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Tax Watch in Brief
Bill introduced containing changes to rules re: mixed use assets, GST and B2B transactions, herd scheme elections
The Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Bill, introduced to Parliament in mid September contains a number of notable changes including in respect of the deductibility of costs relating to certain assets such as holiday homes, boats and aircraft that are used for both private and business purposes (i.e., mixed use assets).
The new rules which broadly align the tax deductions with the income that is earned, will apply to assets used to earn income that are also used privately and are unused for more than 62 days in an income year. An asset used in that way will only be caught if it is land (or a land improvement) or has a cost greater than $50,000 to the person. Assets such as motor vehicles and those subject to apportionment of expenditure based on floor space (such as home offices) are excluded.
In addition, the bill contains proposed changes to the GST rules which are intended to support businesses trading internationally. Please see our article on the changes “B2B GST: Enhanced Registration for Non-Residents ” included in this issue.
The other notable change in the Bill are proposed amendments to the rules enacted earlier this year (as part of the 2012 Budget) to make herd scheme elections irrevocable. One of the changes included is a proposed exception to the herd scheme irrevocability rules which allow election out of the herd scheme when there is a change in a farming regime from breeding to fattening for which a cost-based regime is more appropriate.
Taxation (Annual Rates, Returns Filing, and Remedial Matters) Bill passes
The Taxation (Annual Rates, Returns Filing, and Remedial Matters) Bill (introduced to Parliament in September last year) has now received Royal assent .
The legislation changes certain requirements with respect to the filing of returns and record-keeping, raises the minimum employee and employer contribution rates for KiwiSaver (as announced in the 2011Budget), ensures that expenditure on software development is deductible if the software cannot be used and the project is abandoned, and makes changes in other areas.
Tobacco excise tax legislation passed
The Customs and Excise (Tobacco Products-Based Measures) Amendment Bill will bring about annual 10% increases in tobacco excise for the next four years. This increase is in addition to the annual indexation increase. The legislation is yet to receive Royal asset.
Changes to KiwiSaver periodic disclosure requirements
The Minister of Commerce has announced proposed changes to the KiwiSaver rules on reporting certain information on returns, fees and costs, assets and portfolio holdings, liquidity and liabilities, and key personnel.
In 2010, Cabinet had agreed that regulations were necessary to require retail KiwiSaver schemes to make periodic reports on returns, fees, assets and conflicts of interest. In 2012, Cabinet agreed to the development of a regulatory framework to address this information gap. As such, the Economic Development Group of the Ministry of Business, Innovation and Employment has released draft regulations for public consultation.
Under the draft regulations, KiwiSaver providers will be required to publish five disclosure statements per year, which contain the following information:
- One comprehensive disclosure statement relating to the tax year; and
- Four briefer disclosure statements relating to the 12 months preceding the end of each quarter of the tax year.
Excepted financial arrangements
The Government is planning to move quickly to close a loophole which it believes allows an unfair tax deduction within the financial arrangements rules. The rules currently allow a taxpayer to treat short-term agreements for the sale and purchase of property or services as financial arrangements, thus minimising compliance costs. However, an unintended outcome of electing financial arrangement treatment is that it is possible to claim a deduction for either the cost of acquiring the agreement or any losses on disposal of that agreement, when the expenditure is essentially of a capital (and therefore non-deductible) nature.
The amendment will apply retrospectively from the 2008/09 tax year (the date at which the current Income Tax Act came into force). Retrospective action is considered necessary and justified in this instance because of the length of time that some financial arrangements can cover, and to prevent exploitation of the loophole over the remaining term of the arrangement.
INTERNATIONAL TAX UPDATE
Government to pursue FATCA Inter-Governmental Agreement
Domestic legislation enacted by the United States in 2010, the Foreign Account Tax Compliance Act (FATCA), places obligations on foreign financial institutions to carry out customer checks and to provide account information on United States tax residents (tax residency in the US is based on citizenship) to the United States tax authority, the Internal Revenue Service (IRS). The legislation also requires foreign financial institutions to withhold tax on United States source payments made to United States tax residents, recalcitrant account holders (account holders who have refused to waive domestic privacy laws, thus preventing the financial institution from determining whether the account holder is a United States tax resident) and certain other foreign financial institutions that do not to comply with FATCA.
