8 Jun, 2020 | The Week in Tax
- The Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill introduced covering purchase price allocation, taxation of land, feasibility expenditure and trusts
- Inland Revenue phone issues
- Last week for applications for the small business cashflow scheme
Transcript
After a frenetic period of activity with COVID-19 related measures coming out almost daily, it’s reassuring to see a normal tax bill turn up with the introduction into Parliament of The Taxation (Annual Rates for 2020-21, Feasibility Expenditure and Remedial Matters) Bill.
Now, this is a sort of standard type of tax bill we see twice a year. There’s usually one introduced in May and another in November. And typically, these bills will deal with some policy matters that have been on the table for some time, plus tidy up remedial issues. So, this Bill is a sign of nature healing and a return to normal.
This Bill has a number of measures which will be both welcomed and not welcomed across the board. Firstly, there’s a measure up to encourage investment by allowing businesses to take a deduction for feasibility expenditure incurred in investigating or developing a new asset, or process, even if that process is actually abandoned and never implemented. Until this bill there was some doubt that any of this expenditure would be deductible.
And there are two parts to this measure which are welcome. Firstly, for small and medium businesses, qualifying expenditure on feasibility expenditure, which is less than $10,000 a year, will be immediately deductible in the year of expenditure.
Where the expenditure is above that $10,000 threshold, then a business would be able to claim a deduction spread over five years for the expenditure it incurred on investigating this new asset, process or business model. And this deduction will be available even if the planned project is abandoned.
There are several other measures in the Bill. One which won’t be welcomed is in relation to what we call purchase price allocation. And this happens when parties to the sale and purchase of assets with differing tax treatments for the purchaser and vendor allocate the sale prices between assets to maximise the tax advantage.
This has been a running sore point for Inland Revenue because you could actually find that for the same asset, the purchaser and the vendor have adopted completely different tax treatments. This bill is designed to ensure the treatment for the asset is consistent across the board and it’s expected to raise $154 million dollars over four years.
There are more rules relating to the taxation of land, particularly in relation to investment property and speculators. What is particularly targeted here are attempts to get round the provisions which apply where someone has a “regular pattern of buying and selling of land”. In these circumstances the transactions are deemed to be taxable.
The Bill proposes to extend the regular pattern restrictions which apply for the main home, residential and business premises, to a group of persons undertaking, buying and selling activities together, rather than looking at the regular pattern of a single person.
So that will introduce more complexity into an area which is already very complex, because a lot of the matters relating to the taxation of land involve defining rather subjective terms such as “work of a minor nature” or “a regular pattern”. What is a “regular pattern”? What is “work of a minor nature”? These are issues that have dogged the taxation of land for some time. And dare I say it, a simpler answer would have been a comprehensive capital gains tax. Then everyone’s on the same treatment. But I guess it’s probably too soon to talk about that.
There is a measure to help dairy and beef cattle farmers who because they’re taxed under the rules for the herd scheme have unexpected taxable income because their herds have been culled as part of the attempt to eradicate Mycoplasma bovis over the past few years.
Now, what will happen instead is that income, which would normally be taxed in a single year, will now be able to be spread forward over six years. Farmers who have been affected by Mycoplasma bovis will be relieved that this measure will take some of the pressure off them.
Some of the Bill’s measures had already been in the public domain for consultation for some time, but others have not. There is some interesting legislation in relation to the taxation of trusts, which I had not expected to see. One of these to watch out for is if a beneficiary is owed more than $25,000 at the end of a tax year, then he or she will be deemed to be a settlor of the trust. And that has quite significant tax ramifications.
So there’s a lot in this bill, and over the coming weeks I’ll pick out particular aspects and discuss in a little bit more length.
Worsening client service
Moving on and another sign that we’re returning to normality, complaints about Inland Revenue not answering the phones are back
in the press.
Now, you may recall at this time last year, Inland Revenue was absolutely swamped with calls as it went through its automatic calculation process for the first time as it worked out what tax was due for two million taxpayers on PAYE. And so a similar process is happening this year. And once again, people are complaining that they can’t get through to Inland Revenue.
In part, Inland Revenue’s business model actually does not want to encourage phone calls. It rather would deal online with people. And in fact, to be fair to it, matters are being responded to very quickly through the Inland Revenue myIR online portal.
The call centres are under pressure as they always come under pressure this at time of year. But the pressure has been exacerbated by the fact that Inland Revenue have got to try and maintain social distancing and have a lot of staff working from home.
