Snapshot of Recent Developments
Tax Alert - February 2020
Tax legislation and policy announcements
KiwiSaver Bill reported back
On 18 December 2019, the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Bill, introduced on 27 June 2019, was reported back to Parliament. Broadly the key measures of this bill include:
- Allowing KiwiSaver members to change their contribution rates through their scheme provider or Inland Revenue, in addition to through their employer.
- Allow the Commissioner of Inland Revenue to change the tax rate applied for portfolio investment entity (PIE) investors in a greater variety of circumstances, rather than leaving the onus solely on the investor.
- Broaden eligibility for refundable research and development tax credits.
- Exempt overseas-based borrowers with serious illnesses or disabilities from being required to pay interest on student loan repayments.
- Making numerous remedial and technical amendments to a wide variety of income tax issues, some of which we will pick up in future issues of Tax Alert, once enacted.
The bill will undergo its second reading in the house once Parliament has resumed in February and is expected to be enacted before the end of March 2020.
New DTA with China is now in force
On 27 December 2019, the New Double Tax Agreement between New Zealand and China (DTA) came into force. It replaces an earlier agreement dating back to 1986 and therefore provides a modern set of tax rules to deal with double tax issues. The new DTA with China does not extend to Hong Kong, which is managed by a separate DTA.
The new DTA intends to provide cross-border investors with more certainty about tax treatment, particularly for dividends, interest and royalties. The DTA introduces a lower withholding tax rate for dividends where the beneficial owner is a company that has held a direct interest of at least 25% of the capital of the company throughout a 365-day period that includes the payment date.
The new agreement also reflects recent work by the Organisation for Economic Co-operation and Development (OECD) on base erosion and profit shifting (BEPS). The new agreement includes a number of anti-BEPS measures to improve the ability of both countries to detect and prevent tax evasion. That is, it now incorporates many of the MLI articles.
The DTA will apply from 1 January 2020 in respect of withholding taxes and to taxable income years beginning on or after 1 January 2020 for income and other taxes.
For more information about this new DTA see our earlier article.
Government to clarify donation tax credit
On 17 December 2019, Revenue Minister Stuart Nash announced that the Government would move to restrict the issuance of donation tax credits and gift deductions to cash donations (including payments made by credit card or bank transfer). The announcement follows a Court of Appeal decision that ruled that, under current law, donors are entitled to claim a tax credit or gift deduction on debt forgiveness. The proposed change would be included as a late item in the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Bill due for its second reading in Parliament in early 2020. Refer to our other article in this edition of Tax Alert: Happy New Year – a taxpayer (pyrrhic) victory, and a refresher on Parliamentary sovereignty.
Tax treatment of operating leases
Late last year, the Government released details of proposed changes that would allow taxpayers who apply IFRS 16 to more closely follow their accounting treatment of leases for tax purposes if they choose to. This has come about because IFRS 16 removes the accounting distinction between operating and finance leases. The proposed changes would only apply for the person using the asset (the lessee), not the person supplying the asset (the lessor), and would also only apply to taxpayers with IFRS reporting obligations for income years starting on or after 1 January 2019. The proposed changes will be included in a tax bill planned for introduction early in 2020.
A fact sheet has been released to explain the proposed changes.
These new rules would apply to taxpayers with IFRS reporting obligations for income years starting on or after 1 January 2019, to align with the commencement of IFRS 16. Early adopters may be able to agree a filing position using this basis with Inland Revenue even though the tax rules are not enacted.
Draft Inland Revenue items released
Distributions from foreign trusts
On 19 December 2019, Inland Revenue released IS 19/04: Income tax – distributions from foreign trusts. This interpretation statement discusses the tax treatment of New Zealand residents from overseas who receive amounts of money and property that are potentially distributions from trusts. It covers how to determine if the amounts come from a trust, whether they are beneficiary income or a taxable distribution from a foreign trust, and the ordering rule (s HC 16) in the Income Tax Act 2007. It also considers the law of administration of deceased estates. The interpretation statement will be useful for the significant number of migrants to NZ and the many New Zealanders with relatives overseas. This was covered in our October 2019 Tax Alert article.
