Tax News

Bright-line test rollover relief

Bright-line test rollover relief

11 Oct, 2021 | The Week in Tax

  •  Bright-line test rollover relief
  • Inland Revenue consults on land taxation and cross border worker issues
  • What could be the fallout from the Pandora Papers?

Transcript

It’s been a busy couple of weeks in the tax world. Last week, the relevant legislation for the interest limitation rules was released in a Supplementary Order Paper, and on the same day, probably not by coincidence as one or two other tax advisors have noted, Inland Revenue released a draft interpretation statement concerning whether, and if so to what extent, the land sales rules in the Income Tax Act 2007 apply to changes to co-ownership, subdivisions of land and changes of trustees. Coming out on the same day as the interest limitation legislation it certainly has given us plenty to chew on.

Furthermore, Inland Revenue has kept busy this week with an issues paper seeking feedback on a number of matters facing employers and payers of cross-border workers.  The whole week kicked off with the Pandora Papers, reigniting the debate over New Zealand’s controversial foreign trust regime.

Property transfers between associated people

As we discussed last week, the Supplementary Order Paper with the relevant draft legislation for the interest limitation rules was released, and submissions are open to the Finance and Expenditure Committee until 9th November.  So, you’ve got approximately five weeks to get in and make submissions on these draft rules. I expect there will be some changes as a result of submissions and certainly I encourage everyone who has an interest in this area to make submissions with the aim of trying to improve the legislation.

Included in the Supplementary Order Paper is something which begins to address an issue which has been in place since the bright-line test was introduced in October 2015. And that is when there is a transfer between associated persons. Say for example, a person holds a property and transfers it into a trust or a look through company. As the legislation presently stands, that transfer would reset the clock for the bright-line test. So, a property that might be known for many years – more than 10 years for example – which has been transferred to an associated entity and therefore economically, when you look at it, no real change of ownership has happened. But for the bright-line test purposes there has been a deemed change of ownership and therefore the clock gets reset.

Now this was a problem identified way back in 2015, and the Supplementary Order Paper begins to address it by having some new rollover relief rules, which will apply from 1st April 2022. However, the rules are very complicated, particularly in relation to the transfer for a trust. And it could be really quite problematic for trust resettlements because the transfer to the trust must be a beneficiary who is also a natural person and can qualify for the main home exclusion. There’s quite a bit of detail to unpack in there.

In fairness this is an improvement on the original proposal we saw when in consultation with Inland Revenue earlier this year, but it still has a number of complexities and traps which will make it not particularly user friendly. So, although it’s a step in the right direction, this is one area I would very definitely recommend people make submissions on.

Land sales tax rules

Now, the other thing that was released on the same day as the Supplementary Order Paper, was a draft interpretation statement – nearly 60 pages – on how the land sale rules in the Income Tax Act might apply changes to co-ownership, subdivisions and changes of trustees.

This is an extremely important paper because it addresses issues where there was some broad understanding of what the position might be, but it’s good to see Inland Revenue set out its position.

Now the starting point to bear in mind is that income tax legislation in dealing with land transactions, refers to “disposals”, not sales. And this is the issue that the draft interpretation statement is addressing – what happens if there are transfers between co-owners, for example, does that create a disposal for tax purposes?

Now, quick digression here. The paper refers to tenancy in common and joint tenancies. A tenancy in common is where each party owns a distinct share, i.e. 50% or a one third share. A joint tenancy is where the land is owned by the parties together, but there’s no specific shares, in which case each person has a notional proportional share. So, for example, if there are two joint tenants each has a notional 50% share. And if there are five joint tenants, each has a notional 20% and so on.

What the interpretation statement goes through is what happens if there’s changes to types of co-ownership. For example, instead of owning it 50-50, they go to one party owning a one third share and the other party having a two-thirds share. Or there are two people and a third person is introduced or there are three people, and then one decides to.

What the interpretation statement says if it’s the type of co-ownership and the proportional notional changes don’t change, there isn’t a disposal under the land sale rules, so that means there’s no tax implications on the transfer. So, for example, if A and B were tenants in common with 50% each and they then moved to being joint tenants with again the notional 50%, there’s no disposal.

On the other hand, if, for example, A had 25% and B had 75% under a tenancy in common and then moved to 50:50, then B has disposed of 25% interest, and this disposal, could be taxable. And here’s where the issue gets quite tricky because this sort of transaction may be done on paper and no cash may change hands.  People have got to be very careful that if they are changing the proportions of how they own property, that they don’t trigger a tax charge and find themselves with a tax bill, but no cash has actually changed hands to enable payment of any tax which may become due.

To recap, if there’s a change in the form of ownership where the proportional and notional shares don’t change, that’s not a disposal. But if there is transfer, that adds a new co-owner, for example, that would be a disposal. And likewise, if there’s a transfer that removes a co-owner, that’s also a disposal. There’s a lot to consider in this paper and we’ll need to pore over it very carefully. But at least it gives us some guidance to work with. Submissions are open until 9th November.

Cross border workers

Earlier this week, Inland Revenue released another issues paper this time dealing with cross-border workers and identifying issues for reform. Work on this has probably been accelerated because of what’s happened with COVID, which has disrupted work and travel patterns. In the words of the issues paper,

“It has also highlighted the role of technology in enabling cross-border work arrangements. The pandemic has accelerated existing trends affecting how, when, and where people work and technologies such as artificial intelligence and the greater use of contracts. The supply of personal services will be increasingly important drivers in the future.”

