New Tax Bill introduced

The Bill includes the following reforms:

• Measures to clarify the GST position of bodies corporate
• Proposals for the cash out of research and development tax losses
• Amendments to tackle black hole research and development (R & D) expenditure
• Annual setting of income tax rates for the 2015-16 tax year
• The addition of new charities to Schedule 32 of the Income Tax Act 2007 (the Act)
• Changes to the calculation of fringe benefits from employment-related loans for employers who are in the same group of companies as a person in the business of lending money to the public, which would allow the employer to use the market interest rate method to calculate the value of the fringe benefit.
• A number of remedial changes to the controlled foreign company rules
• The repeal of reforms (not yet in force) which would require individuals who were not required to file an income tax return but chose to do so, to file returns for the previous four income years in addition to the year they have chosen to file.
• Enabling tax pooling funds purchased to be used to meet interest owed as a result of a tax dispute or amended tax assessment.
• Remedial amendments to the thin capitalisation reforms enacted in the Taxation (Annual Rates, Employee Allowances and Remedial Matters) Act 2014 in relation to companies which are controlled by non-residents acting together.
• Remedial changes to clarify that the capital limitation does not prevent a deduction for bad debt of the principal amount of a financial arrangement entered into in the ordinary course of business.
• A number of other remedial changes.

Separate articles appear on the first two items. A brief outline is provided below on a few key areas likely to be of most interest to readers.

Black hole expenditure

Reforms are proposed to target black hole research and development expenditure. These were announced in Budget 2014. The key aspects of the reforms are:

• A taxpayer who has developed an intangible asset (recognised for accounting purposes) that is not depreciable for tax purposes will be allowed an income tax deduction for capitalised development expenditure they have incurred on the asset when the intangible asset is derecognised (i.e. written-off) for accounting purposes (other than by disposal). This will apply to expenditure incurred on or after 7 November 2013 (i.e. the date the discussion document on black hole expenditure was released). The deduction will be allowed irrespective of whether the asset was useful for a period or the R & D was unsuccessful.
• In the event that a derecognised non-depreciable intangible asset is sold or becomes useful again and a deduction has previously been taken for the asset, the deduction will be clawed back.
• Taxpayers who have created an intangible asset that is depreciable for tax purposes will be allowed to include capitalised expenditure that relates to the asset as part of the costs of the asset. In the case of patents, patent applications, plant variety rights, and the new additions to Schedule 14 proposed, the person must have incurred the expenditure on or after 7 November 2013 for the expenditure to be included in the depreciable cost of the item of depreciable intangible property.
• The following assets will become depreciable intangible property in Schedule 14 of the Act for expenditure incurred after 7 November 2013:
  • A design registration;
  • A design registration application; and
  • Copyright in an artistic work that has been applied industrially.

Filing requirements for individuals

This proposal would see the repeal of reforms (not yet in force) which would have required individuals who were not required to file an income tax return, but chose to do so, to file returns for the previous four income years in addition to the year they have chosen to file. These reforms were enacted in the Taxation (Annual Rates, Returns Filing and Remedial Matters) Act 2012 to prevent taxpayers from only filing income tax returns that would result in a tax refund. These rules were to apply from the 2017 income year.

The original policy of the reforms was set three years ago and the Government now considers their implementation is no longer a sound investment given Inland Revenue’s Business Transformation programme which is expected to deliver a more accurate PAYE structure resulting in fewer people being in a refund or tax-debt position.

Tax pooling and interest liabilities

As previously signalled by the Minister of Revenue, reforms in the Bill will allow taxpayers to use tax pooling arrangements to pay any interest owed as a result of a tax dispute or amended tax assessment. This addresses the situation where taxpayers could not use purchased tax pooling funds to meet interest liabilities in these circumstances (resulting in interest continuing to be charged on the outstanding shortfall and therefore not “stopping the clock” in tax disputes).

The proposed reforms will apply retrospectively from 3 July 2014. This means that taxpayers who had an amended assessment issued or challenge proceedings resolved before 3 July 2014 will be able to access tax pooling funds to pay the interest outstanding if the 60-day period to access tax pooling funds was current on 3 July 2014.

For further information on these issues, please contact your usual Deloitte advisor.

March 2015 Tax Alert contents

New Tax Bill introduced

GST and Bodies Corporate

R&D cashing out losses

Amending return errors: Taxpayer friendly High Court ruling

Consultation sought on related party debt remission

Tax treatment of life insurance policies

Draft re-issue of rulings for interest deductibility