Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Bill
Officials' report to the Finance and Expenditure Committee on submissions received on the Bill
February 2001
Items raised by officials
- Depreciation on non-residential buildings
- Portfolio investment entity schedular income
- Issue: Simplifying the PIE schedular income year-end adjustment calculation
- Issue: Clarifying that PIE losses and loss tax credits are incorporated when calculating a person’s income tax adjustment
- Issue: Clarifying that a natural person investor is a New Zealand resident
- Issue: Clarifying that the adjustment does not apply to a trustee of a trust
- Issue: Limiting the removal of excluded income status for multi-rate PIE income
- Issue: Tax adjustments for under- and over-payments of tax on PIE income are included when calculating residual income tax
- Small business cashflow (loan) scheme
- Other matters
- Issue: Initial provisional tax liability definition
- Issue: Foreign trust registration and annual return fees
- Issue: Using passport numbers in the student loan customs information match
- Issue: Tax treatment of distributions on wind-up of an approved unit trust
- Issue: Direct crediting of Problem Gambling Levy
- Issue: Temporary loss carry-back remedial to enable loss grouping for groups that are not wholly owned
DEPRECIATION ON NON-RESIDENTIAL BUILDINGS
Issue: Restrictions on depreciation rates for depreciable property transferred to an associate
Submission
(Matter raised by officials)
Section EE 40 should be amended to allow a new owner of an asset to change depreciation rates where the depreciation rate has changed in legislation.
Comment
Non-residential buildings are depreciable at a rate of 1.5% or 2% from the 2020–21 income year, as opposed to the 0% that applied from the 2011–12 income year.
The depreciation rate that can apply where a person has acquired depreciable property from an associate is restricted by section EE 40 to the rate used by the associate. As a result, a purchaser who acquired a non-residential building from an associate could be restricted to a 0% depreciation rate, rather than the allowable rate of 1.5% or 2%.
Section EE 40 is intended to ensure that the purchaser is unable to claim more depreciation for the item than the associated person would have been able to claim had they retained the item. However, it was not intended to limit a purchaser’s use of a deprecation rate where the rate has been changed by legislation as this is a change clearly intended by Parliament.
Recommendation
That the submission be accepted.
Issue: Application date of repeal for building fit-out transitional rule
Submission
(Matter raised by officials)
Section DB 65, which provided a transitional rule for fit-out depreciated as part of a building, should be repealed with effect from the 2020–21 and later income years.
Comment
Section DB 65 was repealed with effect from 1 April 2020 by the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020, as a result of depreciation for non-residential buildings being reinstated.
The section should have been repealed with effect from the 2020–21 and later income years, to match the reinstatement of depreciation on non-residential buildings.
Recommendation
That the submission be accepted.
PORTFOLIO INVESTMENT ENTITY SCHEDULAR INCOME
Changes to the portfolio investment entity (PIE) rules made in the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 introduced a year-end adjustment process to allow for refundability of overpaid tax on multi-rate PIE income of individuals from the 2020–21 tax year. These changes require some remedial amendments and clarifications to ensure that the PIE year-end process works with the existing provisions in the Income Tax Act 2007 and the year-end income tax processes for individuals.
The changes should apply retrospectively to the 2020–21 tax year, the first year of the PIE year-end adjustments. Auto-calculated year-end processes for individuals for the 2020–21 tax year are planned to commence from late May 2021.
Issue: Simplifying the PIE schedular income year-end adjustment calculation
Submission
(Matter raised by officials)
The prescriptive calculation in subsections HM 36B(2) and (3) of the Income Tax Act 2007 should be changed to an outline of the items that should be taken into account when calculating PIE schedular income.
Comment
The current prescriptive calculation in subsections HM 36B(2) and (3) of the Income Tax Act 2007 can result in situations where the calculation may not include some attributed tax credits for the future benefit of the investor. Moving from a prescriptive formula to an outline of what the Commissioner needs to take into account when calculating PIE schedular income adjustments simplifies the subsections. It also future-proofs the calculation, enabling the Commissioner to incorporate any improved data reporting on credits.
Recommendation
That the submission be accepted.
Issue: Clarifying that PIE losses and loss tax credits are incorporated when calculating a person’s income tax adjustment
Submission
(Matter raised by officials)
PIE schedular income adjustments calculated under section HM 36B only refer to attributed PIE income. The provision should be clarified to specifically include attributed losses and resulting tax credits when calculating the PIE schedular income tax adjustment.
