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Richard's Tax Updates: May
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’…
- So how long do they last (period of ruling)?
- Charitable organisations and FBT
- Director’s fees and schedular payments
- “Value” of shares
- New legislation further explained (taxation bill)
- Trust taxation
- Commissioner not restricted by her operational statements
- Compulsory Zero-Rating – draft interpretation statement
- 2017 Commissioners mileage rate confirmed
- Tax payer permitted credit for “tax spared”
- Budget 2017
- Black hole expenditure
- Budget Bill introduced and passed
- Bill passes through first reading
So how long do they last?
IR has released QB 17/03, which is a QWBA covering the issue of the Tax Administration Act 1994 and the period for which a private or public ruling applies.
While the legislation states that a ruling must specify the period for which it applies, it does not specify what that period should be, instead leaving that decision to the discretion of the Commissioner. In this regard, QB 17/03 sets out a number of factors which will be taken into consideration by IR when determining the period of the ruling, including a desire to provide certainty to the applicant and the likelihood or risk of the Commissioners interpretation of the law changing over time.
Current practice of the Commissioner is to:
- Set the period of the ruling for an exact term or the expected life of the arrangement where the arrangement for which a ruling has been requested has a term or expected life of less than three years.
- Set the period of the ruling to three years where the arrangement for which a ruling has been requested has a term or expected life of more than three years.
Only in exceptional circumstances will the Commissioner consider issuing a ruling for a period in excess of five years.
Charitable organisations and FBT
IR has released BR Pub 17/06, which provides commentary on the Commissioner’s position with respect to charitable and other donee organisations and the possible exclusion from FBT under section CX 25 of the Income Tax Act 2007 in relation to benefits provided to their employees.
Section CX 25 is specifically targeted to benefits provided by charitable organisations, and states that an employee benefit is not a fringe benefit, unless the employee receives the benefit in connection with their employment, and the employment consists of the carrying on by the organisation of a business whose activity is outside its benevolent, charitable, cultural, or philanthropic purposes.
BR Pub 17/06 clarifies the application of section CX 25, by stating (with the exception of a short-term charge card facility that exceeds defined thresholds):
- No FBT arises where the benefit is not received by the employee mainly in connection with their employment,
- No FBT arises where the benefit is received by the employee mainly in connection with their employment but that employment is in respect of carrying out the qualifying organisation’s benevolent, charitable, cultural or philanthropic purposes (including employment in a business activity carried on for those purposes), and;
- FBT will apply where the benefit is received by the employee mainly in connection with their employment and that employment is in respect of a business carried on by the qualifying organisation which is outside the organisation’s benevolent, charitable, cultural or philanthropic purposes.
The ruling applies from 1st July 2017 and is for a five year period.
Director’s fees and schedular payments
PUB00267 has been released by IR, which is a draft interpretation statement (“IS”) outlining the Commissioner’s position with respect to the situations in which tax must be withheld from directors’ fees payments, and when and how much tax must be withheld and paid to the Commissioner if withholding is required.
The IS provides guidance on the Commissioners views with respect to payments of directors fees to both individual and non-individual taxpayers. The key to determining whether any obligation to withhold exists, will often be found by considering who has actually been contracted by the company to provide the directorship services.
Where the contracting party is an individual, a secondary question will be determining whether the directorship services will be provided as a component of an existing employment relationship, in which case the payments will usually be subject to PAYE, not schedular withholding tax. If however an employment relationship does not exist, and consequently the individual is being engaged on an independent contractor basis, it is likely the amounts paid for the directorship services will be schedular payments, with an associated withholding obligation for the paying company.
It is not uncommon for non-individuals to be contracted to provide directorship services, common scenarios arising in relation to employees of legal and accounting firms engaged as independent professional directors. A payment to a company usually falls outside of the schedular payment definition, although exceptions apply in the case of directors fees paid to an agricultural, horticultural or viticultural company or to non-resident contractors or entertainers. It should be noted here that partnerships (other than listed limited partnerships) and trusts who are contracted to provide directorship services, do not have the automatic exclusion from the definition of schedular payments which companies have (other than those listed earlier in this paragraph) and consequently payments to these non-individuals are likely to be subject to withholding, unless the payee provides the payer with an appropriate exemption certificate.
The IS also makes it clear that the GST registration status of the contracting party has absolutely no bearing on schedular payments and the obligation to withhold, which is an issue commonly misunderstood by payers of schedular payments in general, not just directors fees.
The standard rate of withholding on director’s fees schedular payments is 33%, although with the recent enactment of the elective rate option, a resident payee can have the rate reduced to 10%. Any deduction of schedular payment withholding tax is due to be paid to IR by the 20th of the month following the month of deduction.
Deadline for comments on PUB00267 is 30th May 2017.
“Value” of Shares
Effective 1st April 2017, employers are required to report the value of any share benefit received by an employee pursuant to a share purchase agreement, in the employer monthly schedule relating to the time at which the share benefit arises. The employer may also elect to withhold PAYE on the share benefit received by the employee.