Unfortunately, it’s a fact of life that at this present time, Inland Revenue isn’t really in a position to answer phones as promptly as possible. It’s partly, as I said, the result of COVID-19 requiring some physical restrictions which has made it difficult for Inland Revenue to actually have everyone where they want them.
In addition, Inland Revenue has prioritised responding to matters COVID-19 related, that is, applications for debt remission, wage subsidy enquiries and the Small Business Cashflow Scheme. The pressure is such that Inland Revenue has basically turned off answering the phones on the dedicated tax agent line. We have a habit of ringing up and then asking about several clients at one time because it takes tax agents some time to get through even on a dedicated line. And that doesn’t really fit well with how Inland Revenue is operating at the moment.
The delays are frustrating, but it’s a fact of life. And I would expect this to be continuing for at least another six weeks or so, possibly longer.
Inland Revenue the banker
And finally, one of the additional things that Inland Revenue is currently dealing with is the
Small Business Cashflow Scheme. This is where businesses can borrow up to $10,000 plus $1,800 per full time employee from the Government at 3% but if the loan is repaid within a year, it would be interest free.So far, more than 69,000 small businesses have applied for almost $1.2 billion in lending under the scheme but note applications close next Friday. So, if you qualified for the wage subsidy and you believe your business is sustainable, you might want to check this out separately. It’s possible it could be extended.
Update: After this was recorded on Friday morning the Finance Minister
announced an extension of the scheme until 24th July.My view is the Government should look at introducing some form of permanent variation of the scheme when everything settles down.
Research that we on the Small Business Council received last year, indicated that access to finance for businesses with five or fewer employees was difficult. About 45% or about 31,000, of the 69,000 applications under the scheme have been made by businesses with five or fewer employees.It seems to me that the response to the Small Business Cashflow Scheme indicates that it is meeting an unfulfilled need. You may recall the Government agreed to underwrite 80% of the lending under the
Business Finance Guarantee Scheme administered by the banks. But the take up on that has been disappointing.
There’s a number of factors going on there. But it does seem that the banks were quite happy to socialise the risk and privatise the profit. And certainly, reports I’ve heard are that the application processes were very cumbersome and off-putting for small businesses. For example, I had one tax agent advise me that a bank had requested projected cashflow statements for two years going forward. Well, in this climate, three months is a long way off.
Anyway, a variation of the Small Business Cashflow Scheme is something that I think the Government should investigate. In the United States the Small Business Administration runs a variation of this scheme which could be of interest.
Well, that’s it for this week. I’m Terry Baucher, and you can find this podcast on my www.baucher.tax or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. Thanks for listening. And until next time, Kia Kaha stay strong.
25 May, 2020 | The Week in Tax
- The Small Business Cash Flow Scheme
- Inland Revenue’s guidance on the sharing economy
- Employees claiming home office expenditure
Transcript
With the move to Alert Level Two, there’s some level of normality being restored, and most businesses are now able to operate. But for many, the COVID-19 pandemic represents a major hit to their business and cash flow.
So, one of the measures that they probably welcome is the most recent one announced by the Government, the Small Business Cash Flow scheme (which wasn’t actually included in the Budget estimates and hasn’t yet been costed formally).
Now, this scheme had a rather chequered start when the legislation enabling it was accidentally released and then passed by Parliament ahead of time. But now the details have been fleshed out and it has been up and running since May 12th. For one month until June 12th businesses with 50 or fewer full-time equivalent employees can apply for a loan.
Eligible businesses and organisations can then get a one-off loan with the maximum amount being $10,000 plus $1,800 per full-time equivalent employee. There’s an annual interest rate of 3%, but no interest will be charged if the loan is fully repaid within one year.
Now, the scheme is being administered by Inland Revenue, which seems odd because it’s not its core business. But if you think that it already administers the student loan scheme, then giving it the responsibility to manage the Small Business Cash Flow is not unreasonable.
The scheme was put together very quickly when it became apparent that the business finance guarantee scheme arranged with the banks under which the Government underwrote 80% of the risk was not delivering funding to small businesses quickly enough.
It is already – in terms of demand – a huge success. By Friday of the first week of its launch more than 33,000 business had applied for a loan, and 31,000 loans had been approved. So far, just under $600 million dollars has been approved for lending. There are about 400,000 businesses in New Zealand with 50 or fewer full-time equivalent staff who are eligible. So the Government is looking at a potentially horrendous amount of borrowing.
