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Richard’s Tax Updates: Sept/Oct
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’…
- Gifts of Food and Drink
- LTC Deductions
- Tax Bill Update
- Our Aussie Friends
- Diamond case results in updated IS
- Tainted Capital Gains
- GST on “Remote Services”
- GST – Horse Racing Activities
- Deductibility of Feasibility Expenditure
- Student Loan Interest Exemption Amendment
- A Birthday!!
- Cross Border Intragroup Loans
- OECD Consultation on Transfer Pricing
- Unitary Plan Change – Land Tax Potential
- Prime Global
Gifts of Food and Drink
IR has recently published a clarification with respect to the issue of whether a gift of food and/or drink to a client, customer or supplier is fully deductible, or subject to the limitations of the entertainment regime and consequently only 50% deductible. Confusion appears to have arisen due to a December 2011 Business Tax Update that suggested a taxpayer could generally claim 100% of the costs of gifts such as food and wine, which was followed by a February 2012 article in the same publication that tried to explain the issue further by stating the expenditure was fully deductible as long as it’s not provided or consumed away from the taxpayers business premises. IR has noted some taxpayers now treating the expenditure as fully deductible while others have only been claiming 50%. In Agents Answers Issue 193 (August 2016), IR has outlined its present position, that if gifts of food and/or drink that will provide a private benefit to the recipient and a business benefit to the taxpayer are provided off the taxpayers premises, then the 50% limitation rule will apply. While IR will not be devoting resources to identify where incorrect claims may have been made, overclaimed deductions identified during an audit will be adjusted, however it is unlikely shortfall penalties will be imposed where the taxpayer can point to previous reliance on the Business Tax Update articles.
An issue brought to my attention last week which I have not had to consider in any great detail to date, but is certainly worthy of a reminder in my view, is that the deduction limitation rules apply regardless of whether the LTC is in a profit or loss position for the income year. Often referred to as the loss limitation rule, section HB 11 is actually titled “LIMITATION ON DEDUCTIONS BY PERSONS WITH INTERESTS IN LOOK-THROUGH COMPANIES”. Consequently, if the owner’s basis is calculated to be less than the deductions amount for the current income year, then the limitation will apply to restrict the claimable amount to the level of the owner’s basis. It should be noted however, that the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Bill presently before Parliament intends to remove the deduction limitation rule for LTC’s, effective from the commencement of the 2017/18 income year.
Tax Bill Update
Following on from the final comment in the last paragraph, what is the progress status with respect to the latest taxation Bills? You may recall that there are presently two of significance before the House, the previously mentioned “Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Bill” and the more recently introduced “Taxation (Business Tax, Exchange of Information, and Remedial Matters) Bill”. Both pieces of proposed legislation include a number of amendments which will no doubt be welcomed by our clients, particularly the latter with its use of money interest changes that to a large extent will make all of our crystal balls redundant.
The Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Bill which was introduced on 3rd May 2016, is presently with the Finance and Expenditure Committee (submissions having been due by 29th July 2016) and a report is due by 15th December 2016. The Taxation (Business Tax, Exchange of Information, and Remedial Matters) Bill which was introduced on 8th August 2016, is also with the Finance and Expenditure Committee (submissions having been due by 9th September 2016) and a report is due with respect to this Bill by 11th February 2017.
Our Aussie Friends
For those of you who have clients doing business across the ditch (in the UK recently I was asked if you can just jump on a ferry to get from NZ to Aus!), the ATO has recently commenced issuing guidance to its compliance approach with respect to transfer pricing issues. In its draft discussion paper on offshore marketing hubs, the ATO is proposing a 5-tier grading system which will prescribe which companies must tell the ATO of their marketing arrangements, ranging from low risk green level entities which can essential apply 100% mark-up to costs with minimum risk of any compliance activity, to those entities that will be required to fully disclose all aspects of the arrangements. The ATO is also presently reviewing offshore procurement hub arrangements, so we can expect to see a similar discussion document issued in this respect shortly.
Note that for those of you looking to acquire property in Australia, most States have been active recently in introducing a foreign purchasers surcharge (NSW the latest with 4%) in an attempt to reduce foreign ownership issues, and similar to our own recently enacted Resident Land Withholding Tax effective from 1st July 2016, Australia has introduced a foreign resident capital gains tax withholding regime with application from the same date. The rules require any purchaser acquiring Australian real property valued at $2million or more from a foreign vendor to withhold 10% of the purchase price and pay it to the ATO. Vendors can apply to the ATO to vary the amount.