Inland Revenue has entered into negotiations with the IRS, with a view to signing an Inter-Governmental Agreement (IGA) in respect of the requirement of foreign financial institutions to provide account information to the IRS. Under the IGA, New Zealand financial institutions will be able to provide account information to Inland Revenue, which will then forward the relevant information to the IRS. The IGA, therefore, aims to reduce the compliance burdens of FATCA on New Zealand financial institutions. Furthermore, the IGA will provide for certain New Zealand entities and products to be exempt from FATCA altogether.
Removal of UK VAT registration threshold for non-established businesses
With effect from 1 December 2012, the UK VAT registration threshold (currently GBP 77,000 over 12 months) will no longer apply to businesses that do not have a business or fixed establishment in the United Kingdom. The change also applies to individuals in business, who do not live in the UK.
The change will mean that from 1 December non-established businesses will be required to register for VAT in the UK from the earliest of the date any taxable supplies are made or the date taxable supplies are expected to be made in the next 30 days. Registration brings with it various obligations, including accounting for VAT and lodging VAT returns.
Businesses undertaking, or planning to undertake, activities in the UK that are not currently VAT registered or do not have a place of business in the UK may be impacted. Examples of supplies that would result in a requirement to register include sales of goods located in the UK, bringing goods into the UK from another EU Member State and supplies of services relating to land or property in the UK or involving physical performance in the UK (e.g., installing goods in the UK)."
Malaysia / New Zealand double tax agreement
A protocol to amend the current double tax agreement (“DTA”) between Malaysia and New Zealand has been signed. The protocol amends article 22 of the DTA, which deals with information exchange between tax authorities. The amended DTA is intended to help both countries combat tax evasion.
In particular, the new protocol provides that one country may request information from the other country and that the other country may not deny the request for information solely on the basis that it has no domestic interest in the information.
The protocol also confirms that the amended DTA shall not require either country to carry out any conduct or supply information where to do so would contravene ordinary domestic law. This includes the protection of trade, business, industrial, commercial or professional secrets.
The protocol, although signed, is yet to come into force.
Papua New Guinea/New Zealand Double Tax Agreement signed
New Zealand has signed a Double Tax Agreement (DTA) with Papua New Guinea, which will prevent cross-border income being taxed twice and will provide greater certainty about how the income of residents of New Zealand and Papua New Guinea is to be taxed in the other country. In doing so, the DTA will reduce compliance costs for certain activities and decrease the tax payable on certain income including withholding tax on interest, royalties and dividends.
The DTA will come into effective once ratified which is done domestically by way of an Order in Council.
New Zealand signs multilateral convention
New Zealand has signed the multilateral Convention on Mutual Administrative Assistance in Tax Matters, a convention developed by the OECD and Council of Europe in 2010. The purpose of the convention is to combat tax evasion and to regulate tax information exchange between tax authorities of signatory countries (for example, allowing Inland Revenue to request information and assistance from an overseas tax authority in collecting outstanding tax debts from New Zealand taxpayers who have moved overseas and vice versa).
Currently, 42 countries have signed the convention, and 10 others have formally signalled their intention to sign. The Convention is also open to countries that are not OECD or Council of Europe members. Minister of Revenue, Peter Dunne has described New Zealand’s signing of the convention as, “one more nail in the coffin for tax evasion”.
Trans-Tasman portability of retirement savings edges closer
In 2009, the governments of New Zealand and Australia signed a Memorandum of Understanding to develop a Trans-Tasman Retirement Savings Portability Scheme which is due to commence on 1 July 2013. The scheme will allow New Zealanders and Australians moving between the two countries to take their respective retirement savings with them.
