Business tax simplification measures are a step closer

Tax Alert - December 2016

By Veronica Harley

The business tax simplification measures recently took a step closer to becoming a reality with the report back to Parliament in late November 2016 by the Finance and Expenditure Committee (FEC) on the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Bill (“the Bill”). The Bill is expected to be enacted early in 2017.

Our September 2016 Tax Alert outlined the contents of this Bill in some detail.  But briefly, this Bill includes changes to increase and expand the current safe harbour threshold regarding use of money interest applying for provisional taxpayers.  It also introduces a new method of calculating provisional tax known as AIM (i.e. accounting income method) which is based on accounting income as calculated by accounting software, new withholding tax rules for labour–hire firms, the removal of the 1% incremental late payment penalty, plus various other measures to simplify the tax rules for small to medium businesses.

Some refinements have been made to aspects of the original proposals regarding use of money interest on provisional tax and the AIM provisional tax method.  Originally the Bill also included a proposal whereby shareholder-employees and the company can agree that the shareholder-employee’s provisional tax payment obligations are attributed to the company. However this proposal has been removed from the Bill for now as the rules were overly complex and the FEC felt that further work was needed to refine the mechanism.

Most of the business tax measures will apply from the beginning of the 2018 income year so will first start to affect those taxpayers making their first provisional tax instalment for the 2018 income year.  It should be noted that the AIM measures have a later application date of the 2019 income year. Once the Bill is enacted and the application date is nearer, we’ll report more fully on these important changes and any practical or planning issues arising.

This Bill also contains changes to the disclosure requirements for foreign trusts, following the Government inquiry earlier this year.  In this regard, most submitters were supportive of the need to strengthen the foreign trust disclosure rules.  However, some submitters were critical of the fact that the generic tax policy process had not been followed.  The FEC has recommended the development of an Approved Information Sharing Agreement to enable Inland Revenue to disclose information about a foreign trust where requested by the Overseas Investment Office for the purposes of approving investments in sensitive New Zealand assets by overseas investors.  Other changes include adding an exemption from registration and filing fees in certain cases, measures to ease compliance for trustees who are natural persons who are not in the business of providing trustee services and amendments to narrow the definition of settlor and settlements for the purposes of the foreign trust disclosure rules.

The Bill also proposes to insert a new section allowing the Governor-General to make regulations providing for transitional exemptions as and when necessary to facilitate the smooth transition from Inland Revenue’s FIRST to START software platforms as part of the Business Transformation Project without causing undue delay.  The FEC has recommended that the transitional regulations provided be amended to ensure that regulations are drafted in the most specific and limited terms possible as there was concern about the broad scope of the original draft.

Finally the Bill also contains Automatic Exchange of Information (AEOI) measures to implement the G20/OECD standard for the automatic exchange of information with applicable jurisdictions.  This is designed to counter offshore tax evasion by requiring financial institutions to undertake due diligence to identify offshore accounts and to report information on those accounts to Inland Revenue.  For more information on these proposals, see our earlier article.

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