- Inland Revenue has released five COVID-19 related variation determinations including ones covering look-through companies, bad debt write-offs and tax pooling
- The tax problem of appointing an Australian resident executor
- A temporary increase to the write-off threshold for tax to pay
This week, a roundup of several useful COVID-19 related variation Determinations released by Inland Revenue, a reminder to be careful about who you choose to be an executor of your will, and a temporary increase in the write off threshold for tax to pay for PAYE earners.
As part of the response to the COVID-19 pandemic, a specific discretion was introduced into the Tax Administration Act to make clear Inland Revenue’s ability to issue variations to requirements under the various Inland Revenue Acts. Basically, the conclusion was that Inland Revenue needed more discretion to be able to extend the filing date, due dates for tax returns and various other filing requirements.
This was part of one of the first earliest pieces of legislation enacted in April. Following that, Inland Revenue has now used this discretion to issue five Variation, Determinations, setting out the requirements for when it would apply its discretion in certain situations.
The first one deals with a variation to extend the time to file a look-through company election. Now normally, that must be done by the start of the relevant income tax year i.e. 31st March. This variation now extends the deadline to June 30th 2020, which is a welcome little addition.
Another variation varies the time to make an election, to spread back forestry income, and a third extends the time to make an application to change the GST taxable period. For example, you might want to switch to filing monthly GST returns from previously filing six-monthly or bi-monthly GST returns.
But the next two variations are probably of most relevance in these interesting times. The first one is variation COV 20/04, which extends the time for writing off bad debts. Now, basically under Section DBI 31 of the Income Tax Act, a debt must be written off as bad in that income year. So normally for the year ended 31st March 2020, if you’ve got a bad debt, you must have written it off by 31st March 2020. What this determination does is extend that write off period to 30th June. It’s a useful concession, although as always, there’s a couple of caveats here.
Firstly, that the person did not write the debt off by 31st March 2020 because of the COVID-19 impact. In other words, the disruption to their processes meant they weren’t able to process bad debt write offs as they would normally have done so. And the second one is one I think is going to cause a few headaches, because it gets down to significant interpretation. In writing off the debt, the person can only take into account information that was relevant as at the end of the 2020 income year. I’m not sure exactly what was meant by “relevant” here? You might be aware that a business was struggling but hadn’t decided to take action. Would that count? We don’t know. I suspect this is one of those caveats that’s been put in more as a protection. But we could see in a few years a significant tax case on the issue.
And the final variation, which is going to be helpful, is one that extends the time for using tax pooling transfers. Now, regular listeners will recall that I had a podcast session with Chris Cunniffe of Tax Management New Zealand late last year. Using tax pooling companies like TMNZ extends the time through which you can make payments of provisional and terminal tax, yet be deemed to have made the payment on time. So they’re a very useful mechanism for managing cash flow and minimising the impact of use of money interest.
Now, what this determination does is it extends the time for which a person can put in place a contract with a tax pooling company in order to meet the tax due for the 2019 tax year. And that time would normally have expired by now. But this variation gives an extension until July 21st 2020.
The caveat in this instance is that between January 2020 and July 2020, the business must have experienced, or for June and July 2020, be expected to experience a significant decline in actual predicted revenue. As a result, they were either unable to satisfy their existing contract for 2019 tax or they weren’t able to set up/enter into a tax pooling arrangement with a tax pooling company.
The “significant decline” in actual revenue has got to be at least 30% and must be COVID-19 related. So that last criteria is a little bit vague because it doesn’t address a position where the company was struggling to make the payment before COVID-19 turned up anyway.
The variation gives an extra month until July 21st to put a contract in place to make a tax pooling payment. And the advantages of using tax pooling are saving use of money interest and late payment penalties because the tax is deemed to have been paid when it was due. And the rate of use of money interest charged by tax pooling companies is lower than that charged by Inland Revenue.
Instalment arrangements and use of money interest
The rate of use of money interest popped up in a story on Thursday. It talked about the arrangements Inland Revenue is putting in place with taxpayers who have been struggling to meet their liabilities. And some of the taxpayers putting arrangements in place have also experienced the impact of use of money interest and late payment penalties.
Interestingly, Inland Revenue is waiving much of these interest and penalties if the delay is down to COVID-19. But again, as a caveat, only if it’s down to COVID-19. I think at some stage we may find is a hardening in the approach of Inland Revenue here.
Now Inland Revenue has lowered its use of money interest rate to 7% but it’s significantly higher than the 0.25% Official Cash Rate. I suggested in the article that it was well past the time late payment penalties were abolished. These apply in addition to use of money interest and add another 1% immediately, then a further 4% if it’s not paid within seven days, and then continue at a further 1% per month thereafter. There’s no evidence late payment penalties encourage any prompter payment when compared to other jurisdictions that don’t have them.
Currently about 87% of taxes are paid on time under the current regime. There’s little evidence late payment penalties make any discernable difference to prompter payment. They just cause resentment and a 7% use of money interest rate is a very substantial deterrent in these low interest times. We’ll see when things settle down a bit if there’s finally some movement made in this area.
Beware your choice of executor
Moving on, one thing about tax that keeps me busy is the accidental tax impacts of sometimes quite apparently innocuous decisions. And one such example that I’ve come across recently is appointing an executor who is resident in Australia.
This seems fairly straightforward. You may have a parent here in New Zealand with three children, one of whom lives in Australia and the other two here. Under the will the parent appoints all three as executors. This is not an uncommon scenario.
Problem is that the Australians view a trust as being tax resident in Australia if any trustee is resident in Australia. And as I discovered recently, this also applies to personal representatives or executors of the states. You have a deceased estate of a person who died here in New Zealand. All the assets are here in New Zealand. But in the scenario I outlined earlier, one of the children who is an executor lives in Australia. This is currently sufficient for the Australians to consider the estate to be an Australian estate and therefore taxable. How exactly that is enforced is not clear, but this position is a very real risk.
So, here’s a reminder for people who may be considering wills in these uncertain times. Just be sure to cover off the tax consequences if it so happens you have someone such as a child you want to either appoint as an executor or make a beneficiary, who is living overseas.
Increase in tax write-off threshold
And finally, back to a COVID-19 related matter. The Government has temporarily increased the write off limit for unpaid tax for people on PAYE from $50 to $200. Right now, Inland Revenue is going through approximately two million people who are on PAYE and doing the automatic calculation of their liabilities for the year ended 31 March 2020.
The general rule was if they owed $50 or less, it would be written off. But above that amount, they’d have to pay. And what’s happened is they’ve decided as an interim measure to help people through this pandemic is to immediately increase the $50 threshold to $200. It only will apply for the year ended 31 March 2020.
This is only available for individuals whose year-end tax liability is calculated automatically. If you are required to file a tax return, because, for example, you’ve got a rental property, you’re not covered by this change.
And by the way, just on the automatic calculation there’s an interesting thing to note here that any amount of tax to pay for someone who is paid fortnightly and had twenty seven fortnightly pay periods during the year ended 31 March 2020 is automatically written off. (The same applies to anyone paid weekly who had 53 pay periods in the year, or someone paid four weekly who had 14 pay periods).
Well, that’s it for this week. Thank you for listening I’m Terry Baucher, and you can find this podcast on www.baucher.tax or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. And until next time, Kia Kaha stay strong.