If you work through the Inland Revenue website, you’ll see the calculation of the loan is tied to the wage subsidy scheme. In fact, you can apply for the loan, even if you haven’t applied for a wage subsidy. The reference to the wage subsidy scheme is there just simply to provide a rough and ready calculator of the amount that’s available.
Under the terms and conditions, the loan must be repaid within five years and the interest rate is 3%. But if you are late with an agreed repayment, use of money interest, which is now 7%, will apply in addition. So effectively there’s a 10% rate for late payments.
As I said, the scheme is open until 12th of June. It’s looks like it’s going to have a huge take up.
And it does raise an interesting point that given the difficulties small businesses have had accessing financing from banks – despite the Government agreeing to underwrite 80% of the risk – this scheme was still needed. And the question arises that once everything settles down and we return to business as normal, whenever that is, whether there is a role for a similar type of scheme to exist for small businesses in the future. In America, the Small Business Administration runs a hugely successful small business loan scheme. Something I think the policy advisers at MBIE should be considering is maybe a permanent iteration of this scheme.
How Inland Revenue is coping
Moving on, Inland Revenue has continued to operate as best as possible through the pandemic. Its call centres have been very hard hit with having to deal with the effects of social distancing. Quite apart from that, Inland Revenue has found itself with additional responsibilities in the aforementioned Small Business Cash Flow Scheme and also assisting the Ministry of Social Development in administering the wage subsidy scheme. What happens is the MSD calls Inland Revenue to confirm details regarding the applying business’s tax affairs. And once those are confirmed, the wage subsidy is then approved or declined as appropriate.
As a result, Inland Revenue has stopped answering the phones on its dedicated line for tax agents and its call centres have, as I mentioned, reduced staffing because of social distancing measures. But it has been responding very, very quickly using its online features and particularly its myIR feature.
Inland Revenue’s recommendation is if you want to make contact, the best way is through the online myIR service. And furthermore, if you get a response from Inland Revenue, you can actually reply to that response. Previously, replying to IR used to trigger a new response and a new inquiry. So there’s a lot of favourable stuff happening in the background with Inland Revenue.
Inland Revenue has also been upgrading its website as part of its Business Transformation programme. It is splitting off the technical matters such as tax policy and legislation, Tax Information Bulletins, the various formal determinations, interpretation, statements and other technical documents that it issues.
Inland Revenue’s main website actually makes really clear reading, and it’s been adding explanations of various areas of interest where it will be focusing its attention.
Tax and the sharing economy
One of the features it has recently added is a section on the sharing economy. The sharing economy is described “as any economic activity through a digital platform such as a website or an app where people share assets or services for a fee.”
It goes on to explain that such activities are obviously still subject to income tax and GST and you need to consider the implications of that.
The various sharing-apps it discusses are obviously the ride sharing or sometimes called ride sourcing, such as Uber, Zoomy or Ola.
Then there’s short stay accommodation, including renting a room or a whole house unit. So that’s Airbnb, Bookabach or Holiday Houses. Then there’s sharing assets, for example cars, caravans or motor homes. And those who come through platforms such as Yourdrive, Mighway, Parkable, MyCarYourRental and Sharedspace.
Finally there’s people who in the gig economy are using platforms such as Pocket Jobs, Fiverr, Air Tasker, WeDo, Askatasker, Deliveroo and Mad Paws. Very creative names there.
All these platforms are covered by the sharing economy and they’re all subject to income tax, and GST if the value of your services exceeds $60,000 in any 12-month period.
Inland Revenue’s website sets out what is fairly standard guidance as to how it expects the rules to apply.
What it also sets out is what are not considered part of the sharing economy, and that includes online selling or classifieds such as Trade Me or eBay, cryptocurrency exchanges which are dealt with completely separately, and peer to peer financing or crowdfunding. Now these still have income tax and GST obligations, but slightly different rules apply.
As I said, this guidance from Inland Revenue is really clear in setting out the rules. There should be no reason for people not complying.
As Inland Revenue gets back to a normal, what I expect will happen is that its investigators and staff will basically be told to kick over every rock around to see what’s under there. So you can expect a tightening of the rules and increased examination of the cash economy, using cash to avoid tax.
Ride-sharing apps, by their nature are outside the cash economy. But I think one of the things Inland Revenue will be doing is sending requests to the ride sharing app platforms asking for details of who in New Zealand is using the respective platform.
In summary, the rules are set out there very clearly. And behind them is the unspoken threat that Inland Revenue will be looking at this sector as things return to normality.
