A snapshot of recent developments
Tax Alert - April 2017
Closely Held Companies Bill receives royal assent
On 30 March 2017, the Taxation (Annual Rates for 2016-17, Closely Held Companies, and Remedial Matters) Act 2017 (CHC Act) received royal assent. Significantly, the CHC Act aims to give taxpayers more certainty over their tax affairs by dealing with inefficiencies and complexities that have occurred over time. It also aims to reduce compliance costs by simplifying certain tax rules. The CHC Act:
- Changes the eligibility criteria in relation to look-through companies, and simplifies the dividend rules as they apply to closely held companies to ensure that the decision to convert a small business to a company is not driven by tax considerations;
- Tightens the NRWT and AIL rules around taxing New Zealand interest earned by non-residents;
- Addresses various GST issues including allowing businesses to deduct GST associated with the costs of raising capital;
- Provides depreciation rollover relief for businesses in last year’s earthquake-affected areas (upper South Island and Greater Wellington);
- Clarifies time bar rules and application to ancillary tax returns;
- Changes the treatment of related party debt that is remitted;
- Changes the deductibility and timing treatment of aircraft overhaul expenditure; and
- Adds 14 new charities to the list of donee organisations in schedule 32 of the Income Tax Act 2007.
Look out for an article in this issue on the NRWT and AIL reforms as they apply to branches.
Inland Revenue releases 2017 International Tax Disclosure Exemption
Inland Revenue has released the 2017 International tax disclosure exemption ITR28 (Disclosure Exemption), which is released annually to remove the requirement for a resident to disclose various interests of less than 10% in a foreign company or foreign interest funds.
The Disclosure Exemption is unchanged from the prior year and applies for the 2016/17 income year.
Inland Revenue increases the threshold for minor errors
Inland Revenue has increased the monetary threshold for taxpayers to self-correct minor errors from $500 to $1000 following the enactment of the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act 2017. This change is now reflected in Inland Revenue’s Standard practice statement SPS 16/01: Requests to amend assessments.
Tax relief for flood damaged farms
On 16 March 2017, the Minister of Revenue Judith Collins welcomed Inland Revenue’s decision to exercise its discretion on income equalisation for farmers around the Franklin Ward, Hauraki District and Thames-Coromandel District. Farmers who are significantly affected by floods will be allowed late deposits from the 2016 income tax year to be made up to 30 April 2017, regardless of when the 2016 tax return is filed or the due date for filing that return. Early tax refunds will also be allowed.
Honk Land Trustees Ltd v Commissioner of Inland Revenue
On 10 March 2017, the New Zealand Court of Appeal delivered a judgment on the deductibility of management fees, finding for the Commissioner that management fees were not deductible as there wasn’t a nexus between the payments and the taxpayer’s income earning and/or business activities. The Court found that the management fee served the sole purpose of eliminating the taxpayer’s income tax liability by transferring it to a company that itself had losses, therefore totally eliminating any tax. The Court also confirmed that the Commissioner had correctly imposed a shortfall penalty on the taxpayer for taking an abusive tax position.
Inland Revenue releases draft Question We’ve Been Asked – Income tax: Whether YouTube receipts are taxable
Inland Revenue has released a draft Question We’ve Been Asked (QWBA) for consultation. The draft QWBA considers whether YouTube receipts are subject to income tax and concludes that in many cases YouTube receipts are taxable income because they are derived from a business. A YouTuber may also find that they may deduct some of the expenses related to producing or creating content for the website.
Inland Revenue finalises Interpretation Statement 17/02 – Income tax: deductibility of farmhouse expenses
Inland Revenue has finalised interpretation statement, IS 17/02: Income tax – deductibility of farmhouse expenses, which considers the deductibility of expenditure relating to a farmhouse that forms part of a farming business. The Commissioner distinguishes between two types of farms; Type 1 farms, where the value of the farmhouse is 20% or less of the total value of the farm, and Type 2 farms, where the value of the farmhouse is 20% or more of the total value of the farm.
Farmers can continue to claim a deduction of 100% for interest and rates relating to the farmhouse if they have a Type 1 farm. However, Type 2 farmers must undertake a “home office” calculation like any other taxpayer who carries on business from their home to determine the proportion between business and private use. This apportionment calculation can be based on time or space. This percentage can also be applied to all general farmhouse expenses that cannot be dissected. In addition, farmers are only allowed to deduct 50% of their home telephone rental (previously, farmers could deduct 100% of these costs) unless they can show that actual business use is higher.
IS 17/02 applies from the start of the 2018 income year.
Special report released on GST and services connected with land
On 31 March 2017, Inland Revenue released a special report which provides early information on the change to the Goods and Services Tax Act 1985, recently enacted in the CHC Act, relating to GST zero-rating of services connected with land.
From 1 April 2017, the ability to zero-rate services relating to land in New Zealand, where these services are provided by New Zealand suppliers to non-resident customers who are not in New Zealand, has been reduced. The previous GST legislation excluded from zero-rating services which are “directly in connection with” land in New Zealand, and a physical change of the land by the services provided was necessary to disallow zero-rating. Now, zero-rating will be disallowed for services, which are in connection with land, or an improvement to land, located in New Zealand, where those services are “intended to enable or assist a change in the physical condition, or ownership or other legal status, of the land or improvement”. This will require a significant range of service providers (including lawyers, valuers, advertisers) to charge GST at 15% on their services.
While the principle itself is clear, its application to some services is somewhat questionable as to what will be the critical point in evaluating how close or removed these services are to/from the particular land in relation to this GST taxation scope extension. The special report provides some guidance including examples, but does not provide clarity for all situations.
Inland Revenue has a new foreign trust webpage
Inland Revenue has created a webpage for foreign trusts. The webpage provides a broad overview on the new disclosure requirements for foreign trusts, the registration process, annual return process, and what happens if the contact trustee for the foreign trust changes. Trust registration forms are available for download.
Use of money interest rates decrease
Effective 8 May 2017, use of money interest rates will decrease. The taxpayer’s paying rate of interest on unpaid tax will move from 8.27% to 8.22% per annum, and the Commissioner’s paying rate of interest on overpaid tax decreases from 1.62% to 1.02% per annum.
Third party providers approved to store taxpayer electronic records offshore
Inland Revenue has updated the list of approved certain organisations that are permitted to store taxpayers’ electronic records outside of New Zealand. You can view the approved organisations on Inland Revenue’s website.
Taxpayers who store their business records with these approved organisations do not need to obtain approval under s 22(2BA) of the Tax Administration Act 1994 to store their business records outside of New Zealand. Although a third party provider may be used to store business records, taxpayers remain responsible for their tax obligations including retaining business records for the retention period (usually seven years) required under the Tax Administration Act.
New corporate tax residency test proposed in Australia may result in dual residency implications
The Australian Tax Office (ATO) has proposed a new corporate tax residency test which has the potential ability to capture more companies as tax resident. Previously, the ATO deemed a company to be an Australian resident if it carries on business in Australia and has its centre of management (CMC) in Australia. The proposed new test as set out in draft Taxation Ruling TR 2017/D2 significantly broadens the net for Australian residency by determining Australian residency simply on the basis of a company’s CMC. Effectively, it will no longer matter whether a company carries on business in Australia.
For example, a New Zealand subsidiary that is incorporated in New Zealand and carries on its business on New Zealand shores, could be deemed to be Australian tax resident if it has a parent company who exercises “centre management and control” in Australia. This dual residency outcome is unfavourable and will likely attract considerable debate.
Submissions on the draft ruling are due 12 May 2017 and, once finalised, this ruling will apply from 15 March 2017.
April 2017 Tax Alert contents