Tax Bill – Reforms galore
Tax Alert - May 2016
By Robyn Walker and Nigel Jemson
The Taxation (Annual Rates for 2016-17, Closely Held Companies and Remedial Matters) Bill (“the Bill”) has been introduced into Parliament by the Minister of Revenue.
The Bill contains a bonanza of reforms, some of which are a result of consultation on various issues papers released last year. This Bill is more dense than most, clocking in at 139 pages of legislation, over 200 pages of commentary, and containing over 70 different reforms.
The Bill includes tax changes in the following areas:
- Review of tax rules for closely held companies;
- Non-resident withholding tax (‘NRWT”) and Approved Issuer Levy (“AIL”) changes;
- GST technical issues;
- Related parties debt remission;
- Interaction of loss grouping and imputation rules;
- Time bar and ancillary taxes;
- Remission income, tax losses and insolvent individuals;
- Amending the empowering provision for New Zealand’s double tax agreements (“DTA”) to clarify that anti-avoidance rules can still override the effect of a DTA;
- Annual setting of income tax rates for the 2016-17 tax year;
- Addition of new charities to schedule 32 of the Income Tax Act 2007;
- Various remedial changes.
Some of the more topical reforms are discussed below.
Closely held companies
As noted in the title, the Bill includes tax changes focused on closely held companies (i.e. companies which typically have only a few shareholders). The reforms arise as a result of consultation on the issues paper “Closely held company taxation issues” (further coverage on the issues paper can be found in the September 2015 Tax Alert Special).
Included in the Bill are various changes to the rules for look-through companies (“LTCs”) to address the complexity of these rules. In particular, the deduction limitation rule is being removed in most cases and the entry criteria expanded to allow an LTC to have more than one class of share. Various new limitations on the LTC entry criteria are also being introduced, including restrictions on charities and Māori authorities being LTC owners. There are also restrictions being introduced on foreign-controlled LTCs so that the foreign income that a foreign-controlled LTC can earn annually is limited, otherwise the company will lose LTC status.
Changes included under the closely held companies umbrella but applying to all companies include sensible changes to the general dividend rules to enable a company to opt out of deducting RWT from a fully imputed dividend paid to corporate shareholders. Other technical reforms to the dividend rules signalled in the earlier issues paper are included in the Bill.
Non Resident Withholding Tax and Approved Issuer Levy
Following on from the issues paper “NRWT: Related party and branch lending” released last year, there are a number of NRWT / AIL related proposals included in the Bill. Further coverage on the issues paper can be found in the June 2015 Tax Alert article.
While the substance of the original issues paper proposals has been retained, some of the “rough edges” have been removed following the consultation process. The proposals in this area are particularly complex and like, most Tax Bills, include a new acronym for taxpayers and advisors to learn – NRFAI (i.e. non-resident financial arrangement income). The application date of the various NRWT/AIL changes differ, the earliest being the enactment date of the Bill.
Included amongst the reforms is an amendment aimed at removing the ability for related taxpayers to benefit from a mismatch between when income tax deductions are available for interest expenditure and when the associated NRWT liability arises. Currently NRWT ordinarily arises when interest is actually paid whereas the financial arrangement rules can spread deductions over the life of an arrangement. The Bill includes changes aimed at ensuring that an NRWT liability will arise at approximately the same time that an income tax deduction (calculated under the financial arrangement rules) is available to the borrower for that interest. The formula used to calculate the NRWT liability does helpfully include concessions such as a de minimis threshold, which was not previously proposed in the earlier issues paper.
In a cross-border lending arrangement not involving related parties, AIL can be paid at a rate of 2% rather than NRWT. One of the key drivers behind some of these reforms is a concern that parties were structuring around the rules to pay AIL instead of NRWT. In response, changes have been introduced to define further situations as involving related parties (meaning therefore AIL cannot apply). These target back-to-back loans and multi-party arrangements where a third party is interposed in a lending arrangement to mask what would otherwise be an associated party loan. In addition, non-residents “acting together” will be defined as related parties. The concept of acting together is similar to the existing concept within the thin capitalisation rules, introduced in 2014.
