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Richard's Tax Updates: July
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’ over the last month…
- Participating jurisdictions determination
- Loss offset elections
- GST six monthly filing
- Residential care subsidies
- Watch out for constructive trusts exposure
- Improving social policy payments
- Applying for balance date changes
- Director’s fees interpretation statement finalised
- OECD publishes transfer pricing guidelines update
- Liability for company tax debts
- New UOMI rules
Participating Jurisdictions Determination
IR has published a list of participating jurisdictions for the purposes of the Common Reporting Standard (CRS), and in respect of the first reporting period which commenced on 1st July 2017.
The CRS is a major component of the Automatic Exchange of Information (AEOI) platform, an OECD/G20 joint initiative introduced to clamp down on global tax evasion via the sharing of information between participating jurisdictions.
The initial list contains 85 participating jurisdictions (excluding NZ) and it is proposed it will be updated prior to 1 April each year, to reflect additions and deletions to the group during the past year.
If you wish to continue to hide your hard earned wealth on little islands, potentially far from the reaches of IR’s grasp in the past, the havens of Vanuatu, the Cayman Islands and Guernsey may require deleting from your shopping list, all three presently included among those willing to share information with others.
Naturally only time will tell as to whether being a group signatory correlates to open sharing of useful information when the heat is actually turned on.
Loss Offset Elections
IR has issued ED0198, a draft standard practice statement (SPS) with respect to loss offset elections between group companies.
The SPS does not cover all aspects of loss offsets between group companies as provided for under Subpart IC of the income Tax Act 2017, so I would suggest you do not rush to read it if you are looking for a comprehensive guidance document in that regard.
In fact, the SPS is only 10 pages in length and is quite brief content wise in my view (although admittedly it is an SPS, and not an IS), however it does provide a useful summary of issues associated with effecting group loss offsets for clients, including the ability to obtain time extensions, undertake part-year offsets and the Commissioner’s intended practice when either the loss or profit companies annual result is amended post the assessment of the original tax returns.
GST – Six Monthly Filing
IR has also issued ED0197, a draft SPS outlining the Commissioner’s practice in exercising her discretion to allow registered persons to remain or become six-monthly return filers.
A registered person can request a six-monthly filing basis, where –
- their turnover in a 12 month period does not or is not likely to exceed $500k (prev.$250k); or,
- they are seasonal suppliers where 80% of their taxable supplies are made within a six month period
ending on a day within the last month of their income year (turnover irrelevant).
The legislation already contains a list of specific events, not to be included in the annual turnover calculation (such as replacement of plant or capital assets) when determining eligibility to file six-monthly, so the SPS focus is on scenarios where a one-off breach in excess of the threshold not covered by the legislative exclusions may occur, where the Commissioner will permit the taxpayer to continue with six-monthly filing.
I found it interesting that IR considers in practice that taxpayers will monitor their turnover when they
calculate and file their GST returns – my experience with clients would suggest otherwise, once registered,
six-monthly filing simply becoming the norm without a second thought about turnover thresholds (same
thing with payments versus invoice basis thresholds).
Points to note:
- If you are required to change, you must notify the Commissioner within 21 days, although the change
does not take effect until the first day following the end of the return period that aligns with the end
of the 12 month period in which you ceased to meet the requirements;
- Seasonal suppliers who have been on the six-monthly filing basis within the past 24 months are
unable to apply again during this period; and,
- The SPS contains a useful flowchart setting out six-monthly filing criteria.
Residential Care Subsidies
Not exactly tax related, but I thought it would be an issue of interest to those of you facing the sudden
realisation that there will not be the expected role reversal of your children willingly looking after you as you see out your golden years.
A recent High Court case has examined the issue of gifting and the impact this effective deprivation of assets (and potential income associated with those assets) should have on a person’s ability to claim residential care subsidies (RCS).
Present social security legislation permits gifting of up to $27,000 per year, and provides that such amounts will not be taken into account when a person is means tested by MSD, when their application for RCS is being considered.