More on home office expense claims
And finally, we recently discussed the treatment of Home Office expenditure.
It so happened I was interviewed for the Cooking the Books podcast of the New Zealand Herald about this matter this week. There was an unfortunate misstatement in the article, which initially suggested that people would be entitled to a $15 per week tax refund.
That is not correct. An employee can’t claim a deduction for home office expenditure, but they can apply to their employer for reimbursement. And Inland Revenue has issued a temporary determination valid until September, under which payments of up to $15 per week can be made to an employee and they will be treated as exempt income for the employee. If you have any questions, as always, you know where we are.
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. Please send me your feedback and tell your friends and clients. Until next time, Kia Kaha, stay strong.
4 May, 2020 | The Week in Tax
- Inland Revenue releases a determination on payments to employees for working from home
- COVID-19 tax measures legislation is introduced
- Provisional tax is due 7th May
Transcript
This week, Inland Revenue releases a determination on payments to employees for working from home. The COVID-19 tax measures legislation is introduced and in case you forgot, Provisional tax is due Thursday 7 May.
A little earlier this month, I outlined the rules regarding employees claiming a deduction for home office expenditure, and I suggested that Inland Revenue should issue a ruling on the matter to help clarify the position. It was quite clear that many employees were unaware of the position. And likewise, employers were not sure of their own obligations.
Therefore, I’m very pleased to see that Inland Revenue has followed through and on Wednesday issued Determination EE002: Payments to employees- for working from home costs during the COVID-19 pandemic.
Now this Determination is described as a temporary response to the COVID-19 pandemic and applies to payments made for the period from 17th of March to 17th of September 2020.
What the Determination does is explain the rules that apply where employers have either made or intend to make payments to employees to reimburse costs incurred by their employees as a result of having to work from home during the pandemic. And it notes that realistically
…many employers will not be in a financial position to make additional payments to employees during the COVID-19 pandemic. This Determination is not intended to suggest that employers make such payments to employees.
The Determination explains only the employer can claim a deduction for such expenditure, but they can reimburse employees for their costs and such payments would be exempt income for the employee. It’s not binding on employees and employers who can work out their own allocations and allowances within the rules.
Critically, and very usefully, the Determination sets out the amounts Inland Revenue regards as acceptable. Under the Determination an employer who pays an allowance that covers general expenditure to an employee working from under because of the pandemic, can treat up to $15 per week of the amount as exempt income of the employee. And this amount applies on a pro-rata basis if the payment is made fortnightly i.e. $30 per fortnight or $65 per month if you make a single monthly payment. Anything above that $15 per week threshold, unless they can prove that the actual costs are higher, the excess would be taxable Income and subject to PAYE.
Additional payments can also be made for the cost of furniture and equipment, and that’s to recognise the fact that an employee might incur a depreciation loss on furniture and equipment used in a home office, which because of the employee limitation, they’re not allowed to claim that deduction.
The Determination actually offers two options: a safe harbour option in which an employer can pay up to $400 to an employee and it would be treated as exempt income. Alternatively, the employer can reimburse employees for the actual cost of furniture and equipment purchased for use in a home office.
The Determination also usefully summarises the impact of a previous Determination EE001 relating to telecommunication usage plan costs under which to $5 per week can be paid is exempt income if the plan is used for the job. Otherwise, then you take an apportionment basis depending on the amount of business use involved.
Finally, the Determination sets out what evidence is needed to support the payments. For the safe harbour option of $400 reimbursing for home office equipment and furniture, no evidence is required if that’s the only amount paid. In relation to the $15 per week for other expenditure (such as additional heating and power costs), again, no evidence is required. And similarly, for the telecommunications usage plan costs of $5 per week. In every other instance you would need to provide evidence or have evidence available to support the payment made.
Now this is a temporary measure, it was signed off on April 24th and released on April 29th and it only applies for payments between 17th March up until 17th September. But it’s a good measure and helps clarify a position with a lot of uncertainty around it. Inland Revenue would have been working flat out behind the scenes on this one.
Tax loss carry-back legislation
Moving on, the legislation for the tax and other COVID-19 related measures was introduced into Parliament on Thursday. Now, the tax part of this covers the temporary loss carry-back regime and also gives the Commissioner of Inland Revenue a temporary discretionary power to modify where appropriate due dates and timeframes or other procedural requirements under the various Inland Revenue acts.
