Other policy matters
- Financial arrangements – agreements for the sale and purchase of property or services in foreign currency
- Income tax rates for 2014–15
- The acquisition date of land
- Repeal of substituting debenture rule
- Withholding tax and inflation-indexed bonds
- Deductions for underground gas storage facilities
- Charities with overseas charitable purposes
- Change of tax residency for GST purposes
- Zero-rated services supplies to non-residents
- Classification of mining permits as real property for tax purposes
- Extending the tax exemption for non-resident offshore oil rig and seismic vessel operators
FINANCIAL ARRANGEMENTS – AGREEMENTS FOR THE SALE AND PURCHASE OF PROPERTY OR SERVICES IN FOREIGN CURRENCY
(Clauses 60 to 67)
Summary of proposed amendments
The taxation rules for financial arrangements which are agreements for the sale and purchase of property or services in foreign currency (the foreign currency arrangements) are being changed to:
- reduce the complexity of calculations and increase overall compliance;
- minimise the volatility of taxable income in comparison to accounting income; and
- ensure that interest calculation for tax purposes reflects the economic reality.
An officials’ issues paper released in July 2012 also proposed that the taxation rules for agreements for the sale and purchase of property or services in New Zealand currency be changed for the same reasons. This proposal has been deferred to allow for further consideration of the issues by officials in consultation with taxpayers.
The amendments will apply to foreign currency arrangements entered into from the 2014–15 income year. Taxpayers using International financial reporting standards (IFRS) can make a once-and-for-all election to apply the new rules to foreign currency arrangements entered into from the beginning of an income year commencing with the 2011–12 income year.
In addition, tax positions taken consistently for existing foreign currency arrangements which are essentially based on the new rules will be validated.
The new rules will require IFRS taxpayers to follow their accounting treatment for foreign currency arrangements. This means the value of the property and services and any interest included in foreign currency arrangements will follow the accounting treatment. Compliance costs and complexity for these taxpayers will be considerably reduced compared with the current tax treatment.
Non-IFRS taxpayers will follow similar rules to IFRS taxpayers, based on spot exchange rates. There will be the ability to use forward exchange rates when these taxpayers elect to follow a prescribed foreign currency hedging tax treatment. Again, compliance costs and complexity for these taxpayers will be reduced.
A primary purpose of the financial arrangements rules in the Income Tax Act 2007 is to account for the income or expenditure on a financial arrangement (the “interest” component) over the term of the arrangement. The interest component includes foreign currency gains and losses on financial arrangements.
Agreements for the sale and purchase of property or services have been financial arrangements since the commencement of the financial arrangement rules in 1986. This is because they can include an interest component resulting from prepayments or deferred payments. Any interest component is identified by comparing the value of the property or services with the consideration paid for the property or services.
Foreign currency arrangements have been subject to a complex mandatory tax treatment since 1996 to identify any interest component. This treatment includes the use of forward exchange rates for valuing the property or services and taxing the unrealised gains and losses during the term of the arrangements.
The current rules for foreign currency arrangements have caused significant compliance difficulties and volatility of taxable income (compared with accounting income). The volatility of taxable income is especially significant for IFRS taxpayers. The compliance difficulties are relevant to all taxpayers but are especially significant for non-IFRS taxpayers.
Modern accounting practice has now comprehensively and coherently dealt with this issue, thereby offering an opportunity to consider changes to the relevant tax rules.
The proposed new rules will apply from the application dates noted above to new foreign currency arrangements as follows:
- This group will use the accounting treatment for the value of property or services in all cases. These values are calculated at spot exchange rates where designated hedging is not applied for accounting purposes. When designated hedging is applied for accounting amounts from the designated hedges are aggregated with the values calculated at the spot exchange rates to get the values of property or services. The accounting values will also be used for other tax purposes for example, the “cost” of property for calculating tax depreciation, and valuing revenue account property etc.
These taxpayers will be taxed on any interest and foreign currency gains and losses from foreign currency arrangements and designated hedges included in the accounting income statement that are not included in the accounting values of property or services. The accounting result is considered to be the correct economic and tax result in these cases.