Against that background, Inland Revenue have been looking at reviewing the tax obligations that apply to payers of cross-border workers. And this paper focuses on what happens for employers and payments to independent contractors. This is an issue I’ve encountered quite a bit recently, as people have migrated to New Zealand but continue to work remotely for their overseas employer.

The paper begins by looking at the current PAYE rules. And it concludes that these are inflexible. One of the big issues is that we have arrangements concerning our double tax agreements where a person who is deemed to be non-resident but working in New Zealand and can be paid by their overseas employer for up to 183 days without triggering PAYE.

But currently under the PAYE rules, when they cross that 183-day threshold then after the day count is breached, the employer is required to correct the tax position not just going forward but also from the first day the employee was present in New Zealand. So, it could be several months later when the position is realised. And this means employers get additional compliance costs and could also be potentially subject to shortfall penalties and use of money interest. All in all, pretty much a compliance nightmare.

Inland Revenue recognise this needs to be reviewed because it’s simply not always practical to collect PAYE from the income of cross-border employees. It’s hoping to allow greater flexibility for employees. And one of the things they’re proposing is a new period of time for correcting a situation, which is 28 days from the employer first becoming aware that this day count threshold that I mentioned earlier has been breached.

To use an example from the issues paper, Estella a Brazilian tax resident, comes to New Zealand on a 10-week assignment, 70 days, to work on a construction project. It’s anticipated that the 92-day exemption, which is part of our Income Tax Act, will apply. We don’t have a double tax agreement with Brazil yet, so this 92-day exemption is only one available.

But the project gets delayed and now extends beyond the 92-day exemption to 98 days and a catch-up payment for PAYE is therefore required. And no penalties should arise so long as this is done within 28 days of identifying that there will be a breach of the 92-day threshold. That’s one of the issues Inland Revenue are looking at.

They’re also looking at non-resident contractors. There’s another set of rules that apply to independent contractors working in New Zealand. Currently, non-resident contractors’ tax is 15% and the New Zealand resident payer is required to withhold that from each contract payment made to a non-resident contractor.

The thresholds and rates haven’t been changed since 2003. Those thresholds, by the way, were adopted and in the wake of the Lord of the Rings when a large number of American productions came to New Zealand in the early 2000s and encountered this issue and work was done to mitigate those issues. It’s therefore probably time to have a look at these issues again. And it’s good to see that Inland Revenue putting some ideas out there. Submissions on this are open until 19th November.

New Zealand’s controversial foreign trust regime

As I mentioned the week kicked off with the Pandora Papers revelations. This reignited the debate over New Zealand’s foreign trust rules. Now, when the extent of the use of New Zealand based foreign trusts was revealed in 2016 in the wake of the Panama Papers, the then government moved very quickly to tighten regulations.

And as a result of that, the estimated numbers of foreign trusts registered with Inland Revenue fell from about 13,000 back in 2016 to just over 4,000 now. The Pandora Papers will reignite debate about these rules.

These foreign trusts exist as a by-product of changes made to New Zealand’s taxation regime for trusts in 1988. That’s when New Zealand switched from taxing trusts based on the residency of the trustees to taxing on the basis of the residency of the settlor (the person who established it).

Now the reason behind this was to tackle what was seen as quite substantial tax avoidance by New Zealand tax residents, and by and large, that move was highly successful. It is practically impossible now for any New Zealand tax resident to set up a trust now in a tax haven and shelter income from New Zealand tax.

But an accidental by-product of the regime was that non-New Zealand residents are able to establish such trusts. What they would do is settle a trust under New Zealand law with New Zealand trustees. Under the foreign trust regime, income from outside New Zealand would not be taxable. Which, by the way, is legal and consistent with general tax principles around the world – that is you tax residents on a global basis, or you tax income with a source in the country. So, for example, New Zealand taxes income with a New Zealand source and New Zealand residents.

If you have rules as New Zealand established, which say, “Well, we don’t deem this trust to be tax resident in New Zealand”, then offshore income becomes tax exempt in New Zealand. And so, this is quite attractive because it meant that New Zealand essentially became an onshore tax haven for sheltering income.

So, it’s quite controversial, and started to attract quite a lot of attention.  In part because of growing unease with tax havens we saw the introduction of the Common Reporting Standards on the Automatic Exchange of Information. New Zealand’s current foreign trust disclosure rules are in line with those standards.

The Panama Papers gave a boost to those rules, and I’m sure the Pandora Papers will also lead to further tightening as well. Although the Minister of Revenue didn’t seem particularly enthusiastic about moving very quickly on the matter, there’s a lot going on as we have discussed.  In any case, the position is that the number of trusts registered with Inland Revenue has fallen by two thirds since 2016 to just over 4,000.  The argument would be that a fair amount of the more dubious entities have been weeded out.

But what’s common in moves around the world and it ties into anti-money laundering moves particularly in Europe is for establishment of trust registers which is where details of these trusts are held.  Now whether they are held publicly like the Companies Office register, or privately and available only to Inland Revenue which is essentially what we are doing at the moment, needs considering.

For those who are calling to tax these trusts what needs to be kept in mind is that often these foreign trusts are established partly on grounds of secrecy but also to ensure assets held in such a trust are outside two taxes, both of which New Zealand doesn’t have. That is capital gains tax and estate duties.  Now these are transactional taxes, which are triggered by death or disposal.

So, when considering calls for New Zealand to tax foreign trusts we need to think about how we would practically do that given we don’t have a general capital gains tax or estate duty. Basically, we would then be looking at a wealth tax or something akin to the foreign investment fund regime.   Whatever, there’s going to be quite a bit of debate on this going forward and it’s not going to die down very quickly.

