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Officials’ issues papers
Proposed changes to thin capitalisation rules
An officials’ issues paper prepared by the Inland Revenue and the New Zealand Treasury proposing changes to the thin capitalisation rules was released in January this year.
The thin capitalisation rules are intended to discourage multinational enterprises from excessively debt-funding their New Zealand operations by denying interest deductions in extreme cases. Officials consider that the rules work effectively in respect of the New Zealand operations of large multinationals that are listed on a stock exchange however, not in the context of foreign private equity investment. Reasons postulated for this discrepancy are:
- That the current rules only apply when a single non-resident controls the investment; however private equity investors often work in groups that essentially imitate a single controlling investor;
- The rules can be ineffective when the debt funding for an entire global group comes from the ultimate shareholders, rather than third parties. Closely held investment vehicles are more likely to use such a method of funding than listed companies.
The paper proposes that the thin capitalisation rules for inbound investment be extended so that they also apply to investments that are not controlled by a single non-resident. The proposed new regime would apply to a group of non-residents as long as those investors were working together (either by explicit agreement or via a private equity manager).
This main proposed change would likely be accompanied by a range of other related amendments, as follows:
|Current Rules||Proposed Rules|
|Foreign controller||Apply to single non-resident||Would also apply to a group of non-residents holding an interest of 50% or more and acting together|
|110% safe harbour||Worldwide debt includes all of the group’s debt||Worldwide debt would exclude debt linked to shareholders of group companies|
|Resident trustee||Apply to non-complying trusts where more than 50% of settlements are made by a single non-resident||Would also apply to non-complying trust where more than 50% of settlements are made by a group of non-residents acting together|
|Capitalised interest||Capitalised interest is included in “assets” for purposes of debt-to-asset ratio calculation||Capitalised interest would be excluded from “assets” when a deduction has been claimed in New Zealand for interest|
|Consolidation for outbound groups||Individual owner of an outbound group of companies is treated separately from the group||Individual owners’ interests would be consolidated with those of the outbound group|
|Asset uplift||Some taxpayers recognise increased asset values, owing to internal sales||Would ignore increased asset values owing to internal sales|
EY has made submissions on the proposed changes. If you would like to discuss the likely effect of the proposed new rules on your business or to discuss our submission, please contact your usual tax advisor.
GST remedial matters
An officials’ issues paper released at the end of last year by the Inland Revenue and the New Zealand Treasury identifies a range of GST issues which require clarification or amendment to the legislation, but do not have major policy implications. Amongst the issues identified are:
- Application of the hire-purchase time-of-supply rule to land transactions;
- Treatment of directors’ fees;
- Consequential and remedial amendments following the introduction of the:
- Apportionment rules
- Zero-rating for land rules
- Changes to the definitions of “dwelling” and “commercial dwelling”; and
- Credit notes where GST is mistakenly accounted for.
Inland Revenue seeks to have these matters addressed in the first tax bill of 2013.
International tax update
Base Erosion and Profit Shifting initial report released
A report, released by the OECD as part of its initiative to address member States’ concerns regarding the taxation of multinational companies has been welcomed by the Inland Revenue. A number of governments consider they are losing substantial tax revenue, through tax planning by multinationals which erodes the domestic tax base to locations where the profits are subject to a more favourable tax treatment.
The report, “Addressing Base Erosion and Profit Shifting”, is intended to provide a starting point for member states to develop a collective view of how to deal with their concerns. It identifies key issues and calls for the development of a robust action plan by June 2013. The action plan is expected to include specific actions, set deadlines for implementation, and identify necessary resources going forward.
The ultimate aim of the Base Erosion and Profit Shifting (“BEPS”) initiative is to provide comprehensive, balanced and effective strategies for countries concerned with tax base erosion and profit shifting.
In New Zealand, the BEPS initiative gained traction with a tax policy report, “Taxation of Multinational Companies”, released by Inland Revenue on 13 December 2012. The report signalled New Zealand’s commitment to the high-level BEPS issues raised in an earlier background brief released by the OECD on 20 November 2012. Please click here to view a copy of the report.
The Inland Revenue report identifies broad options for New Zealand to ensure that multinationals are taxed on activities performed in New Zealand. Those options include: strengthening New Zealand’s domestic base protection rules (such as the thin capitalisation rules – see below); promoting best practice for taxation on the basis of residence in all countries; and improving the international tax framework that is reflected in the OECD Model Double Tax Agreement.
