14 Apr, 2020 | Tax News
Are extra expenses and use of personal assets to work from home deductible against your taxable income? As usual with tax, its complicated.
We’re in week three of the Lockdown, and although the Prime Minister has indicated there may be a possible shift to Level 3 from 22nd April, a majority of employees may still be required to work from home even after that shift.
Naturally, employees will be incurring expenses in carrying out their employment duties. And the question arises, can they claim a deduction for these expenses? And the short answer is no. The Income Tax Act specifically precludes a deduction for “An amount of expenditure or loss to the extent to which it is incurred in deriving income from employment. This rule is called the employment limitation.”
This is a longstanding prohibition which has been in place since the mid-1990s. It was introduced as part of a simplification of tax return filing requirements. Instead, what is to happen is that the employer needs to reimburse employees for such expenditure. The employer will be given a deduction for the relevant expenditure and it will be treated as exempt income of the employee.
But what potentially could be deductible? The Inland Revenue guidelines for businesses with home offices are equally applicable for employees working remotely.
These guidelines allow a deduction of 50% for the rental of a telephone line, if it is also a private line which is used for business. Obviously specific business calls would be deductible. With regard to Internet costs this depends on the plan and the business proportion. How that is determined is a matter of some judgement. In addition to these costs, the business proportion of household expenses such as rates, power, rent or mortgage interest expense could be claimed.
Generally, the business proportion is calculated as the area set aside for use as an office over the total area of the house. For example, if an employee has an office which is say, 10 square metres of a 100 square metre house, then the deductible proportion is 10%.
There’s an alternative option of using a fixed rate as determined by Inland Revenue based on the average cost of utilities per square meter of housing for an average New Zealand household and applying it per square metre of the office area.
For the 2018-19 income year the rate was $41.70 per square metre so in the example above the deduction would be $41.70 x 10 or $417. It does not include the costs of mortgage interest rates or rent and rates. These must be calculated based on the percentage of floor area used for business purposes.
All of the above is perhaps easy enough where a person has a dedicated office at home, but as no doubt is happening all over New Zealand right now, employees are working on kitchen tops, dinner tables and out of bedrooms. What happens in these instances?
As the area being used cannot be said to be entirely dedicated to office use, a full deduction based on these apportionments is probably not available. The area of the room used for non-business purposes for example a bed or other furniture should be excluded. Arguably the deduction would be time-limited (for example, if it was only in office use for 8 hours a day, then only one-third could be claimed).
For the employer, they may be able to claim GST on the relevant proportion of GST expenditure claimed using the standard apportionment methodology, if the employee provides invoices. At this point the employer is probably thinking this is getting needlessly complicated.
A more practical approach would be for the employer to simply pay a flat rate allowance to employees. This is allowable if the allowance is based on a “reasonable estimate”.
The other potential issue is fringe benefit tax. Theoretically, FBT applies on the private use of tools such as mobile phones and laptops. Fortunately, there is an FBT exemption if the laptop or mobile phone is provided mainly for business use and the cost of those laptops and mobile phones is no more than $5,000 including GST.
All of the above represents a compliance nightmare for employee employers and possibly a target rich environment for Inland Revenue in a future date where it considers that the allowances paid, or deductions claimed for home office expenditure, have been excessive. In this instance the employer will be liable for the PAYE which should have been deducted from the amount determined to be excessive/non-deductible.
In practical terms, Inland Revenue might simplify clarify a lot of issues for employers and employees alike by issuing a determination setting out a flat rate amount of expenditure it would consider acceptable. An employer could pay above that amount but then PAYE would be applicable.
Of course, all of the above is somewhat hypothetical, if the employer has no cash flow to pay any such allowances. I suspect that is the matter employers are most concerned about right now. In the meantime, let’s hope we can return to a new normality soon.
This article was first published on www.interest.co.nz
30 Mar, 2020 | The Week in Tax
- Explaining some of the detail about the Government’s COVID-19 package
- Inland Revenue discretion about waiving use of money interest
- Tax residency and unintended consequences of COVID-19
- Time to defer 7th May provisional tax and GST payments
Transcript
Mike Tyson once said everybody’s got a plan until they get a punch in the mouth, and it’s fair to say that we’ve all taken one tremendous sledgehammer to the mouth in the past few weeks. The pace of the developments is extraordinary. As are the government’s attempts to keep up and get ahead of the issues.