Applications open

And finally, in Covid related news you have until 11:59pm on Thursday 14 October to apply for the fourth round of the August 2021 Wage Subsidy Scheme.  And applications for a third round of the Resurgence Support Payment are now open. To be eligible, your business must have experienced at least a 30% drop in revenue or a 30% decline in capital-raising ability over a 7-day period, due to an increase in Alert Levels.

  • You can receive $1,500 per business plus $400 per full-time employee (FTE), up to 50 FTE.
  • The maximum payment is $21,500.
  • If you’re a sole trader, you can receive a payment of up to $1,900.

If you’ve applied for previous Resurgence Support Payments and you’re eligible you can apply for this one.

Well, that’s it for today. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening. And please send me your feedback and tell your friends and clients. Until next week kia pai te wiki, have a great week!

Draft interest limitation legislation including 20 year new build exemption

Draft interest limitation legislation including 20 year new build exemption

4 Oct, 2021 | The Week in Tax

  • Draft interest limitation legislation including 20 year new build exemption
  • Interest deductions on taxable disposals
  • The view of the Ministry of Housing and Urban Development

Transcript

The draft legislation for the interest limitation rules was finally released on Tuesday through a Supplementary Order Paper to the Taxation (Annual Rates for 2021-22, GST and Remedial Matters) Bill. This Supplementary Order Paper (SOP) introduces amended sections CB 6A and CB 16A, which cover the changes to the bright-line test rules, and also to cover the interest limitation rules is a new subpart DH with sections DH 1 to DH 12. There are also new sections FC 9B to FC 9E which relate to the ability to roll over for the bright-line test purposes. In addition, there was a release of the regulatory impact statement and some very useful information sheets, six in all covering the basics of the changes.

There has been no change to the basic position, which was outlined in March, that interest limit deductibility would be limited for residential investment properties. As of today, between now and 31st March 2023, 25% of interest relating to residential property investment is non-deductible. And then that proportion of non-deductible interest will rise steadily over the next following years until it’s fully non-deductible with effect from 1 April 2025.

To quickly recap, the main home is not affected by these proposals. It’s been confirmed that the limitation would not apply to interest related to any income earning use of the owner occupier’s main home, such as flatting. Commercial property which is not related to the provision of accommodation isn’t affected either.  Farmland, certain Māori land, emergency, transitional, social and council housing are all exempt. So too is commercial accommodation but not short-stay accommodation which could provide a residential dwelling (Airbnb would be the target here).  Care facilities, retirement villages and rest homes are exempt, as are employee accommodation, student accommodation and land outside New Zealand.

Now, the big exception to this is an exemption for a “new build.” This is going to last for 20 years from the date on which a Code of Compliance Certificate is issued. These provisions are in the proposed section DH 4. An interesting thing about this new build exemption is that it applies for the 20-year period, regardless of the number of owners. So, it’s not just the first owner, the builder perhaps, who has the exemption, but all subsequent owners up to a 20-year period. So that’s probably as simple as they could make it which is generous.

It’s interesting when you look at the accompanying regulatory impact statement to see that the Ministry of Housing and Urban Development was opposed to limiting interest deductions for residential property because it thought it was concerned about the negative impact this could have on new housing supply. The Ministry of Housing and Urban Development said it preferred a long new build exemption, at least 20 years, which it saw as crucial to ensure that the new supply of houses was not reduced.

I would actually recommend a good read of the regulatory impact statement, it’s got a lot of fascinating insights. So, the Ministry of Housing and Urban Development got its wishes, but I do know from consultation that there was a general hope that there will be a longer period granted for this new build exemption.

A new build doesn’t actually have to be a completely new material. It can include modular or relocated homes, which is excellent. And it also covers converting an existing dwelling into multiple new dwellings. And critically, because this was a sticking point when the announcements were first made, it also covers converting commercial building into residential dwellings.

When does the new build exemption apply? Well, it applies either from when you acquire your new build, if it already has a Code of Compliance Certificate or you acquired off the plans or when your new build receives a Code of Compliance Certificate. I imagine there will be submissions wanting to extend that period on that, but at least it’s a line in the sand. I do think it’s probably on balance, allowing it to cover run for 20 years, regardless of the number of owners it might run through is also sensible.

The rules clarify that there’s a land business exemption if you hold the land as part of a developing, subdividing or land dealing business or if you’re in the business of erecting buildings. Also, interest relating to remediation work and other expenses relating to the ownership and development of land also qualifies for the land business exemption.

There’s a development exemption which will apply for interest on land you develop, sub-divide or build on to create a new build. And again, that exemption will apply from when you start developing the land and it ends when you sell the land or receive a Code of Compliance Certificate for your new build, at which point it flips over to the new build exemption.

Now, what happens if you sell the property and you’ve had interest deductions denied, but the gain is taxable for whatever reason, either under the bight-line test or another reason? In most cases, you’ll be allowed to treat the non-deductible interest as a cost for the purposes of calculating the gain. However, the deduction will be limited to the gain on sale. In other words, if the total interest costs not previously deducted, exceed a taxable gain that may that arises on the sale, only the interest to the point of the total amount of the gain will be allowed.

The new subpart DH deals with the issue of existing loans and rules around borrowing. If you borrowed funds on or after 27th March 2021, the interest is no longer allowed from 1st October 2021. Except if you used the funds to purchase a property acquired before 27 March or for a new build. In relation to refinancing, amounts up to the level of the original loan will not affect the deductibility of interest. And if that original loan was subject to being phased out over time, then the same treatment applies.

