Richard's Tax Updates: February

Richard has had over 30 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’…

 
GST DIY Improvements Implemented
IR has announced the “go-live” of myGST from 7th February 2017. The new tab will appear on a taxpayer’s myIR account, and they will be able to use the facility to:
register for GST

  • register as a preparer of tax returns
  • amend GST returns and accounts
  • file and pay GST at the same time
  • set up payment plans, and;
  • track their GST payments and refunds online.

The system modifications will also provide new migrants and organisations with the ability to be able to apply online for an IRD number, and businesses will be able to use their New Zealand Business Number when they or their advisors contact IR.
Relief for Northland drought affected farmers
Tax measures have been announced in the wake of the latest drought to hit Northland farmers. Relief will be provided by allowing affected farmers to make late income equalisation deposits for the 2016 income year and to apply for refunds earlier than usual. The intended result of the relief measures is to permit farmers to average their taxable income over several years more easily, consequently easing cash flow pressures as tax payments are spread over a longer time period.
2017 Budget Date
The 2017 Budget will be delivered on Thursday, 25th May 2017. Being an election year, and a natural desire for National to win a further term, one can expect possible vote winning tax driven changes….
Business Tax Bill one step closer to enactment
The Business Tax Bill which contains measures to make tax simpler for businesses, the implementation of the G20/OECD standard for Automatic Exchange of Financial Account Information in Tax Matters, and the implementation of the new disclosure requirements for foreign trusts, moved one step closer to enactment as it passed through its second reading in Parliament on the 8th.
The Bill provides some welcomed changes with respect to provisional tax and UOMI, including:

  • increasing the safe harbour threshold from $50,000 to $60,000 and extending its reach to nonindividual taxpayers
  • introducing a new accounting income method (AIM)
  • where the standard option payment method is used (and payments made), eliminating UOMI for first two provisional tax instalments
  • removal of incremental late payment penalty for new GST, income tax and WFTC debt

We should expect to see the third and final reading occur within a matter of weeks now, and certainly the new legislation in place pre the end of the income year.
Unit Trust GST QWBA Released
IR has released two separate QWBA’s – PUB00277aa which deals with the question of whether fees chargeable by managers of unit trusts is subject to GST, and PUB00277bb which considers the issue of the GST treatment of services for a unit trust provided by a third party to the manager of a unit trust.
IR concludes under PUB00277aa, that the services supplied by managers of unit trusts are wholly exempt supplies being financial services under either sections 3(1)(c), (d), (k) or (l) or a supply of services that are reasonably necessary or incidental to the supply of financial services by the manager. Consequently no GST should be charged on the supply of the services.
Under PUB00277bb, IR concludes that the third party supplies are taxable supplies as they do not relate to any of the activities listed in the definition of financial services.
Associated with the release of both QWBA’s, IR is also trialling a new online form as a way for you to provide feedback on IR publications. There is a link to the form at the end of each document.
Business Tax Bill Passes
Following on from last week’s brief and somewhat quicker than I expected, the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Bill passed its third and final reading and now awaits Royal assent.
As well as the eagerly awaited changes to the provisional tax regime which I referred to briefly in last week’s edition, for those of you with clients who have a foreign trust, the new disclosure requirements will soon be enacted. Registering existing foreign trusts with IR must occur no later than 30th June 2017, which will require the payment of a one off registration fee of $270. Once registered, a foreign trust must file an annual return every year (with an associated $50 filing fee), the first such returns due 30th June 2018.
GST on Traffic Fines
IR has released BR Pub 17/03 which confirms the GST aspects of infringement fees imposed on offenders breaching provisions of the Land Transport Act 1998. The ruling confirms that GST is not a component of the fee, as an infringement fee is a penalty for an offence imposed under a statute. There is no existence of reciprocity in the transaction (usually required with any taxable supply), the payment not being made by the offender in return for any supply provided by the local authority.
Yes, it must be an Election year….
Well it has started. The Minister of Finance, the Hon Steven Joyce, has raised the prospect of tax cuts for middle and lower income earners during a speech last week. Tax cuts are one of four key areas Mr Joyce will be focusing on over the coming few months, prior to his first budget to be delivered on 25th May 2017.
The other three areas to be covered are:

  • delivering better public services for a growing country
  • building the infrastructure needed in growing a modern economy, and
  • paying down debt as a percentage of GDP

SOP to Closely Held Companies Bill Released
Further to the recent earthquakes that hit the upper South Island and greater Wellington area, and similar to the legislative relief provided following the Canterbury earthquakes, a SOP has been released to provide depreciation roll-over relief for businesses affected by the disaster, ensuring that they do not face an immediate tax bill when replacing assets lost in the earthquake. New sections EZ 23BC, EZ 78 and EZ 79 will apply in this regard.
Issuing the SOP has also provided Parliament with an opportunity to make several amendments to the debt remission rule changes that were contained in the Closely Held Companies Bill, particularly those dealing with “self-remission” scenarios (debts remitted within partnerships/LTC’s where there has been no net increase in economic wealth) and debt remissions occurring during an amalgamation, to ensure the new provisions work as intended.
GST Draft Interpretation Statement Updated
PUB00228 has been released for further consultation, as the original version was significantly amended post a review of the submissions received at the initial consultation phase. The item deals with the issue of a supply that may contain multiple elements (supplied together in a single transaction), and whether for GST purposes there is a single supply or multiple separate supplies (each with their own GST treatment).
The summary to PUB00228 states that sometimes the Act itself will deem supplies of multiple elements to be treated in a particular manner, however where this is not the case, IR suggests a number of questions to be asked, the answers of which may assist in determining the nature of the supply:

  1. What is the true and substantial nature of what is supplied to the recipient for their payment? This should be viewed from the recipient’s perspective. It is the actual supply made to the recipient that must be considered and not how the supply is invoiced or charged to the recipient.
  2. What are the relationships between the elements supplied? Is one of the elements merely ancillary or incidental to, or a necessary or integral part of, any other element of the transaction?
  3. Is it reasonable or practical to sever the elements into separate supplies? Does a sufficient distinction exist between the different elements of a transaction to make it reasonable to sever them into
    separate supplies and would such severing artificially split, what, from an economic point of view, is a single supply.

The deadline for submissions is 22nd March 2017.
IR Interpretation Statement on Feasibility Expenditure Finalised
Previously I commented briefly on the draft to the now released IS 17/01, which updated IR’s position with respect to feasibility expenditure deductibility, particularly as a follow-on to the Supreme Court decision in Trustpower Ltd v C of IR, which had certainly raised an eyebrow or two in the taxation community.
For most of us, provided the expenditure had not been incurred preliminary to or preparatory to the commencement of a business or income-earning activity, and that it was of a recurrent nature and incurred as an ordinary incident of our client’s business, it was fully deductible in the year incurred, on the basis that all the expenditure was achieving, was getting our client’s into a position to be fully informed to enable them to make a decision about whether to proceed with a particular project or not. As there was no definitive commitment to the project at the time the expenditure was incurred, there was no capital element to it.
The Trustpower decision however, suggests that where the client’s ultimate goal is to acquire or develop a capital asset that will form part of the profit making structure of the business, the feasibility expenditure is likely to be capital expenditure. This is irrespective of whether the asset actually eventuates, so there is no ability to re-characterise the expenditure as revenue in nature simply due to the projects failure.
IR has suggested that feasibility expenditure is likely to be deductible in the following two scenarios:

  • Firstly where the expenditure is not directed towards a specific capital project, usually occurring where initial feasibility work is being undertaken before a specific capital project is identified
    (although note IR’s comment that the project, asset or benefit need only be identified in general terms; the exact details do not need to be known.
  • Secondly where expenditure relates to a specific project that has been identified, however the expenditure is so preliminary, that it has not yet been directed towards materially advancing that specific project. This can be contrasted with expenditure that is aimed at making tangible progress on a capital project (asset or benefit).
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