The tax loss carry-back regime ad inserts a new section IZ 8 into the Income Tax Act 2007 and the legislation on this amounts to nearly 5 ½ pages, so it’s quite involved. They’ve also put in an anti-avoidance provision, section GB 3B to counter any possible tax avoidance or abusive use of the loss carry-back measure.
As previously discussed, small businesses with a 31st March balance date are probably not going to really benefit from this scheme, but let’s wait and see. Obviously, if you’ve got a balance state, which is not to 31st March, say, for example, to 30th September 2020, this measure is more likely to be of greater use. So, it’s almost a question of suck it and see what we can do around that. But at least we now know the relevant legislation.
Intriguingly, some have suggested that maybe an alternative position might have been to have an extended income tax year or double tax year that is treat the period from 1st of April 219 through to 31st March 2021 as a single tax year. That’s an interesting response. I have seen something similar in the UK when a loss carry-back regime was introduced. How much use is made of it we’ll just have to wait and see.
The Commissioner of Inland Revenue has also been given a temporary discretionary power for the period from 17th March 2020 until 30th September 2021. These are included in new sections 6H and 6I of the Tax Administration Act 1994. Now those temporary sections may be extended in duration, but they give Inland Revenue the ability to do as we’ve discussed in recent weeks and extend the timelines for filing tax returns or clarify what are the COVID-19 implications for tax residency.
I still think we probably may finish up with some specific legislation on these issues, but at least Inland Revenue now has the tools it needs to respond quickly to issues as they arise.
Looking ahead to the Budget
What next? Well, the Budget is in two weeks on the 14th of May. We may see some more tax measures but probably it will focus on Government spending, over the next four-year period and what measures it plans to apply to start paying for all of this. My understanding is that the long overdue income tax threshold changes I’ve previously suggested are now off the table. No doubt people will be making submissions behind the scenes on what they would like to see.
Intriguingly, the COVID-19 legislation released on Thursday included reference to a Small Business Cashflow Scheme which is to be administered by Inland Revenue. [As has been reported elsewhere this was a mistake although I was aware beforehand that something might be in the pipeline.] The scheme is probably a counter to complaints that small businesses have been making about the difficulties of accessing bank finance under the Business Guarantee Finance Scheme, which was announced a couple of weeks ago. We’ll soon see, and I’ll report further if there’s any interesting tax matters which come out of it.
Provisional tax is due
Finally, a reminder that the third instalment of Provisional tax for the March 2020 income tax year is due Thursday, 7th of May. Now, if you can pay that, you should do so. Hopefully, businesses will be in a position to do so as well those with regular sources of income, such as overseas pension schemes.
But if you can’t pay your provisional tax tell Inland Revenue quickly so that it will then apply the concession relating to use of money interest. And if you’ve got any issues around what you think your tax bill is going to be or how you’re going to manage it, get in touch with your tax agent or contact Inland Revenue directly through your myIR account and let them know what’s going on.
29 Apr, 2020 | The Week in Tax
- Latest guidance from Inland Revenue on Covid-19 tax measures
- Draft guidance from Inland Revenue on tax implications of owning overseas rental property and application of financial arrangements rules
- DIA ruling on AML-CFT
Transcript.
This week, the latest from Inland Revenue on its response to the Covid-19 pandemic. Inland Revenue releases draft guidance for consultation on the tax implications of owning overseas rental property, and the Department of Internal Affairs isn’t really helping.
Inland Revenue has been releasing updates on its interpretation of various tax issues arising out of the Covid-19 pandemic. The latest release on Wednesday was a public statement regarding residency issues.
In a previous podcast I raised the question of what is going to happen to people who may inadvertently become tax resident of New Zealand either because they fell sick or were unable to leave when they intended to because of border closures. Subsequently, they then become tax resident under the days present test, that is they’ve been present in New Zealand for more than 183 days in any twelve-month period.
In this instance what the Inland Revenue guidance says is that an individual will not become tax resident in New Zealand under the days present test just because they become stranded here. They will be treated as non-resident if they leave New Zealand within a “reasonable time after they are no longer practically restricted in travelling. Then extra days when that person was unable to leave will be disregarded. The day tests are based on normal circumstances when people are free to move.”
Now this is good to hear. But I’d feel more comfortable advising clients on this if we had some form of statutory basis to this interpretation. As it stands this is at Inland Revenue’s discretion. And I do know of pre-Covid-19 instances where a person has been deemed to be tax resident even though they fell sick and were unable to travel. In my view there’s no difference between not being able to travel because of the Covid-19 pandemic and the resulting travel restrictions around that, and not being able to travel because you’re physically sick.