There are also provisions covering the question of deductions for interest on variable loans, such as a revolving credit or overdraft facility. If the amount outstanding is higher than the amount outstanding on 27 March, only the interest on the amount outstanding at 27th March will be deductible under the phased approach. The interest on the rest will be deemed to be non-deductible. There’s going to be a special transition rule to help work out what happens if you took out a loan prior to 27, the March 2021.

What if you can’t work out exactly how much the loan was used for residential property and how much was used for other business purposes? The example they give here is buying a truck for a transport business. What will happen is that loan will be treated as being used to acquire other business property first, based on the market value of that business property, and then the balance will be applied to residential property. That’s actually quite a generous treatment.

So, as I said, the regulatory impact statement makes for some interesting reading, you can see the arguments between Treasury, which supported this initiative, don’t allow deductions and don’t think there should be a newbuild exemption. On the other hand the Ministry of Housing and Urban Development and Inland Revenue took the completely opposite approach to Treasury arguing we really we don’t think these rules should be adopted.

According to Inland Revenue, the option which has been adopted, Option Three, is expected to raise $1.12 billion over the forecast period from 1st October 2021 through to 31 March 2025. It will be interesting to see how those extra funds are deployed. You’d hope that they would be used to build more social housing and help ease the crisis, but we shall see.

As you can imagine, it wasn’t just the Ministry of Housing and Urban Development and Inland Revenue who were a bit sceptical of the proposals. A total of 484 submissions were received from various bodies. The majority came from private landlords, but also included tax advisors, property investors, representative groups, real estate agents, iwi groups, property developers and engineers. This has stirred up quite a significant amount of debate and will continue to do so. We’ve got a long way ahead of us as we work through all these provisions. And no doubt, as we drill down into the detail, more points of contention will emerge.

The process going forward is that the Finance and Expenditure Committee should call for submissions very shortly and it’s expected there will be about six weeks to respond. Now, according to the Parliamentary timetable, the actual report on the tax bill of which this legislation is now part is due to be released next March. So, as I said, there’s some way to go before we might see the final form of the legislation. But at the moment it’s applicable and these rules are in force. We’ll obviously keep you updated on developments along the way.

Well, in the meantime, that’s it for today. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening. And please send me your feedback and tell your friends and clients. Until next week kia pai te wiki, have a great week!

This week, a new report finds strong support for using tax to support the post Covid-19 recovery

This week, a new report finds strong support for using tax to support the post Covid-19 recovery

27 Sep, 2021 | The Week in Tax

  • This week, a new report finds strong support for using tax to support the post Covid-19 recovery
  • A look at the submissions to the Finance and Expenditure Committee’s Inquiry into crypto currencies
  • The ATO launches a crackdown on disguised undeclared foreign income.

Transcript

Earlier this week the International Federation of Accountants, in cooperation with the Chartered Accountants Australia and New Zealand (CAANZ) and the Association of Chartered Certified Accountants, issued the third edition of the Public Trust in Tax Study. This is an international study carried out across 8000 people in the G20 countries and New Zealand. These people were asked questions about who they trust in the tax world.

This is the first time this survey has been carried out since 2018 and there are some really interesting findings in here. People continue to have the highest level of trust in professional tax accountants – 55% highly trust them, with professional tax lawyers coming in at 50% and NGOs at 37%.

Now one of the most interesting findings, and one which is very encouraging around the world, is that trust in government tax authorities has improved from a net 2.7% to 14.9% – an almost six-fold increase. But that said, you’ve still got quite a split on that, as you might expect, with 43% saying they trust or highly trust the tax authorities, while 22% say we distrust them or highly distrust them. Politicians still have work to do because they have a net 22.8% distrust.

In relation to media, and this is quite relevant because there’s quite a bit of debate going on at the moment around media reporting, has a net 0.1% positive, but 41.9% distrust or highly distrust social media. The lowest level of trust was in New Zealand were just 13.4% of respondents had trust in social media.

Now, across the G20, 48% of the population are satisfied with the ease and efficiency of their dealings with tax authorities, that’s slightly down from 2018. But people strongly support the use of tax incentives to support sectors affected by Covid-19, with an overall 66% support for that. There’s also support for tax incentives to target what are described as global megatrends, such as climate change and the ageing population.

However, this is really quite interesting because it seems contradictory, 49% support the use of tax incentives to attract multinational businesses. However, support for international tax collaboration has fallen in 15 of the 20 countries sampled since 2018. And here in New Zealand, support for incentives to attract multinationals was bottom. New Zealanders saw it as very unimportant, with only 21% supporting incentives.

New Zealanders were also the least likely to believe in the importance of intergovernmental competition on tax matters, which incidentally was also the position back in 2018 when this survey was last held. New Zealanders were also more inclined than most other countries to require multinationals to disclose country by country tax information.

And this is where there’s been a big shift, because in 2018, 12 of the sample countries said tax information should be made publicly available. But in this current survey, only six countries, including New Zealand, supported it, with the main shift being towards the information should be made available to authorities but not publicly.

Inland Revenue will be very encouraged that when questioned about the least burdensome tax filing processes, New Zealand comes top with 81.8% of respondents reporting less than one week’s time spent each year. And New Zealanders also felt that Inland Revenue ranked highly in the overall fairness of the process and interacting with tax authorities. So again, that’s good work for Inland Revenue. And, of course, this will have started to take account of the impact of Inland Revenue’s Business Transformation programme.

