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Taxation Annual Rates for 201718 Employment and Investment Income and Remedial Matters Bill

Remedial items

EMPLOYEE MEAL ALLOWANCES AND DEFINITION OF “EMPLOYER’S WORKPLACE”

(Clause 24)

Summary of proposed amendments

The term “employer’s workplace” in section CW 17CB of the Income Tax Act 2007 (Payments for certain work-related meals) is to be clarified as meaning the workplace of the employer at which the employee normally works.

Application date

The amendment applies from 1 April 2015, to coincide with the application date of section CW 17CB.

Background

Generally meal allowances and similar payments made to employees are taxable to the employee as they provide a private benefit to the employee. However, there is an exemption for meal allowances and similar employer meal payments that are provided to employees who are working away from their employer’s workplace.

This exemption is a practical way of recognising that although the cost of a meal is a private expense, there are additional costs for the employee as a result of their employer requiring them to work away from their usual place of work.

Section CW 17CB, enacted in 2014, specifies the situations when the exemption applies.

For the exemption to apply, the legislation requires the employee to be working away from his or her “employer’s workplace”. When an employer has multiple workplaces, the issue is whether the workplaces that are not the employee’s normal place of work are intended to be covered by the term “employer’s workplace”. For example, an employer may have offices throughout New Zealand and while employees are generally based at particular offices, their work may require them to occasionally work at other offices.[7]

From a policy perspective, meal allowances and reimbursements should be tax-free if they are genuinely business-related, irrespective of where the work takes place away from the employee’s normal workplace. This includes work at other offices of the employer. The proposed amendment clarifies this intention.

PIE REMEDIALS

(Clauses 80, 82–83, 86–88, 172(25) and 217)

Summary of proposed amendments

The Bill makes a number of amendments to the portfolio investment entity (PIE) rules to ensure the legislation aligns with the policy intent and operational practice.

Application date

The amendments will come into force on the date of enactment.

Key features

Notification requirements

A multi-rate PIE must elect to use any of the exit calculation, quarterly calculation or provisional tax calculation options. The provisions that allow for these elections state that the notice requirements are set out in section 31B of the Tax Administration Act 1994.

While existing section 31B sets out the notification requirements for PIEs, the provisions only relate to notification requirements when an entity elects to become a PIE or cancel its PIE status.

Proposed section 31B(1B) will provide the notification requirements for these elections consistent with the existing process.

PIE losses

In general, multi-rate PIEs are able to cash out their tax losses for the current tax year. Provisional tax PIEs are an exception to this general approach – they are required to carry forward their losses to a later tax year. This less favourable treatment of tax losses was part of the policy trade-off for provisional tax PIEs getting simpler rules.

When an entity elects to become a PIE any loss brought forward is treated as a formation loss and spread over three years. Allowing that loss balance to be immediately cashed out could potentially have a significant impact on aggregate tax collections. The formation loss rules therefore exist largely to protect the Government’s revenue flows.

The legislation does not currently cover the treatment of a loss carried forward by a provisional tax PIE when it elects to use the quarterly or exit options. The policy intention is this should also be treated as a formation loss so that a provisional tax PIE cannot cash out its losses by electing out of the provisional tax calculation method.

However, the current definition of a “formation loss” only includes losses incurred prior to the entity becoming a PIE rather than when it was already a PIE using a different calculation method.

The Bill proposes to extend the definition of “formation losses” to include a tax loss arising from a period a PIE applied the provisional tax calculation method before applying a different calculation method.

Ownership interests

Subject to a number of exceptions, a PIE (or investor class within a PIE) can only own up to 20 percent of another entity. This is known as the outbound investment test and is designed so that the PIE cannot exert a significant influence on the underlying entity.

Unlike most comparable tests in the Income Tax Act 2007, this test currently only applies to voting interests without having a market value interest test. A consequence is that a PIE can potentially undertake investments that are any proportion of the value of the underlying entity provided voting interests do not exceed 20 percent. This would allow the PIE to undertake investments that could not be considered portfolio investments and would not be comparable with anything available to an individual investor other than through a PIE.