Diamond case results in updated IS
For those of you familiar with the Court of Appeal decision in CIR v Diamond, which dealt with the issue of the application of the permanent place of abode test as it applied to an individual’s tax residency status, it was clear from statements made in the judge’s ruling, that it would be only a matter of time before IR would have to release an updated position. In 2014, IR had released IS 14/01 which outlined its views with respect to the tax residency tests contained in the Income Tax Act 2007, as they applied to individuals, companies and the taxation regime for trusts. In the section on the issue of determining whether or not an individual had a permanent place of abode in NZ, IR had taken the view that it was a two-step test, step one there must first be a dwelling that is available for the taxpayer in NZ, and if one existed, then step two was to consider the taxpayers continuity and duration of presence in NZ and the durability of their association with the available dwelling. The Court of Appeal however concluded that IR’s two step approach was incorrect and that the determination could not be broken down into a set of discrete questions. Instead what was required was an integrated factual assessment, directed to determining the nature and quality of the use the taxpayer habitually makes of a particular place of abode (and the court listed a number of factors (non-exhaustive) for consideration in that regard). IR has now released IS 16/03 to replace IS 14/01. It should be noted that the only change to the previous IS, is the section on the permanent place of abode test. IR has also released its operational position with respect to the application of IS 16/03, advising that as the statement now reflects the correct interpretation of the law, any taxpayer who has taken a tax position based on the permanent place of abode test analysis contained in IS 14/01 can request a review of their previous years assessments, which IR will consider in accordance with the principles set out in their standard practice statement with respect to section 113 requests.
Tainted Capital Gains
For those of you with clients who presently have locked in tainted capital gains, you may or may not be aware that some relief is on the way in the form of legislative changes proposed in the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Bill. Under the present rules, a company that sells an asset to an associated party and derives a capital gain from the transaction, has what is often referred to as a tainted capital gain. Such amounts are taxable as a dividend whenever distributed to shareholders, even during the course of the company’s liquidation. This is because the definition of “the available capital distribution amount” (which usually excludes capital gains from the dividend definition if distributed during liquidation) does not include a capital gain arising upon the disposal of an asset to an associated person. The proposed changes in the Bill, will result in the tainting issue only arising, firstly where the disposal is to another company (so disposals to non-corporate persons are excluded) where 85% commonality of ownership exists at the time of the disposal, and then secondly, that at the time of the distribution of the capital gain amount during the liquidation of the vendor company, more than 85% of the ownership interests in the asset are still owned by the original owners of the liquidating company. The focal point shifts therefore from determining the tainting issue at the time of the disposal of the asset itself (which could be some time pre the liquidation of the vendor company) to the time of the distribution of the gain to the vendor company’s shareholders during liquidation. The new rule is proposed to come into effect on the date of enactment of the Bill, and applies to any distribution made after that date (importantly “distribution” not “asset disposal”) which will effectively see existing tainted capital gains no longer retaining that status unless the 85% threshold is breached at the time of distribution.
GST on “Remote Services”
A timely reminder that the new rules apply from this weekend – 1st October 2016. Basically, where a nonresident supplies a “remote service” (essentially defined as a supply where at the time of performance of the service, there is no necessary connection between the physical location of the customer and the place where the services are performed) to a New Zealand resident non-business consumer (one not acquiring the service for use in their taxable activity), the non-resident supplier will have an obligation to register for NZ GST and charge GST on the supply, where they meet the usual registration criteria (supplies exceeding $60k in 12 month period etc). For the period 1st October 2016 through to 31 March 2017, GST returns will either be for one six month return period or for two monthly periods should the non-resident elect for the shorter filing period. Post 1st April 2017, all GST return periods will be quarterly. Non-resident suppliers who are caught by the new rules and are therefore required to apply for a NZ IRD number in order to register for GST, will be exempted from the new requirements to have an active NZ bank account. It will certainly be interesting to see what effect, if any, the new rules have on NZ resident consumers buying behaviours (now that the “GST” saving factor is likely to disappear).
GST – Horse Racing Activities
IR has released a draft QWBA on the issue of whether a horse racing syndicate or partnership can register for GST. Registration can only be permitted where the syndicate or partnership can show the carrying on of a taxable activity and that the horse racing is not simply a private recreational pursuit or hobby which is specifically excluded from the taxable activity definition. Consideration would therefore be given as to whether:
- the activity of the syndicate or partnership is organised to achieve a pecuniary profit, and it operates in a systematic fashion that on an objective assessment appears to materially reduce the element that luck plays in whether any prize-money is won
- a significant amount of time is involved in performing the activity undertaken by the manager of the syndicate or partnership (including acquiring and managing the horses that are assisting in meeting financial imperatives and disposing of horses that are not), and
- the syndicate or partnership is formed not for the personal interest or pleasure of the participants, but for the purpose of making a profit from the activity, and it is operated in that manner.
Where all of the above factors are present, GST registration is likely to be granted. The deadline for comment on the draft QWBA is 9th November 2016.
Deductibility of Feasibility Expenditure
Until the recent Supreme Court decision in Trustpower Limited v C of IR ( NZSC 91, (2016) 27 NZTC 22-061), the general approach to feasibility costs was that they were deductible provided they were not incurred pre the commencement of the taxpayers income earning activity or business, the expenditure formed part of the normal business operations and the taxpayer had not definitively committed to the project the feasibility costs were incurred in respect of. In other words, the incurrence of costs to a point that simply puts the taxpayer in a position to make an informed decision about a particular proposal, was not enough to trigger the capital limitation. IR’s IS 08/02 confirmed the Commissioners views in this regard.
