Business Transformation steamrolls on
Tax Alert - April 2017
The Government’s business transformation program to modernise New Zealand’s tax administration system continues to roll on, with changes to the disclosure of investment income information and the PAYE rules in the Taxation (Annual Rates for 2017-18, Employment and Investment Income, and Remedial Matters Bill) (Bill), introduced on 6 April 2017.
The Bill will greatly extend the pool of data available to Inland Revenue in relation to investment income (mostly interest and dividends). This will place a significant and costly burden on many financial institutions and other companies. The Bill also changes the administration of PAYE and the taxation of employee share schemes, as well as other minor policy and remedial changes. Inland Revenue will release the submission date in due course.
Investment income information ramps up
From 1 April 2020 interest and dividend payers will have to disclose to Inland Revenue regular and comprehensive information on interest and dividend payments, including details of the recipients of those payments. Inland Revenue considers it does not receive sufficient information on investment income at the moment, and cites evidence suggesting that some taxpayers are under-declaring interest income in particular and receiving higher social policy entitlements than they should be. The response is to require such a significant volume of data that one wonders whether Inland Revenue’s (admittedly re-vamped) computer systems will be able to process it accurately and on a timely basis. The aim of the reforms is to reduce costs for recipients of investment income and for the Government - what the Commentary on the Bill fails to acknowledge is that the cost will be borne by investment income payers. As the Government receives information on withholding taxes already on an annual basis, we wonder why the estimated $21m - $27m of income tax is foregone every year due to income not being disclosed. We also wonder whether this figure will be greater or lesser than the cost to investment income payers of complying with the new rules.
Payers of interest on domestically issued debt will have to provide investment income information electronically to Inland Revenue every month that interest payments are made, by the 20th of the following month. The information required is extensive, including the investor’s tax file number, contact details, date of birth, amount and type of income and tax withheld, information about any joint owners, and the investor’s tax rate.
Similar information must be disclosed by the payers of dividends, Maori Authority distributions, and royalties paid to non-residents.
The intention is that Inland Revenue will gather the data to compile a complete picture, along with employment and other income information, of each taxpayer’s total income, and use this information to determine whether taxpayers are on the correct tax rate, to proactively adjust a tax rate if necessary, and to pre-populate income tax returns.
Other measures to support this objective include:
- IRD Numbers: Strengthening rules requiring provision of IRD numbers to payers of investment income. The non-declaration rate will increase from 33% to 45% and investors in multi-rate PIEs will be deemed to have exited unless an IRD number is provided within six weeks of opening their account.
- E-filing: Investment income payers will have to file investment income information electronically unless it would subject the payer to unreasonable compliance costs or hardship as a result of having to file electronically (from 1 April 2020).·
- RWT exempt-status: The terminology for those with a certificate of exemption from RWT will change to describe them as having RWT exempt-status. An electronic database will be created so that any investment income payer can verify whether an investor has current RWT-exempt status.
- Year-end withholding tax certificate: This will no longer be required unless recipients of investment income payments have not provided their IRD number to the investment income payer.
- Correcting errors: Errors in the amount of withholding tax deducted will be able to be corrected in the year following payment of the investment income without the imposition of penalties or interest, up to specified thresholds – the greater of $2,000 or 5% of the payer’s total withholding tax liability. Taxpayers have an option to opt in earlier than 1 April 2020 if they so wish.
Changing the taxation of employee share schemes
The Bill introduces reforms to the taxation of employee share schemes (ESS), both for “option-like” schemes and for widely-offered share employee share schemes. Although there has been consultation on these proposals in a 2016 Officials’ issues paper Taxation of employee share schemes (refer to our October 2016 Tax Alert for more background on these proposals), it is only now that the detail of the reforms is available that affected employers and employees will be able to properly identify the impact of the new rules. The stated objective of the proposals is to achieve a neutral tax treatment of ESS benefits, i.e., the tax position of the employer and employee will be the same, regardless of whether remuneration for labour is paid in cash or in shares.
“Option-like” share schemes
There have been concerns for some time that share schemes have been structured in a manner to bring forward the taxing point for employees in order to have no tax payable by employees. This has been achieved by having employees (or a trustee on their behalf) acquire shares on Day 1, with title passing at some point in the future once conditions have been satisfied. Provided the shares are acquired for the market value on Day 1 there would be no tax payable if there is any movement in the value of shares to the date when they vest with the employees.
New rules will ensure that employees are taxed as there will be a new “share scheme taxing date”, being the date the employee holds the shares like any other shareholder (i.e. they have vested with the employee).
Employers who are incurring costs on these employee share schemes will effectively be entitled to claim a deduction for the cost of shares (noting many employers are already able to do this), however the timing of the deduction will be aligned with when employees are returning taxable income (i.e. at vesting point).
The Bill includes some complicated proposals dealing with the Available Subscribed Capital consequences of employee share schemes.
In effect the rules will tax employees on capital gains made on the value of the shares they receive. This will have a disproportionate effect on start-up companies, who may not even be able to utilise the deduction they receive if they are generating losses initially and have a change in shareholder continuity, as is common for start-ups.
The new rules will generally apply six months after the Bill has received Royal Assent.