- This group will also have existing tax positions consistently taken on existing foreign currency arrangements which are essentially based on the new rules validated. This measure is necessary to ensure existing tax positions for existing foreign currency arrangements where spot exchange rates have been applied instead of the mandated forward exchange rates are not subject to future dispute. The use of spot exchange rates instead of forward exchange rates for existing foreign currency arrangements has resulted in tax timing differences which will reverse over time. These differences will have gone both ways and are now locked into the fiscal base. It is not considered productive to have them corrected by use of the disputes process.
- These taxpayers will generally value the property or services in foreign currency arrangements at actually realised spot exchange rates. There will be a once-and-for-all ability to elect to include in the value of property or services amounts from specifically identified forward foreign exchange contracts which hedge the foreign currency arrangements. The election criteria will be prescribed in the legislation. This will suit many non-IFRS taxpayers who hedge their foreign currency purchases or sales. Others will simply use the spot exchange rate option.
- This group will not be taxed on any unrealised foreign exchange gains and losses under the stand-alone foreign currency arrangements. (They are presently taxed on the unrealised foreign exchange gains and losses under the current rules.) If they elect to include amounts from specifically identified forward foreign exchange contracts used to hedge the foreign currency arrangements in the value of property or services they will not be taxed on foreign gains and losses on the hedges. If they do not elect to include the hedge amounts in the value of the property or services they will be taxed on foreign currency gains and losses on the hedges. That is the current tax treatment for such stand-alone hedging financial arrangements.
- These taxpayers will be taxed on any interest under foreign currency arrangements arising from prepayments or deferred payments which are made 12 months or more before or after the “rights date” (the possession of the property or performance of the services). These prepayments and deferred payments are considered to be in the nature of loans and have always been taxed under the financial arrangement rules. This rule will not apply to payments for progress made on either making or constructing property, or providing services. These payments are not considered to be in the nature of loans.
- Under the proposed rules, this group will have existing tax positions consistently taken on existing foreign currency arrangements, and which are essentially based on the new rules, validated. This measure is necessary to ensure existing tax positions for foreign currency arrangements where spot exchange rates have been applied, instead of the mandated forward exchange rates, are not subject to future dispute.
INCOME TAX RATES FOR 2014–15
Summary of proposed amendment
The bill sets the annual income tax rates that will apply for the 2014–15 tax year and are the same as those that applied for the 2013–14 tax year.
The provision will apply for the 2014–15 tax year.
The annual income tax rates for the 2014–15 tax year will be set at the rates specified in schedule 1 of the Income Tax Act 2007.
THE ACQUISITION DATE OF LAND
Summary of proposed amendment
The land provisions contained in subpart CB of the Income Tax Act 2007 are being amended to clarify the time at which land is considered to have been acquired for tax purposes. In particular, the amendment clarifies that for the purposes of section CB 6 (land acquired with the intention or purpose of disposal), that the date a person’s intention or purpose will be tested is at the beginning of the period when the person has an estate or interest in the land.
The amendment will apply to disposals of land from the date the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Bill is introduced.
New section CB 15B provides that the date a person acquires land for the purposes of subpart CB (income derived from land) is the date that begins a period in which the person has an estate or interest in the land.
Practically, this means that the date the taxpayer’s purpose or intention is tested under section CB 6, and the other relevant land provisions, will be the date a binding agreement is entered into.
Indicative characteristics of the date a binding agreement is entered into (that is, the agreement has no conditions precedent, but the vendor and the purchaser intend to be bound by the terms of the contract even if there are conditions subsequent that have to be fulfilled) are:
- the date a binding sale and purchase agreement has been signed and executed by both the vendor or purchaser (including nominees or agents); or
- the “Date” indicated on a binding sale and purchase agreement, which is then subsequently signed by the parties to the agreement; or
- the date a binding oral agreement for the disposal of land was agreed to by the parties, which has then been subsequently actioned by part performance of the agreement and if required later, evidenced by a memorandum.