Any application for RCS is a two-step process. Step 1 is a means test – come in under the threshold, then step 2 is an income test.
The applicant in the present case, had made gifts of less than $27,000 per year, equating to a total deprivation of assets of $328k. As a consequence of the gifting program, the means test was satisfied. MSD then undertook an income test, and decided that as a result of the gifting of assets to a trust, the applicant had effectively deprived herself of income of $45k per year, which should then be taken into account for the purpose of determining any RCS entitlement.
Having lost an appeal to the Social Security Appeal Authority (Authority), the applicant appealed to the High Court, on the basis that once a gift is transferred, that is the end of the matter. The income associated with that asset cannot then be factored back in when calculating an applicant’s income.
The High Court noted in its judgement, that due to the increasing use of gifting and trusts, and the consequent increase in applications for RCS, MSD in late 2007 changed its internal policy of limiting gifting reviews to the period 5 years prior to the RCS application, to having no limitation. However, regardless of whether or not MSD felt that the present regime was unduly generous, that was ultimately a decision for Parliament to make, and until there was a clear indication to the contrary, an applicant’s unconditional gifts within permissible thresholds, includes the gifting of any associated actual or potential income streams from those assets. Such income cannot therefore be factored back into the means assessment process when assessing a person’s eligibility for RCS.
The High Court ruled therefore that the Authority erred in its findings, and found in favour of the applicant, requiring the removal of the deemed income from MSD’s income assessment.
Watch out for constructive trusts exposure…
While not of a taxation flavour, I thought this High Court decision would raise the eyebrows…
The case involved a couple who were married in India and then returned to NZ to live with the husbands
parents. This event occurred in 2008 and remained this way until the parties separated in 2015. The husband had four siblings, three sisters who lived overseas, and a brother, who also lived in the parent’s house until 2011, when he acquired his own home.
During the period the couple lived together in the parent’s house, they contributed to the monthly outgoings (mortgage, rates & insurance), made several lump sum capital payments towards reducing the mortgage and assisted in domestic duties associated with the running of the household. The total deposits into the mortgage account over the years equated to approximately $360k.
In return for the financial assistance, the parents changed their wills to reflect that should there not be a surviving spouse upon the death of one of them, the house would pass to the son, although with a requirement that he make a one-off payment to his brother, of $50k. The daughters would not receive anything under the will.
Upon separation, the wife (very kindly) filed a claim for a constructive trust in the High Court, asserting because of the agreement, the father was holding a one third interest in the property on behalf of her and her husband. Should the claim be successful, the value assigned to the one third interest by the Court, would become relationship property, to which the wife was entitled a one half share.
Case law over the years has established that a claimant must succeed on four grounds before a constructive trust would be recognised by the Court – a direct/indirect contribution to the property at issue, expectation of an interest in the property at issue, that such expectation of an interest was reasonable and that the defendant should reasonably expect to yield the claimant an interest.
What gave the case an interesting twist I thought, was the defendants comments regarding several cultural
aspects in relation to what had occurred (sons continue to live with parents post marriage; parents look after children until children financial enough to look after parents etc), yet the judge made no mention of this in the decision. Would such factors not negate the reasonable expectation requirement for the claimant?
The Court also accepted the “but if not for” argument presented by the claimant, that had they not put the funds into the parent’s house, they would have bought their own – because “it was just sensible to buy a property and own a property rather than put money, leave the money in the loan account, just to have used the interest because the property prices were rising leaps and bounds”.
Finally, the Court seemed less than impressed with the father’s testimony – his reference to the daughter-inlaw as “lazy”, no cross-checking of her numerical evidence (easily confirmed via the bank statements) and claims the wills were subsequently amended but inability to produce the evidence of such amendments to the Court. In fact, the judge’s comment “As with other aspects of the father’s evidence, I found this response to be less than satisfactory”, probably sums up the case and that dad did not do himself many favours.
