April 2017 Bill moves towards enactment
Tax Alert - March 2018
By Emma Marr
The Bill introduced to Parliament in April 2017 has finally emerged from the select committee stage and been reported back to the House. The 2017 general election put the Bill on hold for a while, so readers might need a brief refresher of what is in the Bill. For a full recap refer to our earlier Tax Alert article here. For an update on the reforms, read on.
The headline acts for the Bill were changes to employee share schemes, the information disclosure requirements for payers of investment income, and new rules for payers of PAYE income. Different application dates are noted in relation to specific new rules, however generally the rules will apply from enactment of the Bill, expected to be before 31 March 2018.
Investment income: New disclosure rules applying from 1 April 2020 will require payers of dividends and interest to provide regular and detailed information to Inland Revenue in relation to those payments, including in relation to the recipient. Submissions on these proposals generally pointed to the heavy compliance burden this places on payers of interest and dividends and the possibility of some overreach in the design of the rules. Officials have responded by suggesting some changes to the rules that may pare back some of this overreach, but it would be fair to say that the rules are still extremely comprehensive.
PAYE payers: This is a key part of the business transformation programme Inland Revenue is currently rolling out. Payers of PAYE income will have to provide detailed information to Inland Revenue on each payday, rather than monthly as they do currently. It is intended the ability to provide the information is integrated with payroll systems. The new rules as originally proposed are largely unchanged, with some amendments:
- Officials agree that employers should be able to include reporting on out-of-cycle payments with the next regular payday report, rather than generating a new report for every out-of-cycle pay. This would apply unless to do so would carry the information beyond the end of the PAYE payment period.
- More concessionary reporting timeframes have been introduced for schedular payments (eg directors fees, payments to non-resident contractors which are generally not paid via the payroll system), shadow payrolls (maintained for internationally mobile employees working in New Zealand), and employee share scheme benefit information.
- The repeal of the current payroll subsidy provided to employers who use a payroll provider from 1 April 2018 will be reconsidered, to determine whether there is some benefit to retaining the subsidy for small employers in the short term. Officials have begun discussions with Government Ministers.
The rules will allow Inland Revenue some discretion around imposing penalties in the early days of the new rules, so as to allow employers to transition to the new reporting regime
The new rules apply from 1 April 2019, although employers can opt-in voluntarily from 1 April 2018 if they file digitally.
Employee share schemes: The Bill will enact fundamental changes to the taxation of employee share schemes (ESS). Strong submissions were made against the proposals proceeding, on the basis (among other things) that the new rules: would discourage the use of ESS, are flawed, result in double tax, were not subject to a properly run consultation process, result in a capital gains tax, and will result in uncertainty in how ESS are taxed. Such submissions were all declined. Some very minor submissions, relating largely to compliance issues, were accepted.
As a result the following changes will apply:
- “Option-like” share schemes: employees will be taxed when the shares have vested in the employee, which may be a later taxing point than under the current rules. This means the employee will be taxed on any increase in share value between the date the option was granted and the shares vested. In effect this is a capital gains tax. Employers will be entitled to a deduction, which will be of little value to start-up companies generating losses, who are often the employers who utilise these types of ESS. This change applies from a date six months after the Bill receives Royal Asset.
- Widely-offered share schemes: The current rules that apply to this type of ESS will be modernised and changed so that employers are not entitled to a deduction for the cost of shares to employees. This will apply from the date of enactment of the Bill.
IRD numbers: A new rule allowing the Commissioner of Inland Revenue discretion in deciding whether to require that a non-resident has a bank account in order to obtain an IRD number will apply from enactment of the Bill. This should hopefully end two and a half painful years of non-residents having to obtain a bank account they neither needed or wanted in order to comply with their New Zealand filing obligations. Banks were equally unimpressed with the requirement. The original rule was poorly thought-out and this fix has been far too slow coming, nevertheless it is extremely welcome. In future, Inland Revenue will be able to provide a non-resident with an IRD number if they are satisfied with the identity and background of the taxpayer. Inland Revenue have committed to providing guidance on what type of information Inland Revenue will accept as satisfying it on the identity and background of the taxpayer, and have also confirmed it will not be a requirement that the taxpayer demonstrate that they cannot obtain a New Zealand bank account. A dedicated email address will be available for non-residents applying for an IRD number, to smooth the process.
Trustee capacity: A reform to ensure that a trustee’s personal and body corporate capacity are distinguished will apply from enactment of the Bill, despite submissions that it should apply retrospectively from the date of two High Court decisions that gave rise to the amendment. In Concepts 124 Ltd v CIR  NZHC 2140 and Staithes Drive Development Ltd v CIR  NZHC 2593 it was held that voting rights attached to shares owned by a corporate trustee were attributed to the corporate trustee’s natural person shareholders in their personal capacity, which was seen as an overreach.
Demergers: The transfer of shares of a subsidiary of an ASX listed company received by a New Zealand shareholder as a result of a demerger will not be treated as a dividend, from the beginning of the 2016/17 income year. Some amendments were made to the initial proposals, including ensuring that immaterial deviations in shareholding continuity pre- and post-demerger do not prevent the new rules applying.
Petroleum mining decommissioning: The existing “spread-back” mechanism for petroleum mining decommissioning expenditure will be replaced with a refundable tax credit. Following submissions some technical amendments to the rules were made, including clarifying that the rules will apply to the planning, management and execution of the decommissioning, as well as ongoing monitoring of the sites. The Bill also amends the rules allowing a refund of any tax credit to ensure that the refund is not denied due to a breach in shareholder continuity. This means that petroleum miners who have acquired a mine that they then decommission do not have to generate new imputation credits in order to receive a refund of a tax credit when the decommissioning expenditure is incurred.
Contractor withholding tax: Inland Revenue have recommended an amendment to the contractor withholding rules that took effect in 2017. As currently enacted the rules do not allow contractors operating through a company to transfer tax credits from their company to themselves in the income year in which the income is derived (see more detail here). This means the individual may have a provisional tax liability at the same time as their income is already being taxed at source, for example via a withholding tax deducted by a labour-hire firm. The application date for the change is 1 April 2017, to align with the application date for the labour-hire withholding tax rules.