A Snapshot of Recent Developments
Tax Alert - December 2018
Legislation and policy developments:
R&D tax bill
Since our last Tax Alert, the Taxation (Research and Development Tax Credits) Bill had its first reading in Parliament and has been referred to the Finance and Expenditure Committee (FEC). The Government is keen to pass these measures into law in mid-2019. To enable this passage, the submission date on these measures is 14 December 2018 with the report back from FEC to Parliament due on 1 April 2019.
We expect the Taxation (Annual Rates for 2018-19, Modernising Tax Administration, and Remedial Matters) Bill to be reported back from the FEC to Parliament imminently. To remind readers, this bill contains the major changes which are intended to simplify the tax obligations for individuals and allow automated tax refunds (and assessments). As these rules are proposed to apply from 1 April 2019, the bill must be enacted prior to this date. We will report on any developments in our next Tax Alert in February 2019.
GST offshore supplier registration bill
The Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Bill was read a first time on 11 December 2018 and has been referred to the FEC who will then set a submission date (we think this is likely to be late January or early February 2019).
Increased minimum family tax credit
The Income Tax (Minimum Family Tax Credit) Order 2018 comes into force on 1 April 2019. This order increases the prescribed amount in section ME 1(3)(a) of the Income Tax Act 2007 from $26,156 to $26,572. The prescribed amount is used when calculating the amount that a person may be allowed as a tax credit (referred to in section ME 1 as a minimum family tax credit).
Finalised Inland Revenue items:
Income tax – treatment of the costs of resource consents IS 18/06
On 5 November 2018, Inland Revenue released IS 18/06 Income tax – treatment of the costs of resource consents. This finalised interpretation statement considers the tax treatment of the costs of obtaining a resource consent.
The ability to deduct or depreciate expenditure on a resource consent depends on the type of expenditure and the type of consent. It is necessary to understand the different types of resource consents for tax purposes and to be able to identify what expenditure is included in the cost base of the resource consent (or another asset) for depreciation purposes. These key concepts and a discussion of Trustpower Limited v CIR  NZSC are covered in Part One of this statement. The tax treatment varies depending on the circumstances. Part Two of this statement considers the specific situations in which expenditure on resource consents may be deductible or depreciable.
GST – When will goods and services supplied in connection with the repatriation of human remains from New Zealand be zero-rated?
This finalised question we’ve been asked, QB 18/15 was released on 5 December 2018 and considers the GST treatment of goods and services supplied in relation to the repatriation of human remains from New Zealand overseas. In particular, it considers when the goods and services can be zero-rated. This updates and replaces PIB 168 “GST on Human Remains for Repatriation” (January 1988: 5).
Draft Inland Revenue items for consultation:
Standard Practice Statement – voluntary disclosures ED0201
On 6 December 2018, Inland Revenue released an exposure draft of a standard practice statement ("SPS") on voluntary disclosures for consultation. Section 141G(1) of the Tax Administration Act 1994 allows a shortfall penalty to be reduced if, in the Commissioner’s opinion, the taxpayer makes a full and voluntary disclosure to the Commissioner of all the details of the tax shortfall. This statement sets out the factors the Commissioner will consider when forming an opinion as to whether a taxpayer has made sufficient disclosure of all details of the tax shortfall. In particular this draft SPS provides detailed discussion on the four essential elements of a voluntary disclosure. That is, that a voluntary disclosure:
• must disclose a tax shortfall, and
• must disclose all of the details of the tax shortfall, and
• must disclose something to the Commissioner, and
• must be made voluntarily.
Feedback on this draft SPS can be made until 31 January 2019.
Appeal for deductions in relation to expenditure in deriving foreign dividends allowed
The Court of Appeal has allowed an appeal from the taxpayer with regard to deductions taken for expenditure incurred in deriving exempt foreign dividends under section DB 55 of the Income Tax Act 2007. The Commissioner had disallowed the expenditure as not having sufficient relationship to dividends paid to it by its subsidiaries as a result of comparing the “nexus” wording in section DB 55 to section DA 1. The Court found that by taking into account the plain words of the section, the statutory context and recorded legislative intent, the ambit of deductibility provided by section DB 55 is to be decided in accordance with general principles of deductibility. The Court also held that the taxpayer had met the required nexus test. It should be noted that section DB 55 has since been repealed as a result of the Controlled Foreign Company (CFC) reforms and the removal of the Foreign Dividend Withholding Payment (FDWP) regime.
Taxpayer’s residency appeal denied
Having unsuccessfully challenged decisions in the Taxation Review Authority (TRA) and High Court, Mr van Uden, a ship’s captain, who is at sea for approximately eight months every year, appealed to the Court of Appeal in the matter of whether he had a permanent place of abode in New Zealand for the 2005-2009 income years.
The Court dismissed this appeal (following guidance in the Diamond case) as the “objective integrated fact assessment” did not support Mr van Uden’s characterisation that he felt more connected to Europe and did not have the intention of using the New Zealand property in question as a home.
A consequence of having a permanent place of abode meant that Mr Van Uden was tax resident for these years and therefore liable to pay tax on his interest in his foreign employer’s superannuation fund (which was a Foreign Investment Fund or FIF).
Further, because Mr van Uden had not disclosed his FIF income and overseas salary in his tax returns, the Court agreed with the Commissioner’s decision to lift the four year time bar allowing the earlier years to be reassessed. Finally, an unacceptable tax position penalty imposed by the Commissioner was also upheld.
Anti-avoidance cased dismissed
A win for the taxpayer in this High Court tax avoidance case in which Justice Muir ruled that section BG 1 of the Income Tax Act 2007 had not been appropriately invoked by the Commissioner. The arrangement entered into by Frucor Holdings Ltd involved, among other steps, an issue of a Convertible Note (the Note) to the New Zealand branch of Deutsche Bank, and a forward purchase of shares that the bank could call for under the Note by Frucor’s Singapore based parent Danone Asia Pte Ltd.
Justice Muir stated that this was a transaction that had “real and (from a New Zealand perspective) legitimate economic drivers”, and was self-evidently more “commercial” than the zero-coupon arrangements in Alesco. Interest was incurred and paid by Frucor both legally and, at a single-entity level, economically. At the time of writing this, it was not known whether the Commissioner would appeal this decision.