Administrative amendments
Issue: Changes to response period for notices related to R&D tax credits
Clauses 433 and 474
Submission
(67 – New Zealand Institute of Chartered Accountants)
The wording of the new response period provision in the Tax Administration Act 1994 should be amended so the start date of the response period in proposed section 89AB(4)(a), (b) and (c)(i) is the date of issue of the initiating notice and not the date the initiating notice is received in an office of the department. Additionally, the reference to “that Act” in proposed section 89AB(4)(c) is confusing and should be changed to the Income Tax Act 2007.
Comment
Proposed section 89AB of the Tax Administration Act 1994 is a rewrite of the “response period” definition in current section 3(1) of the same Act. The rewrite ensures that the response periods for notices relating to R&D tax credits are consistent with other time limits relating to the tax credit. It was not the intention of the rewrite to change the response periods in cases that do not relate solely to an amount of R&D tax credit. Officials therefore agree that proposed section 89AB(3)(a), (4)(a) and (b) be amended so the start date of the response period is the date of issue of the initiating notice and not the date the initiating notice is received in an office of the department. Proposed section 89AB(4)(c) concerns a notice relating solely to an amount of R&D tax credit and should not be amended.
We do not agree that the reference to “that Act” in section 89AB(4)(c) is confusing. The use of this term is standard drafting practice, and it is clear from section 89AB(4)(c) that “that Act” refers to the Income Tax Act 2007.
Recommendation
That the submission be accepted in part, subject to officials’ comments.
Issue: Filing detailed R&D returns on behalf of partners
Clauses 466 and 467
Submission
(68A – Corporate Taxpayers Group)
Requiring partners to individually file R&D returns could increase compliance costs for taxpayers and also result in confusion if there is inconsistency in the positions taken by individual partners.
Comment
Currently the legislation allows partnerships to file a detailed statement. When this happens, all the R&D relating to a partnership and the partners is required to be on the same detailed statement. This means that partner A has to disclose to partner B the R&D partner A is doing on their own behalf. The amendment in the bill addresses this problem by requiring individual partners to file a detailed statement rather than the partnership.
The amendment also streamlines the process in situations when a partner is a member of more than one partnership doing R&D, and particularly when they are also in an internal software development group.
Recommendation
That the submission be declined.
Issue: No credit until detailed statement is filed
Clause 244
Submission
(68A – Corporate Taxpayers Group)
Clarification may be required so that a taxpayer can claim the R&D tax credit in their tax return, due to be filed before the detailed statement, and so that the tax credit is also factored into the appropriate year’s residual income tax. These issues could be addressed by allowing the tax credit to be available only once the detailed statement is filed.
Comment
Proposed section LH 2(8) provides that no tax credit arises before an R&D detailed statement is provided. Information contained in the detailed statement is necessary for Inland Revenue to properly process the claim. The submission supports the amendment but queries whether this creates a problem because taxpayers claim the tax credit in their tax return and factor in the credit in calculating the residual income tax, both of which occur before the detailed statement is filed.
The intention is that, if a detailed statement is not filed, the credit is treated as if it never existed. It is still intended that taxpayers claim the credit in their return and factor in the tax credit in calculating residual income tax. This should be clarified.
Recommendation
That the submission be accepted.
Issue: Change to response periods for notices related to R&D tax credits
Clauses 433 and 474
Submission
(68A – Corporate Taxpayers Group)
The proposed changes to response periods for filing a notice of proposed adjustment (NOPA), should be amended so that if an R&D tax credit adjustment has been included in a NOPA with other issues, the portion of that NOPA which relates to R&D tax credits will have a response period of one year (or two years if the temporary extension applies).
Comment
The normal tax rules allow a four-month opportunity for taxpayers to amend a tax return. However, because the R&D tax credit raises particular risks, different time periods for amendment were considered desirable. It is therefore appropriate that the proposed two-year response period only relates to a notice of proposed adjustment (NOPA) that relates solely to R&D tax credits.