So it’s quite an interesting survey overall.  I think the thing that catches my eye is this sort of shifting mood around multinationals and international cooperation. And I think something that tax authorities need to be paying more attention to is that the public is probably not really aware of just how much information sharing is going on. Reading between the lines here, there’s a bit of unease about that.

But the fact that people also prefer tax incentives to attract multinationals is quite interesting to see as well, because those tradeoffs mean there are tradeoffs for overall revenue. But obviously the belief is that more multinationals mean a higher tax revenue. New Zealanders, however, would appear to be very sceptical of that. And that’s probably because we’re not one of the largest 20 countries in the world, so that the issue of multinational investment and its benefits is rather greyer for New Zealand than it might be in other countries.

Cryptos and tax

Moving on, the Finance and Expenditure Committee announced an enquiry into the current and future nature impact and risks of cryptocurrencies and called for submissions last month. These submissions are now publicly available. They received nearly 270 of them from a variety of people, including one from Satoshi Nakamoto, who is apparently quite important in the crypto world. (Assuming it is him).

The Reserve Bank drew attention for its submission where it really was very sceptical about the future worth of cryptocurrency and in fact, made a couple of references to their potential involvement in tax evasion.

PricewaterhouseCoopers and Chartered Accountants Australia and New Zealand also made submissions, and the Chartered Accountants Australia and New Zealand submission is actually quite well worth reading. It was submitted a couple of days before the new Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill was released, which actually addressed some of these issues.

In its summary, CAANZ said that the taxation of cryptocurrency in New Zealand remains problematic and

The taxation of cryptocurrency in New Zealand remains problematic. Application of the current tax rules results in material inconsistency and the Government legislative response has been light. We believe a comprehensive framework is needed.

The CAANZ submission is actually a good little precis of the current state of the tax treatment of crypto currencies and what Inland Revenue guidance has been issued.

The submission says it seems sensible to remove cryptocurrency from the GST rules, but in relation to the financial arrangements rules, it believes that’s not quite as clear cut as it might be thought. CAANZ believes that there are both pros and cons to making this change, depending on the nature of the coin and the taxpayer specific circumstances.

What it summarises is there’s a need for a comprehensive framework that allows cryptocurrency to fit into the existing tax rules. It’s needed to give simplicity and clarity and reduce compliance costs, because as CAANZ quite rightly points out, the existing tax rules are generally well understood and can be applied to existing and new cryptocurrency overall guidance. And I think that’s where Inland Revenue is trying to head. But it’s moving forward cautiously on this.

CAANZ asked about of its 600 members if they held cryptoassets themselves, if their clients did and if so had they sought advice?  They got a reply from about 300, with many expressing concerns about the time and cost involved in keeping accurate and detailed records. And they thought that significant taxpayer education is required because there was a feeling that the rules were unclear, and that people did not understand the rules as well as they should do. So an education campaign was required.

Some interesting stuff there. And no doubt we’ll probably see some further submissions from CAANZ on the new tax bill.

Concealed foreign income

Across the ditch, the Australian Tax Office has released an alert on what is called concealed foreign income. What it’s concerned about is that people are misrepresenting foreign income as a gift or a loan from a related overseas entity such as a family member, friend or a related company or trust.

It is basically saying all those taxpayers deliberately omitting foreign income, concealing their interests in foreign assets or making false claim for deductions in their tax returns, will face substantial penalties, including possible sanctions under criminal law. Now, the ATO Alert also sets out guidance as to how to document genuine gifts or loans from overseas related entities where the funds are not used for income producing purposes.

Now, this is of interest because often where the ATO goes, Inland Revenue will follow. And at the moment we know Inland Revenue is assiduously working through information it’s received under the Common Reporting Standard Automatic Exchange of Information which should cover foreign income. But it is one of those areas that myself and other colleagues persistently see – people have overseas income and are not entirely clear about their obligations in relation to it.

In most cases, they’re reporting it in the jurisdiction in which the assets are situated, but not reporting it here because there is this idea that double taxation means if it’s being taxed over there so it doesn’t get taxed here. So disabusing people of that misconception is something we’re working on constantly. And again, this is also a question of perhaps more Inland Revenue guidance allied with an education campaign.

Covid support update

And finally, just a quick reminder that applications for the third round of the wage subsidy opened last Thursday and are open until 11.59 p.m. on 30th September.

What you’ve got to keep in mind here is that if you miss one of these subsidy rounds, that’s it. No retrospective applications are allowed. And I’ve seen one or two instances where people have not realised this and have missed the opportunity to claim a wage subsidy. So be alert. We may be seeing more in this space. The resurgence support payment is still available and as I mentioned last week, there may be further rounds to come.

That’s it for today. I’m Terry Baucher. And you can find this podcast on my website, www.baucher.tax  or wherever you get your podcasts. Thank you for listening and please give me your feedback and tell your friends and clients. In the meantime, kia pai te rā, have a great day!

Latest Lockdown developments including third round of wage subsidy and second Resurgence Support Payment

Latest Lockdown developments including third round of wage subsidy and second Resurgence Support Payment

20 Sep, 2021 | The Week in Tax

  • Latest Lockdown developments including third round of wage subsidy and second Resurgence Support Payment
  • NZ Super Fund pays $2.3 billion in tax on record $15 billion return
  • Using tax to fund NZ Superannuation

Transcript

There’s inevitably been a certain Groundhog Day effect to the current Lockdown now we’re into our fifth week. It dominates the discourse and that hasn’t really changed in the tax world. The Government has now announced that there will be a third round of the Wage Subsidy and applications for that opened at 9:00 a.m. Friday and will remain open until 11. 59 p.m. on Thursday, 30th September.

