Parliament which target transfer pricing (TP) and permanent establishment (PE) avoidance.
- Developing measures to prevent the avoidance of a NZ PE
- Amending NZ TP legislation to better collect information and tax MNE’s more from an economic activity substance perspective. A key change proposal being to remove IR’s present burden of proof onus.
- Strengthening NZ treaties so they cannot be used for TP and PE avoidance
- Implementing administration measures to make it easier to assess and collect tax from uncooperative MNE’s
The introduction of a diverted profits tax (similar to Australia/UK) has also not been ruled out.
Discussion document for consultation expected to be released early in 2017.
GST Change of Use Adjustments
For goods and services acquired post 1 April 2011, change of use adjustments (if required) are now accounted for annually, usually in the March GST return period (for standard balance date clients). A trap for the unwary client, particularly those who are not familiar with the 2011 rule changes, is the timing of input tax credit claims where an asset that was previously not acquired for a taxable purpose is brought into the taxable activity and is 100% applied for such purposes.
Under the previous change of use adjustment rules, the client would essentially (assuming all other criteria were met) claim all the relevant input tax in the GST return period that covered the date the change of use occurred. Now however, it could take up to two years to recover the same amount of input tax. The timing difference results firstly from the definition of the “first adjustment period” and secondly the requirement to determine the “extent” the asset has been used for a taxable purpose during that period. So, take the following example:
Danny, a GST registered potter, acquired a bare section of land in May 2016, from a GST registered farmer who was carving off some lots to generate some extra cash. Danny was initially thinking he would like to build his dream home on the land and as he was not going to use it for a taxable purpose, the farmer charged GST on the sale price of $100,000. In March 2017, Danny had still not commenced his dream home project, when he discovered a large source of clay, ideal for the type of pottery he was making. He decided a better use for the land therefore, was to construct a new workshop and gallery and to move his commercial operation to the property. As the land was now going to be applied 100% for taxable purposes, Danny was looking to claim $15,000 of input tax credits in his March 2017 GST return.
Under the new adjustment rules however, Danny will not be able to recover the full $15,000 until March 2018 at the earliest. The reason for this is that the “first adjustment period” for the land is deemed to be from the date the land was acquired (May 2016), through until March 2017 (a period of 11 months), and the extent that the land has been applied for a taxable purpose during that first adjustment period is only 9% ((0% x 10/11) + (100% x 1/11)). Consequently, Danny is only entitled to claim $1,350 in his March 2017 GST return. Provided Danny continues to use the land 100% for taxable purposes during the second adjustment period, he will be able to claim the remaining $13,650 in his March 2018 GST return.
Motor Vehicles & FBT
If your clients are providing their employees with motor vehicles for work-related purposes which the employee is taking home overnight, ensure they are not making the following common mistakes which could create a nasty unexpected FBT exposure for them:
- A motor vehicle that satisfies the work-related vehicle definition, must still have any private use of the vehicle restricted by the employer in order for no FBT to apply. One of the first things IR is likely to request in the event of any review, are copies of the private use restriction letters.
- Claiming that the employees need to take the vehicle home for security reasons will not exclude your client from an FBT liability where the vehicle does not satisfy the work-related vehicle definition. The legislation specifically defines private use to include home to work travel unless the vehicle qualifies as a work-related vehicle, so even a vehicle that has a private use restriction in place will be exposed to FBT because there has still be actual private use of the vehicle.
- Sign-writing a vehicle is not enough to qualify a car (one designed principally for the carriage of passengers) as a work-related vehicle. To avoid IR asserting an FBT liability exists, appropriate alterations will need to be made to the car to essentially convert it to be principally one for the carriage of goods.
- If your client wishes to claim their employees home is a second workplace of the employer and that consequently there is no home to work travel in the car by the employee, IR’s discussion document on this topic should be reviewed as often the simple existence of a home office will not be enough to satisfy a workplace definition.
