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Tax Alert - May 2020

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Tax legislation and policy announcements
 

Budget 2020

The 2020 Budget, also known the “Rebuilding Together” Budget was delivered on 14 May 2020 by the Minister of Finance, Grant Robertson. It is focused on the Government’s response to COVID-19. You can view Deloitte’s full coverage here.

Items of note include the Wage Subsidy Scheme which was allocated $3.2 billion to extend beyond the original scheme which closes on 9 June. The extension will be available to fund a further eight week period (at the existing rates) for those who can show that they have suffered a 50% reduction in revenue over the 30 days prior to application compared to a similar period last year. The scheme is also extended to pre-income R&D start-up firms. The revised scheme will open on 10 June and will be open for applications for 12 weeks (until early September).

As part of the direct Business Support package, the Government is launching a $150 million short-term temporary loan scheme to incentivise businesses to continue to invest in R&D programmes that may otherwise be at risk due to COVID-19, complementing the existing R&D tax credit regime. The loans will be one-off, up to $100,000, and administered by Callaghan Innovation. The details of the loan scheme are expected to be announced soon, with applications opening in early June.

While already announced, the Budget further indicated the Government’s commitment to allowing deductions for black hole feasibility expenditure.

COVID-19 Response Acts passed under urgency

The Government has introduced and passed several Acts under urgency in response to the COVID-19 induced economic crisis.

  • The main features of the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020, introduced and passed on 25 March 2020, include the restoration of building depreciation, an increase in the threshold for low-value write-off, temporary UOMI remission rules, an increase in the provisional tax threshold and a bringing forward of the broader R&D refundability proposals, as discussed in our earlier article.
  • The second bill introduced and passed under urgency on 30 April is the COVID-19 Response (Taxation and Other Regulatory Urgent Measures) Act 2020 which includes the temporary tax loss carry-back regime (see article in this issue), the Commissioner’s discretion introduced and some other non-tax measures.
  • On 12 May 2020, the Government released Supplementary Order Paper (SOP) No 488 to the COVID-19 (Further Management Measures) Legislation Bill which was also passed under urgency on 15 May 2020. This bill mainly include non-tax measures, but the SOP includes amendments to ensure that the Small Business Cashflow (Loan) Scheme (SBCS) works as intended. It confirms that resident withholding tax will not be withheld at source for interest under a small business cashflow loan. Further, in consideration as to what is income for Working for Families, any amounts derived from this loan scheme will not counted as income. The Supplementary Order paper also makes minor amendments to the loss carry-back regime. Most notably, section 120KBB of the Tax Administration Act 1994 has been altered to ensure that associated taxpayers will not be adversely impacted by use of the loss carry-back regime.

UOMI rates have dropped

The Taxation (Use of Money Interest Rates) Amendment Regulations 2020 came into force on 8 May 2020 and amended the Taxation (Use of Money Interest Rates) Regulations 1998 to:

  • decrease the taxpayer’s paying rate of interest on unpaid tax from 8.35% to 7% pa;
  • decrease the Commissioner’s paying rate of interest on overpaid tax from 0.81%to 0% pa.

A use of money credit interest rate of 0.00% means that there will no longer be any credit interest paid where any credit is held with Inland Revenue. This includes KiwiSaver contributions paid to Inland Revenue before being passed on to Scheme Providers.

It is of note that in April 2020, the Taxation (Use of Money Interest Rates Setting Process) Amendment Regulations 2020 (LI 2020/35) amended the setting process for the Commissioner’s paying rate from the Reserve Bank of New Zealand 90-day bank bill rate less 100 basis point to a floor of 0%. This prevents the Commissioner’s paying rate from being set at a negative rate if the 90-day bank bill rate drops below 1%.

Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020

On 23 March 2020, the Taxation (KiwiSaver, Student Loans, and Remedial Matter) Bill received Royal Assent. The omnibus bill, originally introduced in June 2019 has three main objectives:

  • To continue the Government’s program of simplifying and modernising of social policy administration, specifically KiwiSaver and the student loan scheme;
  • To further improve the application of New Zealand’s broad-base, low-rate framework through various remedial amendments covering a wide range of issues. For more information on this see our earlier article; and
  • To further encourage research and development expenditure by extending the refundability of R&D tax credits.

Direct credit for financial support and student loan payments

On 9 March 2020, an Order in Council was made to include refunds for excess payments of financial support and student loan deductions as tax types refundable by direct credit under section 184A of the Tax Administration Act 1994. The provisions in sections 184A and 184B require tax refunds to be paid via direct credit to a bank account nominated by the taxpayer and were introduced to benefit taxpayers by eliminating time delays associated with the postal system and costs related to cheques. The order in council came into force on 9 April 2020.

Tax relief and support for farmers

The Government announced in late March that support for farmers and growers affected by drought conditions would be expanded and extended across the country, with access to Rural Assistance Payments (RAPS) available throughout the North Island and parts of the South Island and the Chatham Islands.

On 27 March 2020, the Government announced it will introduce legislation to ensure that farmers whose herds were culled in response to the Mycoplasma eradication programme will not face an undue tax burden. The change will be included in a future tax bill and will be backdated to apply from the 2018 income year. Further details can be found in the Inland Revenue’s factsheet.

OECD releases

During April, OECD released several documents on tax policy suggestions in response to the COVID-19 pandemic. 

