More tax legislation served up to taxpayers
Tax Alert - September 2016
By Robyn Walker and Nigel Jemson
As part of the increasing buffet of tax legislation being dished up by the Government, in August a Tax Bill was released aimed at implementing the business tax simplification measures announced as part of this year's budget.
The Tax Bill also includes the following reforms.
- Amendments to the disclosure requirements for foreign trusts with New Zealand resident trustees. These amendments are the result of the Government Inquiry into Foreign Trust Disclosure rules. Refer to the separate article here for further Deloitte analysis on the new foreign trust disclosure requirements.
- Automatic exchange of information: Legislation amendments to implement the G20/OECD standard for Automatic Exchange of Financial Account Information in Tax Matters in New Zealand (refer to the separate article here on these measures).
Business tax simplification measures – the main course
From a policy standpoint, very little has changed compared to when the business tax measures were originally announced in April, aside from a few tweaks around the edges. There is a smorgasbord of changes, with the most significant changes relating to provisional tax and use of money interest.
- New options have been introduced to allow businesses to fall outside of the use of money interest regime when paying provisional tax. In particular:
- Use of Money Interest (“UOMI”) will be removed for the first two provisional tax instalments for taxpayers using the standard uplift method.
- The safe harbour threshold will be extended to non-individuals and increased from $50,000 to $60,000 so that anyone with residual income tax of less than $60,000 will not be subject to UOMI.
- Small and large businesses may be able to choose to pay provisional tax based on their tax-adjusted income calculated by an Inland Revenue approved software package. This is intended to align tax payments with when income is earned and is called the Accounting Income Method (AIM method).
Other tax dishes on offer are:
- A shareholder-employee and the company can agree that the shareholder-employee’s provisional tax payment obligations on their shareholder salary are transferred to the company.
- Contractors subject to the schedular payment rules can elect their own withholding rate without having to apply to Inland Revenue for a special rate (subject to certain minimum rates), and contractors not covered by the schedular payment rules can opt in to the rules with the consent of the payer.
- The schedular payment rules will be extended to contractors working for labour-hire firms.
- Inland Revenue will no longer impose a 1% monthly incremental late payment penalty on unpaid GST, income tax and Working for Families tax credits overpayment.
- The Commissioner will be allowed to disclose a taxpayer’s information and their significant tax debt to approved credit reporting agencies, and Inland Revenue will be able to share information with the Registrar of Companies to enforce certain serious offences.
- The motor vehicle expenditure rules in subpart DE of the Income Tax Act 2007 ("ITA 2007") are to be extended to allow certain close companies to use these rules as an alternative to paying FBT on a motor vehicle benefits provided to shareholder-employees.
- The self-correction threshold for minor errors will be increased from $500 to $1,000.
- Taxpayers will be able to use a simplified method for the calculation of deductions for premises and vehicles that are used for both business and personal purposes.
- The threshold for calculating and returning FBT on an annual basis will be increased from $500,000 to $1 million of PAYE/ESCT.
- Taxpayers to be able to choose whether to apply the existing rule in section EA 4 of the ITA 2007 for the timing of the deduction for an amount of expenditure on employment income paid within 63 days after the end of the income year.
The AIM method will initially be available to businesses with gross income of under $5 million and will apply from the 2019 income year. Conceptually, this method allows businesses who are operating accounting software to use this software to pay provisional tax as they go – based off accounting profit with some tax adjustments calculated automatically by the accounting software.
One change from the original discussion document is that Inland Revenue are now opening up the AIM method to larger taxpayers. An amendment has been included in the Bill to taxpayers with income >$5 million to use the AIM method if they are using a software package that the Commissioner has approved for AIM.
The detail of how the AIM method will work in practice is yet to come. Most of the detail of how the method will work (particularly translation of accounting data into a tax payment calculation) will be issued in a determination by the Commissioner of Inland Revenue. This appears to be the best approach, given that many of the finer workings of this method are yet to be nutted out.
The business tax simplification measures are primarily targeted at small businesses, however larger businesses will benefit from the proposals. Businesses are likely to welcome these measures, particularly the changes to allow businesses to avoid the use of money interest rules, which have long been a bugbear for many businesses.
While many of these measures do achieve the aim of tax for business, we consider there is still a lot more room for the Government to further simplify the tax rules. Some examples of business tax simplification measures we’d like to see on the menu include:
- Introducing the ability for businesses to write-off low value residual asset balances in their tax fixed asset register (e.g. write-off balances under $100);
- Raising existing thresholds in the Act which have not changed since they were introduced (e.g. $10,000 threshold in section DB 62 for taxpayers to claim a deduction for legal fees without the need to review for capital items).