Inevitably, that means that some of the detail perhaps isn’t as tidy as Inland Revenue, the Government and tax agents and taxpayers would like. But we can work through these issues. And that’s what’s happening. So, to clarify a position in relation to the government’s wage subsidy and payments subsidy no GST applies to these payments. A specific Order in Council has been passed to clarify that position and incorporate the payments in the exempt part of the GST Act.
As for the income tax treatment it is excluded income under Section CX47 of the Income Tax Act 2007 – but the payments which are passed through to the employees will be subject to PAYE. The portion of a salary that represents the wage subsidy, i.e. the maximum $585 per week for full time employee is not a deduction for the employer. So just to clarify that it’s not income on the way in when the employer receives it and it’s not a deduction on the way out.
Now, that will mean that people will need to make sure their accounting packages can deal with that properly. Otherwise, there’s a potential for a double deduction to incur when the salary gets deducted as well as the portion which represents a wage subsidy. And of course, the worst-case scenario the other way is that the wage subsidy might accidentally be counted as income.
Separately, I’m seeing some discussion about the treatment of a wage subsidy paid to a shareholder employee. Now, for those who don’t know, shareholder employees are shareholders in a company and they’re also an employee. They are usually within the provisional tax regime and not taxed under PAYE. And the advantage they have is that the salary that can be allocated to them for a tax year can be done after the end of the tax year before the return is filed. So, for example, right now, tax agents with clients linked to their tax agency will have until 31 March 2020 to file the tax returns for 31 March 2019.
And so accountants will be looking at this and saying, all right, we can allocate you this amount of the company’s income to you as a shareholder-employee salary for the year ended 31 March 2019, so people are working through that. And the question people are obviously looking at is what do we do for shareholder-employees for the 2020 year? I don’t know yet. It’s an interesting question. I suspect it’s possible that a shareholder-employee may not be eligible, in that case, for the subsidy. [CLARIFICATION, the latest thinking is they are eligible.]
These issues are a good example of how moving rapidly and without the normal processes of putting it through consultation does throw up these anomalous questions and other issues. It’s worth keeping in mind that the proposals for the wage subsidies were announced on March 17th, barely nine days ago. And so it’s not surprising we’re still working through some of the detail.
It might point to perhaps that small business involvement earlier on might have helped. But to be truthful, everything is moving so quickly at this stage, it’s inevitable that sometimes some detail slips through the cracks.
Meantime the tax measures announced at the same time as the wage subsidies – such as restoring building depreciation, increasing the value of the low value asset write off for assets to $1,000, allowing the waiving of use of money interest and allowing wider access to the in-work tax credit have now gone through and received the Royal Assent.
That’s actually a reflection of how quickly things can be done when required in a Westminster style democracy.
Now, one measure which is generally being welcomed but could actually be storing up a headache for Inland Revenue further down the track, is its decision to waive/suspend late payment penalties and use of money interest on late paid tax. At this point, it appears its being done on a case by case process, but on 25 March, just two days ago, Inland Revenue released a further update on what it was doing which read as follows.
If your business is unable to pay its taxes on time due to the impact of COVID-19, we understand, you don’t need to contact us right now.
Get in touch with us when you can, and we’ll write-off any penalties and interest.
It would help if you continue to file however, as the information is used to make correct payments to people, and to help the Government continue to respond to what is happening in the economy.
That’s helpful, but it also may be giving Inland Revenue a problem because it basically appears to be saying we’re going to write off all penalties and interest if you’ve paid late. That opens the door for, shall we say, some unscrupulous taxpayers who can decide to simply not pay and hold out until Inland Revenue comes around and bangs on the door. So Inland Revenue might have given itself a headache by doing that. But we do know it is on a case by case basis.
And there’s another issue that anyone who’s thinking about trying to pull a fast one needs to consider. The measure applies to provisional tax, GST and PAYE. In relation to GST and PAYE it’s worth remembering that Inland Revenue regards these as payments made on trust, that is, you’re withholding and paying tax on account of other people.
In that situation if Inland Revenue concludes you’re deliberately withholding payments, prosecution will probably follow, if it emerges you were in a position to pay it. So watch that space.
Cashflow is obviously tight for people and a lot of taxpayers will be in a position where the difference between the time they triggered the PAYE or GST liability and the actual due date of payment, everything has just run into a brick wall.