  • On 3 April, the OECD Secretariat issued guidance on cross-border workers who are unable to physically perform their duties in their country of employment during the COVID-19 restrictions. Issues covered include the creation of permanent establishments; the residence status of a company (place of effective management); cross-border workers; and a change to the residence status of individuals. For more information, please see the article in this issue. 
  • On 15 April 2020, the OECD released a report Tax and Fiscal Policy in Response to the Coronavirus Crisis: Strengthening Confidence and Resilience. The report takes stock of COVID-19 emergency tax and fiscal measures introduced by countries worldwide. It discusses how tax and fiscal policies can cushion the impact and support economic recovery.
  • On 21 April 2020, the OECD published Tax administration responses to COVID-19: Measures taken to support taxpayers. The document sets out a range of measures being taken by tax administrations to ease the burden on taxpayers and to support businesses and individuals with cash flow problems, with difficulties in meeting tax reporting or payment obligations or otherwise facing hardship. It was produced to assist tax administrations and provide a reference in terms of considering domestic measures they may want to take.

Inland Revenue statements and guidance – Finalised items

EE002: payment to employees for working from home costs during the COVID-19 pandemic

On 24 April 2020, Inland Revenue issued determination to provide a temporary response covering payments to employees to reimburse costs incurred as a result of employees working from home during the COVID-19 pandemic. This determination applies to payments made during the period from 17 March 2020 to 17 September 2020. For more information see our article in this issue.
 

Questions and answers for dividend stripping

Inland Revenue recently published a questions and answers sheet (RA 18/01a) to accompany RA 18/01: 'Dividend stripping' - share sales where proceeds are at a high risk of being treated as a dividend for income tax purposes. The Q&A includes a range of questions and answers about the Alert, for example:

  • Whether to apply for a binding ruling when a restructure may pose a risk;
  • Whether there can be a dividend when no cash has been received;
  • Whether a restructure which is outside the four-year time bar is open to review;
  • Whether transactions are still considered tax avoidance if there are commercial reasons for the restructure.
     
2020 International tax disclosure exemption ITR31

Inland Revenue has released the 2020 International tax disclosure exemption ITR31 (the 2020 disclosure exemption). (We note that this link may not work in Internet Explorer). The exemption applies for the income year corresponding to the tax year ended 31 March 2020. The scope of the 2020 disclosure exemption is the same as the 2019 disclosure exemption. The 2020 disclosure exemption removes the requirement of a resident to disclose:

  • An interest of less than 10% in a foreign company if it is not an attributing interest in a foreign investment fund (FIF) or if it falls within the $50,000 de minimis exemption. The de minimis exemption does not apply to a person that has opted out of the de minimis threshold by including in the income tax return for the income year an amount of FIF income or loss. 
  • If the resident is not a widely-held entity, an attributing interest in a FIF that is an income interest of less than 10% if the foreign entity is incorporated (in the case of a company) or otherwise tax resident in a treaty country or territory, and the fair dividend rate or comparative value method of calculation is used. 
  • If the resident is a widely-held entity, an attributing interest in a FIF that is an income interest of less than 10% if the fair dividend rate or comparative value method is used for the interest. The resident is instead required to disclose the end-of-year New Zealand dollar market value of all such investments split by the jurisdiction in which the attributing interest in a FIF is held or listed.

The 2020 disclosure exemption also removes the requirement for a non-resident or transitional resident to disclose interests held in foreign companies and FIFs.


Determination G31 – NZX Milk Price Futures Contracts: an expected value approach

Inland Revenue issued a determination which provides the method that must be used by a farmer who enters into an NZX MKP Milk Price Futures Contract (MKP Futures Contract) to calculate the income derived and the expenditure incurred over the term of that contract. The determination applies to a farmer who:

  • enters into a MKP Futures Contract for the sole purpose of hedging the price received for all or part of their anticipated milk solids production, and 
  • does not use IFRSs to prepare financial statements and to report for financial arrangements under the financial arrangements rules in the Income Tax Act 2007.

A farmer to whom this determination applies must use this determination for MKP Futures Contracts they enter into, on or after 1 April 2020.
 

Participating jurisdictions for the CRS applied standard

On 30 March 2020, Inland Revenue released Determination AE 20/01: “Participating jurisdictions for the CRS applied standard”. It updates the list of participating jurisdictions with effect from 1 April 2020.

Inland Revenue - draft items for consultation

Investment in US limited liability companies

On 6 March 2020, Inland Revenue issued five rulings and commentary (PUB00338 - We note that this link may not work in Internet Explorer) setting out the income tax treatment and availability of foreign tax credits for NZ investors in a US LLC that is taxed on a fiscally transparent basis as a partnership in the US, but as a company in NZ. The rulings demonstrate the different treatment depending on whether the interest in the US LLC is classified as not being a FIF, a FIF or CFC. There is also an analysis of the operation of the relevant fiscal transparency and double tax relief provisions (arts 1(6) and 22) in the NZ/US DTA. Submissions closed on 17 April 2020.
 

Goods and services tax – supplies of residences and other real property (interpretation statement)

On 6 March 2020, Inland Revenue issued a draft statement (PUB00308 - We note that this link may not work in Internet Explorer) which applies to situations where a private residence is included as part of a wider supply. Where this is the case, s 5(15) deems there to be separate supplies that need to be considered independently for GST purposes. Submissions closed on 17 April 2020.

Other items of interest

Extension of Time – Basic Compliance Package

On 31 March 2020, Inland Revenue extended the Basic Compliance Package or BCP filing due date (originally 31 March 2020) to the 30 June 2020 in light of COVID-19. Affected taxpayers should have received a letter from Inland Revenue confirming this.
 

New Tax Technical website

Inland Revenue has released a beta version of the new Tax Technical website, designed to help tax specialists find technical answers more quickly. It can be viewed at taxtechnical.ird.govt.nz. (We note that this link may not work in Internet Explorer).

 

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