The definition of “land” in the Income Tax Act 2007 also includes an option to acquire an estate or interest in land. For the purposes of an option under the proposed new rules, the date a binding agreement is entered into will be the date the parties enter into the main contract and the taxpayer acquires the option but has not yet exercised it. Although the option is yet to be exercised and the parties still have to enter into a subsequent agreement for the sale and purchase of the land pertaining to the option, the taxpayer has acquired an equitable interest in the “land” and this date is reflective of the underlying “first interest” policy that underpins the proposed legislative clarification.
The amendment seeks to clarify the acquisition date of land for the purposes of the land disposal provisions in the Income Tax Act 2007, in particular section CB 6, which is causing considerable uncertainty for taxpayers, their agents and Inland Revenue.
Section CB 6 deals with land acquired for the purpose of, or with the intention of disposal, and the taxation of income derived from disposing of the land. If a taxpayer acquires the land with the intention or purpose of disposal and subsequently disposes of the land, any profit made is taxable.
The uncertainty is caused by the timing of when the taxpayer’s intention or purpose should be determined. The Courts have held that “intention” or “purpose” should be tested when a taxpayer has acquired the land in question (known as the date of acquisition). However, because the definition of “land” in the Income Tax Act 2007 includes estates and interests in land, and the taxpayer acquires different interests and estates in “land” at different times under a typical sale and purchase agreement (which are then merged when the title is registered), neither the legislation nor common law have provided sufficient clarity over which interest in “land” the date of acquisition should apply to.
To address this uncertainty, as part of Budget 2013 officials released the issues paper Clarifying the acquisition date of land. The issues paper discussed two possible interpretations of the provisions. It concluded that the “first interest” interpretation whereby the date of acquisition is the date when the first equitable or legal interest in land arises in a sale and purchase agreement (typically in the early phases of a sale and purchase agreement), would provide greater certainty and be more economically efficient. This interpretation also more closely reflected the policy underlying section CB 6 (which targets property speculators), as it is the initial decision-making that informs how a person intends to use the property. It would be unusual for a property speculator to enter into a sale and purchase agreement unless they thought it very likely that the purchase and its subsequent disposal would be profitable.
REPEAL OF SUBSTITUTING DEBENTURE RULE
(Clauses 38, 40, 51, 83, 84, 105 and 123(13) and (40))
Summary of proposed amendment
The bill proposes the repeal of the substituting debenture rule in section FA 2(5) of the Income Tax Act 2007, and other consequential amendments as the rule is now out-dated.
Currently, the rule recharacterises debt issued by a company to its shareholders by reference to their equity (most commonly debt issued in proportion to shares held) as equity for tax purposes. This means interest paid in respect of a substituting debenture is taxed as a dividend; it is non-deductible to the company and subject to imputation.
The amendment will apply for the 2015–16 and later income years. This aligns with the application date for the amendments in the bill to the thin capitalisation rules.
Clause 84 of the bill repeals section FA 2(5) of the Income Tax Act 2007, which defines “substituting debenture”, and section FA 2(7), which quantifies the amount of the debenture.
As well as repealing the substituting debenture rule, the bill also:
- makes certain consequential amendments, primarily to remove references to substituting debentures in other sections of the Income Tax Act 2007 (in clauses 38, 40, 51, 105 and 123(13) and (40) of the bill); and
- introduces a transitional provision for substituting debentures that are already in existence when the rule is repealed.
Clause 83 contains the transitional provision. Its purpose is to ensure that no adverse tax consequences arise on transitioning from treating the debenture as a share for tax purposes, to treating it as a debt for tax purposes.
The transitional provision will treat the taxpayer as having redeemed the substituting debenture for its outstanding principal immediately before the beginning of its 2015–16 income year and re-advanced the redemption proceeds under a new loan equal to the outstanding principal on the first day of its 2015–16 income year.
Any income derived or expenditure incurred in respect of the loan on or after the first day of the taxpayer’s 2015–16 income year must be accounted for under the financial arrangements rules. Any income and expenditure arising under the substituting debenture in income years before the 2015–16 income year will not be taken into account under the financial arrangements rules because that income and expenditure will have been dealt with under the tax rules applying to shares.
A number of tax advisers and commentators have recently raised concerns about the substituting debenture rule.