In 2010, the New Zealand Parliament enacted the necessary domestic legislation to give effect to the scheme (see the Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Act 2010).
Following this, Australia has now also introduced a Bill to give effect to its side of the scheme (see the Superannuation Legislation Amendment (New Zealand Arrangement) Bill was introduced in Australia on 11 October 2012). The Australian legislation will allow New Zealanders returning home and Australians moving to New Zealand to bring Australian savings and consolidate them with their New Zealand retirement savings. Similarly, New Zealanders who move to Australia and will be able to transfer their KiwiSaver balances to their Australian superannuation benefits.
As the scheme is voluntary, New Zealanders and Australians may leave their superannuation in their home country if they wish.
Specified minerals mining issues paper released
Two officials’ issues paper “Reviewing the Royalties Regime for Minerals” and “Taxation of Specified Mineral Mining” setting out proposed changes for the taxation of minerals have been released for public consutlation. The papers focus on specified minerals including gold, silver and iron sands but exclude oil and gas (and coal in respect of the taxation paper).
The royalties paper recommends higher withholding tax rates on royalties relating to large and highly profitable mining operations (only new permits and not those already existing) would be affected.
Under the current tax regime, specified minerals are afforded preferential treatment as immediate deductions are allowed for expenditure which would otherwise be capitalised and depreciated. In certain cases that means, expenditure may be deducted before it is even incurred. The taxation paper proposes repealing the current regime and replacing it with rules that are more aligned with general tax principles that apply to other forms of investment.
OTHER RECENT DEVELOPMENTS
Question We’ve Been Asked QB 12/12: Abusive tax position penalty and the anti-avoidance provision
This “Question We’ve Been Asked” (QWB) addresses whether the penalty under s 141D of the Tax Administration Act for an “abusive tax position” automatically applies where there is a “tax avoidance arrangement” under s BG 1 of the Income Tax Act.
The QWB reaches the same conclusion as the draft QWB0110 (released 13 June 2012). The penalty does not automatically apply where there is a tax avoidance arrangement, because the tests for an “abusive tax position” and a “tax avoidance arrangement” are fundamentally different. The former requires a dominant purpose of avoiding tax, whereas the latter only requires a purpose or effect of tax avoidance which is more than merely incidental. The threshold for an “abusive tax position” is higher than for a “tax avoidance arrangement”. The penalty under s 141D, therefore, will generally only apply to abusive tax positions but not to tax avoidance arrangements.
In determining whether a tax position has a dominant purpose of avoiding tax, the tax purposes must be balanced against the other purposes of the arrangement (for instance, commercial or family purposes). The arrangement is less likely to be considered an abusive tax position if it has legitimate commercial and/or family purposes. Furthermore, the arrangement is more likely to be considered an abusive tax position if it relies on artificial commercial structures, circular funding and/or strained interpretations of tax laws.
Extension of time to disclose Penny and Hooper type arrangements
As a result of the decision of the Supreme Court in Penny and Hooper v Commissioner of Inland Revenue  NZSC 95, Inland Revenue had agreed to accept settlement for taxpayers who make voluntary disclosures in respect of income diverting arrangements, in place during the previous two years. Inland Revenue has now extended the two-year time limit to the previous four years. The aim, therefore, is to encourage taxpayers to change their behaviour and also to discuss their arrangements with Inland Revenue.
Instalment arrangements for provisional tax
In Tax Information Bulletin TIB 24/8, Inland Revenue has responded to a query regarding Standard Practice Statement SPS 11/01: Instalment arrangements for provisional tax. SPS 11/01 had previously established a practice of Inland Revenue not accepting instalment arrangements from a taxpayer who has outstanding returns.
SPS 11/01 has now been amended such that Inland Revenue will accept such instalment arrangements. Inland Revenue considers that this change is consistent with the overall tenor of the rules contained in s 177B of the Tax Administration Act 1994 (which prevents the Commissioner from entering into an instalment arrangement if it would place the taxpayer in serious hardship).
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