A taxable share benefit arises for an employee, where on the date of acquisition of the shares, the amount paid for the shares by the employee, is less than the market value of those shares.
IR has released CS 17/01 to provide guidance to employers with respect to calculating the value of the share benefit, including the valuation methodologies the Commissioner will accept. However the statement is not intended to be a definitive list of permissible valuation techniques and employers may still apply alternative methods to determine the value of the share benefit, provided that method reflects the market value of the shares on their acquisition date.
CS 17/01 also details the records the Commissioner expects the employer to retain, dependent on the valuation methodology used.
For the majority of our clients, the shares are unlikely to be listed on a recognised exchanged. Where an independent valuer has not been engaged to value the shares or there has not been an arms-length commercial transaction within the past 6 months, internally prepared valuations will be permitted provided an appropriate valuation method has been used. The Commissioner will accept either a Discounted Cash Flow or Capitalisation of Earnings methodology as being an “appropriate” method in this regard.
New legislation further explained
I mentioned briefly in a recent edition, that the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Bill (249-1) was introduced into Parliament on 6 April 2017, and contained changes to the way employee share schemes are taxed.
For those of you who have not yet read the Bill’s associated commentary (or have no desire to), it is worth noting several other functions of proposed legislation:
- IR’s collection of investment income data, particularly with respect to dividend payments (for which the Commissioner presently has to request information from a payer), will be greater enhanced via new reporting obligations for various payers of interest and dividends.
- Concerns raised by two recent High Court decisions which effectively looked-though a corporate trustee to the individual shareholders when determining voting interests and hence completely ignored the capacity in which those shares were hold, will be addressed by introducing a general rule in respect of trustee capacity, thereby ensuring the stated policy intention that corporate trustees should be treated as the ultimate shareholder will be retained.
It has been some time, 1989 in fact, since IR last released any detailed commentary on the taxation of trusts in general, and it should be an interesting read therefore (I have not done so myself yet) to understand the Commissioner’s present position on trust taxation as outlined in draft PUB00261.
The interpretation standard is not all-encompassing however, with several topics such as the application of the foreign tax credit regime to trusts and the impact of double tax agreements not covered (considered to be entire subjects in themselves). PUB00261 will effectively cover the same content as the 1989 explanation, however updates the legislation including commentary on the minor beneficiary rule.
Submissions on the draft are requested to be filed by 27 June 2017.
Commissioner not restricted by her operational statements
A recent Court of Appeal case has considered the issue of whether an operational statement published by the Commissioner, then limits the scope of her statutory powers.
The background to the case was a request for information by the Commissioner, which had been progressed by way of a section 17 notice issued to a tax agent, and an operational statement (OS 13/02) which had been published as a guidance document for taxpayers, outlining the procedures which would be followed by the Commissioner in the issuing of such notices.
The tax agent had sought a judicial review of the Commissioner’s section 17 notice in the High Court, alleging that the Commissioner acted unlawfully, either by breaching a legitimate expectation that the Commissioner would not issue the notices without first seeking the requisite information from the taxpayers themselves or by failing to take into account certain relevant considerations. The Commissioner had applied to strike out the judicial review application, which was granted (with the exception of one claim). The High Court decision was appealed by the tax agent.
The Court of Appeal found, among other findings, that policy statements prepared for the guidance of taxpayers and the general public, cannot be elevated to the character of constraints or internal conditions on the Commissioner’s statutory duty. Parliament alone has that authority. The same underlying rationale must apply equally to the exercise of the Commissioner’s statutory powers.
CZR – Draft Interpretation Statement
IR has recently issued PUB00255 – Goods and services tax – compulsory zero-rating of land rules (general application).
Compulsory zero-rating, better known as CZR, was introduced effective 1 April 2011, as IR’s risk mitigation strategy to deal with phoenix type schemes involving associated parties, where the purchaser would receive a refund of the GST, with the vendor deliberately winding up their entity before the GST output tax would be paid.
The draft interpretation statement provides a general overview of the CZR rules, including practical examples of how the CZR rules work. The statement’s focus is on helping vendors and purchasers get it right from the start, before a land transaction settles.
The deadline for comments on PUB00255 is 23rd June 2017.
2017 Commissioners mileage rate confirmed
IR has confirmed the 2017 mileage rate to be 73cents/km. Separate rates have also been introduced for Hybrid and Electric vehicles of 73 cents/km and 81 cents/km respectively.
The annual mileage rate is calculated by the Commissioners in accordance with Operational Statement 09/01. As a result of changes to the legislation which will be effective from the 2018 income year (close companies able to elect not to pay FBT on vehicles provided to shareholders, using a subpart DE calculation method instead), we are likely to see a draft replacement
Operational Statement being released for consultation over the coming months.
Taxpayer permitted credit for “tax spared”
Perhaps not as relevant now, due to changes to the CFC regime (effective 1st July 2011) which saw the introduction of the active/passive business test and a move away from the previous attribution method, a recent High Court decision has confirmed that a taxpayers entitlement to claim credits for taxes paid in a foreign jurisdiction in accordance with the terms of a double tax treaty (DTA), includes both credits for taxes actually paid and for taxes spared by the foreign jurisdiction under its domestic tax legislation.