The Bill proposes to insert a rule that a PIE cannot hold a market value interest of greater than 20 percent other than when an existing exemption applies.

Unit trusts and the PIE rules

The entrance criteria to the PIE rules for collective schemes and foreign PIE equivalents, in addition to other entity types such as a company or a superannuation scheme, both include a criteria starting with “the trustee of a trust that would be a unit trust”. Two issues arise from these provisions.

The intention of this category is to allow trusts, which meet the other requirements, to be a PIE, including when an entity with sufficient owners to meet the PIE entrance requirements in its own right holds all the units in a trust that elects to be a PIE.

The phrase “the trustee of a trust” is used in numerous places in the Income Tax Act 2007 and reflects that a trust has no legal personality and instead the trustee is liable for the trustee’s actions on behalf of the trust and its beneficiaries. However, in this context, applying the test to the trustee instead of the trust is inappropriate.

This is because the PIE rules are intended to apply to widely held investment vehicles, or vehicles that are used for investment by other widely held investment vehicles. However, the current provisions would allow a person who was not intended to receive the benefits of the PIE regime (for example, a New Zealand trading company) to set up a PIE using a trust where the trustees met the PIE entrance requirements. This issue could be resolved by removing the words “the trustee of” from the relevant provisions.

Historically it was considered that one of the requirements for a trust to be a unit trust was that it had more than one unit holder (for example, see public ruling BR Pub 95/5A Relationship between the “unit trust” and “qualifying trust” definitions). This restriction was not considered necessary for the purposes of a trust accessing the PIE rules, hence the wording of sections HM 3(1)(b)(iii) and HM 9(c) including “a trust that would be a unit trust if there were more than 1 subscriber, purchaser, or contributor participating as beneficiaries under the trust”.

On 29 July 2016 Inland Revenue released interpretation statement IS 16/02: Income Tax – Unit Trusts – When a unit trust can have a single unit holder. This interpretation statement concludes that the essential feature of a unit trust is the provision of the facilities for subscribers to participate, and that is not altered by there being only one subscriber or the intention that there will continue to be only one subscriber.

On the basis of this interpretation the relevant wording of the entrance provisions shown above is now largely redundant as a trust that would be a unit trust if there were more than one subscriber, purchaser, or contributor would already not be excluded by only having one subscriber, purchaser, or contributor provided there were facilities for more than one subscriber, purchaser, or contributor. These trusts will therefore be unit trusts which meet the existing entrance criteria as a company in sections HM 3(1)(b)(i) and HM 9(a).

The Bill therefore proposes to repeal sections HM 3(1)(b)(iii) and HM 9(c) as they are no longer necessary.

DONATION TAX CREDITS FOR DONATIONS TO COMMUNITY HOUSING ENTITIES

(Clause 109)

Summary of proposed amendment

An amendment to section LD 3(2)(ac) of the Income Tax Act 2007 clarifies that tax credits for donations made to community housing entities can only be claimed for the period the entity qualifies for the income tax exemption in section CW 42B.

Application date

The amendment will apply from 14 April 2014, when the sections LD 3(2)(ac) and CW 42B came into force.

Key features

The proposed amendment to section LD 3(2)(ac) will ensure that donation tax credits are only available for donations made to a community housing entity during the period the entity qualifies for the income tax exemption under section CW 42B.

Background

From 14 April 2014 donations made to community housing entities that meet the requirements to derive exempt income under section CW 42B qualify for a donation tax credit.

Due to an earlier change to section LD 3(2)(ac), donors have been able to claim a tax credit for a donation made to a community housing entity when the entity does not meet the requirements of section CW 42B. This has occurred because the current wording of section LD 3(2)(ac) states that a donation tax credit is available for donations made in a tax year that the entity meets the requirements to derive exempt income under section CW 42B. This means that a donation made to an entity that began a tax year qualifying for the section CW 42B income tax exemption, but ceased to qualify later in that year, would still qualify for a donation tax credit.