Comment
Including attributed losses and resulting tax credits in the calculation of PIE schedular income would clarify that a natural person investor who is attributed a loss, and who has or is entitled to have a tax credit calculated on the loss using their prescribed investor rate, can also receive an adjustment where the rate used during the tax year was incorrect.
Recommendation
That the submission be accepted.
Issue: Clarifying that a natural person investor is a New Zealand resident
Submission
(Matter raised by officials)
It should be clarified that the PIE schedular income tax adjustment only applies to natural person New Zealand residents.
Comment
Specific rules apply to non-resident investors in a multi-rate PIE. Section HM 36B of the Income Tax Act 2007 introduced a process to calculate PIE schedular income tax adjustments for a natural person investor. However, the process was not intended to make any changes to these rules. It should be clarified that the new adjustment only applies to a natural person investor who is resident in New Zealand.
Recommendation
That the submission be accepted.
Issue: Clarifying that the adjustment does not apply to a trustee of a trust
Submission
(Matter raised by officials)
It should be clarified that the PIE schedular income tax adjustment does not apply to a trustee of a trust.
Comment
Specific legislative rules apply in relation to a trustee of a trust investing in a multi-rate PIE. The new year-end PIE schedular tax adjustment was not intended to make any changes to these rules.
Section HM 36B of the income Tax Act 2007 should be clarified to ensure that the new year-end adjustment does not apply to a person who is an investor in a multi-rate PIE and derives income as a trustee of a trust.
Recommendation
That the submission be accepted.
Issue: Limiting the removal of excluded income status for multi-rate PIE income
Submission
(Matter raised by officials)
The removal of the excluded income status for natural person multi-rate PIE income should be limited to the calculation of the PIE schedular tax adjustment.
Comment
Before the introduction of the new year-end adjustment rules income from multi-rate PIEs was largely considered to be the excluded income of a natural person. This meant that it did not flow through to the person’s income tax return and assessment. To better incorporate the new year-end adjustment process into existing year-end income tax processes, this excluded income status was removed entirely.
However, this may have unintended flow-on consequences for loss offsets, and added complications for Working for Families tax credit, student loans and child support. To avoid this, the removal of the excluded income status for natural person multi-rate PIE income should be limited to the calculation of the PIE schedular tax adjustment.
Recommendation
That the submission be accepted.
Issue: Tax adjustments for under- and over-payments of tax on PIE income are included when calculating residual income tax
Submission
(Matter raised by officials)
To simplify the PIE adjustment process, the year-end adjustment rules should be changed so that any PIE adjustment (debit or credit) is included in the person’s final income tax calculation and therefore residual income tax.
Comment
As currently drafted, any PIE tax payable or refundable as a result of the year-end adjustment is initially included in the calculation of the person’s tax due, then backed-out for the calculation of their residual income tax. This adjustment, or PIE square-up, will happen alongside the year-end process for income tax. This creates two different end-of-year amounts that need to be used for establishing due dates for any late payment or use-of-money interest for the current year’s income tax, and as the basis for next year’s provisional tax. This different treatment increases complexity for taxpayers and Inland Revenue’s systems.
To simplify the adjustment process, the year-end adjustment rules should be changed so that any PIE adjustment (debit or credit) is included in the person’s final income tax calculation and therefore residual income tax. This would result in one tax liability figure for the year-end tax payment, which would also be the basis for provisional tax for the following year.
Recommendation
That the submission be accepted.
SMALL BUSINESS CASHFLOW (LOAN) SCHEME
Issue: Ability to transfer tax refunds to an amount borrowed under the Small Business Cashflow (Loan) Scheme
Submission
(Matter raised by officials)
The definition of “tax” for the purpose of Part 10B in the Tax Administration Act 1994 should be widened to include a loan advanced to a taxpayer under the Small Business Cashflow (Loan) Scheme (SBCS), to enable tax refunds owed to that taxpayer to be transferred to their loan balance.
Comment
Currently, if a borrower is owed a tax refund, they are unable to request that Inland Revenue transfer this amount toward paying down their SBCS balance. This is because a loan under the SBCS is not included in the definition of “tax” for the purpose of Part 10B of the Tax Administration Act 1994, where transfers of excess tax can be made to another tax type or to another amount due.
At the moment, any tax refund must be made to the borrower’s bank account, so the borrower then has to make a manual repayment to repay their loan under the SBCS. The widened definition would simplify this transaction by allowing Inland Revenue to apply a taxpayer’s tax refund to their loan balance if requested to do so.
Recommendation
That the submission be accepted.
OTHER MATTERS
Issue: Initial provisional tax liability definition
Submission
(Matter raised by officials)
The provisional tax threshold increased from $2,500 to $5,000 following amendments contained in the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020. To do this, all references to the old threshold of $2,500 were changed to $5,000.