The case concerned a NZ tax resident individual who owned interests in Chinese CFC’s. Under China’s domestic tax legislation, the CFC’s received various tax concessions, so they were relieved of Chinese tax that would otherwise have been imposed on their incomes (tax spared). When the taxpayer filed her NZ income tax returns, she claimed credits for the tax spared as well as for the actual taxes paid by the CFC, against her attributed income. The Commissioner disagreed with the assessments and reassessed the taxpayers 2005 to 2009 income tax returns.
The decision relied upon an interpretation of Article 23 of the DTA, firstly being whether the term “Chinese tax paid” included that paid by the CFC itself as opposed to by the taxpayer directly, and secondly, if so, was the taxpayer also then entitled to a credit for tax spared to the CFC under Article 23(3).
The High Court found for the taxpayer, among its findings stating that:
- A New Zealand resident is entitled to a credit for tax spared in China to the CFC. This enables Article 23 to be read in a principled way, giving effect to its purpose of relieving double taxation.
- This interpretation of Art 23(3) also respects the purpose of the tax sparing provision in the China DTA to encourage investment in China by ensuring that the benefit of the Chinese tax concessions remains with investors rather than New Zealand tax collectors.
Then commenting on the effect of Article 23 on NZ domestic tax legislation, the court stated:
- The China DTA has direct effect in NZ and therefore pursuant to the China DTA, the taxpayer is entitled to credits for tax paid by and tax spared to the CFC. NZ’s domestic legislation must be interpreted consistently with and give effect to New Zealand’s obligations under the China DTA.
It is with eager anticipation that any tax adviser awaits the annual Budget – what new complexities will the Government of the day introduce to our tax system that may open doors to potential opportunities for our clients…
Unfortunately not much in the 2017 release, it is election year after all, so we were certainly not going to see the introduction of a capital gains tax, or anything of a “take” nature in fact, that may risk a voter movement to the other side of the fence.
Instead, election year Budgets are all about giving (although not for the corporate world, whose calls appear to have gone unanswered, chasing a more competitive company tax rate on the world scene)…..
So it was not surprising to see the personal income tax threshold movements – the 10.5% rate now applying to the first $22,000 of income (prev. $14,000), and the upper end of the 17.5% application moving from $48,000 to $52,000 – both effective 1st April 2018. The increased thresholds will however see an end to the independent earner tax credit (offset by the threshold changes the Government argues).
Then there were increases in working for families credits – the rates you are presently entitled to for children up to the age of 16 will all increase to the existing age 16 – 18 rates (for eldest child an increase of $481 per year), although somewhat countered by the abatement rate changes (the threshold where your entitlements commence reducing) where the annual income threshold reduces from $36,350 to $35,000 and the abatement rate increases from 22.5cents to 25cents per dollar. The rationale for the latter being to ensure the credits are targeted more towards lower income families??? Changes are also effective 1st April 2018.
Finally there is the amendment to accommodation payments, the maximum Accommodation Supplement rates for a two person household increasing between $25 & $75 per week (larger households between $40 & $80). The payments will also be more location targeted, so those living in areas where cost increases have been the greatest will receive more. And to assist student allowance recipients who are facing the challenge of ever-increasing accommodation costs, their entitlements could rise from $40 per week to $60 per week. Changes effective 1st April 2018.
Black hole expenditure
Budget 2017 also saw the release of a new discussion document, black-hole type expenditure again the target as the Government continues to attempt to remove tax considerations from the investment decision making tree, ensuring it does not become an obstacle to businesses innovating and pursuing opportunities for growth.
I have little doubt that the release is as a consequence of last year’s ruling by the Supreme Court in the case of Trustpower v C of IR, where the Court’s ruling somewhat muddied what were thought to be relatively clear waters surrounding the issue of deductibility of project feasibility expenditure.
Black-hole expenditure can occur where the taxpayer is not entitled to an immediate deduction as the expenditure has a capital flavour to it, however for one reason or another, it also does not lead to an eventual depreciation deduction.
The discussion document is therefore focussed on feasibility expenditure and removing the black-hole potential, by ensuring the costs are deductible (if not by way of a depreciation claim) either entirely when incurred, due to being non-capital in nature, or at any future time upon the capital project being discontinued pre a depreciable asset having been created.
Feedback on the proposals set out in the discussion document is requested to be no later than 6th July 2017.
Budget Bill introduced and passed
If you blinked you missed it. Introduced on Thursday and passed into law on Friday, all of Budget 2017 Family Incomes Package changes have quickly progressed from dream to reality – you just have to wait another ten months to feel it in your pocket (some six months post the election too – hmmm…)
Bill passes through first reading
The Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Bill (249-1) passed through its first reading, heading now to the Finance and Expenditure Committee, who are due to report back on the Bill by 24th November 2017.
The Bill proposes measures relating to the collection of employment and investment income information, reforms to the taxation of employee share schemes, adds five charities to the list of donee organisations in sch 32, and includes numerous other policy and remedial changes to tax legislation.
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