Inland Revenue is expected to submit another tax policy report on BEPS to the Minister of Revenue and the Minister of Finance in March this year.
New Zealand/Japan double tax agreement updated
A new double tax agreement (DTA) has been entered into between New Zealand and Japan to replace its 1963 predecessor which is currently in force.
The 1963 agreement is one of New Zealand’s oldest tax treaties and is being updated to recognise the increased trading and significance of the economic relations between the two countries.
The new DTA once in force will reduce the maximum withholding tax rates that can be deducted at source from dividends, interest and royalties paid by tax residents of one country to the other. Under the current 1963 DTA, the withholding rate for dividends is 15% however; there is no corresponding relief for interest income or royalty income (i.e. withholding tax is deducted at the rates applicable under the domestic tax legislation of each country).
Under the new DTA, dividends paid by a company resident in New Zealand to a company resident in Japan (and vice versa) will be subject to withholding tax at the rate of 0% if the recipient company owns directly (or indirectly) at least 10% of the voting power in the company paying the dividend and:
- The recipient’s principal class of shares is listed and traded regularly one or more recognised stock exchanges; or
- At least 50% of the shareholding in the recipient company is held by five or fewer companies whose principal class of shares are listed and traded regularly on a recognised stock exchange; or
- A competent authority approval is acquired (in New Zealand that would be the Inland Revenue).
Where the above requirements are not met dividends paid between residents of the two countries will continue to be subject to withholding tax at 15%.
The new DTA will also introduce reduced withholding tax rates for interest and royalty payments, with the rates for each of those types of payments being set at 10% and 5% respectively.
The new DTA is not yet in force and will only apply once ratified (which is done in New Zealand by Order in Council) by both countries.
Student loan bill reported back
The Finance and Expenditure Committee has released its report on the Student Loan Scheme Amendment Bill (No. 2), which was introduced to Parliament on 23 August 2012.
The purpose of the bill is to improve the value of the student loan scheme, by enhancing its fairness and efficiency, and encouraging greater personal responsibility for loan repayments. As such, the bill seeks to introduce measures which would:
- Widen the definition of “income” for student loan repayment purposes, so that the definition is consistent with the definition used for the purposes of Working for Families tax credits;
- Implement information-sharing between with the New Zealand Customs Service, to identify borrowers in serious default who return to New Zealand; and
- Ensure that the core policy objectives of the Student Loan Scheme Act 2011 continue to be delivered.
The Student Loan Scheme Act 2011 brought about key policy changes, which included:
- Providing a consolidated loan balance so that borrowers could view all of their transactions;
- Moving from an annual calculation of deductions, to more regular calculations carried out each pay period; and
- Significantly reducing penalty rates.
The Officials’ report on the Bill states that in order to protect the continued delivery of the key policy changes brought about by the Student Loan Scheme Act 2011, Inland Revenue should not proceed with other less critical changes contained in the Act.
Tax Administration Amendment Bill goes through third reading
Section 81 of the Tax Administration Act provides that every officer of Inland Revenue shall maintain the secrecy of all matters relating to tax and other laws. This bill proposes to insert a new section 81A into the Tax Administration Act.
The new provision would allow the Commissioner of Inland Revenue to supply information (which would otherwise breach section 81) under an information sharing agreement approved by Order in Council, made under the Privacy Act.
Proposed changes to the financial arrangement rules
The Government intends to simplify parts of the financial arrangements rules by proposing changes to streamline the rules applying to financial arrangements that are agreements for the sale and purchase of property or services.
Taxpayers who prepare financial statements in accordance with International Financial Reporting Standards (IFRS) will soon be able to follow their accounting treatment for tax purposes, for almost all agreements for the sale and purchase of property or services. The amendments are intended to reduce compliance costs and volatility in taxable income from year to year.
The new rules will not apply to non-depreciable capital account transactions. These items will be dealt with using spot rates, and any hedging of these amounts will be treated separately, as required by the current rules.
It was originally suggested that the amendments would apply from the 2013 income year. However, it has since been proposed that the new rules will apply from the 2014 income year, in order to minimise disruption to taxpayers’ provisional tax obligations. The legislation will also permit IFRS taxpayers to elect to apply the new rules to arrangements from the 2012 income year onwards.
It is likely that the draft legislation will be included in a tax bill in early 2013, and will be available for comment sometime in March.
Inland Revenue to take firmer stance on salary packaging
A revenue alert relating to the taxation of certain salary arrangements has recently been issued by the Inland Revenue. Revenue alerts are generally issued by the Commissioner to provide information about a significant and/or emerging tax planning issue that is of concern to the Inland Revenue.