You will probably have guessed by now, that the Court found for the claimant, that she had a legitimate
interest in the property with her husband and that the value of this interest should equate to a one third share of the present market value of the property assessed to be $1.3m of $433k.
So the lesson to be learned – should you have clients or family members in similar positions, you might want to highlight to them that their property is not necessarily safe just because it is outside of what would usually be considered to be the relationship pool, and documentation is key – if you do not want your children’s present or future relationship partners gaining an interest in your hard earned wealth, make sure any potential arrangements are clearly documented.
Improving Social Policy Payments
A new consultation document “Making tax simpler – Better administration of social policy” has been released jointly by the Ministers’ of Revenue and Finance. The document examines proposals to improve the way social policy entitlements and obligations are administered by IR, and focuses on working for family tax credits, child support, student loans and KiwiSaver.
The main proposals are:
- To base working for families payments on recent actual income, instead of current year income estimates. With legislative changes underway to improve the timeliness of information received by IR from payers of various types of income, it is suggested that IR will be able to recognise changes in income more quickly and adjust payments accordingly to reduce the risk of overpayment of entitlements.
- Similar to working for families, to base child support payments on more recent information surrounding both parents income (presently can be up to two years ago data), and to deduct payments automatically from salary and wages. There is also a proposal to take into account all income of a parent (including that earned via a company or trust structure) and to have payments adapted more quickly to changes in a parents income levels throughout the year.
- Changes for student loan borrowers, living in NZ, would see an expansion of the types of income from which repayments would be deducted (contract or casual work for example), and to have those such as self-employed borrowers, making regular payments throughout the year.
The closing date for submissions is 15th September and it is proposed that legislative changes will be introduced in an amending Bill sometime during 2018.
Applying for Balance Date changes
IR has issued ED0199, which is a draft standard practice statement (“SPS”) setting out IR’s practice for considering applications by taxpayers to change their balance date.
The draft statement commences by reaffirming the Commissioners duty and obligation to protect the integrity of the tax system, and in that respect, the legislative intent that taxpayers are required to return income to a 31 March year end, and to ensure that the timing of tax revenue to the Government is not seriously eroded.
The SPS sets out 13 reasons where IR will usually agree to a requested change as a matter of course, including:
- aligning with agreed industry balance dates
- aligning subsidiary with parents balance date
- aligning shareholder-employee with company from which they derive their prime source of income
Approval will not be granted usually however, where:
- primary reason to defer tax payments
- simply to smooth out administrative workloads
- simply the anniversary date of the commencement of business
The SPS also sets out the method of election, which in certain cases can be over the telephone as opposed to in writing. An appendix is also attached to the statement, which identifies various industry-specific non-standard balance dates the Commissioner has already agreed to.
The deadline for comment is 25th August.
Directors’ fees interpretation statement finalised
Further to the recent draft interpretation statement, and post consideration of all subsequent public submissions on the issue, IR has now released IS 17/06, the finalised version of the Commissioners interpretation on the application of the schedular payment rules to payments of directors fees.
The statement discusses the scenarios under which IR will expect schedular withholding tax to have been deducted from payments of directors’ fees, and how much tax should be withheld.
IS 17/06 includes a useful flowchart to assist payers with determining their compliance obligations. Often the nature of the contract between the parties, particularly with respect to who has contracted to provide the directorship services, will be suggestive of whether or not a schedular payment is being made. If the definition is not satisfied, there will be no requirement to withhold tax from the payment.
It should be noted that the statement does not cover the withholding treatment of directors’ fees paid to non-residents.
OECD publishes transfer pricing guidelines update
The OECD has released the 2017 edition of OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
The guidelines provide guidance on the application of the “arm’s length principle”, which represents the international consensus on the valuation, for income tax purposes, of cross-border transactions between associated enterprises.