It applies too widely in some circumstances. Arguably any shareholder loan is caught. It is easy for those not taking advice to mistakenly issue substituting debentures. Often the rule applies to fairly common company dealings which are of no policy concern. Taxpayers who inadvertently issue substituting debentures may have consequential problems with past tax years (for example, the company may have paid too little tax by virtue of treating the interest as deductible, the incorrect amount of RWT may have been deducted by the company from the payments, no imputation credits would have been attached by the company to the “dividend”, and there may be penalties and use-of-money interest payable as a result of taking an incorrect tax position in past years).
Conversely, the rule is too narrow in other circumstances, and can be easily circumvented. For example, the rule does not apply where the debt is in the form of a convertible note or where the loan is not made by the direct shareholder, but an indirect shareholder higher in the ownership chain. Taxpayers may also deliberately structure their funding as substituting debentures to take advantage of the equity recharacterisation. The ease with which the substituting debenture rule can be manipulated may facilitate cross-border tax arbitrage, as taxpayers can effectively choose whether a debenture is treated as debt or equity for New Zealand tax purposes.
The scope and the application of the rule are uncertain. This leads to increased compliance costs as taxpayers are inclined to seek advice (and even binding rulings) on fairly straight forward transactions.
Furthermore, in light of the recent tax avoidance cases, taxpayers are becoming increasingly concerned about standard commercial transactions which seemingly circumvent the rule. It is difficult to determine whether Parliament’s intention is frustrated when the policy issue Parliament contemplated no longer exists given current policy settings.
The rule was enacted in 1940 as a specific anti-avoidance rule, under very different tax policy settings (in particular, New Zealand did not have an imputation regime).
The rule originally targeted transactions in which companies were swapping their ordinary equity for debt. These transactions were popular at the time because dividends were paid out of post-tax income and were exempt income to the shareholders, whereas interest was deductible to the company and taxable to the recipient, generally at a lower tax rate than the (then) company rate. Ultimately, the tax burden on dividends was often higher than that on interest. It is also possible that the Government was concerned about the collection of tax from ultimate shareholders as the predecessor of resident withholding tax (RWT) was easily circumvented.
In 1958 the dividend exemption was removed. This meant that dividends were subject to double tax, but interest was not (absent the substituting debenture rule). There was a clear tax incentive to structure investments as debt rather than equity, so the substituting debenture rule continued to serve an anti-avoidance purpose at this time.
Since the introduction of imputation in 1988, the original purpose of the substituting debenture rule has ceased to be relevant in many cases (as debt and equity returns are generally subject to the same tax treatment in the hands of a New Zealand-resident in a taxpaying position).
For investors such as non-residents, who still prefer to receive interest rather than dividends for tax reasons there are targeted rules, such as the thin capitalisation and transfer pricing rules, which limit the ability to take undue advantage of the preference.
Accordingly, the rule is now out-dated and the bill proposes its repeal. To mitigate any risk to the tax base as a result of the repeal, the application date of the repeal aligns with the strengthened thin capitalisation rules.
WITHHOLDING TAX AND INFLATION-INDEXED BONDS
(Clauses 119, 121, 122, 123(22), 128(3), 130, 131, 132 and 133)
Summary of proposed amendment
The resident withholding tax (RWT) and the non-resident withholding tax (NRWT) rules in the Income Tax Act 2007 are being amended to deal with technical problems relating to the application of these withholding tax rules to inflation-indexed instruments. The proposed amendments relate to the timing and the amount of withholding tax to be deducted from the inflation-indexed component of such instruments.
To administer the proposed changes, amendments to the record-keeping and filing provisions in the Tax Administration Act 1994 are also proposed.
The amendments will apply from the date of enactment.
The proposed changes are:
- Section RE 2(3) is being amended to exclude the inflation-indexed component, which is income that accrues to the bond holder at the end of the tax year, from being interest for the purposes of the general application of the RWT rules.
- New section RE 18B will:
- limit the RWT payer’s obligation to deduct resident withholding tax on both the interest and inflation-indexed amount to the amount of the interest payment; and
- require RWT to be deducted from the interest and inflation-indexed amount when the bond coupon is paid.
- Section RF 2(1) is being amended to treat the inflation-indexed component as being non-resident passive income at the time the coupon interest is paid. This is to ensure that NRWT is deducted at the same time.