For further analysis of the business tax proposals, please refer to this Deloitte Special Tax Alert that was issued when these proposals were first announced.
Supplementary order paper to the Bill – dessert or appetite spoiler?
Subsequent to the release of the Bill, the Government has introduced a supplementary order paper (“SOP”) to the Bill – a dessert of sorts, albeit some are finding it is leaving a sour taste.
The SOP proposes an amendment that would provide the Government with a regulation-making power to change the application of a provision in the Tax Administration Act 1994 so that the application of the legislative provision is consistent with its policy intent. This regulation making power is limited to legislative provisions impacting the Business Transformation process and is intended to be used in situations where a prompt regulatory response is required to avoid the potential for delays to the transformation process.
The accompanying Regulatory Impact Statement notes that there are two main situations where a prompt regulatory response may be needed:
- When a process aligned with the current computer system is examined and found to be inconsistent with the current law because of the limitations of the current system. A regulatory response would be needed to provide a bridge between the current process and the correct process in the new computer system; and
- When the new computer system offers a more efficient or different process to that currently legislated. A prompt regulatory response could reduce the delay in getting the law to line up with the new process, so as to provide a smooth transition from the old law to the new law.
The exemption and regulation-making power would enable the delegated legislation to achieve the following:
- Amend, suspend or override a provision in the Tax Administration Act 1994;
- Define or amend a term in the Tax Administration Act 1994; and
- Exempt a person from a provision of the Tax Administration Act 1994.
Some safeguards have been included to limit the exemption and regulation-making power:
- Regulations must include a date on which they will be repealed, with a maximum of a 3 year sunset clause. Any further legislative amendments would need to be made via the parliamentary process prior to the regulation being repealed;
- Regulations can only be made where they are consistent with the current policy intent;
- Regulations can only be made when they are necessary or desirable for the orderly implementation of business transformation;
- Regulations must have been the subject of a consultative process. However, what constitutes a consultative process is left undefined.
The regulation-making power and any unexpired regulations made under this provision would expire on 31 December 2021 (as Inland Revenue envisage Stage 4 of Business Transformation to be complete by this date).
These proposals are bound to create concern about the powers being granted to Inland Revenue but this does not mean they are without merit. We agree it would be useful for Inland Revenue to have some regulatory flexibility, where tax legislation is not consistent with the underlying policy intent. This would prevent Inland Revenue’s business transformation process being held up unnecessarily by delays in the parliamentary process. This is particularly important as we head into the 2017 election year which typically slows the pace at which legislation can progress.
We acknowledge that the regulation making power goes against the constitutional principle that taxes should not be levied without parliamentary authority. However, the safeguards put in place should help limit any potential abuse of the power. The Government does not have unlimited power to vary tax legislation as they wish as the regulation-making power is limited to situations relating to business transformation and where the legislation is inconsistent with the underlying policy intent.
However, we acknowledge that further consideration will need to be given to ensure the proposed safeguards are sufficient. In particular, the draft legislation does not adequately canvass the following issues:
- Where the policy intent is not clear or Inland Revenue and taxpayers disagree on what the underlying policy intent of a particular provision is.
- What is necessary for the ‘orderly implementation of business transformation’ is left undefined. Taxpayers and Inland Revenue could disagree on what this entails.
- While some of these issues can be ironed out via the envisaged consultation process in the draft legislation, it is not entirely clear what this consultation process would entail. We suggest that Inland Revenue create a defined consultation process so that there is sufficient public oversight over the regulation-making power. This could include a website where proposed regulations are posted, giving the public an opportunity to comment within a defined timeframe.
We also note that it would have also been preferable if these proposals were introduced at the same time as the Bill or alternatively, the consultation timeframe on the Bill extended. The Bill already has a truncated consultation process (with submissions due 9 September). Introducing reforms via supplementary order paper to a Bill which already has a short consultation timeframe runs the risk that there is insufficient time to iron out any flaws with the proposals.
While controversial, provided some of the flaws in the regulation-making power can be ironed out, these proposals are a tentative step in the right direction towards enabling a swifter fix to issues in tax legislation.
Submissions on the Bill close on 9 September 2016 with a report back date of 11 February 2017. We expect the Government to move swiftly to enact the Bill, given that many of the business tax reforms will apply from 1 April 2017 and are intended to be a pre-election sweetener for business taxpayers.
For further information on the Bill’s reforms, please contact your usual Deloitte advisor.
Stay tuned to Deloitte Tax@hand and Deloitte Tax Alerts for further developments.