The United Kingdom has a specific clause in its legislation excluding days where someone is not able to travel because of sickness or ill health, either of themselves or of a relative. I think it would ensure future clarity if a similar provision was actually legislated for, maybe later on in the year. But anyway, as a temporary measure, it’s good to see the Inland Revenue has taken this approach.
Next week we should see the legislation relating to the loss carry-back provisions. The general consensus forming around small business advisers and fellow tax agents is that although it’s a measure which is useful in the long term, right now because of the timing of how everything has happened, it’s probably not terribly significant for a lot of small businesses.
That said, people are considering tweaks to make it more user friendly for small businesses. One of the issues that’s being addressed during consultation with Inland Revenue, which is going on at the moment, is about possibly allowing shareholder-employee salaries to be reduced too.
At present if a shareholder has an overdrawn current account, i.e owes the company money, then interest of 5.77% is chargeable on the overdrawn balance. The problem is, revising the shareholder-employee salary to utilise the loss carry-back rules may worsen the shareholder current account balance. So people have been suggesting if some sort of a workaround could be introduced to resolve that matter. We’ll see what comes out when the legislation is released on Tuesday or Wednesday next week.
Moving on, the normal everyday compliance matters and consultation programme for Inland Revenue still continue to run along, even though right now Inland Revenue policy resources are very much focused on producing answers to the Covid-19 pandemic. And so it’s easy to have overlooked a couple of draft Interpretation Statements which were released just before the country went into lockdown.
The first of these is an Interpretation Statement on tax issues arising from the ownership of overseas rental property. The Interpretation Statement begins with a reminder that New Zealand tax residents are taxed on their worldwide income and gives a quick overview of the residency rules. It outlines the New Zealand principles about recognition of income and expenditure as these rules may differ from an overseas country. It goes on to explain what you can do if you are required to prepare tax returns in an overseas to jurisdiction to a balance date other than 31 March and how to calculate the conversion of foreign income into New Zealand dollars.
Apart from covering overseas rental income and income from the sale of the property, the Interpretation Statement also explains the very often frequently overlooked and horrendously complicated financial arrangement rules. These relate to the foreign currency gains on a mortgage that may be taken out to purchase an overseas rental property.
Finally, the Interpretation Statement also covers off a taxpayer’s entitlement to foreign tax credits and the application of double tax agreements. Overall, it’s a very comprehensive document. Submissions are due by the end of the month but given current circumstances, Inland Revenue will take submissions past that date.
A related Interpretation Statement has been issued on the application of the financial arrangements rules to foreign currency loans used to finance overseas rental property.
Regular readers will know that I have discussed these from time to time. These basically are the quantum physics of New Zealand tax. They are mind numbingly complicated and frankly were not, in my view, really intended to apply to Mum and Dad investors with an overseas property.
The Interpretation Statement is a very useful overview of the issues involved. In fact, it’s the first time to my knowledge that Inland Revenue has issued something on this topic that’s quite digestible for the general public. It’s therefore going to be useful for advisors to be able to point out to clients “These are the rules Inland Revenue is applying”.
The Interpretation Statement itself goes into quite a bit of detail about the financial arrangement rules, which as I said previously, are horrendously complicated. It also discusses applying some of the Determinations that Inland Revenue has issued to help interpret the application of the financial arrangements rules.
The Determinations are themselves very complicated and in many cases, some of these Determinations have not been revised to take effect of the updates to the Income Tax Act. In fact, if you read some Determinations, they still refer to the Income Tax Act 1976, i.e. they go back to when the financial arrangements legislation was first introduced in the mid-80’s. It really is odd that such complicated provisions should apply to Mum and Dad investors.
One way that this could be resolved would be to raise the thresholds around the application of the rules and maybe rethink the policy intent and application. Who exactly should be covered by the financial arrangements rules and consequently face a quite hefty compliance burden? The rules often result in an irony in some cases, where for New Zealand tax purposes, the sale of the property should not be taxable, but the redemption of the mortgage may trigger taxable income.
And finally, from the “You really aren’t helping” files, a ruling from the Ministry of Justice and the Department of Internal Affairs relating to their administration of the Anti-Money Laundering and Countering Financing of Terrorism Act.
A matter of interpretation for some time was whether the use of tax pooling arrangements such as those made through companies such as Tax Management New Zealand would be subject to these rules.