Waiving of use of money, interest and penalties is designed to help in that circumstance. But there will be other taxpayers who’ve got cash in the bank and could pay and should pay but decide they don’t want to pay and just play the game. I foresee that once Inland Revenue is back up to speed, we’ll hear more about those employers.
Moving on. There are going to be plenty of unintended tax consequences that will come out of this lockdown. And I’ve already encountered one interesting case. And it’s in relation to people who are holidaying here and can’t leave the country because the borders have been shut. So they’re stuck here because they can’t get back to where they come from, because the transit area countries have just shut down all connecting flights.
So what happens with their tax residency? In New Zealand, tax residency is determined in one of two ways. Either you have a permanent place of abode in New Zealand, which is the main test, or you spend more than 183 days in any 12-month period in New Zealand. And it’s that latter test that is going to trigger the accidental unintended consequences for taxpayers. There’ll be people who holiday here for, say, four, maybe five months of the year and then go back to somewhere in the northern hemisphere. I see quite a bit of that. They’ve already got some interesting tax issues they’ve got to be mindful of.
But what happens if they get stuck here? There’s the question of them becoming tax resident even though it wasn’t a deliberate decision to do so. Our legislation doesn’t give any discretion to Inland Revenue to consider the options that someone is stuck here either because they become sick (which has happened), or as in this case, a dramatic change of events means they can’t leave the country.
I know in the UK they have a days present test there as well. There is discretion on this matter within the legislation. And in fact, H.M. Revenue & Customs did release a press statement just reminding people that it would regard someone as an overstayer, for want of a better phrase, because of the Covid-19 outbreak, to be within those special circumstances.
We don’t have that option. Arguably, you might say, the relevant double tax agreement can sort it out and it will do so in most cases. But there’s a second issue that could happen for some people and that is it triggers the start of their four-year transitional resident’s exemption. And that’s actually quite significant for them. So, it may turn out that because of double tax agreement relief, they’re not deemed to be resident in New Zealand for tax purposes, but in their home jurisdiction. And therefore, New Zealand only gets to tax the income which arises only in New Zealand. That’s quite manageable.
But it’s the triggering of this four-year exemption for the transitional residence exemption and for transferring your foreign superannuation scheme that is more of an issue. I’ll be writing to Inland Revenue and asking for clarification as to how they will treat this and probably requesting a legislative amendment at some stage.
Moving on, what next? We’re in very uncertain times here. And we’re right up against the end of the tax year for those with a 31 March balance date, which is most people.
This event has happened at practically the worst time for them because they will have derived most of their income for the year. And then suddenly, wham, Covid-19 arrives, followed by lockdown and business comes to a shuddering halt, and what I’m hearing is cash flow has just dried up.
There are two tax payments coming up for those taxpayers with a 31 March balance date. On 7th of April, those who had a tax agent will have to pay their terminal tax for the year ended 31 March 2019. Now to go back to what I said a few minutes ago those who have the cash should pay it, but there’ll be those that may need to use Inland Revenue’s discretion. And most people would have been aware before the lockdown happened that they had that 7th April terminal tax liability coming up.
The bigger issue in my mind is what to do about the 7 May provisional tax payment, which is the final provisional tax payment for the March 2020 balance date.
There are two issues here. One, have you got the funds to pay it? And in the middle of a lockdown, which won’t end until April 26th or 27th April, how is it possible for accountants and clients to work out the GST liability for the period ended 31 March. So there’s real practical difficulties and in my view, Inland Revenue should postpone the 7th May provisional tax payment and GST collection dates by at least a month, possibly even two months, to let everyone catch up. Effectively, it’s doing that by that blanket measure I spoke about a few minutes ago when it apparently said “look we will waive interest and penalties on late paid tax”.
So why not take the pressure off taxpayers and itself? Because Inland Revenue will be affected here by the lockdown. It won’t have all its staff in the right places. And it’s also trying to to integrate the next part of its business transformation package. So I think that a deferral of the 7 May provisional tax and GST payment dates would actually be good for everybody involved, even though it would be a cashflow hit to the government.
Also, as to the question of 31 March year end, we’ve not heard anything from Inland Revenue on this, so we’re assuming carry on as normal. But these are extraordinary times. We’re trying to get hold of people, and ensure final elections are filed on time all with restricted communications. Although we have the ability to have people sign forms and get things done remotely, we still have a practical issue of being up against a deadline at a time when the whole country is in lockdown.
