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Richard's Tax Updates: October
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…
- Australian Limited Partnerships – FTC’s
- FATCA Guides
- Can a Fit-Out be “Improvements” for s.CB 11 Purposes?
- Useful Guidance for Not-For-Profit’s
- Qualifying as a Donee Organisation
- Six Monthly GST Filing
- Update to Public Rulings Work Programme
- FTA Update
- Draft QWBA on Group Insurance Policies
- Taxpayer Loses Tax Residency Appeal
- What’s on the Agenda?
- Airbnb Operators Beware…
Australian Limited Partnerships – FTC’s
It is hard to believe five years have now passed since the release of the original public rulings dealing with the issue of NZ resident partners (“NZP”) of Australian Limited Partnerships (“ALP’s”), and the ability to claim a foreign tax credit (“FTC”) for income tax or dividend withholding tax (“DWT”) paid by the ALP.
PUB00297 is focussed solely on ALP’s that are corporate limited partnerships for Australian tax purposes and consequently are treated as companies under Australian tax law. First point to determine therefore, is whether the ALP is also a corporate limited partnership under Australian tax law. In this respect, note that this will not be a limited partnership akin to our own regime, which has a separate legal identity (s.11 LPA08).
Where the definition is satisfied, PUB00297 contains 5 separate rulings:
- ALP pays Australian income tax on Australian sourced income – FTC available for NZP
- ALP makes distribution to NZP and deducts DWT – No FTC for NZP (as distribution itself not taxable income for NZP)
- Australian Unit Trust makes distribution to ALP upon which Australian income tax paid – FTC available for NZP
- ALP receives franked dividend – No FTC for NZP in respect of franking credit attached to the dividend
- ALP is a head company and pays Australian income tax on total consolidated group income – FTC available for NZP but only to extent relates to ALP direct income
The draft ruling contains examples for each of the 5 scenarios.
Deadline for comment is 8th November 2017, although considering PUB00297 is essentially a reissue of the initial ruling, I would not expect to see any material changes to the draft position post any public submission process being completed.
IR has dutifully published an update to various FATCA publications it now has available online:
- IR1083: Foreign Account Tax Compliance Act (FATCA) — U.S. reportable accounts
- IR1084: Foreign Account Tax Compliance Act (FATCA) — Application of FATCA to collective investment vehicles
- IR1086: FATCA status of NZ trusts that are not U.S. persons.
Can a fit-out be “improvements” for s.CB 11 purposes?
A draft QWBA has been released by IR (PUB00286) to discuss the question of whether the fit-out of an existing building can be deemed an “improvement” to land for the purposes of s.CB 11 of the ITA07 and therefore create potential tax consequences for the land owner should a disposal of the land occur within 10 years of the improvements being completed.
S.CB 11 is one of the ten so-called land tax provisions (s.CB 6A to CB 14). It subjects to taxation (unless one of the 3 permitted exclusions apply), amounts derived from a disposal of land within 10 years of the date improvements to the land are completed, where at the time the improvements began, either the taxpayer themselves carried on a business of erecting buildings (regardless of whether or not the land in question was acquired for the purpose of that business), or they were associated to another person who carried on such a business.
Unlike some of the other s.CB land tax provisions, where central to the relevant provision having application is the nature of activities being carried on by the taxpayer or an associated person at the time the land in question is acquired, s.CB 11 is distinguished, firstly because it is the activities carried on by the relevant parties at the time the improvements to land are begun that are critical, and secondly, because the ten year clock only starts to tick once the improvements in question have been completed.
PUB00286 restates the long-standing land law principle, that a building attached to a piece of land is considered to be a part of that land. Consequently, any improvements made to a building itself, will be improvements to land upon which that building is situated. The key consideration therefore, is whether the work undertaken by the taxpayer, is an “improvement”, and the starting point here is the statutory definition of that term for the purposes of s.CB 11, contained in s.YA 1. Primary to the definition is whether or not the improvements are “not minor” (although secondary in essence to having already asked yourself the question of whether the fit-out is permanent or temporary in nature, as the latter will not be an improvement to the building itself per se and therefore cannot be an improvement to the land).