For example, if a community housing entity met the section CW 42B requirements from 1 April 2016 until 30 September 2016, under the current wording of section LD 3(2)(ac), any donations made to that entity between 1 October 2016 and 31 March 2017 would qualify for a donation tax credit because the donation was made during the 2016–17 tax year. This was not the intention of the provision.

The amendment will bring the provision in line with its underlying policy intention.

THE USE OF PART-YEAR ACCOUNTS FOR THE ACCOUNTING STANDARDS TEST

(Clauses 58(2) and (3), and 59)

Summary of proposed amendment

New section EX 21F of the Income Tax Act 2007 will allow a person (or a member of their group) who only holds an income interest in a controlled foreign company (CFC) for part of an accounting period to use accounts that cover that part-period to calculate whether the CFC passes the active business test under the accounting standards test.

Application date

The amendment will come into force on 1 July 2009.

Background

The proposed amendment addresses the concern that a person who only owns an income interest in a CFC for part of an accounting period may not have access to the CFC’s prepared accounts for the full accounting period and must therefore use the default test to determine whether the CFC passes or fails the active business test.

To determine whether a CFC is a non-attributing active CFC under section EX 21B, two different methods are available – the default test in section EX 21D and the accounting standards test in section EX 21E. The default test uses tax concepts specified in the Income Tax Act 2007, while the accounting standards test allows the taxpayer to use accounts prepared under a permitted accounting standard (for example, International Financial Report Standards (IFRS) with some adjustments. If less than 5 percent of the CFC’s total income is passive income under either method, the active business test is passed, the CFC is a non-attributing active CFC and no CFC income or loss is required to be attributed.

If a person uses the accounting standards test and breaches the 5 percent threshold, they may then do the calculation using the default test. If they fail the active business test using the default test, they are required to calculate their attributable CFC income or loss for the accounting period. There is some overlap between the calculations undertaken for the default test and the calculations undertaken to calculate the attributable CFC income or loss.

The calculation under both the default test and the accounting standards test look at the full accounting period for the CFC. Under the accounting standards test, this requires a set of accounts for the full accounting period prepared under an applicable accounting standard, for example IFRS.

One issue is that when a person only has an income interest in a CFC for part of the accounting period, they may not have a set of accounts for the full accounting period which meets the required standard. This means they are unable to use the accounting standards test and must instead use the default test, which can be more compliance intensive, even if it is clear that the CFC is an active business.

Proposed new section EX 21F will allow a person who (or a member of their group) only holds an income interest in a CFC for part of an accounting period to determine whether the active business test is passed under the accounting standards test, using accounts prepared for that part-period of ownership, provided the accounts meet the other requirements set out in sections EX 21C and EX 21E. If the accounts do not meet the requirements of section EX 21C or if they do not cover the entire part of the accounting period when the CFC is owned by the person or a member of the person’s group, they must use the default test in section EX 21D.

If the CFC passes the active business test using the part-period accounts, it will be a non-attributing active CFC for the full accounting period, but only for that person (or a member of that person’s group) whose income interest in the CFC covers the part-period, as provided for in proposed new section EX 21F(3). Other income interest holders must undertake their own calculations.

In the event that the CFC fails the active business test using the accounting standards test for the part-period, proposed new section EX 21F(4) clarifies that the person must use the default test for the full accounting period.

AVAILABILITY OF FOREIGN TAX CREDITS

(Clause 112)

Summary of proposed amendment

Under the proposed change, a foreign tax credit will be available under section LK 1 of the Income Tax Act 2007 for foreign income tax paid in relation to a CFC from which attributable income is derived, when the foreign income tax has been paid by the taxpayer’s parent or a member of the taxpayer’s group.

Application date

The amendment will come into force on 1 July 2009.

Background

The proposed amendment recognises that there are some situations in which foreign income tax has been paid, but not by the CFC or the direct New Zealand shareholder and that a foreign tax credit should be available when it has been paid by a person who is part of the same functional economic unit – for example, the New Zealand shareholder’s group.