- Section YA 1 is being amended to insert a definition of an inflation-indexed instrument.
- A new paragraph is being inserted in sections 25(6) and 51 (2) of the Tax Administration Act 1994 that will require the bond issuer to notify the recipient of their requirement to file, and the Commissioner of Inland Revenue of any remaining tax liability.
- A new paragraph is being inserted in sections 33A(2) and 33AA(1)(l) of the Tax Administration Act 1994 that will provide an exclusion from non-filing requirements for a bond holder who has an interest payment capped by new section RE 18B.
As part of the 2012 Half Yearly Economic Fiscal Update, the Government announced that it intended to target up to 10–20% of total bonds outstanding over time in an inflation-indexed bonds format. The Government had previously issued inflation-indexed bonds in 1996 but suspended their issue in 1999.
Inflation-indexed bonds are intended to diversify the Crown’s investor base, to provide long-term cost-effective funding for the Government and to provide investors with a hedge against inflation as recommended by the Capital Market Development Taskforce in 2009, and in accordance with the 2010 Government Action Plan.
An inflation-indexed bond is a bond in which the nominal capital value invested increases by a measure of inflation in any year. The measure of inflation is generally a price index published by Statistics New Zealand and is actually credited when the bond matures, but is taken into account in calculating the coupon payments.
The coupon paid in any year is paid quarterly on the capital value of the bond. The capital value of the bond is the face value or nominal amount of the bond adjusted for cumulative changes in the Consumer Price Index.
Section EI 2 treats the inflation-indexed component as income having been credited at the end of the year.
Tax treatment of inflation-indexed instruments
The tax treatment of inflation-indexed bonds falls within the relevant RWT, NRWT and inflation-indexed instruments provisions in the Income Tax Act.
RWT is due on most forms of interest for New Zealand residents who do not hold an RWT exemption certificate.
NRWT is also due on most forms of interest for non-residents, unless a 0% NRWT rate applies. In most cases where a 0% NRWT rate applies, approved issuers (or a person on their behalf) must pay a levy on the securities they register with Inland Revenue, known as the approved issuer levy (AIL).
Approved issuers are able to pay interest to non-residents without deducting NRWT. Instead approved issuers are required to pay a levy at the rate of 2% for every dollar of interest paid on the inflation instrument.
If RWT or NRWT has been deducted at the wrong rate, the taxpayer may be obliged to file a tax return at the end of the year and make up the difference (or receive a refund). NRWT for the majority of non-resident holders is a final withholding tax.
The problems the changes seek to address
Two technical tax problems have been identified with the reissuance of these bonds which this bill seeks to address.
The primary problem is the potential for a withholding tax obligation to exceed the coupon amount. In this situation, the issuer of an inflation-indexed bond would have a liability to pay withholding tax, but no administratively workable “payment” to deduct it from.
At present this problem is a potential risk rather than an actual problem. The current coupon rate for the new Government issue of inflation-indexed bonds is 2% per annum, and this low coupon rate increases this potential risk. For example, the following table provides an indication of what the rate of inflation needs to be in order for the potential risk to become a problem.
|Tax type and rate||Coupon rate||Annual inflation rate for the coupon
payment to be insufficient
|RWT at 33%||2%||4.1%|
|RWT at 30%||2%||4.7%|
|RWT at 17.5%||2%||9.5%|
|NRWT at 15%||2%||11.3%|
While the risk of withholding tax exceeding the coupon payment is currently perceived to be low, the proposed changes go some way towards mitigating the cashflow and potential tax collection consequences if the inflation risk profile were to change significantly.
The proposed amendments to limit the RWT liability to the amount of the coupon are not extended to NRWT because the risk is considered lower.
The second and related problem stems from a timing issue. The legislation intends that RWT should be deducted annually from the inflation-indexed component. However, the coupon is generally paid quarterly and the administrative practice is to withhold the tax on the inflation-indexed component for the previous quarter, and deduct it from the coupon payment. This can result in an unclear situation where an issuer may be withholding tax from a coupon amount in advance of the bond holder’s legal obligation, because there is some form of cashflow from which to deduct the withholding tax.