The decision of the Supreme Court however, has resulted in IR issuing a draft interpretation statement, PUB00280, to update the Commissioner’s view based on the judgement. The main change is with respect to the discussion re the application of the capital limitation. In this regard, where the taxpayer’s ultimate goal is intended to result in the acquisition or development of a capital asset (or other enduring benefit) that is likely to form part of the taxpayer’s profit-making structure, generally, any expenditure will be on capital account. However, some expenditure on the early stages of feasibility work may be deductible, and IR’s view is that this could occur in two, related, situations.
The first situation is where the expenditure is not directed towards a specific capital project, usually, but not always, in situations where a specific capital project has not yet been identified. However, IR’s view in this regard, is that the project need only be identified in general terms; the exact details do not need to be known; before the capital limitation may apply. Deductibility may still apply in this situation however, where the expenditure is so preliminary as not to be directed towards materially advancing that specific project. This can be contrasted with expenditure that is aimed at making tangible progress on a capital project.
It is important to note that deductibility does not turn on the success or failure of the project. When the creation of an asset fails to eventuate, the expenditure incurred cannot be re-characterised as revenue in nature – the expenditure must be considered at the time it is incurred. Deadline for comment on the draft IS is also due by 9th November 2016.
Student Loan Interest Exemption Amendment
A SOP has been released proposing amendments to the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Bill, to extend the present scenarios whereby a borrower who is overseas can still obtain an exemption from interest on their student loan. The current regime permits the Commissioner to still treat a borrower who is outside of NZ as NZ-based and therefore to qualify for the interest exemption in certain circumstances. The changes will apply to borrowers in receipt of NZ Government-funded scholarships who are either studying full-time overseas or who are undertaking approved internships, also on a full-time basis.
For those of you who are sentimental about historic dates in NZ taxation (not many of you I expect), Saturday saw the passing of the 30th birthday for the NZ GST regime. The date also coincided with the commencement of the new remote services rules, to which IR advised they have received some 75 registrations to date from non-resident suppliers.
Cross Border Intragroup Loans
IR has set out guidelines with respect to documenting intragroup loans in the latest Large Enterprises Update – Number 36: August 2016. While the literature is targeted towards transfer pricing rules, it is also a useful summary in my view of the basic documentation requirements for any loans between group members to ensure a subsequent review of the transaction by IR gets the green light.
The guideline lists ten points of detail, most of which you would expect to see in any loan document regardless of whether the parties are associated or not, including the purpose of the loan, interest rates, repayment terms and security taken (if any). Refer to the document for full details.
OECD Consultation on Transfer Pricing
And since Transfer Pricing issues appear to be the flavour of the month recently, the OECD is holding a public consultation, over a two day period (tomorrow and Wednesday), to discuss two recent discussion drafts released as part of the ongoing BEPS Action Plan implementation – Attribution of Profits to Permanent Establishments and Guidance on Profit Splits.
Unitary Plan Change – Land Tax Potential
In the spotlight recently has been Auckland Council’s unitary plan changes and discussion surrounding the benefits that will be provided as a result of its implementation, to assist with resolving the Auckland housing crisis. Not so well publicised however, is the potential for a lesser known land tax provision to be triggered when land affected by the changes is sold.
Section CB 14 of the Income Tax Act 2007, treats any amount derived from a disposal of land as income where the land is sold within 10 years of its acquisition date, and more than 20% of the gain arising upon sale was as a result of a land use change (including a likely change where one has not occurred yet).
The question is one therefore of valuation – what appreciation effect did the land use change (or likely change) have on the value of the land being disposed of – more than 20% and you have a potential tax issue. Naturally the first thing one does when faced with a taxing event for their client, is look for what exclusions, if any, may be available. Section CB 14 in this regard, has exclusions for both residential and farmland use, however firstly, the prospective purchaser must be going to use the land for an identical purpose (which essentially knocks out selling your land to a developer), and secondly, as the exclusion only applies to the person and members of their family living with them, it would not appear to be available where a family trust owns the land.
Section CB 14 only applies where other land taxing provisions do not (including the recent bright-line test amendment), and where the section does apply, a discount of 10% is provided for each year that the land has been owned by the person. So own the land for eight years pre disposal, and only 20% of the gain is taxable.
It will be interesting to see over the coming months whether IR’s activity in this area increases.
I am away in Japan next week for the annual Prime Global Asia Pacific Region conference. As a firm, we have been Prime Global members for a number of years now. I thought it might be timely therefore to remind you all of our connection, in case you have clients moving offshore and are in need of some local jurisdictional advice. Prime Global is a collection of independent firms similar to our own, with member firms situated across the globe. I am more than happy to put you in touch with an appropriately situated firm, should you require some assistance with obtaining advice for your client.