Apparently on April 20th, the Ministry of Justice advised the Chartered Accountants Australia and New Zealand that it would deny an application for an the exemption because there was a “medium risk” of money laundering and terrorism financing being associated with tax transfers.
I really cannot express how mind numbingly exasperating this decision is. It’s going to affect a lot of taxpayers going forward. As a result of what’s going on right now with the Covid-19 pandemic tax transfers are going to become quite important. So basically, we have Inland Revenue doing its best to try and make matters as easy as possible and the Government’s general policy trying to assist taxpayers through this pandemic.
And then we have the Ministry of Justice and the Department of Internal Affairs taking a very juristic approach to the matter and completely contrary to the wider policy going on. I really can’t express how frustrating this decision is. This was something that really should have been sorted out way, way before. Accountants have been subject to the AML legislation since 1st of October 2018, and 18 months on we are only just getting a decision like this.
I said way back that I thought the DIA and the Police Financial Intelligence Units were under-resourced. I consider the whole AML approach was needlessly bureaucratic with a lot of duplication and frankly, probably not really achieving very much. And in a nutshell, this decision actually exemplifies all those points.
Anyway, that’s it for this week. I’m Terry Baucher and you can find his 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 Kia Kaha stay strong and be kind.
20 Apr, 2020 | The Week in Tax
- New temporary loss carry-back regime – will it help small businesses?
- The inherent flaw in the foreign investment fund regime; and
- The rules around claiming deductions for working at home
Transcript
In today’s podcast, will the latest government tax measures help small businesses? The inherent flaw in the foreign investment fund regime. And we look at claiming deductions for working at home.
The temporary loss carry-back scheme announced by the Government last Wednesday was one of the most significant tax measures yet.
It enables businesses that were expecting to make a loss in either the 19/20 income year or the 20/21 income year to estimate the loss and use it to offset profits in the previous tax year. In other words, they could carry the loss back one year.
Now, this is a measure I’ve seen before and used when I was working in the United Kingdom. That measure was introduced in the wake of a fairly severe recession in the late 80s, early 90s. It’s a promising measure which is expected to cost up to about $3.1 billion over a two-year period.
However, my tax agent colleagues are concerned that we’ve only just ended the year end 31 March 2020. And right up until 1st March, everything was running reasonably smoothly before the effects of Covid-19 landed with a big thump. Companies with a standard balance date of 31st March 2020 won’t actually have been significantly affected by the Covid-19 pandemic, but it’s quite likely that in the year to 31 March 2021 they will be.
The issue we have is that that’s a long way out to be predicting losses. And what if we get those estimates wrong? The position is that use of money interest would still apply. Although the temptation would be to make a guess at an estimated loss for the coming financial year and then carry that back to the 2020 tax year, it comes with the caveat that use of money interest – currently 8.35% – will apply on any underpaid tax. It’s a very much a dual-edged sword.
So, the main concern that my colleagues have about the loss carry-back proposal is that it’s really not terribly helpful for small businesses that have a standard 31 March balance date because they’re being asked to predict too far ahead and with too many variables.
The better option is, as I’ve said previously, would be to postpone or cancel the 7 May provisional tax payment coming up, let things settle down a bit and then work forward from that.
The loss carry-back measure is going to be introduced as a permanent feature with effect from the start of the 2021/2022 income year and the Government will take consultation later this year on the proposal. It is a measure that I’ve thought for some time would be useful.
The problem is its timing is not terribly convenient for many small businesses right now. And this points to a dichotomy in our tax legislation and tax policy.
The majority of taxpayers and small businesses prepare their financial statements, their tax returns to 31 March. But the majority of provisional tax, however, is paid by bigger companies, and many of those have different balance dates. The Government SOEs have a 30 June balance date and then overseas companies might have a 31 December or 30 September balance date.
Now, if you’ve got a 31 December balance date, you’ve got to wait a bit of time ahead, but you’ll probably get a better handle on what’s going to be happening. That’s even truer of those with a 30 September balance date because this has happened halfway through their tax year.
So larger businesses are probably going to be the primary beneficiaries of this measure. It’s not to say it’s of little use to small businesses. It’s just that they’re going to need to proceed with caution because the use of money interest provisions will apply.
I think that this measure will need to be fine-tuned. As I said earlier, I do wonder whether it might just be easier to simply say forget about paying provisional tax on 7 May.
Alternatively, maybe do as the Canadians have done. They’ve introduced a measure where a business can borrow up to 40,000 Canadian dollars from the Government, and if they repay it by 31 December 2022, 25% of the amount borrowed will be written off. Such a measure will help companies with their cash flow, which is the critical matter for small business at the moment.