Widely-offered share schemes
There are currently tax concessions for certain widely-offered share schemed (often referred to as Section DC 12 Schemes). The Bill proposes to modernise these schemes to make them more flexible and easier to apply. Existing DC 12 Schemes should automatically fall within the new rules (i.e. it will not be necessary to change these schemes as a consequence of these changes).
These schemes currently exempt the income received by employees from tax. This treatment will continue, however on the flipside in order to have symmetry the Bill proposes to deny employers from claiming a deduction for the cost of the shares provided to employees (even when the employer is purchasing shares on-market rather than undertaking a fresh issue of shares). Given the cost of shares is a true cost to employers, it is disappointing that this approach has been taken in the Bill. Of even greater concern is it is proposed that deductions are to be denied from the date of introduction of the Bill, i.e. from 6 April 2017.
More detail on these proposals will be provided in our next Tax Alert.
Improving the administration of PAYE
The administration of PAYE will be improved by integrating information provision obligations with payroll software and aligning timing with payday cycles. Employers will be able to report information directly to Inland Revenue from compliant payroll software systems, or to continue to provide information on paper if their systems do not allow electronic filing. Information will be required shortly after each payday, with timeframes varying depending on the size of the employer and their access to suitable digital services. This replaces the current two weekly and monthly filing timeframes. It is intended to reduce compliance costs by integrating tax obligations with existing pay cycles. Payday information will have to be provided from 1 April 2019 but can be provided from 1 April 2018 by employers who wish to make the change earlier. These information requirements will replace the current PAYE returns, however employers will still have to make PAYE payments on the dates they do currently – either fortnightly or monthly. Both aligning information provision with payday cycles, and integrating this with payroll software should streamline the way in which employers comply with their tax obligations. Additional reforms to the administration of PAYE include:
- Lowering the threshold for mandatory electronic filing of PAYE information from $100,000 of PAYE and ESCT in the preceding tax year to $50,000 from 1 April 2019;
- Requiring employers to provide Inland Revenue with information about new and departing employees no later than the next return of payday information;
- Requiring employers to disclose the value of share benefits employees received under employee share schemes effective from 1 April 2017;
- Giving employers the option to tax holiday pay paid in advance as if the lump sum payment was paid over the pay periods to which it relates; and
- Abolishing the existing payroll subsidy for PAYE intermediaries from 1 April 2018.
Other remedial and policy matters
There are a number of other remedial and minor proposals in the Bill, and we highlight some below.
- Bank account requirement for IRD numbers: The vexed requirement for an offshore person to have a New Zealand bank account before they can have an IRD number has finally been resolved by a sensible amendment – the Commissioner will have discretion to issue IRD numbers if she is satisfied as to the identity of the offshore person. This amendment is welcomed.
- Trustee capacity: The Bill proposes to distinguish between a trustee’s personal or body corporate capacity, and their separate trustee capacity. This is intended to address the uncertainty that arose from two recent High Court decisions, Concepts 124 Ltd v Commissioner of Inland Revenue  NZHC 2140 and Staithes Drive Development Ltd v Commissioner of Inland Revenue  NZHC 2593. In those cases 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. This resulted in the unfavourable situation where a shareholder in a trustee company (such as a solicitor’s trustee company), which in turn holds shares in a number of unrelated client companies on trust for unrelated beneficiaries, would result in otherwise unrelated client companies being associated for tax purposes. The proposed change will ensure this is not the case as, in effect, the corporate trustee will be treated as the ultimate shareholder and not looked-through and will be acting in a different capacity for each trust.
- Demergers: Transfers of shares of a subsidiary of an ASX listed company received by a New Zealand shareholders as a result of a demerger will not be treated as a dividend. We support this amendment which recognises the fact that there is no change in the shareholder’s economic ownership of the shares.
- E-filing GST returns: This will be compulsory when taxable supplies exceed a prescribed threshold set by Order in Council following consultation. Exemptions will be available for those without access to suitable digital services. As long as the threshold is sensible and consultation is proper and genuine, we agree that this is a useful amendment recognising the efficiency of electronic filing.
- GST treatment of Pharmac rebates: Confusion regarding the GST treatment of community and hospital rebates paid to Pharmac will be removed by ensuring the treatment for both types of rebates is the same.
- Petroleum mining decommissioning: The existing “spread-back” mechanism for petroleum mining decommissioning expenditure will be replaced with a refundable tax credit.
- Lloyd’s of London tax simplification: The tax treatment of payments made to Lloyd’s of London (an insurance market rather than an insurance company) will be aligned with the tax treatment of premiums paid to overseas insurers.
For more in-depth information on the Bill’s proposals, please refer to the following:
- Minister of Revenue Hon Judith Collins’ media statement;
- Bill commentary;
- Summary of submissions from the investment income information consultation in July 2016; and
- Cabinet papers (relating to the Making Tax Simpler consultation, feedback and decisions).
April 2017 Tax Alert contents
Business Transformation steamrolls on
Beware the hidden traps in the new foreign trust disclosure rules
When did I buy my land? Inland Revenue explains.
Withholding tax reforms for branches
Are you ready for the new withholding tax rules?