In doing this, a change was made to the definition of “initial provisional tax liability” in section YA 1 of the Income Tax Act 2007, which could adversely affect some taxpayers. To correct this, officials recommend adding a transitional provision to the definition of “initial provisional tax liability”, so that taxpayers who were over the old threshold but were not over the new threshold do not become initial provisional taxpayers again.
Comment
An initial provisional taxpayer is a taxpayer who has not been required to pay provisional tax in the previous four years because their residual income tax is beneath the threshold for paying provisional tax.
It was not intended for a person to become a person with an “initial provisional tax liability” under the old threshold and the new threshold. Without an amending transitional provision, a person who has previously had residual income tax of more than $2,500 but not more than $5,000 could meet the definition again. This could give them an adverse outcome compared to someone who does not have an initial provisional tax liability.
The transitional provision would provide that a person who, in the previous four years, had residual income tax of more than $2,500 but not more than $5,000 does not have an initial provisional tax liability.
Recommendation
That the submission be accepted.
Issue: Foreign trust registration and annual return fees
Submission
(Matter raised by officials)
The Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act 2017 brought in new disclosure rules for foreign trusts. Those rules included fees for registering a foreign trust (section 59B of the Tax Administration Act 1994) and for filing its annual return (section 59D).
Technically, these fees are a “tax” under section 3(1) of the Tax Administration Act 1994, as they are payable to the Commissioner under a tax law and are not explicitly excluded from being a “tax”. This has unintended consequences, such as late payment penalties and use-of-money interest applying when the fees are not paid.
It was never intended that these fees be “taxes”. Officials therefore recommend carving the fees out of the definition of “tax”, retrospectively to 21 February 2017, when the disclosure rules came into force.
Recommendation
That the submission be accepted.
Issue: Using passport numbers in the student loan customs information match
Submission
(Matter raised by officials)
A student loan borrower who is New Zealand-based is entitled to an interest-free student loan and loan repayments are based on their income. Interest is payable on student loans for borrowers who are based overseas.
Currently, Inland Revenue undertakes an information match with the New Zealand Customs Service (Customs) for the purpose of verifying whether a borrower is in New Zealand or overseas. This information allows Inland Revenue to ensure that borrowers are correctly treated as New Zealand or overseas-based, and to identify borrowers in serious default when they leave or enter New Zealand.
The legislation governing this match currently allows Inland Revenue to share the borrower’s name, date of birth and IRD number with Customs. Inland Revenue would like to improve the accuracy of this match by adding the borrower’s passport number to this information. Officials propose an application date of 1 October 2021 to align with planned system changes as part of Inland Revenue’s business transformation programme.
Comment
Adding the passport number to the match will improve the accuracy of the match because passport numbers are a unique identifier used by Customs. This in turn improves the integrity of the student loans system by reducing the possibility that borrowers could be overseas without Inland Revenue being aware of this.
Recommendation
That the submission be accepted.
Issue: Tax treatment of distributions on wind-up of an approved unit trust
Submission
(Matter raised by officials)
All distributions by an approved unit trust should be treated as trustee income.
Comment
An approved unit trust is a special type of unit trust that is declared not to be a unit trust for tax purposes under the Income Tax Act (Exempt Unit Trusts) Order 1990. An approved unit trust is instead treated as a trust for tax purposes. Trustee income of an approved unit trust is taxed at a rate of 28%. Bonus Bonds is the only approved unit trust. It pays prizes out of prior year after-tax earnings, as tax-free distributions to beneficiaries.
On 26 August 2020, it was announced that Bonus Bonds would stop accepting new investments, with the intention of being wound up. In the year Bonus Bonds winds up, it will have to distribute income derived to beneficiaries. Under current law, income derived in an income year is beneficiary income to the extent to which it vests in a beneficiary in the income year, or is paid to a beneficiary in the income year or within a certain period after the end of the income year, and as such will be taxed at beneficiaries’ marginal tax rates.
The recommended change will ensure that all income of an approved unit trust that would have been beneficiary income, including income derived in the year Bonus Bonds is wound up, will be taxed consistently with other income derived over the life of the trust: as trustee income. This is in line with the policy intent and will deliver compliance cost savings for bondholders, Bonus Bonds and Inland Revenue.
Recommendation
That the submission be accepted.
Issue: Direct crediting of Problem Gambling Levy
Submission
(Matter raised by officials)
Officials recommend including the Problem Gambling Levy within the meaning of tax for the purpose of section 184A(5) of the Tax Administration Act 1994, to allow Inland Revenue to make refunds by direct credit.
