Latest tax legislation solves some problems you didn’t know you had
Tax Alert - April 2021
By Robyn Walker
It’s fair to say that tax can be quite complex sometimes. The length of the Income Tax Act 2007 (“the ITA07”) is testament to this fact (the current PDF version on the Parliamentary Counsel Office website runs to 3,670 pages); and it’s inevitable that sometimes there are going to be some quirks and unexpected outcomes hidden within all those pages.
Fortunately, amongst other things, within its 114 pages, the recently enacted Taxation (Annual Rates for 2020/21, Feasibility Expenditure and Remedial Matters) Act 2021 (“the amendment act”) makes some amendments to fix some quirks within the legislation; but potentially with every problem that is fixed, another one takes its place. In this article we explain a few of the changes in the new amendment act which may fix problems you didn’t know you had. We also recap some of the other major reforms included in the amendment act.
The amendment act has not passed through Parliament without some controversy. There are a number of taxpayer unfavourable changes which came under criticism from submitters and even members of the Finance and Expenditure Committee and its independent advisor, but the changes still made their way into legislation (changes to GST and mobile roaming costs and purchase price allocation rules fall into this camp).
Likewise the announcement that the bright-line test was being extended from 5 to 10 years was put straight into the legislation via a supplementary order paper and turned into enacted legislation in less than a week.
Another criticism which can be levied against the amendment act is its extensive use of retrospective legislation – 207 clauses or subclauses come into force before the date of royal assent. As the Clerk of the Finance and Expenditure Committee pointed out during the legislative process, retrospective provisions were used extensively, without justification. New Zealand’s Legislation Guidelines prescribe that legislation should be prospective not retrospective, with provision that retrospective legislation may be appropriate in some limited circumstances, such as if it is intended to be entirely to the benefit of those affected, or it validates matters generally understood or intended to be lawful but are not due to a technical error. It’s understood that most retrospective changes in the amendment act are merely technical tidy-ups which are intended to be taxpayer favourable.
Donated Trading Stock
Section GC 1 of the ITA07 is a section that many taxpayers may currently be oblivious to. What this section says is that trading stock is always deemed to be disposed of for market value. The background to this section was that in the 1940’s (when the total length of New Zealand’s tax legislation ran to around 50 pages) there were some examples of retiring farmers gifting livestock to relatives, but as a quirk of the legislation, the relative was still able to claim a tax deduction for the market value of the livestock. To put a stop to this, an equivalent of today’s section GC 1 was created to ensure that the retiring farmer had to pay tax.
Fast-forward to the 21st century and life is different now. There are numerous different regimes that exist to protect the tax base from businesses trying to give trading stock away in a mischievous fashion; however section GC 1 still exists and potentially captures a number of one-sided “social good” transactions within its ambit. Potentially caught transactions include supermarkets donating (not quite) expired food to foodbanks rather than putting it in the bin, retailers giving away bottles of water to people following a natural disaster, hand sanitiser businesses donating their stock to front-line essential workers etc. There are some arguments to support section GC 1 not applying in these circumstances, but it’s far from clear.
The issue of section GC 1 having an overreach was previous corrected on a temporary basis following the 2010 Canterbury earthquakes, and, in response to COVID-19, once again we have another temporary measure which will effectively switch-off the overreach of section GC 1 for qualifying transactions between 17 March 2020 and 16 March 2022. While this solves the problem for now, section GC 1 will still pose a problem after 16 March 2022, so we’re hopeful that between now and then a permanent solution can be found.
Unexpectedly caught under the bright-line?
You’d naturally think that if you’re taxed on the income from the sale of an item that you should receive a tax deduction for the cost of that item, right? Unfortunately, until now, the ITA07 has been less than clear when an asset has been acquired for private use (e.g. a family holiday home which is then sold within the bright-line period) as there is a prohibition on claiming deductions for private expenditure. Fortunately, the amendment act inserted a retrospective change that applies from the first date that the ITA07 applied (1 April 2008) to allow deductions for the cost of private property which is taxed on disposal.
What is a dwelling?
Still on the topic of the bright-line, a question was raised as to how the bright-line test (and other rules relating to property) applied to property which wasn’t actually used as anyone’s residence; e.g. a property held vacant or for short-term rental. The bright-line test applies to “residential land”, residential land includes property with a “dwelling” on it, and a dwelling was defined as “…any place used predominantly as a place of residence or abode…”. You may see where the uncertainty arises if a property is actually empty more often than it is used.
As the amendment act was working its way through the Finance and Expenditure Committee, a decision was made to change the definition of dwelling with effect from the date that the bright-line test was originally introduced in 2015. A dwelling is now retrospectively defined as “…any place configured as a residence or abode, whether or not it is used as a place of residence or abode…”. There is no analysis provided as to how many property sales may now be subject to tax because of this retrospective change.
Can you remind me what else is in the amendment act?
The title of the amendment act could lead you to incorrectly conclude that the extent of the tax reform in the bill is limited to feasibility expenditure changes and a few other “remedial” matters. However, there is much more to this act than just remedial matters. Some of the changes have been the subject of previous Tax Alert articles, and some will be covered in future Tax Alert articles (there is too much to cover in one edition). Key reforms include:
- Allowing certain feasibility expenditure to be deductible over five years when a project is abandoned;
- Introducing a new business continuity test to allow taxpayers to carry forward losses in more circumstances;
- New rules to require businesses to agree purchase price allocations when buying/selling a mixture of different asset types (note, the application date of these reforms as been deferred from 1 April 2021 to 1 July 2021);
- Some taxpayer favourable and unfavourable changes to the Research and Development Tax Credit Regime;
- Providing some additional exemptions from the new trust disclosure rules;
- Concessions to allow IFRS taxpayers to following the IFRS-16 treatment for certain leases;
- Changes are made to the land sale rules to ensure that taxpayers who are habitually buying and selling land cannot interpose different legal entities to avoid creating a “pattern” of land sales;
- Telecommunications businesses will need to charge New Zealand GST to customers when they are roaming on their mobile devices outside of New Zealand. This change will take effect from 1 April 2022;
- The processes around unclaimed monies are modernised;
- It’s confirmed that dividends are derived on a cash basis;
- Improvements are made to assist taxpayers who are dealing with mycoplasma bovis.
Note, this is not a comprehensive list as the amendment act made over 50 substantive sets of changes. The links included above also explain the proposals as originally introduced in June 2020 and as some refinements to proposals were made during the legislative process, there may be some changes to the positions as explained in those articles.
The amendment act makes a number of positive changes for taxpayers, but also includes a range of changes which might unexpectedly catch people out – particularly those laws which were added into the legislation after public consultation had ended. Large amounts of the legislation in the amendment act applies with retrospective effect; and so the real message out of this process is to ensure that tax advice is sought before entering into transactions as there may be new unknown and unpleasant tax outcomes; unfortunately tax advice received on a transaction in the past does not mean that the same answer applies the next time to carry out a similar transaction.
For more information on the amendment act please contact your usual Deloitte advisor.
April Tax Alert contents
- Changes to the property tax landscape
- Latest tax legislation solves some problems you didn’t know you had
- Feasibility issues no more?
- OMG my tax return is wrong
- Is tax pooling still relevant for managing your tax payments?
- Recapping Deloitte’s FBT and employment taxes webinar – key things you need to know under the 39% rate
- Snapshot of recent developments