As of September 12th, there have been 427,388 applications approved for the first two rounds of the wage subsidies, which has supported over 982,000 employees and 274,000 businesses. The total amount paid out to that date is just under $1.8 billion.

To quickly recap the tax implications of the subsidy for an employer, the receipt by an eligible business is excluded income to the extent that the subsidy is passed on to the employee. The employer is not entitled to an income tax deduction for wages paid out of the wage subsidy and the amount of wages paid in excess of the wage subsidy, that is amounts funded by the employer, are deductible as normal. No GST applies to the payment.

Now, Inland Revenue just reminded people that any amount of the subsidy that is not passed on to an employee is required to be repaid to the Ministry of Social Development (MSD)because that’s part of the criteria and declarations made at the time of application. If the wage subsidy isn’t returned to MSD, then Inland Revenue may consider the amount not returned as taxable income, which needs to be included in the income tax return for the year in which it was received.

Now, the interesting development this week is that the Government has now said that a second payment under the Resurgence Support Payments scheme will be available and, applications for that opened Friday. Now, in order to qualify, organisations must experience at least a 30% decline over seven days for the period commencing 8th September as a result of being at Level Two or higher.

Remember, the Wage Subsidy is only available at Levels Three and Four, but the Resurgence Support Payment (RSP)is available at Levels Two, Three and Four.

Now, the income tax treatment of this is that the RSP is not subject to income tax and accordingly, income expenditure funded by payments under the RSP scheme are not deductible. GST registered businesses will return GST on payments received under the RSP and will be able to claim input tax deductions for expenditure funded by payments under the RSP such as rent, for example. The intention is any RSP received is used to cover business expenses such as wages and fixed costs.

As of 12th September, about $500 million dollars has been paid. And the Government has indicated that there could be another two payments after the for which applications opened today. These will be three weeks apart, so long as the conditions that continue to trigger the Resurgence Support Payment scheme continue to apply, i.e. the country is in an Alert Level Two or higher.

Now, there’s an ongoing debate, quite rightly so, about the level of support, whether it’s targeted or appropriated enough, but it’s useful to see Inland Revenue is keeping people up to date as to what their obligations are. Whether the level of support is the right level or appropriately directed, well, that’s another matter.

And just quickly, a reminder that there are some other schemes available.  There is the Leave Support and the Short-Term Absence Payments Schemes. Businesses may still be eligible for the Small Business Cashflow (Loan) Scheme. And there’s also Business Debt Hibernation.  We talked about these when we first went into Lockdown. All those four schemes, by the way, are available at Alert Level One or higher.

A very large taxpayer

Moving on, the New Zealand Superannuation Fund, which was an initiative by the late Sir Michael Cullen, has just posted its strongest ever annual return of 29.63% for the June 2021 financial year. This means that the fund has now grown to $59.8 billion dollars, an increase of $15 billion over the 12 months.

And during that period, the Government made contributions totalling $2.1 billion to the fund. Now the super fund is a sovereign wealth fund, but almost uniquely, as far as I can tell, amongst sovereign wealth funds, it’s taxed.  For the year just ended, it paid $2.3 billion dollars on its $15 billion. And that’s because the rules around the Foreign Investment Fund and the Financial Arrangements regimes apply to the super fund.  It therefore will pay a fair amount of tax, obviously, when its investment return is nearly 30%.

Making it fairer, go further

Now, of course, the Super Fund was established to help fund the future cost of New Zealand Superannuation. You may recall last week we discussed the Treasury’s draft long term fiscal outlook and in relation to the growing cost of superannuation, Treasury put forward a couple of options to consider, which were increasing the age of superannuation entitlement from 65 to 67 or actually cutting back the amount of people’s entitlements.

New Zealand Superannuation is universal, which is one of its great strengths. Radio New Zealand has received Inland Revenue figures which show that in the March 2010 income year, there were 2,209 people who were on incomes of more than $200,000 a year who were receiving super.

By the year ended 31 March 2020 that number had more than tripled to 7,860. And as Baby Boomers and the population ages, more people who on the face of it don’t need Super will be receiving it because of its universality.

The Retirement Commissioner, Jane Wrightson, was asked about this and she said it’s not a problem, because one of the great things about New Zealand Superannuation is that it is universally applied. But she did say it is a reasonable policy question, the normal answer to this has been means testing which was applied briefly in the mid-90s and applies in Australia. However, this was roundly rejected by New Zealanders in the past.

So, two questions emerge. One, how are we going to fund superannuation going forward? And secondly, is it right that it is universal and people who on the face of it have sufficient to fund their retirement are still receiving it? Mind you, you could say 7,800 people in the context of the hundreds of thousands receiving New Zealand Superannuation isn’t actually that much, but that number will grow.

Now, a suggestion to address this particular issue of potential over generosity for higher income earners has been put forward by my colleague, Associate Professor Susan St John of the University of Auckland Retirement Policy and Research Centre. She has released a briefing paper updating an idea she’d first proposed back in 2019.  It basically treats the pension as a basic income and then taxes pensioners’ other income at a higher rate.

And the idea is that there will be a threshold at which it becomes uneconomic to take super, thus saving funds.

The proposals is, instead of having super inside the tax system, take it outside, treat it as a basic income, and then tax people receiving other income at a higher rate. And then that would mean, as I said, once their other earnings reached a certain point they would be better off to not claim superannuation.

The issue, as has been pointed out all around by various people, is that the number of pensioners between now and 2060, is expected to double. And Treasury’s forecast is that the cost of superannuation, which is already our most generous welfare payments, is going to grow at one and a half times faster than the economy over that period. Therefore, its cost, relative to the economy, is going to increase.