But still this loss carry-back measure is going to be of use. It’s something that will become part of the tax landscape and we should never look a gift horse in the mouth.
There’s a couple of other things the Government measures announced as well, which are also important for small businesses. One is the changes to tax loss continuity rules.
Currently, if you have a tax loss and you want to continue to carry forward that loss, you must maintain 49% of the same shareholders, what we call the shareholder continuity rule. What has been an issue for some time for growing businesses is that a significant investor wants to come onboard and they want to have more than 51% of the company, maybe a 60- 70% stake. If they do that, then under the current rules, the losses accumulated to that point are forfeited.
This is something we in the Small Business Council recommended be reviewed. It’s therefore good to see this proposal. With effect from this income year – 1 April for most people – if you can show that you’re continuing to carry on a same or similar business as that prior to the change of shareholding, you can continue to carry forward losses. This is a test modelled on what happens in Australia. It’s a welcome move for fast growing companies who want to attract capital but don’t want to lose the value of the tax losses.
The other tax measure announced gives Inland Revenue discretion to temporarily change due dates and other procedural requirements outlined in the various Inland Revenue acts. This is for businesses and individuals affected by Covid-19. This will enable Inland Revenue to extend the filing date for elections and filing tax returns or defer the due date for payment of tax.
This is a good move. It gives Inland Revenue flexibility, which it probably should’ve always had, but it never really managed to see a need for such a measure beforehand. That said, I still think there’s one or two other things that legislative changes will be needed around. For example, accidental overstayers becoming tax resident. But on the whole, this proposal is a good move, and we’ll look forward to seeing that in operation very quickly.
KiwiSaver and the Foreign Investment Fund regime rules
Moving on, the foreign investment fund regime was introduced with effect from 1 April 2007. Those who know this rule should also know it applies to KiwiSaver account holders if their KiwiSaver fund is invested overseas.
Basically, the rules say that for KiwiSaver funds, the income to be determined is calculated using what is called a fair dividend rate, that is 5% of the portfolio’s opening market value at the start of the tax year.
Now for individuals, they have the option to take the actual accrued gains/losses over the tax year. And that means that when there was a significant fall in the markets, individuals are protected against that and don’t have to pay tax on a portfolio which has just suddenly depreciated in value.
But unfortunately for KiwiSaver accounts, they don’t have an alternative. And this is also a big problem for the New Zealand Superannuation Fund, the country’s largest taxpayer, because it has a huge portfolio of overseas investments.
Now, the FIF regime has been in place, as I said, for 13 years now. And Covid-19 is the second such financial crisis to have hit financial markets since the regime was introduced. The flaw in the regime is it’s predicated on markets continually going up or being stable.
Events such as we are seeing right now and in the Global Financial Crisis are anomalies which the FIF regime really doesn’t manage well. Particularly if portfolios are significantly devalued for a period of time to come, and if you look at the overall economic return, sometimes too much tax will be paid.
The Tax Working Group recommended reviewing the 5% fair dividend rate and possibly reducing it perhaps to maybe 3 or 4%. And I think that’s something the Government really need to look at. But – there’s always a but – it’s going to need the revenue going forward. So, whether in fact that measure, which I believe is needed and the Tax Working Group recommended, will actually come to pass, we’ll have to wait and see.
Home office deductions
And finally, many listeners and readers will be working from home and will continue to do so when we go to alert Level 3. So what are the rules around claiming expenses for working from home? Well, I did an article on this. The basic rules are as an employee, you can’t claim a deduction.
Instead you are able to be reimbursed by your employer who can make a reasonable estimate of the amount that you should be claiming based on a number of factors such as area of the place you’re working in – your home office – rates, power, Internet usage, etc. A reimbursement based on this is tax free to the employee and deductible to the employer.
If the employer decides to simply pay a flat rate, it might in fact be more than what is actually a reasonable calculation of expenses. Instead, PAYE will apply.
What was interesting to see about that article was the reaction to it – several employers are applying the rules clearly. Others are completely oblivious to it, and others are simply ignoring the fact that their employees have an expense and are just simply expecting them to bear the costs. It will be interesting to see how this shakes down. All employers will need to be looking at this matter and determining some form of allowance to help their employees.
Well, that’s it for this week. Thank you for listening. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you find your podcasts. Please send me your feedback and tell your friends and clients. Until next time Kia Kaha. Stay strong and be kind.
