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A snapshot of recent developments 

Tax Alert - November 2016

DTA update: China, Korea, Luxembourg and Ukraine

Members of the New Zealand Government have met with Officials from Luxembourg and Ukraine to advance negotiations of double tax agreements (“DTAs”) with the two countries.  It has also been announced that New Zealand’s DTAs with China and Korea are being re-negotiated to modernise the current DTAs, which are 30 and 35 years old respectively.

IS 16/04: Income tax – Treatment of the receipt of lump sum settlement payments

On 26 October 2016, Inland Revenue released the finalised Interpretation Statement IS 16/04, which considers the income tax treatment of lump sum settlement payments received to settle claims that are both capital and revenue in nature.  The statement also considers the approach to apportioning such a payment.  IS 16/04 concludes that, where a single undissected lump sum payment is received, the payment should be apportioned between its capital and revenue elements.  While the apportionment must be done on an objective basis, the parties’ agreement as to how the settlement payment is made up will generally be an appropriate basis for apportionment.

IS 16/05: Income Tax – Foreign tax credits – How to claim a foreign tax credit where the foreign tax paid is covered by a double tax agreement?

On 1 November 2016, Inland Revenue finalised Interpretation Statement IS 16/05, which explains how to claim a foreign tax credit where a DTA applies.  The statement provides that a foreign tax will be covered by a DTA where it is:

  • Expressly listed in the “Taxes covered” article of the DTA; or
  • A tax on income or capital as defined by the DTA; or
  • For taxes enacted after the commencement of the DTA, “identical or substantially similar” to one of the taxes covered by the DTA.

Where the tax in question is covered by the DTA, there is a process (i.e. various articles) to work through in order to determine whether a foreign tax credit is available.  Where the DTA says a foreign tax credit is available, subpart LJ of the Income Tax Act 2007 will then operate to calculate the amount of the credit.

Draft SPS: Retrospective adjustments to salaries paid to shareholder-employees

Inland Revenue has released a draft Standard Practice Statement, which considers the Commissioner’s approach toexercising her discretion under section 113 of the Tax Administration Act 1994 with respect to retrospective adjustments to salaries paid to shareholder-employees.  Generally speaking, the Commissioner will only exercise her power to amend an assessment for salaries paid to shareholder-employees where there is an agreement that the shareholder’s salary is calculated with respect to the company’s profit and it can be shown that there is an error in the company’s profit.

SPS 16/04: Payment of shortfall penalty using losses

Inland Revenue has recently finalised Standard Practice Statement SPS 16/04, which sets out the Commissioner’s practice regarding the use of losses to pay shortfall penalties.  SPS 16/04 establishes that losses can only be applied to penalties on income tax.  The statement also details conditions for using losses, how losses can be used for group penalties and the correct value of an individual or company’s losses when paying a penalty.

Standard for the use of a valid electronic signature on documents provided to the Commissioner

In accordance with obligations under the TAA 1994, Inland Revenue has released a standard for the use of valid electronic signatures on documents provided to the Commissioner.  The standard provides that taxpayers may only use an electronic signature when submitting documents and information to Inland Revenue where they are using Inland Revenue’s online services or where they provide an electronic signature using software that complies with the requirements set out in the standard.

Draft QWBA: Depreciation treatment for “buildings with prefabricated stressed-skin insulation panels”

Inland Revenue has released a draft Question We’ve Been Asked, which considers what buildings would come within the depreciation asset class “Buildings with prefabricated stressed-skin insulation panels” (also known as sandwich panels).  The question has come about because use of sandwich panels has grown from merely being used as a cost-efficient element in the construction of buildings where hygienic food storage is required to being used as unprotected weather cladding and insulation for the building. 

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