And I just wonder whether the government should think about saying, “Right, all elections that would have been due to be filed by 31 March, we will be extending the filing date as a one off measure to say 30 April or maybe a little bit later, say 31 May, depending on how the lockdown goes”.
There’s precedent for this around the world. In the US, the Internal Revenue Service’s due date for filing your 31st December 2019 Federal tax returns is 15 April and they come down hard if you haven’t filed by then. They’ve just extended that by three months to 15th July recognising the impact of Coronavirus. So if the IRS, the tax authority for the largest economy in the world, can take that measure I think Inland Revenue can probably cut us and itself some slack.
There are provisions within the Income Tax Act and Tax Administration Act to extend the time for late filing. So, I’d say to Inland Revenue “Save yourself a lot of bother and apply a blanket discretion and just simply extend the filing dates by one month, two months, whatever.” These are exceptional times. They require exceptional measures.
Perhaps Inland Revenue, which rightly or wrongly feels that if it does things like that, taxpayers will rip it off, should park its paranoia for a little while. Let’s just get things moving properly and then you can sweep up who actually was screwing around and who was actually genuinely caught up by this pandemic?
Well, that’s it for the week in tax. I’m Terry Baucher and you can find his podcast on my website. www.baucher.tax or wherever get your podcasts. Please send me your feedback and tell your friends and clients. Until next time, Kia Kaha. Stay strong.
9 Mar, 2020 | The Week in Tax
- GST issues paper proposes change in GST treatment of crypto-assets
- Retrospective change to treatment of donation tax credits
- More on Inland Revenue’s decision to stop accepting cheques
Transcript
Early last week Inland Revenue released a GST policy issues paper.
The paper “covers a number of issues which have been identified where the legislation produces an outcome that does not reflect the underlying policy intent. The paper is designed to address those issues and maintain and in doing so, maintain the certainty and efficiency and fairness of the tax system”. And so what the paper does is outline technical issues that have arisen in the GST area and then suggesting potential policy options and solutions to those issues.
There’s a whole number of issues covered in here. For example, the paper starts off by talking about tax invoice requirements. Then there’s a discussion on the apportionment and adjustment rules which are complex and difficult to apply, and they’re looking to see how they can improve those set of rules. The apportionment and adjustment rules do cause headaches in the GST area. So another look at that area is always welcome.
There’s a proposal dealing with the treatment of GST and courier business practices where part of an international delivery is subcontracted. There’s an interesting proposal relating to business conferences and staff training. The paper points out that for overseas businesses it’s impractical for them to register for GST to claim a GST refund for a one off expense of sending their staff to a conference or training course in New Zealand. This is something we’ve encountered from time to time. And it’s a deterrent to businesses who might want to come here for a tax conference or any other conference, actually, because if they don’t manage it correctly, then their costs go up by 15 percent. And from the perspective of a New Zealand conference centre this is also an issue for them because they may not be getting business they could otherwise expect.
The proposal here is to zero-rate conference and staff training services supplied to non-resident businesses. That’s a good initiative. It is also actually conceptually logical because if the conference is being carried out for business purposes, then a GST registered business would be able to recover the GST on that. So this proposal is sort of short circuiting that process.
There’s also commentary on managed funds, insurance payouts to third parties, some tweaking of the rules in relation to compulsory zero rating of land and various other remedial issues.
But the issue that’s caught my eye and is quite welcome is in relation to the GST treatment of crypto assets. Now, what the paper notes is that at present there are over 5,000 crypto-assets and the total global market value of all such assets is in excess now of over 300 billion U.S. dollars. But the GST treatment is very inconsistent.
GST was originally designed by the French way back in the 1950s as part of the forerunner of the European Union, the European Economic Community. The designers of GST didn’t ever contemplate crypto-assets and nor did our legislation which dates from 1985. And as the paper points out, crypto-assets have a very different GST treatment to either money or financial services. It’s not clear, for example, whether the supply of crypto-assets could either be an exempt financial service, subject to 15 per cent GST or it’s a zero rated supply to a non-resident. So there’s a lot of confusion on this.