Susan St John’s proposal is that by taxing people who are earning higher incomes means that the payment is then focused on those who really need it. That is, those on lower incomes and that amount is likely to grow as well. And her modelling suggests the break-even point with a flat tax rate of 39% is when the other income exceeds $139,000 a year which is still pretty generous, I guess.

You can tinker with the tax rate, but it’s an interesting idea.  What it builds on is two things.

Firstly, New Zealand Superannuation is a type of universal basic income, which there’s always been a lot of discussion around. Secondly, it then uses the tax system to introduce a bit of equity and disincentivise excessive take up, but not too much, to be honest, because you can earn up to $130,000 in other income. This relative generosity shouldn’t really disincentivise work which is obviously one of the big problems about means testing, the disincentives it creates.

So it’s an interesting. Treasury I think seems quite interested in it, or appears to have had some discussions on the topic and we may hear more about it.

Well, that’s it for this week. Next week, we may be discussing the interest limitation rules in more detail. We’ve been waiting for those for some time. And given that they come into effect from 1st October, it’s going to be quite a crash course to get people up to speed by that time.

But anyway, that’s it for today. I’m Terry Baucher. And you can find this podcast on my website, www.baucher.tax  or wherever you get your podcasts. Thank you for listening and please give me your feedback and tell your friends and clients. In the meantime, kia pai te rā, have a great day!

The Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill clarifies the GST treatment of cryptoassets

The Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill clarifies the GST treatment of cryptoassets

13 Sep, 2021 | The Week in Tax

  • The Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill clarifies the GST treatment of cryptoassets
  • Latest lockdown developments
  • Treasury’s draft long-term fiscal position considers whether taxes need to increase

Transcript

The Taxation Annual Rates for 2021 to 2022 GST and Remedial Matters Bill was introduced to Parliament on Wednesday. Now this is the annual bill which is required to confirm the tax rates for the current year. And it also contains a number of GST and income tax remedial amendments. It doesn’t, by the way, include anything in relation to the proposed interest limitation rules. Those are going to be introduced separately, probably later this month, by way of a Supplementary Order Paper.

Now, what’s particularly interesting about this bill is that it clarifies the tax treatment of cryptoassets, and it has two proposed amendments which would exclude cryptoassets from GST and the financial arrangements rules.

As the commentary to the bill points out, cryptoassets probably fall within the existing scope of GST rules, although it’s a little unclear. And that means that the supply of a cryptoasset could be subject to 15% GST, or it could be an exempt financial service or a zero-rated supply to a non-resident. And what this means is that GST supply to a non-resident is zero rated, but then subject to GST when applied to residents. And that creates a distortion and a preference to sell to offshore investors. Now, that’s slightly different from the zero rating we do for exports, but it’s not seen as an export service here.

But more importantly – and this is an issue that’s well known – is that there’s a big risk of potential double taxation. That is when an asset is purchased with Bitcoin and then, for example, that Bitcoins converted back into fiat currency.

The commentary gives an example of Lucy purchasing $11,500 of Bitcoin from a domestic Bitcoin exchange. At present, the exchange is required to remit $1,500 dollars of this, being GST, to Inland Revenue on the taxable supply of Bitcoin they’ve made in exchange for New Zealand dollars. When Lucy uses the $11,500 of Bitcoin to purchase a car, GST applies on the sale of the car and therefore the company selling the vehicle must return another $1500 dollars of GST. So that means that GST of $3,000 has effectively been charged in relation to the purchase of a vehicle worth $10,000. If Lucy had used New Zealand dollars instead of Bitcoin, only $1500 of GST would have been paid.

This has been known for some time and what has happened is that the Government has decided they’re going to take cryptoassets out of the GST net. And the proposal is that the definitions of goods and services in the Goods and Services Tax Act will be amended to expressly exclude cryptoassets. Now, this amendment will apply from 1st January 2009, the date of the first cryptoasset, Bitcoin, was launched.  By the way, the definition will exclude non fungible tokens, which are going to remain subject to GST if supplied by a registered person.

So this is a very welcome development, clarifying the position that was causing some concern in the cryptoassets world, for the reasons and the example I gave a bit earlier – that there was a probable chance of GST being charged twice in essence, on the same asset. But just remember that GST is still intended to apply for non-fungible tokens as they’re regarded as a good or service that can be supplied.

Now, the other big amendment, which will be welcomed by investors in the cryptoassets world is that cryptoassets will be excluded from the financial arrangements rules. That will be done by amending Section EW5 of the Income Tax Act 2007 to define cryptoassets as an accepted financial arrangement.

Again, however, the issuing of non-fungible tokens are not financial arrangements and they do not meet the definition of a financial arrangements set up in the Section EW 3 of the Income Tax Act. This proposed amendment will also apply from 1st January 2009.

But there is one exception that people need to be aware of, that is cryptoassets will not be treated as an accepted financial arrangement if the owner receives amounts that are determined by reference to the purchase price of cryptoassets, and on the basis that is known by the owner in advance. The purpose of this exclusion is to say that cryptoassets that are economically equivalent to debt arrangements are still taxed under the financial arrangements rules.

And the commentary has an example of such a treatment. An investor invests in Bitcoin on a platform and Bitcoin is locked in for a set period and the investor is paid a guaranteed fixed return for the period that his Bitcoin remains locked into this particular platform. The commentary makes clear that the return on the growth will be taxable, so the additional 5% return will be subject to the financial arrangements rules. I think there might be some more questions dealing around that.