Officials do not agree that this rule should be extended so that when an R&D tax credit adjustment has been included in a NOPA with other issues, then the portion of the NOPA that relates to the R&D tax credit is treated as having a response period of two years, while the other issues will still have the general four-month response period. We consider that the benefits of such a change would be outweighed by the cost of the extra complexity that would be introduced into the rules relating to filing of a NOPA.
Recommendation
That the submission be declined.
Issue: Requirements for a notice of proposed adjustment relating to an R&D tax credit
Clauses 475 and 476
Submission
(68A – Corporate Taxpayers Group)
The new amendments relating to a notice of proposed adjustment (NOPA) in sections 89D and 89DA of the Tax Administration Act 1994 are unnecessary. Given that a tax credit will only arise once a detailed statement is filed, the Commissioner will not be able to issue an assessment in relation to a tax credit before a detailed statement is provided.
Comment
The new amendments to sections 89D and 89DA of the Tax Administration Act 1994 ensure that a claimant cannot dispute an assessment of an R&D amount until an R&D detailed statement (under sections 68D or 68E) has been provided for the tax year. This ensures Inland Revenue has the necessary information about a claimant’s R&D activities before a dispute commences. Officials therefore consider that these amendments are necessary.
There are several time limits which are specific to the detailed statement under sections 68D and 68E of the Tax Administration Act 1994. Officials propose that the new amendments in sections 89D and 89DA be further clarified so that a claimant can only dispute an assessment of an amount of R&D by providing a detailed statement within the time limits required under sections 68D or 68E.
Recommendation
That the submission to remove the new amendments in sections 89D and 89DA be declined.
That the proposal to further clarify these proposed sections be accepted.
Issue: Reviewing the R&D detailed statement as a return
Submission
(Matter raised by officials)
The R&D detailed statement is currently a tax return for the purposes of the Tax Administration Act 1994. Consequently, under section 36(3) of that Act, a claimant must retain a signed, hardcopy transcript of the detailed statement. Section 23 of the same Act also requires this transcript to be retained for seven years after the end of the income year to which the return relates. Another consequence of the detailed statement being a tax return is that shortfall penalties (section 141 of the Tax Administration Act 1994) may apply to the position taken by claimants in the detailed statement. Officials recommend that these features, as well any shortfall penalties that result from the detailed statement being a tax return, are switched off.
Comment
The R&D detailed statement is a completely electronic form that claimants of the R&D tax credit must complete and submit electronically. The requirements to sign and to retain a hardcopy transcript of the detailed statement for seven years are inconsistent with the electronic nature of the detailed statement itself. Officials therefore recommend that these tax return features are “switched off” for the detailed statement.
Although the detailed statement is a tax return, it acts more like a disclosure form. Officials therefore recommend that any shortfall penalties that would apply as a consequence of the detailed statement being a tax return are also “switched off”. This means that the details in a detailed statement are not considered as a “tax position” taken by the claimant. The figures in the detailed statement should, if completed correctly, reflect the R&D tax credit figure claimed in a claimant’s return of income. The R&D tax credit figure claimed in a claimant’s return of income is a tax position taken by a claimant and therefore, will still be subject to all the shortfall penalties under the Tax Administration Act 1994. The absolute liability and knowledge offences (sections 143 and 143A of the Tax Administration Act 1994) will also still continue to apply to the R&D detailed statement.
Recommendation
That the submission be accepted.
Issue: Minor rewrite changes to R&D provisions
Clauses 284, 328 and 339
Submission
(Matter raised by officials)
Proposed sections OP 35(1B), OK 14B(1)(a) and OB 37(1)(a) require minor rewrite changes.
Comment
Minor rewrite changes to proposed sections OP 35(1B), OK 14B(1)(a) and OB 37(1)(a) will ensure that these provisions give full effect to the policy intent of the R&D tax credit amendments.
Recommendation
That the submission be accepted.