Guidance on the “not minor” issue can be found in IG0010 (a 2005 interpretation statement “Work of a minor nature” – TIB Vol17, No1 (Feb05)), however principle factors to consider will be:
- the importance of the improvements in relation to the physical nature and character of the land;
- the total cost of the improvements done, in both absolute and relative terms;
- the nature of the professional services required; and
- the nature of the work required for the improvements (if any).
Should you eventually determine you have a potential exposure under s.CB 11, there are available exclusions for residential land and business premises, neither likely to have application however, where the land in question is simply generating investment income – rent being the most likely example.
Deadline for any commentary is November 17th, although I would not expect to see any material change to the draft, considering that there will always continue to be the murky areas of permanent versus temporary fit-out, and then whether the works themselves breach the minor threshold – for which no black and white determination can ever be provided.
Useful Guidance for Not-For-Profit’s
IR has provided an update regarding its publication of useful guidance material for not-for-profit organisations. Topics covered include:
- Simplifying tax — claiming donation tax credits
- The interpretation of “wholly or mainly” for the purposes of the donee organisation test
- Proposed changes to the tax rules when a charity deregisters
- Changes for not-for-profits that are financial institutions and have foreign account holders.
Follow the link News and Updates to access the updates.
<h3id=”qualifying”>Qualifying as a Donee Organisation
Subpart LD of the Income Tax Act 2007 contains provisions surrounding tax credits for gifts and donations. Where a monetary gift or subscription (one not conferring any rights) of $5 or more is paid to a qualifying organisation (society, institution, association, organisation, trust, or fund), a tax credit (donation rebate) will usually be claimable by the payer.
In mid-2016, an Issues Paper was released by IR (IRRUIP9 Donee organisations — clarifying when funds are applied wholly or mainly to specified purposes within New Zealand). The “specified purposes” referred to in IRRUIP9, focussed on an organisation’s charitable, benevolent, philanthropic or cultural activities. A proposal was made in IRRUIP9 to change the Commissioner’s current practice of accepting a minimum percentage of application of funds to specified purposes of a simple majority of more than 50%, to a 90% threshold.
Following up on the 2016 publication, IR has now released draft interpretation statement PUB00295 – Income tax: Donee organisations — meaning of wholly or mainly applying funds to specified purposes within New Zealand (which also includes an accompanying fact sheet). Readers of the previous IRRUIP9 will note that the key change between the two publications, rests in the proposed threshold for the minimum percentage for the “wholly or mainly” test, reduced now from 90% to 75%.
The main impact of PUB00295 once finalised, and should it retain its present form, will naturally be on those organisations who presently satisfy a 50% funds application threshold, but would not satisfy a higher 75% threshold, and consequently how would a loss of donee organisation status affect their future funding, if the ability for a donor to claim a tax credit was removed. The Commissioner makes limited suggestions in PUB00295 to assist these organisations, instead reminding them that the obligation to ensure ongoing compliance rests with the organisation itself, and providing an 0800 help-line for those who wish to discuss their situation with IR in more detail.
It should be noted that PUB00295 does not apply to any schedule 32 organisations.
It is intended that the interpretation statement will apply from the 2018/19 tax year. The deadline for comment is 30th November 2017.
Six Monthly GST Filing
The passing of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Bill earlier this year, widened the classes of taxpayers entitled to file six monthly GST returns, to those seasonal suppliers who made 80% or more of their taxable supplies during the last six months of the income year (regardless of the level of annual taxable supplies).
IR has now released SPS 17/02, a standard practice statement commenting on the application of the six monthly filing rules, although to be honest, to suggest it is short on useful guidance would be a significant understatement and I would really question why it was felt necessary to publish at all (although clearly to replace GNL 420 – Dec 2001 TIB due to the new 80% rule).
In essence the main point of SPS 17/02, is that should you experience a breach of the $500k threshold when you go to complete your latest GST return, but you can reasonably forecast that you will not breach during the following 12 month period, then you can remain registered on a six monthly basis. Should you not be able to satisfy that criteria however, or should you have already relied on this exemption when completing your last GST return, then you should be advising the Commissioner within 21 days and requesting a change to either monthly or two monthly filing.
Update to Public Rulings Work Programme
For those of you who follow it, the latest update is now available on IR’s website.
In case you were not aware of the publication, it is essentially a monthly update of IR’s Public Ruling Unit’s work programme, advising the various issues that are on their agenda for review and the present status of each issue which is often determined by things such as the potential number of affected taxpayers, the need to resolve an existing issue or the potential revenue implications.