So that Inland Revenue can administer these proposed changes, additional record-keeping requirements for the bond issuer and filing requirements for the bond holder have also been included in the bill.
DEDUCTIONS FOR UNDERGROUND GAS STORAGE FACILITIES
(Clauses 17, 18 and 36)
Summary of proposed amendment
The amendment is proposed to remove from the ambit of the petroleum mining tax rules underground facilities that are used to store processed gas. These facilities will instead be covered by the general depreciation tax rules, with deductions for expenditure on these facilities being spread over the estimated economic life of the asset.
The amendment will apply to expenditure incurred from the date of enactment. However, there is a grand-parenting provision proposed for expenditure incurred by the owner of an existing underground gas storage facility.
An amendment to section CT 7 carves out underground facilities used to store processed gas from being treated as petroleum mining assets. These underground facilities will be subject to the depreciation rules, rather than the petroleum mining rules.
Proposed section CZ 32 provides a transitional rule for the tax treatment of proceeds from selling an underground gas storage facility constructed before the amendments come into force.
The proceeds received from the sale of an underground gas storage facility are currently treated as being on revenue account under the petroleum mining rules (section CT 1). Under the proposed change, which removes underground storage facilities from the petroleum mining rules and includes them within the depreciation rules, the sale of an underground gas storage facility will be treated as being on capital account.
Consideration received from a disposal will be apportioned to reflect the amount of expenditure that has been incurred under the existing rules. For example, if an underground gas storage facility is sold for $500 million in 2016, with $300 million of expenditure incurred before the amendments are enacted and $100 million incurred after the amendments are enacted, the amount of income from selling the facility would be: $300 million/$400 million x $500 million = $375 million.
Currently, a gap in the petroleum mining tax rules means that underground facilities for storing processed gas are eligible for concessionary treatment as a petroleum mining asset. This means that expenditure on an underground gas storage facility is deductible over seven years, instead of over the economic life of the facility (which would be the treatment under the depreciation rules). This is contrary to the policy intent that only expenditure on petroleum exploration and development should be eligible for concessionary treatment. The underground storage of gas that has already been extracted and processed is not an exploration or development activity.
CHARITIES WITH OVERSEAS CHARITABLE PURPOSES
(Clauses 2(25) and 126)
Summary of proposed amendment
The bill adds two new charitable organisations to schedule 32 of the Income Tax Act 2007. Donors to the following charities will be eligible for tax benefits on their donations:
- Every Home Global Concern Incorporated
- Namibian Educational Trust
The amendments will apply from 1 April for the income year following enactment.
Donors to organisations listed in schedule 32 are entitled, as individual taxpayers, to a tax credit of 33 1/3% of the monetary amount donated, up to the value of their taxable income. Companies and Māori Authorities may claim a deduction for donations up to the level of their net income. Charities that apply funds towards purposes that are mostly outside New Zealand must be listed in schedule 32 of the Income Tax Act 2007 before donors become eligible for these tax benefits.
The two charitable organisations being added to schedule 32 are engaged in the following activities:
- Every Home Global Concern Incorporated: The Trust is involved in a wide range of projects throughout the developing world, with particular emphasis on breaking the cycle of poverty and oppression and giving people the skills to improve their lives. The Trust carries on projects in Bangladesh (microenterprises) and Malawi (agricultural and livestock training, amenities and water pumps, HIV/Aids education), Africa generally (mosquito nets) and South Asia (vocational training, HIV/Aids education and microenterprises).
- Namibian Educational Trust: The Trust is involved in projects directed at improving the health and wellbeing of children in northern Namibia. Its main focus is to resource and provide amenities to schools and villages in the region.
CHANGE OF TAX RESIDENCY FOR GST PURPOSES
Summary of proposed amendment
The amendment “turns off” the backdating effect of certain residency rules in relation to the Goods and Services Tax Act 1985.
The amendment will apply from the date of enactment.
Whether a person is a resident or non-resident for the purposes of the Goods and Services Tax Act 1985 is dependant, in part, on whether the person is present or absent from New Zealand for a certain period of time as determined by the Income Tax Act 2007. Once the time period has been exceeded the person’s residence status is backdated to the beginning of the time period.