Comment
As part of Inland Revenue’s business transformation, the administration of the Problem Gambling Levy will transition to Inland Revenue’s new technology platform in March 2021. The Problem Gambling Levy is not considered to be a tax for the purpose of section 184A(5) of the Tax Administration Act 1994. The Gambling Act 2003 makes clear that the levy is neither a tax nor a duty under the Act except for the purposes of “collection, recovery and enforcement” – there is no mention of refunding.
Section 184A of the Tax Administration Act (which only applies to the refunding of tax) cannot apply to the Problem Gambling Levy if this amendment is not made. Therefore, section 184A(5) of the Tax Administration Act needs an amendment to include the levy within the meaning of tax. This will allow direct crediting of overpaid levy by gaming machine and casino operators into a bank account.
The recommended amendment will apply from the date of assent.
Recommendation
That the submission be accepted.
Issue: Temporary loss carry-back remedial to enable loss grouping for groups that are not wholly owned
Submission
(Matter raised by officials)
Officials recommend amending section IZ 8 of the Income Tax Act 2007, so that a company that is 66% or more commonly owned with another company is able to carry losses back to offset against the income of the other company if it meets certain criteria. The amendment would be backdated so that it applies for the duration of the temporary loss carry-back.
Comment
Section IZ 8 of the Income Tax Act 2007 contains the temporary loss carry-back rules. The rules allow a company with net losses in the 2019–20 or 2020–21 income years to carry losses back to offset taxable income in the immediately preceding income year. Special rules apply for companies that are part of wholly owned corporate groups.
To be eligible for the loss carry-back, a company that is not in a wholly owned corporate group must have net loss in the 2019–20 or 2020–21 income years (the “loss year”) and must also have taxable income in the income year immediately preceding the loss year (the “profit year”).
This rule applies as intended to companies using the loss carry-back individually but is problematic for some companies that are in non-wholly owned corporate groups (companies with at least 66%, but less than 100%, common ownership). Under current rules, a company that is in losses in both the loss and profit years cannot use the carry-back to offset its losses against the taxable income of a (non-wholly owned) group member in the profit year. This is contrary to the policy intent expressed in the COVID-19 Response (Taxation and Other Regulatory Urgent Measures) Bill Commentary, which is for a company that has 66% or more common ownership with another company to be able to carry back and offset its losses against the other company’s taxable income in the profit year.
Officials recommend the legislation be amended so that it satisfies the policy intent.
Example
Mippy Co and Speckles Co are 80% commonly owned. In 2018–19, Mippy Co has net income of $100k and Speckles Co has $50k of losses. Speckles Co decides to offset its $50k of losses against Mippy Co’s income that year, so Mippy Co has taxable income of $50k.
In 2019–20, Mippy Co has net income of $50k and Speckles Co has net losses of $75k. After offsetting Speckles Co’s losses against Mippy Co’s net income,* Speckles Co still has $25k of losses remaining. It decides to use the temporary loss carry-back so that it can offset its remaining $25k of losses against Mippy Co’s 2018–19 taxable income.
Speckles Co carries its remaining $25k of losses back to 2018–19, and offsets the losses against Mippy Co’s 2018-19 taxable income of $50k. Mippy Co receives a tax refund of $7,000 ($25k x 28%, which is the corporate tax rate). After using the loss carry-back, Mippy Co still has $25k of taxable income remaining in 2018–19. Speckles has $0 losses remaining in 2019–20 after using the loss carry-back.
| 2018–19 income year | Mippy Co | Speckles Co |
|---|---|---|
|
Net income/(loss) (before offsets and loss carry-back) |
$100k | ($50k) |
| Taxable income/(loss) (after offsets but before loss carry-back) |
$50k | $0 |
| 2019–20 income year | ||
| Net income/loss (before offsets and loss carry-back) |
$50k | ($75k) |
| Taxable income/loss (after offsets but before loss carry-back) |
$0 | ($25k) |
| Temporary loss carry-back | ||
| 2018–19 taxable income/(loss) (after loss carry-back) |
$25k | $0 |
| 2019–20 taxable income/(loss) (after loss carry-back) |
$0 | $0 |
| Amount refunded under loss carry-back | $7k | $0 |
*In this example the two companies have chosen to offset losses within the group in the loss year before using the loss carry-back. This is not a requirement for groups that are not wholly owned.
The remedial amendment would apply for the duration of the temporary scheme, so would apply to two pairs of income years: the 2018–19/2019–20 and 2019–20/2020–21 profit/loss years.
Recommendation
That the submission be accepted.