Under section LK 1, a person with attributed CFC income is provided a tax credit for income tax paid in relation to the CFC. This ensures that the income derived by the CFC is not double taxed.

Similarly, a foreign tax credit is also provided under section LK 1 for foreign income tax (including withholding tax) paid in relation to the CFC against the New Zealand shareholder’s income tax liability.

For a foreign tax credit to be available under section LK 1, the foreign income tax must be paid by the CFC from which the income is derived or by the person with the attributed CFC income in relation to the CFC from which the income is derived.

In some situations, it is possible that foreign income tax has been paid in relation to the CFC from which the attributed income is derived, but neither by the CFC nor by the person with the attributed CFC income. This could occur, for example, if both the CFC and the person are seen as transparent by the CFC’s home jurisdiction. As a result, the foreign income tax may in reality be paid by the person’s parent company or another member of the person’s group.

Section LK 6 provides for the use of credits by group companies in some situations. To make a tax credit available to another group company under section LK 6, the requirements of the loss grouping rules under subpart IC must be met (by reading references to a tax loss as a reference to a tax credit).

However, as a starting point, a tax credit must first exist under section LK 1. This means that the person must have an amount of attributed CFC income before a tax credit can be used under section LK 6.

In the example outlined above, the company that has paid the foreign income tax in relation to the CFC may not necessarily have attributed CFC income, which means it does not have a tax credit under section LK 1 and therefore cannot allow the taxpayer that does have the income tax liability under the CFC rules to access the credit under section LK 6.

Proposed new section LK 1(1B) will provide the person paying the foreign income tax, whether it be the parent or a group member of the person with the attributed CFC income, a tax credit under sections LK 1 and LK 6.

The rationale for the proposed amendment is that foreign income tax has been paid in relation to the CFC and by a taxpayer who is economically part of the same unit as the person who has the income interest in the CFC.

INSURANCE BUSINESS CFCS

(Clause 260)

Summary of proposed amendment

Section 91AAQ of the Tax Administration Act 1994 provides that the Commissioner of Inland Revenue may issue a determination that an overseas insurance business is a non-attributing active CFC. The proposed amendment removes the requirement that the CFC must have been owned prior to 30 June 2009 for a determination to be issued under section 91AAQ, which will allow overseas insurance businesses acquired after 30 June 2009 to qualify.

Application date

The amendment will come into force on 1 April 2017.

Background

Under the CFC rules, income from insurance is treated as passive income and therefore must be attributed to the New Zealand shareholder. As a result, New Zealand insurance companies with foreign subsidiaries operating active insurance businesses in foreign markets do not pass the active business test and are required to attribute income back to New Zealand under the CFC rules.

Several constraints, including the complexity of the issues involved precluded the drafting of special rules for financial institutions (including insurance companies), it was not possible to do so at the same time the active income exemption was introduced. This work was due to be taken forward in the second phase of the international tax review, alongside the work on non-portfolio FIFs and offshore branches. Legislation for the extension of the active income exemption for non-portfolio FIFs was enacted in 2012 and work on the application of the active business test to financial institutions would have followed the work on offshore branches, but for other priorities.

A transitional measure was introduced at the same time as the active income exemption, which allows the Commissioner to issue a determination under section 91AAQ of the Tax Administration Act 1994. This measure allows a New Zealand insurance company to pass the active business test in relation to an offshore active insurance business if it can demonstrate that the offshore insurance business is an active business. The determination facility was not made available for other types of financial institutions because the boundary between active and passive income is less apparent.

One of the requirements that must be met for the Commissioner to be able to issue a determination is that before 30 June 2009, the offshore insurance business must have been controlled by a New Zealand resident and it must have operated a business of insurance in its country of residence. This date requirement was deemed necessary as the determination facility was only intended to be a transitional measure until further work could be completed on extending the active business test to financial institutions more generally.

