Snapshot of recent developments
Tax Alert - April 2019
The Taxation (Annual Rates for 2018-19, Modernising Administration, and Remedial Matters) Act receives the Royal assent
On 18 March 2019, the Taxation (Annual Rates for 2018-19, Modernising Administration, and Remedial Matters) Bill (“TARMTARM Bill”) received Royal assent on 18 March 2019. The Act, among other things:
- simplifies individual taxpayers’ tax return filing rules (effective for 2019 year ends);
- clarifies how Inland Revenue can collect, use and disclose taxpayer information;
- introduces a “short process ruling” where small businesses can more easily apply for a binding ruling from Inland Revenue on any tax matter;
- adds new KiwiSaver contribution rates of 6% and 10% and makes the savings scheme accessible to those aged over 65.
Finalised Inland Revenue Items:
Spreading of income and expenditure under deferred payment arrangement - Special Determination S60
On 12 March 2019, Inland Revenue released Special Determination S60: Spreading of income and expenditure under deferred payment arrangement.
The determination is made under s 90AC(1)(bb) of the Tax Administration Act 1994 (“TAA 94”) and applies to the applicants in relation to a deferred payment arrangement. Under the arrangement, a company assigned its rights to future cashflows to the applicants, in partial satisfaction of existing debts owed by the company to the applicants.
Optional Convertible Notes with Discretionary Interest Payments - Special Determination S61
On 12 March 2019, Inland Revenue released Special Determination S61: Optional Convertible Notes with Discretionary Interest Payments
The determination is made under ss 90AC(1)(bb) and (h) of the TAA 94 and relates to the issue of optional convertible notes issued by the Issuer to Holders who are owned and controlled by the same persons as the Issuer’s shareholders. The determination specifies whether any amount is solely attributable to an excepted financial arrangement.
Spreading method to be applied by Landowners making Infrastructure Payments to fund bulk infrastructure under a Final Encumbrance - Special Determination S62
On 20 March 2019, Inland Revenue released Special Determination S62: Spreading method to be applied by Landowners making Infrastructure Payments to fund bulk infrastructure under a Final Encumbrance.
This Determination relates to an arrangement involving an encumbrance under which a landowner is required to make payments to an LP over a fixed period. This determination prescribes the method for determining the amount of expenditure a landowner has under the financial arrangement in each income year.
Question We’ve Been Asked - What are the requirements for claiming tax deductions for payments to family members for services? – QB 19/01
On 22 March 2019, Inland Revenue released QB 19/01: What are the requirements for claiming tax deductions for payments to family members for services?
This QWBA deals with the requirements for claiming income tax deductions for payments to spouses, partners, or other family members for services they provide to businesses or other income earning activities. It reminds taxpayers that to claim deductions:
- the family member must provide services to the business;
- the amount paid must not be excessive, and
- if the family member is a spouse or partner, the Commissioner's prior approval for a deduction is required unless the business is run though a company (s DC 5 of the Income Tax Act 2007).
Question We’ve Been Asked - Depreciation – change of use event – QB 19/02
On 3 April 2019, Inland Revenue released QB 19/02: Depreciation – change of use event.
This item considers whether depreciation recovery income may arise for a business that becomes a charity and begins deriving exempt income. The item concludes that a business that becomes a charity will have a change of use of its depreciable property, as that property is no longer available for use in deriving assessable income but will be used for deriving exempt income. As depreciation deductions will be disallowed, ss EE 47(2) and EE 47(2B) apply.
The issue was raised following an amendment to the timing of this income (now contained in s EE 47(2B)) which means that any depreciation recovery income will arise immediately before the income exemption applies.
Voluntary disclosures - SPS 19/02
On 28 March 2019, Inland Revenue released standard practice statement SPS 19/02: Voluntary disclosures.
The statement will apply from 27 March 2019 and will replace SPS 09/02: Voluntary disclosures. The finalised standard practice statement sets out the factors that the Commissioner will consider when forming an opinion as to whether a taxpayer has made a full voluntary disclosure.
The High Court dismissed Cullen Group’s challenge to the Commissioner’s assessment that it had avoided $59.5 million of NRWT while it paid $8 million in approved issuer levies (AIL). The Court found that the use of the AIL regime in this arrangement was not within Parliament’s contemplation, on the basis that Parliament had enacted the AIL regime with the objective of encouraging investment in New Zealand, by reducing the cost of New Zealand residents borrowing from non-residents. The Court considered it was relevant that the arrangement in this case in the Court’s view introduced no new funds. The Court construed the arrangement as having restructured shares in one New Zealand company into loans to another New Zealand company which were assigned to overseas entities in form but not in substance.
The Supreme Court has dismissed an application for leave to appeal in the matter of whether a taxpayer had a permanent place of abode in New Zealand. The Court of Appeal decision that Mr van Uden did have a permanent place of abode (PPOA) was covered in our December 2018 Tax Alert. The Court found he had a PPOA in New Zealand because he ‘almost always’ stayed at the property in question when he was in New Zealand, despite never owning the property.
The Supreme Court determined that the appeal raises no point of general or public importance and dismissed the application for leave to appeal.
Peter William Mawhinney as Trustee of the Doug Vesey Trust v Commissioner of Inland Revenue  NZHC 553
The High Court has dismissed Mr Mawhinney’s challenge to a Taxation Review Authority (TRA) decision. The case concerned whether a notice of response (NOR) issued by the Commissioner was issued too late, and whether, as a result, the Commissioner was deemed to have accepted the taxpayer’s notice of proposed adjustment (NOPA).
The Court held that the time available for the Commissioner to issue a NOR began on the day that the Commissioner’s declined to accept the taxpayer’s late-filed NOPA under section 89K(1) of the Tax Administration Act 1994. There was nothing in the relevant statutory provisions which suggested the Commissioner should issue a NOR just in case the taxpayer brought a successful challenge to her refusal.
The Court of Appeal has dismissed Inland Revenue’s appeal against a High Court decision relating to a request for information by the Korean National Tax Service (KNTS) under the New Zealand/Korean Double Tax Agreement (DTA).
The Court of Appeal confirmed the High Court decision that the Commissioner of Inland Revenue should not have issued notices, requesting information, to a Korean national with New Zealand residency, and to the Korean national’s tax advisor.
The Court of Appeal held that although Inland Revenue can apply a "presumption of regularity" to a DTA partner's request, the Competent Authority under the treaty (an Inland Revenue official) had applied the wrong test when determining whether to respond to the request from the KNTS. We will cover this case in more detail in the May edition of Tax Alert.