Year End Housekeeping
A scary thought, but the end of another year is almost upon us (for standard balance date clients). It is a good time therefore to remind your clients of the following:
- Writing any bad debts off pre-31 March – note that writing off does not mean that your client cannot still pursue collection of the debt.
- Undertaking a balance date stock take if required noting that where your client’s turnover is less than $1.3m and they can reasonable estimate that the value of their closing stock will be less than $10k, then no stocktake is required and opening value can be used as closing value.
- Deferring revenue recognition to the next income year by noting where monies have been received pre-balance date but services will not be performed until post balance date.
- Promoting expense deductions by noting commitment to any expenditure pre-balance date that will not be paid for until post balance date.
Increase in Minimum Wage
Effective from 1st April 2017, the minimum hourly wage will increase from $15.25 to $15.75.
The starting-out and training hourly minimum wage rates will also increase from $12.20 to $12.60, remaining at 80% of the adult minimum wage.
IR Managing Change Document Released
IR has published a document which sets out the approach it will take internally to manage changes, either perceived or actual, to interpretation of an issue or Commissioner’s practice. The document will provide guidance on what action should be taken in the circumstances, including determining how to apply a new position and how to communicate the change both internally and externally.
IR will use Tax Intelligence Group (TIG) networks to assist with the early identification of potential issues, and TIG, with the assistance of LTS Technical Standards where needed, will identify IR’s current interpretation or practice and look to recommend whether any new position is a change of the Commissioners existing position on the issue. Any significant or potentially significant change issues will be reported by TIG to the Technical Governance Committee, with LTS Technical Standards, with support from Group Tax Counsel, then being responsible for interim or final operational positions with respect to the issue identified.
Replacement Trustee “Not the same taxpayer”
A recent High Court case contains some useful commentary with respect to trustees (in this case corporate trustees) and transfers of taxation rights and obligations when a new trustee replaces a former trustee.
In this case a trading trust was being used for a property trading business, the trustee of the trust (“H Co”) an asset-less corporate trustee (a common scenario). The trustee was insolvent due to owing a significant GST debt to IR. H Co was then purported to have been replaced by R Co and was placed into liquidation. IR filed a claim to the liquidator, also advising the liquidator that several GST return periods were presently under investigation. That review identified a couple of GST refunds which were mistakenly paid out by cheque, the investigator incorrectly assuming that they would automatically be offset against the existing GST debt. The net GST position post the refund offset, had it occurred, would have been H Co still in debt to IR.
The liquidator banked the GST refund cheques into his trust account and then paid them out to the accountants for R Co, for services provided to the trust. When IR commenced proceedings to recover the GST refunds, the liquidator submitted that R Co had been entitled to receive the refunds as s.47 of the Trustee Act 1956 automatically vested H Co’s rights in R Co at the date of change. Consequently, IR had no claim.
The Court disagreed, and included in its overall findings, it made the following useful comments:
- Insolvency set-off under s.310 of the Companies Act took effect on liquidation and consequently extinguished any debt for GST refunds post that date.
- H Co continued to hold the rights for any tax refunds up to the date of liquidation when s.310 took effect. There were no rights to vest in a replacement trustee, because s.47 was precluded by specific tax legislation whose transfer provisions apply in place of any general legislation (including s.47).
- A former trustee remains liable for debts incurred during its trusteeship, and consequently retains all rights to ensure it can manage its tax responsibilities, including a right to request a transfer of excess tax to another taxpayer (which in itself is only a right IR may consider, not a demand). A new trustee has not itself paid the excess tax and consequently has no “right” to request a transfer (there was no evidence of any transfer requests occurring in this case anyway).
- H Co was only liable to GST during its trusteeship period, as was R Co for a different period once it became trustee. As each must pay different taxes for different periods, they cannot be the same taxpayer. The fact that they were both members of the same unincorporated body, albeit at different times, did not make them the same person. IR’s administrative use of a single IRD number to identify the trust for GST purposes, also did not merge the trustees into a single paying entity.