The Bill also includes limitations on when a security can be registered for AIL. Since the issues paper, the categories of who can register a security for AIL have expanded. The categories are limited to instances where Inland Revenue Officials think it is unlikely that AIL would incorrectly be paid on lending between associated persons or situations where it is easier for Inland Revenue to check that AIL is being incorrectly applied. There are three categories under which a security can be registered, which are listed in clause 330 of the Bill. The categories encompass particular types of issuers, transactions, as well as borrowers which make at least $500,000 of interest payments to non-residents.
Limitations on the offshore and onshore branch exemptions are also incorporated in the Bill. Given the sheer content of these reforms, the NRWT/AIL changes will be covered in further detail in a future Deloitte Tax Alert edition.
GST technical issues
Following an issues paper last year (covered in an October 2015 Deloitte Tax Alert article) a number of GST changes are contained within the Bill, including:
- Proposals to enable businesses to recover GST incurred on capital raising costs. Input tax will be able to be claimed on these costs (which includes the issue, allotment or renewal of a debt or equity security) as the underlying financial service will be treated as zero-rated to the extent the funds raised are expended in an activity of making taxable supplies. This rule will come into force from 1 April 2017.
- Due to the high compliance costs some businesses experience in apportioning / adjusting input tax deductions, new reforms will make it possible for businesses with a turnover over $24million to agree an apportionment approach with the Commissioner. Alternatively industry associations will be able to agree apportionments.
- There are a number of retrospective changes to the zero-rating of land rules as they apply to the commercial leases.
- Amendments are being made to make the agency rules more flexible by allowing agents and principals to opt out of the agency rules; this will allow parties to account for GST as though the supply was two supplies between the supplier and agent and the agent and principal.
Related parties debt remission
The Bill includes a core amendment (as previously announced by the Minister of Revenue) to ensure that the debt remission rules do not produce debt remission income in circumstances where the debt remission causes no change in the net wealth of the economic group or dilution of ownership. Instead the debt will be regarded as being fully repaid. Situations where no debt remission income will arise are where:
- Companies are members of the same wholly owned group of companies; or
- The debtor is a company or partnership (including LTCs and limited partnerships); and
o All of the debt remitted is owed to shareholders or partners of the debtor; and
o The debt remitted is held and remitted pro-rata to ownership.
Further detail on the progress and content of these reforms can be found in the March 2015 Tax Alert article covering the issues paper announcing the reforms and the October 2015 Tax Alert article covering the Cabinet’s approval of the finalised proposals.
Loss grouping and imputation
Reforms signalled in the issues paper “Loss grouping and imputation credits” (covered in a October 2015 Tax Alert article), have been included in the Bill to enable the transfer of imputation credits to another company in a commonly owned group (66 percent or more but less than 100 percent common ownership) as part of a loss grouping arrangement.
Time bar and ancillary taxes
The time bar prevents the Commissioner from increasing an income tax assessment four years from the end of the tax year in which a return has been filed and an assessment has been made (subject to some exceptions). Prior to the inclusion of these reforms in the Bill, there was a long-standing technical issue for taxpayers and advisers where it was uncertain whether the time bar would apply to ancillary taxes or AIL. Ancillary taxes are those such as PAYE, FBT, RWT and NRWT.
The amendments clarify that the time bar should apply to these tax types and will apply from the date the Bill was introduced (3 May 2016). Taxpayers who file returns under these tax types will now be subject to the time bar provided four years have passed from the end of the tax year in which the taxpayer provides the relevant return, however it is not entirely clear in the Bill whether this requirement will apply prospectively (i.e. four years must have also passed from the date the Bill was introduced) or retrospectively. We will be seeking to clarify this.
As indicated above, the Bill has over 70 different policy changes and clarifications, some more remedial than others and many correcting rewrite and drafting errors. Other amendments include:
- Amendments to the deductibility of aircraft overhaul expenses
- Clarification that anti-avoidance rules within the Income Tax Act 2007 can still apply to counteract a tax advantage arising under a DTA
- Remedial changes to ensure tax pooling continues to work as intended
- An amendment to restrict the application of the how the 92-day count test works in relation to the exempt income from personal services rule.
The Bill has been added into the long list of legislation before Parliament and will be referred to the Finance and Expenditure Committee who will call for submissions. Given some initiatives are intended to apply from 1 April 2017 this should act as an incentive for the Bill to progress this calendar year.
For further information on the Bill’s reforms , please contact your usual Deloitte advisor.
Stay tuned to Deloitte Tax@hand and Deloitte Tax Alerts for further developments.