Trust property as it relates to short-term rentals
Inland Revenue have published and finalised two further Questions We’ve Been Asked, relating to the income tax and GST consequences of providing short-stay accommodation through peer-to-peer websites such as Airbnb, Bookabach and Holiday Houses.
- QB 19/15 explains how the income tax rules apply if property held in a trust is rented out by a beneficiary of the trust.
- QB 19/16 explains how the income tax rules apply if property held in a trust is rented out by the trustees.
Treatment of alteration to rights attached to shares
Inland Revenue has released finalised public rulings BR Pub 19/05 and BR Pub 19/06 on the treatment of alteration to rights attached to shares under s CB 4 of the Income Tax Act 2007. The updated rulings discuss arrangements where a shareholder holds shares in a company and where those shares were acquired for the purpose of disposal. The rulings conclude that an alteration of rights attached to shares does not result in a disposal of personal property for the purposes of s CB 4 and that the time of acquisition of a share with altered rights held on revenue account is the time the share was acquired before the alteration.
Draft statement on charities and donee organisations
On 16 December 2019, Inland Revenue released ED0207/a and ED0207/b, which are draft standard practice statements on the treatment of charities and donee organisations respectively. The statements set out how Inland Revenue and Charities Services will monitor and advise charitable entities of the requirements for income tax exemption and donee status. The purpose of the statements is to assist organisations in the charitable mand not-for-profit sectors to understand their tax obligations and the tax exemptions available to them. Comments close on 14 February 2020.
New bloodstock rules - standout yearlings at Karaka 2020
As a result of legislation passed last year, new rules allow new bloodstock investors to claim tax deductions, as though they had a bloodstock breeding business, if they purchase a standout yearling with an intention to breed from the horse in the future. The aim is to incentivise new investors into bloodstock breeding while targeting the best yearling prospects.
Inland Revenue has published minimum purchase costs and criteria to meet. To be eligible for the policy, the investors will have to provide Inland Revenue with evidence within four months of acquiring the yearling that they intend to derive a profit from breeding the high-priced yearling. Inland Revenue has set out a list of information to be submitted when making applications.
NSC 2020: National Standard Costs for Specified Livestock
Released on 28 January 2020, this determination is made under section EC 23 of the Income Tax Act 2007 and applies to any specified livestock on hand at the end of the 2019-2020 income year where the taxpayer has elected to value that livestock under the national standard cost scheme for that income year.
Update on Australian corporate residency rules
The Australian Board of Taxation has been reviewing the Australian corporate tax residency rules in the wake of concerns raised following its finalised practical
guidance on the central management and control tests of corporate residency. The Board has now released two consultation papers on this topic, the last one in December 2019. Submissions closed on 31 January 2020.
Late last year the Australian Tax Office also published an update to PCG 2018/9. The Guideline contains practical guidance to assist foreign incorporated companies and their advisors to apply the principles set out in TR 2018/05: Income tax: central management and control test of residency. The specific updates to PCG 2018/9:
- extend the transitional compliance approach period for companies that are taking active and timely steps to change their governance arrangements in line with the approach;
- confirm the transitional and ongoing compliance approaches on penalties for failing to lodge taxation documents;
- clarify that Australian directors flying overseas to attend board meetings where the company has a substantive commercial presence is not considered an ‘artificial or contrived arrangement’;
- clarify in the ongoing compliance approach that decisions undertaken by circular resolution are captured when it is considered whether a substantial majority of central management and control is exercised in a foreign jurisdiction;
- provide that tax residency for companies operating wholly offshore will often be regarded as ‘low risk’ due to permanent establishment or branch exemption rules.
February 2020 Tax Alert contents
- Purchase price allocation: Using a sledgehammer to crack a chestnut
- R&D tax credits – an ever evolving regime, even before first returns are filed
- Are you aware of changes to the taxation of telecommunication and travel allowances?
- Happy New Year – a taxpayer (pyrrhic) victory, and a refresher on Parliamentary sovereignty
- Snapshot of Recent Developments