For those of you keeping an eye on what is happening at an OECD level, particularly with the BEPS and AEOI projects, the 11th OECD Forum on Tax Administration (FTA) was recently held in Oslo and attended by representatives from 50 advanced and emerging tax administrations, including our own Naomi Ferguson.
The below link will take you to the appropriate OECD webpage where you can find further detail of items discussed (including various document releases), however the primary themes of this year’s forum were:
- Supporting the OECD/G20 international tax agenda, in particular through implementing automatic exchange of information (AEOI), the BEPS outcomes and actions to enhance tax certainty.
- Improving compliance through work on the shadow economy and a future focus on the effective use of data, including from online intermediaries in the sharing economy.
- Building the tax administration of the future with a focus on digital services and delivery, and supporting wider capacity building in developing countries, core to achieving the Sustainable Development Goals, including through assistance on the implementation of BEPS and automatic exchange of information.
Draft QWBA on Group Insurance Policies
IR has released PUB00293, which is a draft QWBA on group insurance policies taken out by employers on behalf of their employees. The item is specific in its coverage, applying only in circumstances where the employee is to receive any pay-outs under the scheme (so the employer effectively holds the policy as trustee for the employee) and the insurance is either term life cover, accident/medical cover or both. Where the policy includes other benefits, such as loss of income coverage, the taxation implications for any claims paid out in this respect, will need to be considered separately to the conclusions reached in PUB00293.
IR’s draft position is:
- The premiums are deductible to the employer (assuming the salaries/wages of the insured employees are), and any subsequent claims paid out are not assessable income of the employer.
- The premiums paid by the employer are subject to FBT.
- Whether the receipt of claims by the employee (or their estate) is assessable income, depends firstly on whether the amount would be considered to be income under ordinary concepts, and if so, whether it is then assessable income or exempt income.
- Usually where a payment is made to replace lost income of the employee or to meet living expenses, the character of the receipt in the employee’s hands will be income. Consequently lump sum (death/trauma benefits) and reimbursing payments are unlikely to be income.
- A receipt which is income will then be exempt income, if it is paid to the employee where they are incapacitated for work and the amount is not calculated according to loss of earning.
Any submissions or comments with respect to PUB00293 are required to be made no later than 29th November 2017.
Taxpayer loses tax residency appeal
In April this year I mentioned a TRA tax residency decision which found in favour of the Commissioner. The basic facts of the case surrounded a master mariner who spent a large amount of his time outside of NZ (8 months on average per year at sea) and the 2005 to 2008 income years where he claimed he was not tax resident in NZ due to not having a PPOA here. This was despite the fact that he had owned a NZ property since the late 1990’s (subsequently transferred to a trust of which he was a trustee/beneficiary), which was deemed to have effectively been available and used as his home in NZ during a ten year period, which included the period under IR review.
The taxpayer appealed the TRA decision to the High Court, which was dismissed, the Court agreeing that the taxpayer did have a PPOA during the disputed period. Naturally with reference to the Court of Appeal’s “Diamond” decision, the High Court found:
- The taxpayer had habitually resided at the NZ property when not at sea, and it was his base for life in NZ (mailing address, SKY subscription, electoral roll, vehicle registration address etc). While the mere availability of a dwelling was not sufficient by itself, the nature and quality of the use of the property by the taxpayer in this instance, was sufficient to satisfy the PPOA criteria.
- The taxpayer had a continuous presence in NZ throughout the period – when not at sea and not otherwise travelling or holidaying, he returned to NZ and based himself at the property.
- The taxpayer maintained significant ties with the property (both financial and practical), and any other use of the property (family/friends etc) was always dependent on the need for the taxpayer and his wife to live in the property.
- There was no evidence of the taxpayer having a PPOA anywhere else outside of NZ.
The case also had to deal with time bar issues, the High Court agreeing with the TRA that the Commissioner (through his agent – an authorised senior manager) had correctly acted in this instance to reopen the time barred periods.
Finally, and just to rub further salt into the wounds (no pun intended), the High Court agreed with the imposition of shortfall penalties, holding that the taxpayer’s claims did not have the prospect of being close to a 50% chance of success.