And it’s a matter that we have been discussing with Inland Revenue and clients. Work arounds have been established, but there’s always a level of uncertainty. So we were looking for guidance from Inland Revenue from on the matter and this paper gives that by proposing to exclude crypto currencies from GST and the financial arrangements rules.
Now, the financial arrangements rules, as regular listeners will know, are a minefield for most taxpayers. It would certainly be a big problem for crypto-asset investors if Inland Revenue had decided that crypto-assets could be within the financial arrangements regime, because, given the volatility, many investors would probably be subject to being taxed on an unrealised basis. So good to hear they’re planning to clarify that this won’t be the case which is a big win for crypto currencies.
There’s another little win as well in that GST registered businesses raising funds through issuing security tokens or crypto assets, which, quote, “have features that are similar to debt or equity” such as a right to share of the profits of a project, should also be able to claim input tax credits on their capital raising costs. This is a good move, and it means that crypto-asset businesses are not disadvantaged if they wanted to try and raise capital through issuing crypto-assets which are a substitute for debt or equity. That’s a good clear rule and also good to see this.
The paper also points out, inevitably, that income tax rules still continue to apply to crypto assets. These changes only relate to GST. The income tax rules set out in the Frequently Asked Questions issued last year will still apply.
Submissions on this issues paper close on 9th of April. If everything progresses as usual, you might see these proposals included in an omnibus tax bill released towards the end of this year. This means that all of this could possibly be in law by 1st of April 2021. Or maybe a little later than that if the omnibus bill is delayed, perhaps because of the election. Still this paper is good news for crypto-asset investors.
Moving on. As many tax practitioners will know, in dealing with Inland Revenue it’s often the case that it’s “Heads they win. Tails you lose.” And this can emerge where Inland Revenue, for example, loses a case in court and then promptly changes the law to what it thought should have been the result.
And this is about to happen. Late last year, the Court of Appeal ruled in the case of Commissioner of Inland Revenue vs. Roberts that a gift of forgiveness of debt made to a charitable trust which was progressively forgiven and donation tax credits claimed, represented money and therefore qualified for the donations tax credit.
In the case in question, Mr and Mrs. Roberts had transferred $1.7 million to a trust by way of loan and then started executing deeds of gift, releasing the trust from the liability to repay specified amounts of that loan and the trust then claimed a tax credit on the basis that the forgiveness of debt was a charitable gift. And the High Court said, “Yes that’s acceptable” and the Court of Appeal upheld that decision on the 17th of December. Immediately Inland Revenue said we’re going to change the law so it’s only gifts of cash that can be eligible for the donation tax credit.
And this week, the Government has released a Supplementary Order Paper to a tax bill going through Parliament right now, which addresses that matter.
And it makes it very clear that only gifts of cash will qualify for the donations tax credit and the 33% rebate back in cash from Inland Revenue.
Now, it’s arguable that what Mr and Mrs. Roberts did was pushing the envelope a little bit. But the question of the treatment of gifts in kind is a live one. I encountered one such case recently where a charity was saying, well, what if the building owner was to give us the use of the property rent free? Is that eligible for the donations tax credit? And I said “No it has to be in cash.”
So this is a matter that does pop up from time to time. There’s also some GST rules around this which are a little unclear. So, on the one hand, some clarity around this rule is to be welcomed. But I can’t help but wonder if Inland Revenue are just taking an overly draconian approach here, because as I said, there are other alternatives where gifts are being made in kind and maybe the donors should be getting a tax credit for that, perhaps you might want to go for a reduced tax credit.
But there’s a second issue here, which is also of concern, and that is because this is a Supplementary Order Paper to an existing tax bill, opportunities to submit on the bill are therefore basically being sidestepped. Now this happens from time to time in our legislative process. But it’s not the first time this has happened in this Parliament. And I’m personally not in favour of seeing stuff like this happen because these are issues that Inland Revenue probably knew about anyway and probably should have raised beforehand.
Obviously, Inland Revenue was expecting its appeal would be successful and therefore wouldn’t have necessarily put something forward. But maybe it should have done so to bring these issues out for discussion. As it is, it’s lost a case and has then decided, “Well, we’re not going to have that because it’s arguably a threat to the integrity of the tax base. But it’s also not what we consider to be the underlying policy’s intent”. Maybe it’s Parliament’s job to determine what the underlying policy intent is and as such, in a democracy, maybe we should have got more input into that matter.