As it is not clear when this work will be progressed, the Bill proposes to remove the 30 June 2009 ownership requirement from section 91AAQ.

This will allow New Zealand insurances companies with offshore insurance subsidiaries to apply for a determination under section 91AAQ to deem the subsidiary a non-attributing active CFC, regardless of when the subsidiary was acquired.

Section 91AAQ also lists a number of other requirements that the Commissioner must be confident are satisfied before issuing a determination. There is no proposal to amend these as they ensure that only legitimate active insurance businesses are able to make use of section 91AAQ and not subsidiaries that are only set up to arrange insurance for related parties, for example.

UPDATING THE STATE-OWNED ENTERPRISES SCHEDULE

(Clause 184)

Summary of proposed amendment

The Bill adds two state enterprises to the list of state enterprises in schedule 36, part A of the Income Tax Act 2007.

Under the Income Tax Act 2007 public authorities are exempt from income tax. State enterprises and mixed-ownership enterprises are excluded from this exemption and are required to pay income tax. Schedule 36, part A of the Income Tax Act 2007 contains a list of state enterprises that are excluded from the public authority exemption.

Application date

The amendments will apply from the date of enactment.

Key features

It is proposed to add the following state enterprises to schedule 36, part A of the Income Tax Act 2007:

  • Animal Control Products Ltd
  • Kordia Group Ltd.

TRADING GAINS OF NON-RESIDENT INVESTMENT FUNDS

(Clauses 26 and 30)

Summary of proposed amendment

The amendment clarifies that the trading gains of non-resident investment funds (foreign PIE equivalents) from the disposal of shares and financial arrangements are to be treated as excluded (non-taxable) income. It is also provided that foreign PIE equivalents are not entitled to a deduction for expenditure incurred in deriving that excluded income.

This amendment ensures consistency of tax treatment for foreign PIE equivalents and other methods of inbound foreign portfolio investment in New Zealand, such as the foreign investor variable rate PIE regime.

Application date

The amendment will have retrospective effect from 1 April 2012, the date on which the foreign investor variable rate PIE provisions came into effect.

PREVENTING UNINTENDED DEDUCTIONS FOR CONSOLIDATED GROUPS

(Clause 29)

Summary of proposed amendment

The proposed amendment addresses an anomaly whereby a member of a consolidated group is currently entitled to a deduction for the cost of purchasing shares (or other excepted financial arrangements) as revenue account property in a company outside the group which subsequently joins the group. The deduction the amendment seeks to remove arises when the shares are cancelled (whether by redemption, amalgamation, liquidation or otherwise) and where at the time of cancellation the issuer of the shares and the holder are members of the same consolidated group. Because the cancellation does not give rise to any income to the holder, removing the deduction results in a net nil position for income tax. This matches the economic reality.

Application date

The amendment will apply for the 2016–17 and later income years.

Key features

The anomaly sought to be addressed by the proposed amendment arises when a company subscribes for shares in an entity that is not in the same consolidated group, then the two entities subsequently become members of the same consolidated group thus cancelling the shares. In this case the holder is currently still entitled to a deduction for the cost of the shares but the amount derived from the cancellation of the shares will be excluded income under the consolidation regime.

This anomaly arises as the consolidation provision that eliminates the income only achieves the correct result if there has not already been a deduction. To address this anomaly the amendment in new section DB 23B will deny the holder a deduction for the cost of the revenue account shares that cease to exist in that year as a result of a transaction or arrangement between two members of a consolidated group.

Where the shares are cancelled in the year they are acquired, the deduction denied is the expenditure incurred as the cost of revenue account property. When the shares are cancelled in a subsequent year the deduction denied is the value of the shares at the end of the previous income year calculated at their cost price.