Under the current rules, to be considered tax resident a person must be present in New Zealand for more than 183 days in total, over a 12-month period. In these circumstances, a person is treated as being a tax resident from the first of the 183 days.
To be considered non-resident, a person must be outside New Zealand for more than 325 days in a 12-month period. In this case the resident will be regarded as a non-resident from the first of the 325 days.
For the purposes of the Goods and Services Tax Act 1985 only, the proposed amendment “turns off” the retrospective application of the residency rules so a person’s residency status is determined on a prospective basis (starting from the first day after the relevant time period has been exceeded).
The residency status of a person for GST purposes is determined by section YD 1 of the Income Tax Act 2007. The provision contains two rules that determine a person’s tax residence – the permanent place-of-abode rule and the day-count rules.
There are two “day count” rules, the 183-day rule for determining whether a person becomes a tax resident and the 325-day rule for determining when a person ceases to be a tax resident.
A number of provisions in the Goods and Services Tax Act 1985 refer to the residency status of a person, most notably the provision that allows services supplied to non-residents who are offshore at the time of supply to be zero-rated. However, the retrospective application of the day-count rules can result in the GST treatment applied at the time of the transaction, on the facts known at the time, subsequently becoming incorrect.
For example, in a situation when immigration services are zero-rated on the basis of being supplied to a non-resident who is offshore at the time of supply, the GST treatment can become incorrect if the recipient’s tax residency status is backdated to a time before the services were performed. This could happen if the recipient visited New Zealand before the services were performed and came back to New Zealand after the services had been performed. The combined time in New Zealand could result in the application of the 183-day rule.
This is not a satisfactory outcome given the fact that the service provider is unlikely to be aware upfront of whether the non-resident will become a resident after the services have been provided. This leads to uncertainty for the supplier who does not know when completing the GST return whether the GST treatment of the services was correct.
The proposed amendment is intended to resolve the above problem by turning off the retrospective application of the income tax residency rules in relation to both the 183-day residence test and, correspondingly, the 325-day absence test. The proposed change follows submissions received on the officials’ issues paper, The GST treatment of immigration and other services, released in June 2013.
ZERO-RATED SERVICES SUPPLIES TO NON-RESIDENTS
Summary of proposed amendment
A new zero-rating rule is being proposed that will allow services to remain exempt from GST when a non-resident receiving services visits New Zealand during the period of service, as long as the non-resident’s presence is “not directly connected” with the services being supplied.
The amendment will apply from the date of enactment.
Currently, services supplied to a non-resident who is outside New Zealand at the time services are being performed are zero-rated for GST purposes.
The proposed amendment allows “outside New Zealand” to be interpreted (for a natural person) as a presence in New Zealand that is minor and not directly connected with the supply.
New Zealand’s GST system is based on the “destination principle” under which supplies of goods and services are taxed in the jurisdiction where the goods and services are consumed. Since services supplied to non-residents who are offshore will not typically be consumed in New Zealand, the services are zero-rated. This ensures GST is not a cost to overseas consumers.
The zero-rating rule requires the supplier to have knowledge of the whereabouts of the non-resident consumer during the period in which the services are performed. However, in some cases the non-resident may visit New Zealand during the period the service is supplied on an unrelated matter. In this situation the supplier may be unaware of the non-resident’s presence in New Zealand and may mistakenly zero-rate the service.
The proposed change is intended to resolve this problem by allowing services to remain zero-rated as long as the non-resident’s presence is “not directly connected” with the services being supplied. However, to ensure services are only zero-rated when they are performed to a non-resident who is predominantly outside New Zealand, the proposed change also requires the non-residence presence in New Zealand to be minor in nature.
A similar provision applies to non-resident companies and unincorporated bodies that have a minor presence in New Zealand or a presence that is not effectively connected with the supply.
The approach proposed in the amendment has been developed from submissions received from the officials’ issues paper, The GST treatment of immigration and other services, released in June 2013.
CLASSIFICATION OF MINING PERMITS AS REAL PROPERTY FOR TAX PURPOSES
Summary of proposed amendment
An amendment is being introduced to clarify that mining permits issued under the Crown Minerals Act 1991 should be treated as “real property” for the purposes of the Income Tax Act 2007.