And finally, speaking of getting some input into the matter. The decision by Inland Revenue and other agencies such as ACC, to stop accepting cheques in payment as of first of March is still rumbling on. And a couple of things happened this past week in relation to that.
Firstly, I got contacted by an international website, Tax Notes International, which is based in the United States. The journalist, in fact, was in New Hampshire and he expressed quite a bit of surprise at what was going on about that money. He pointed out, not unreasonably, that the fact that 424,000 cheques were received during the year to 30th of June 2019 is not an insignificant number in relation to a population of five million. He thought Inland Revenue’s action was quite offhand in that respect.
But he had also sought some feedback from Inland Revenue on the issue who and they said that it has received 160 requests for exceptions to this rule so far. It has accepted 76, turned down 22 and are in the process of reviewing the other 62 requests.
Then Andrew Bayly, the National MP for Hunua and a member of the Finance and Expenditure Committee, made the opening address at the Accountants and Tax Agents Institute of New Zealand’s annual conference last Friday in Taupo. (Excellent conference by the way).
He raised this issue and he has begun a petition to overturn the decision by Inland Revenue and other government departments on the matter.
I’m supportive of that. I don’t agree with the decision. I think the use of cheques will peter out anyway. But government agencies are imposing arbitrary costs on their “customers” when we have no choice in the matter. We can’t exactly go to the Australian Tax Office or the US Internal Revenue Service and use them instead. Inland Revenue is actually kicking the costs across to ourselves as tax agents and the taxpayers and just for its administrative convenience, and that’s unacceptable.
So keeping the pressure up, I have written to the Minister of Revenue and the Commissioner of Inland Revenue on the matter. Don’t hold your breath, but I think we need to keep pressing away at that. It could be that Inland Revenue may decide to relax the rules around the requests for exceptions. But let’s watch this space and see.
Finally, on a personal note, I was very honoured and frankly humbled to receive this year’s President’s Award at the Accountants and Tax Agents Institute of New Zealand’s (ATAINZ) Annual Conference. It is a huge honour and I’d like to thank the ATAINZ Board and all its members for their support of my activities over the past few years. I’d also like to thank my wife Tina and my colleagues here at Baucher Consulting Ltd, Eric, Judith and Darryn, without whom this wouldn’t have been possible. Thank you all very much.
And on that note, I’m Terry Baucher and this has been the week in tax. You can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. Until next time have a great week. Ka kite āno.
18 Nov, 2019 | The Week in Tax
- Property developers and a still too common GST mistake
- EU proposes sharing credit card data to counter tax fraud
- OECD proposes minimum global tax rate as part of BEPS initiative
Transcript
This week, a common and often very expensive GST mistake. The European Union ramps up its anti-fraud fight with a massive data sharing initiative, and the OECD suggests a global minimum tax.
Property developers provide a rich source of work for tax advisers and for Inland Revenue. That is because of the importance of property to the economy as a whole, but also in that they are often remarkably careless about the tax consequences of a transaction. This is probably a character flaw in that a developer sees an opportunity and knows they need to move quickly to maximise the opportunity. They therefore often go charging into a project without having someone on hand sweeping up the bits and pieces to make sure that all the i’s are dotted, and t’s are crossed.
In my experience, a key distinction between developers who fail and those who are successful is often the successful ones make sure that they have a team around them that does look after all the bits and pieces and the necessary legal frame, legal and tax frameworks to ensure the projects go ahead.
How this often manifests itself is that a developer might come across a residential property which is ripe for development and will make a bid for the property and purchase it. This is where the very common tax problem may emerge if the developers aren’t careful. If the developer purchases the property in the wrong entity, either personally or in a company or a trust which is actually used for development purposes.
At some point down the track, the developer’s lawyer or the accountant might say that property shouldn’t be in that entity and we need to get it into the proper development company. The developer often responds “Well, just deal with it. Get it into the appropriate entity”. And what will happen more frequently than it should happen is that a second transfer is made from the developer or the wrong entity to the correct entity.
And then the new entity goes and claims a GST input tax credit. For example, a residential property worth say $575,000 residential property was bought and was then transferred at a later date to the correct development company, which tries to claim an input tax credit of $75,000. Inland Revenue will turn it down.
The reason why it would turn it down is a provision in the GST Act, section 3A(3)(a). Now this provision has been in place since October 2000 and it is quite astonishing that 19 years on this issue keeps arising. Why?
