June Tax bill - a mixed bag | July 2020

By Emma Marr

The Government hasn’t just been busy changing the tax rules in response to COVID-19, they’ve also been hard at work on a raft of other tax reforms. Legislation to implement a number of the proposals was introduced to the house in June 2020, in the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Bill. This omnibus bill includes changes to income tax, tax administration, the GST regime, social policy, and KiwiSaver. It also sets the rates of tax for the 2021 tax year (unchanged from previous years). Although no date has been set for submissions to the Finance and Expenditure Select Committee on the Bill, the date for the Committee to report back to Parliament has been set at 24 December 2020.

We have a packed edition of Tax Alert this month, covering these changes in more detail. Some will be welcomed by taxpayers, some not so much.

Taxpayers will be happy to see the long-running process of changes to the rules for deducting feasibility expenditure entering the final stage of becoming law. This is an important change that will affect many taxpayers who have seen expenditure disappear down the proverbial black hole, and will be relieved to finally be able to deduct it in future.

Somewhat less welcome will be the rules around purchase price allocations. As our article outlines, there are a number of issues with both the concept of a legislative response to the problem, and the details of that legislative response. We look forward to some meaningful engagement at the Select Committee stage.

The rules around land sales have been amended again, to ensure the main home and business premises exemptions don’t apply if a group of related taxpayers have a regular pattern of habitually buying and selling land. The article gives examples of how this could apply and is essential reading if you or your close connections may be affected.

Changes are on the way for the income tax treatment of leases subject to NZ IFRS 16, and our crack team of tax accountants have broken this down into some very easy to understand guidelines.

The government is making more tweaks to the research and development tax credit rules. Our R&D experts cover this and some key considerations and FAQs that will be helpful to any organisation working through how to get the most out of the R&D rules.

Other changes

GST changes

Among several GST changes is a proposal that will result in outbound mobile roaming services used by a person with a New Zealand mobile device while they are outside New Zealand becoming subject to GST at the standard rate of 15% with effect from 1 April 2021.

The other key GST proposal deals with a situation where a supplier may have issued an incorrect invoice charging 15% GST on a supply of goods or services that was actually zero-rated (such as an export) or an exempt supply (such as a financial services). The proposed amendment is to allow the supplier to issue a credit note to correct the mistake.

Changes are also made to the zero-rating of commercial land leases to ensure the rules work as intended.

Thin capitalisation and restricted transfer pricing

Changes are proposed to tighten up the restricted transfer pricing rule. If you have been relying on the terms of your third party debt to set the terms and conditions and to price related-party debt, these changes may be relevant, so get in touch with your Deloitte advisor.

The Government also proposes amendments to the thin capitalisation rules to:

stop the rules applying to certain New Zealand resident trusts if they only fall under the rules because the settlor has an interest in a non-resident company or trust; and
introduce a separate formula for calculating apportionment of interest by an excess debt entity controlled by a non-resident owning body or trustee to seek to ensure that interest paid to third parties remains deductible if the gearing exceeds 60%. Accordingly, the rules seek to remove the assumption built into the current rules that the same interest rate applies to both related-party debt and unrelated-party debt.

Custodial withholding obligations

A clarification has been made to the requirement for custodians to withhold tax when paying investment income to the end investor. Changes to the framework for withholding tax on investment income that applied from 1 April 2020, referred to the requirement for custodians to withhold RWT, but inadvertently didn’t refer to NRWT. The legislation will now refer simply to “the amount of tax”. The amendment will apply from 1 April 2020.

Other policy and remedial items in this bill include:

Measures to enable the direct transfer of New Zealanders’ Australian unclaimed superannuation money from the Australian Tax Office to a KiwiSaver Scheme.
Proposed amendments providing for taxable income arising from the culling of certain qualifying Mycoplasma bovis affected livestock to be spread over six income years.
Various remedial items clarifying aspects of the portfolio investment entity (PIE) tax regime, use of pre-consolidation imputation credits, and the trust rules.
Clarification that a cash dividend will be allocated to the income year in which the person receives it (i.e., not on an accruals basis). This will simplify filing and reduce compliance costs.
A subsequent supplementary order paper (SOP) includes changes to the administration of unclaimed money and increasing the individual income tax write-off threshold from $50 to $200.

To see all the content for the June Bill or for more information, refer to the commentary on the bill and the SOP and the June Bill. If you need help navigating the impact of the proposals, contact your usual Deloitte advisor.

July 2020 Tax Alert contents