The Department has become aware of arrangements where employees can choose to substitute an amount of salary or wages for vouchers (such as supermarket or petrol vouchers) that are of the same value and is carrying out investigations into a number of taxpayers who are utilising such salary packages.
The Department is concerned that vouchers issued under these salary packages are not being treated as income of the employee, and as a result, no PAYE is being deducted, the employees are able to pay less child support, decrease their student loan obligations, reduce their KiwiSaver contributions, and claim a larger Working for Families Tax Credit. In many situations, employers have also failed to pay FBT on the vouchers or account correctly for GST.
Although not technically cash, Inland Revenue considers that the vouchers are essentially a substitute for salary and wages, and as such, are subject to PAYE. Salary packaging where tax is not correctly accounted for may be considered to be tax avoidance arrangements by the Department.
Inland Revenue has increased its enforcement efforts through more investigations of taxpayers suspected of using these arrangements. It is also encouraging taxpayers to make voluntary disclosures if they have participated in these salary packages.
Other consultation items:
Income tax - treatment of subdivision of shares under section CB 4
An exposure draft released by the Inland Revenue applies to arrangements where a shareholder holds shares that have been acquired with the purpose of disposal in a company and the company then subdivides its shares following a director’s resolution which states that:
- All of the shares in the company will be subdivided;
- The rights attaching to shares will continue in existence throughout the subdivision process and will not be altered;
- Each shareholder’s proportionate shareholding in the company will remain the same relative to the other shareholders;
- The subdivision merely represents the reformatting of each shareholder’s interest; and
- The arrangement is not a tax avoidance arrangement.
The draft ruling considers that the sub-division does not involve an issue of new shares or the cancellation of the original shares. As such the subdivision is not considered to be a disposal for the purposes of section CB 4 of the Income Tax Act 2007 (section CB 4 taxes amounts derived from the disposal of personal property that has been acquired for the purpose of disposal).
However, any amount derived from a subsequent disposal of those subdivided shares, where the original shares were acquired for the purpose of disposal will be taxable income under section CB 4. In other words, the draft considers that shares held by a person after a subdivision should be treated as the same property as the original shares that existed prior to the subdivision.
Income tax - treatment of unclaimed amounts of $100 or less
If a business holds amounts of money that is owing to another person (for example, where a customer makes an overpayment) and the amounts remain unclaimed after a certain period of time, the amounts may be deemed to be “unclaimed money” and subject to the Unclaimed Money Act 1971 (UMA). Amounts subject to the UMA become payable by the holder to the Commissioner of Inland Revenue.
However amounts are not subject to the UMA if they do not exceed $100 per owner (being the person the money is owed to) and are applied by the holder for their own or another person’s benefit (or any other purpose) within a specified timeframe. A draft public ruling issued by the Inland Revenue considers that amounts held by a business in these circumstances are taxable income if it is probable that the amounts will not have to be repaid.
Depreciation Rate for machinery used for grading, sorting and packing produce
A draft depreciation determination has been released by the Inland Revenue that sets out provisional depreciation rates for machinery used for grading, sorting and packing food and agricultural products.
The machines referred to in the determination are those that grade and sort a range of produce by scanning the items for defects such as size, colour and quality. The produce then passes further along the production line where they are weighed and packed into containers.
The proposed new provisional depreciation rates are aimed at covering a range of machines (including those that are mechanically operated and those that are computerised and software operated). The determination also rationalises the Commissioner’s table of depreciation rates by deleting those asset classes that are no longer necessary as they would come within the new asset classes.
Ministry of Business, Innovation & Employment discussion document: auditing for charities
The Ministry of Business, Innovation & Employment is seeking submissions on the proposed changes to audit requirements for charities. The most notable proposals include the following:
- To require large registered charities to have their financial statements audited (where “large” means operating expenditure exceeds $1 million);
- To require medium registered charities to have their financial statements reviewed or audited (where “medium” means operating expenditure exceeds $400,000);
- To only allow audits and reviews to be carried out by persons and firms meeting certain requirements as contained in the Financial Reporting Bill; and
- Monitoring of compliance with accounting standards applicable to registered charities by the Department of Internal Affairs would from 2015 onwards.
If you require any assistance in relation to any of the matters raised in Tax Watch in Brief, please contact your usual EY tax advisor or:
Partner – Tax, Auckland
Tel: +64 9 300 7059