I cannot see any basis here for the taxpayer appealing the decision to the Court of Appeal (which interestingly would then put it at the same level as “Diamond”), however when considering the background to this case and that the taxpayer would always have a mountain to climb to find favour with any Authority, who knows what may happen next.
What’s on the agenda?
The waiting is over as Winston (sorry, the NZ First board), decided that mixing with red and green was a better colour match for NZ than going blue.
All eyes were then on the release of the coalition agreement and exactly what was in store for NZ over the next 3 years, particularly (and perhaps more selfishly from my own perspective) on the tax agenda.
As it transpires, not a lot however, although naturally the coalition agreement itself is simply a high level documenting of the meeting of the minds, with no significant detail at this stage.
What is identified presently is:
- A harsher penalties regime for Corporate fraud and tax evasion (potentially a diverted profits tax) – essentially irrelevant therefore if you continue to play by the rules;
- A tax on the export of bottled water – industry focused so again of limited impact to the majority.
While not directly under the tax heading, there is mention of a focus to increase R&D expenditure to 2% of GDP (1.3% in 2016) over the next 10 years, and pre-Election, Labour was hinting about re-introducing the R&D tax credit regime (which National terminated when it introduced the Callaghan fund) to encourage such spending in the private sector. Should we see the new Coalition head down this path, will this also mean changes to the existing loss “cash-out” regime?
Not in the coalition agreement itself, but likely to happen:
- A reversal of National’s planned tax cuts from 1st April 2018;
- The establishment of a Tax Working Group (within the first 100 days).
There was also a lot of talk about Labour’s proposed Tax Working Group pre the Election, with particular focus on whether this would mean the introduction of a capital gains tax. However whatever the outcome of the review, Labour eventually promised that no changes would take place until the 2021 tax year.
I do note however on Labour’s website under their tax plan, separate from their statement regarding setting up a Tax Working Group, are proposals to increase the existing 2 year bright-line period for residential land sales (you are automatically subjected to paying tax on any disposal gain within the bright-line period, with limited exclusions) to 5 years, removing the ability to offset tax losses from rental properties against the
investors other taxable income, and to eliminate secondary tax. Watch this space therefore (particularly Budget 2018 I would suggest), to see which of these three items (if any), Labour attempts to legislate for during its first term.
Airbnb Operators Beware…
We have received several letters recently from IR with respect to a number of our clients who have decided to operate in this arena. I thought it may be timely therefore to provide a few comments in respect of what we are seeing and therefore what the owners of this type of accommodation facility should be aware of:
- We already know that IR has a large property compliance team, with proposals to continue to increase its resource numbers. It is clear from the correspondence we have been receiving, that these team members are trolling various Book-a-Bach, Airbnb and other accommodation websites. Consequently, if your client is trying to make a quick buck, they need to be reminded the information is publicly available and it may only be a matter of time before IR come knocking at their door if they are not being fully tax compliant in respect of the Airbnb income.
- GST second-hand goods claims are common due to the initial property acquisition usually having been from a non-GST registered vendor. IR will want to ensure “short-term stay” accommodation of the type that will satisfy the commercial dwelling definition is the nature of the properties use, so client’s may experience delay’s in the processing of their refund claim, while this “intention” is proved to the satisfaction of the IR investigator. Having sufficient evidence to respond to an IR critique is critical therefore.
- Ensure clients that are simply sharing the use of their own homes (upon which GST has never been claimed) are fully aware of the turnover threshold triggering compulsory registration. Last thing they will want (and you potentially as their trusted advisor) is experiencing the shock of a forced GST registration, having exceeded the registration threshold, and the corresponding output tax exposure for the home (an asset used in the taxable activity), should they ever sell the home or simply cease their Airbnb operation.
- Do not forget the annual GST adjustment periods, where actual use percentages may have changed over the past year, usually due to the owner’s personal use of the property. As part of their review, IR will ask the question regarding actual or anticipated private use of the accommodation by the owners.
- Clients must understand all the cash flow implications from a GST perspective. Yes they may receive a nice refund up front when they commence the activity, however they must also appreciate that should they ever cease the activity, either in its entirety or convert to long-term stays instead, there will be a resulting output tax liability, potentially higher than the initial refund claim, and this obligation will need to be funded by other means considering in these cases the property may not have been sold.