And the commentary also makes clear that the general rules still apply to cryptoassets. That if they’re acquired with the purpose of disposal, they’ll be taxable. Likewise, if you’re trading cryptoassets or you use cryptoassets for a profit-making scheme. But as I said, all the proposals will be welcomed by the investors in the cryptoassets world.

Now, the bill also has proposed amendments in relation to the bright-line test. Firstly, any income derived on the sale of a property which has been used as a main home will not be reduced where the person has used the main home exclusion twice in a two-year period or has engaged in a regular pattern of acquiring and disposal disposing of residential land.

The bill also has an amendment to ensure that a main home that takes longer than 12 months to construct will not be subject to the bright-line test. And this is in relation to residential land acquired on or after 27 March 2021. There’s also an amendment to clarify the application of the 12-month buffer and makes clear that a person may still qualify for the main home exclusion if they have multiple periods each of 12 months where the property is not used as a main home. So, again, that’s welcome because there was some confusion around how these rules might apply.

Business subsidies for wide public health impacts

Now, moving on, the Government’s Wage Subsidies bill has passed $1.2 billion dollars so far. And apparently this subsidy is supporting over 838,000 employees, 117,000 self-employed people and 242,000 businesses.

The highest number of supported workers are in the construction industry, followed then by food and hospitality.

Now, it’s also been made clear that although most of the country has stepped down to Level Two – the wage subsidy is not normally available below Level Three – a claim is still possible if part of the country is still in Levels Three and Four. Because Auckland has remained at Level Four, that means that businesses outside Auckland may still apply for the wage subsidy. However, they have to show the 40% drop in revenue required to meet the wage subsidy requirements is attributable to the effect of the continuation of Alert Levels Three and Four.

So that’s a wee caveat in there that people just need to be mindful of. I know that there’s lobbying going on in relation to the hospitality industry, where the impact of Level Two restrictions limit numbers in bars and restaurants to 50 or fewer. Those lobbying want the ability to still apply for a wage subsidy because they’re affected by that Level Two condition, not necessarily because of the ongoing Level Four lockdown in Auckland.

More taxes to pay for an ageing demographic?

And finally this week, government departments have been asked to prepare a series of long term insights briefings under the Public Service Act 2020. Now these are designed to make available to the general public information about medium- and long-term trends, risks, opportunities that may affect New Zealand.

Treasury has also got a requirement to produce a statement regularly on the long-term fiscal position – what’s known as Long Term Fiscal Statement, and what it’s decided to do is combine the two and it’s released a draft paper for consultation, which makes fascinating reading.

One of the things it says, is that looking at the impact of Covid, it thinks net debt will now peak at 48% of GDP in 2023. And in the Treasury’s view, there is currently no need to reduce debt levels. And it believes that deficits will shrink as the temporary support measures will end. And it also notes that debt level remains low relative to its peers such as the UK, Australia, America. The interest rate composition of debt is much more favourable than when net debt peaked at 55% of GDP in 1992.

And just as an aside, this is a global issue. The UK just this week has announced proposals which effectively increase taxes to pay for the impact of Covid and they’re quite significant increases. And I don’t think that the UK will be the last jurisdiction to be doing so.

But longer term, Treasury is noting that 26% of the population is expected to be 65 years old or more by 2060, compared with 16% in 2020. So that’s going to increase the cost of New Zealand superannuation and also expect healthcare costs to continue to grow because of an ageing population. And that ageing population will change demographics. For example, one of the things that’s happening is that the Pasifika/Māori people are generally significantly younger than other New Zealanders.

For example, by 2038, Māori are projected to account for 20% of the total population, but only 10%of the 65 plus population.

And this leads Treasury to conclude:

“Our projections indicate that the gap between expenditure and revenue will grow significantly as a result of demographic change and historical trends in the absence of any offsetting action by the Government.”

One of the offsetting actions it suggests, is to raise the age of retirement from 65. It suggests let’s have a look at what would be the impact of raising it to 67.

It also looks at what opportunities exist to raise revenue from either existing tax basis or new tax bases beyond personal income tax. And the paper sets out a number of options around raising revenue. And one is ten years of fiscal drag, which incidentally we’ve just done, which is where the tax thresholds and rates are not changed. And wage growth naturally raises the tax take as people’s income crosses income tax thresholds.

Some interesting stats here about the impact of raising GST. For example, in relation to personal income tax – if you raise income tax rates by one percentage point, so that the current top rate of 39% goes to 40%, the 33% rate to 34% and so on, that would raise 0.6% of GDP.

To get the same effect from GST you’d need GST to rise from 15% to 16.5%. And for company income tax, you’d need to raise it from 28% to 34%. So as the paper points out that would not be welcome.

The Treasury paper also points out the Government could extend the taxation of capital gains and maybe think about a land tax as well.  However, as the Tax Working Group pointed out there’s a few issues around a land tax. But the paper notes, by the way, that other countries are looking at the taxing of wealth, either by a net wealth tax or maybe taxes on inheritance.

And finally, the paper notes that New Zealand raises less from environmental taxes than other OECD countries. It’s equivalent to 1.3% of GDP, and that’s lower than the OECD average, which is roughly 2% of GDP. But it points out that environmental taxes are often behavioural taxes. In other words, they change behaviours but therefore may not be a sustainable additional source of revenue.

Anyway, there’s a lot of interesting data to consider in this paper. No doubt it will cause some controversy.

Well, that’s it for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening. And please send me your feedback and tell your friends and colleagues. Until next time Kia Kaha! Stay strong.