What this provision exists to do is to stop people buying a property when no GST was paid. For example, a residential property bought from someone who’s not GST registered, holding it and then selling it at an inflated price to a GST registered entity, which then claims the input tax credit. This was something that was going on and was eventually put a stop to by the introduction of this provision in October 2000.
And the way it works is simply to say that if the transaction involves a sale between associated parties, the amount of the GST that can be claimed by the recipient party, the developing company in this case, is limited to the amount of GST paid by the original purchaser. So, if the purchaser buys from a non-GST registered person a residential property and then on sells it to a GST registered person no GST input tax can be claimed on the purchase because no GST was paid by the original purchaser of the property.
Now this is, as I said, a very common mistake I keep encountering. It’s a reminder to all people involved in the property industry to be careful when buying property to make sure that you have the correct entity settle on the transaction with all the necessary paperwork in place. Too often developers are keen to get something done and then buy in the wrong entity just to get the deal done. And unwinding that transaction is either impossible or proves very expensive. So that’s a word to the wise. But I still find it astonishing that this is an issue I’ve been dealing with repeatedly for 19 years.
A credit card trap
Moving on it’s been a busy week in the international tax world. I’ve spoken in past podcasts about the international efforts to address tax evasion and fraud. And this week, the European Union announced an initiative to counter e-commerce VAT(GST) fraud, which is estimated to be about costing 5 billion euros a year in the European Union.
From January 2024, credit card and direct debit providers will be obliged to provide member state tax authorities with data about certain payment details from cross-border sales. The anti-fraud Eurofisc Network will then analyse this data for potential fraud. This is another part of the massive information sharing programmes which are now common to international tax such as FATCA and the Common Reporting Standards on Automatic Exchange of Information.
Inland Revenue has been operating something similar to this for some time. The most notorious example I encountered was a family here had still kept a credit card issued by a UK bank. The mother wanted to come out and visit them and have a holiday in New Zealand. So, what she did was she put money into the credit card in the UK and they then used it for the only time to hire a camper van.
Inland Revenue found the transaction and knew that this was a credit card transaction that was made by a New Zealand tax resident. It issued a “Please explain” letter. And that turned out to be a very costly matter because in fact the son had made a pension transfer which got picked up and tax paid.
What’s notable is that Inland Revenue’s older computer system was able to track and find that credit card transaction. But following Business Transformation what will Inland Revenue’s computers be capable of tracking? It will be interesting to see. But the warning is that if you use a credit card issued by an overseas bank in New Zealand, Inland Revenue will come asking questions.
Tackling tax aribtrage
And finally, another very significant development in overseas tax. This is part of the ongoing work of the OECD/G20 Base Erosion and Profit Shifting initiative (BEPS). The OECD secretariat last Friday issued a discussion document on what’s termed the Global Anti Base Erosion proposal under Pillar Two.
I spoke on a previous podcast about the Pillar One initiative. The references to pillars, by the way, is because these proposals represent significant changes to the international tax architecture, hence the reference to pillars.
Now this Global Anti-Base Erosion (GloBE) Proposal is really quite significant and worth quoting at length. According to the press release it
“seeks to comprehensively address the remaining BEPS challenges by ensuring that the profits internationally operating businesses are subject to a minimum rate of tax. A minimum tax rate on all income reduces the incentive for taxpayers to engage in profit shifting and establishes a floor for tax competition amongst jurisdictions.”
The press release goes on to note that
“global action is needed to stop a harmful race to the bottom on corporate taxes, which risks shifting the burden of taxes onto less mobile bases and actually may pose a particular risk for developing countries with small economies.”
And this has been something that’s been brewing for a long time now. The way that international multinationals have been using tax competition, encouraging countries to cut their tax rates and also looking to minimise their tax bills through shifting profits into low tax jurisdictions. The OECD proposals are a huge step forward and there’s a lot more to consider.
Things are now happening very rapidly in this space. The timeline for submissions on this particular Pillar 2 proposal is Monday 2nd December. There will be a public consultation meeting the following Monday 9th December in France. And the G20 is saying it wants a solution on the whole matter delivered by the end of 2020. So, stay tuned for what is a remarkably fast changing environment.
Well, that’s it for The Week in Tax. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. And until next time have a great week. Ka kite āno.