The amendment will apply from the date of enactment.
A definition of “real property” is being included in section YA 1 of the Income Tax Act 2007 to clarify that mining permits issued under the Crown Minerals Act 1991 are treated as “real property” for the purposes of the Income Tax Act 2007.
Currently, there is some uncertainty about the treatment of mining permits for tax purposes because section 91 of the Crown Minerals Act 1991 states that a mining permit is neither real nor personal property.
The proposed change will ensure that New Zealand has source taxing rights over income from these permits under Article 6 of its double tax agreements (DTAs), which applies to income from real property. This is consistent with the approach taken in New Zealand’s newer DTAs (signed since the 1990s) where it is evident that mining permits are included within the definition of “real property” contained in those treaties.
EXTENDING THE TAX EXEMPTION FOR NON-RESIDENT OFFSHORE OIL RIG AND SEISMIC VESSEL OPERATORS
Summary of proposed amendments
An amendment is proposed to extend the temporary tax exemption for non-resident offshore oil rig and seismic vessel operators for a further five years, until the end of 2019.
An amendment is also proposed to modify the scope of the non-resident offshore oil rig and seismic vessel exemption by excluding modular drilling rigs.
The extension of the exemption will apply from 1 January 2015 and expire on 31 December 2019. The amendment modifying the scope of the exemption will apply from 1 January 2015.
An amendment is proposed to extend the temporary tax exemption for non-resident offshore oil rig and seismic vessel operators, in section CW 57 of the Income Tax Act 2007, for a further five years.
A temporary five-year exemption from tax on the income of non-resident offshore oil rig and seismic vessel operators was introduced in 2004. This exemption was rolled over in 2009 for a further five years and is due to expire on 31 December 2014.
An amendment is also proposed to modify the scope of the non-resident offshore oil rig and seismic vessel exemption by excluding modular drilling rigs. This will be achieved by amending the definition of “exploration and development activities” in section CW 57(2) to exclude a drilling rig that is of modular construction and is installed on an existing platform.
Offshore rigs and seismic vessels owned by non-residents are covered by the current exemption. They are used to drill for oil and gas and gather data on potential oil and gas finds.
Rigs are generally of two types – semi-submersibles and jack-up rigs. There is a worldwide market in rigs and seismic vessels. No New Zealand company owns offshore rigs or seismic vessels, so any company wishing to explore in New Zealand waters needs to use a rig or seismic vessel provided by a non-resident owner.
Section CW 57 was introduced to deal with a problem created by our double tax agreements (DTAs). New Zealand generally taxes non-residents on income that has a source in New Zealand. However, our DTAs provide that non-residents are only taxable on their New Zealand-sourced business profits if they have a “permanent establishment” in New Zealand. Many of our DTAs (such as the New Zealand – United States DTA) have a specific rule providing that a non-resident enterprise involved in exploring for natural resources only has a permanent establishment in New Zealand if they are present for a particular period of time, often 183 days in a year. Once a non-resident has a permanent establishment in New Zealand, they are taxed on all their New Zealand business profits starting from day one.
The issue caused by this DTA provision was that seismic vessels and rigs used in petroleum exploration were leaving New Zealand waters before the 183-day limit was reached so they would not be subject to New Zealand tax. This meant that, in some cases, a rig would leave before 183 days and a different rig was mobilised to complete the exploration programme. This “churning” of rigs increased the cost for companies engaged in exploration and delayed exploration drilling and any subsequent discovery of oil or gas.
Section CW 57 applies broadly to non-resident companies operating seismic vessels and rigs used in drilling wells (see the definition of “exploration and development activities” in section CW 57(2)).
The main rig types used in drilling wells are semi-submersibles and jack-up rigs. However, a type of rig (a modular drilling rig) exists that is of modular construction and designed to be installed on an existing platform. These modular drilling rigs were never intended to be included within the scope of the exemption, which was designed with semi-submersibles and jack-up rigs in mind. In addition, modular drilling rigs do not have the same high mobilisation and demobilisation costs as larger rigs, which means the rationale for the exemption does not apply in relation to these rigs.