The latest edition mainly reflects a consolidation of the changes resulting from the OECD/G20 Base Erosion and Profit Sharing (BEPS) Project, and it also incorporates revisions of the 2010 edition into a single document.
Liability for Company Tax Debts
It was a fairly quiet week in the world of tax, the only update I found of any real interest being an article written by Mark Keating (Senior Lecturer in Tax, Auckland University), for the July 2017 edition of the CCH NZ Tax Planning Report.
I have lost count over the years, of the number of times a client would have asked me about their personal exposure for the tax debts of their trading company. My common response would be:
- as a shareholder, most likely zero exposure,
- as a director, potential personal exposure, but only where your statutory duties to the company under the Companies Act 1993 have been breached.
For shareholder’s, I suggest “most likely”, as consideration needs to be given as to whether the client has an overdrawn current account (an easy target for any liquidator to pursue), or whether they have been a party to any “asset stripping” arrangement, which could see the Commissioner pursuing them personally via application of section HD 15 of the Income Tax Act 2007 (s.61 GSTA). With respect to the first issue, paying a shareholder salary to reduce the exposure to simply the tax on the salary credit is often a useful strategy (provided you can tick the boxes on commercial reality etc).
The article by Mark Keating focussed on the directorship exposure, and the recent trend by the Commissioner, who is often the petitioning creditor in most liquidations (due to a duty to maintain the integrity of the tax system more than anything), to pursue company directors for unpaid tax, by resorting to remedies under the Companies Act 1993 against those whom she considers is responsible for the default.
Utilising this strategy, the Commissioner is essentially extending her collection powers by directing liquidators to bring actions against directors of failed companies for breach of duties, seeking compensation or reimbursement to the company from those persons responsible for the failure, for the benefit of the company’s creditors (usually IRD).
It is also interesting to note, the ability of the Commissioner to essentially “jump the queue” in a liquidation, by bearing the cost of any recovery action. Even with the higher preference status given to GST and PAYE (via the “trust monies” concept), it is still only ranked at number 18 in the preferential list contained in schedule 7 of the Companies Act 1993, a priority however which can be leapfrogged to number 5 where the Commissioner funds the liquidator.
It is apparent from those cases that have actually made it to Court, that the liquidator’s claims are being supported by the judiciary, although often with a reduced quantum as Judges recognise undue recovery delays by the Commissioner (the passing of time between when a taxpayer first defaulted and when IR actually did something about it) and ballooning of tax debt due to the compounding effect of penalties and interest should not entitle the Commissioner to a complete recovery of the debt.
So as advisers, I would suggest our role is to recognise the Commissioner’s latest tactics, and to ensure our clients are fully aware that their potential personal exposure for the tax debts of their companies is not as limited as it perhaps was in the days gone by. They will need to be more fully abreast therefore of exactly what their statutory duties are, when they commit themselves to a directorship role, and seek advice early as to next best steps, should any potential breach be on the horizon, particularly if their company is experiencing financial difficulties.
New UOMI rules
With the 28th August fast approaching, being the first instalment of 2018 provisional tax for most, I thought it would be timely just to revisit the new UOMI rules that commenced from 1st April 2017. There are two main changes to be aware of in this regard:
- the safe-harbour rule now applies to all taxpayers, not just natural persons, and increased to a residual income tax of less than $60k (prev.$50k). To apply however, your client must have used the standard uplift option and have actually paid the instalments due under that option and by their respective due dates.
- for those persons who do not fit within the safe-harbour criteria and have used and paid their provisional tax under the standard uplift method for at least the first and second instalment dates, UOMI will only apply to any residual income tax remaining unpaid post the third instalment date. In this respect, as the third instalment date is now post the end of the income year, taxpayers have the opportunity to calculate and pay the balance of residual income tax on the final instalment date, thereby essentially eliminating any exposure to UOMI costs.
So we can finally tell our clients they will no longer be needing their crystal balls next month, to try and guestimate how profitable their businesses may be some 7 months down the track, in order to reduce potential interest costs.