Background

When a person acquires shares, or any other excepted financial arrangements, as revenue account property they are entitled to a deduction for the cost of the shares in the year they are acquired. If the shares are still held at the end of the year they derive income equal to the cost of those shares, so there is no net deduction. In following years they are entitled to a deduction for the cost of the shares at the start of the year and if still held at the end of the year they derive income equal to the cost of the shares so again there is no net deduction. In the year the shares are disposed of or are cancelled the person derives income for the amount they receive from that transaction. In that final year the opening deduction (for the original cost of the shares) and income on disposal or cancellation result in net income or a net loss.

If the shares were issued by a company in a consolidated group to another company in that consolidated group, the consolidation provisions ensure no assessable income or deductions arise as all transactions are within that consolidated group.

However, under current law, if a holder acquires shares (and so is entitled to a deduction as described above) and then enters a consolidated group with the issuer of the shares the group will not derive income if the shares are cancelled, as that cancellation occurs entirely within the consolidated group. Through this process the consolidated group will be entitled to a deduction with no corresponding income even though there has been no economic loss to the group. The amendment will align the law with the policy intent by preventing a deduction in this circumstance.

CHILD SUPPORT (PRISON WORK INCOME)

(Clauses 313 and 314)

Summary of proposed amendment

The amendment clarifies that payments made by the Department of Corrections to prisoners are not considered “income” for the purposes of granting an exemption from payment of financial support.

Application date

The amendment comes into force on 1 April 2017.

Key features

Sections 89D and 89F of the Child Support Act 1991 clarify that income earned from employment under section 66 of the Corrections Act 2004 does not prevent a liable person from receiving an exemption from payment of financial support.

Background

Under the Child Support Act 1991 liable parents who are long-term prisoners are eligible to seek an exemption from payment of financial support (child support and domestic maintenance) on the grounds that they have no income, or only a very small amount of income from investments, while in prison.

The Department of Corrections makes small incentive payments to prisoners participating in prisoner employment activities (under section 66 of the Corrections Act 2004). Prisoners receiving these payments have historically qualified for an exemption as the payments were not considered “income”.

Inland Revenue recently determined that these payments are, in fact, income. This means prisoners receiving them will no longer qualify for an exemption. The policy intent is that prisoners should be eligible for an exemption despite receiving these small payments.

TAX ON NET ASSETS OF DEREGISTERED CHARITIES – REMEDIAL AMENDMENTS

(Clause 90)

Summary of proposed amendment

Amendments are being made to the Income Tax Act 2007 to ensure that the net assets tax for deregistered charities also applies to non-registered entities exempt under section CW 42 of the Income Tax Act and which cease being “charitable” at law. The amendments also clarify that all entities that cease to be charitable at law must transfer their accumulated income and assets for charitable purposes.

Application date

The amendments will have retrospective effect from 14 April 2014 (when section HR 12 of the Income Tax Act was first enacted), with a “savings” provision to allow taxpayers who have already filed returns before the introduction of this Bill to rely on the position they have taken.

Key features

Amendments are being made to section HR 12 of the Income Tax Act 2007 to ensure that:

Background

In 2014 new rules were introduced to address the tax consequences for deregistered charities – that is, when a charity is removed from the Charities Register.

These rules ensure that any income or assets accumulated while an entity was exempt from tax as a registered charity are always destined for a charitable purpose. Tax concessions should only be available to genuine charities. To protect the integrity of the revenue base, deregistered charities are held to account for assets and income accumulated while they were exempt from income tax.

Section HR 12 of the Income Tax Act 2007 taxes the net assets of deregistered charities. One year following the day of the final decision to deregister the entity, the accumulated assets and income of the organisation will be included as income of that organisation. Excluded from this net asset calculation are assets distributed or applied for charitable purposes, or in accordance with the entity’s rules contained on the register. Also excluded are assets received from the Crown in relation to a Treaty of Waitangi settlement claim, and non-cash assets which were gifted to the organisation.

The proposed amendments are aimed at ensuring that the policy objectives are met by:

  • amending section HR 12 so that it applies to any person who is not registered as a charity under the Charities Act 2005 but derives exempt income under section CW 42, and subsequently ceases to meet the requirements of section CW 42; and
  • amending the wording of section HR 12 so that deregistered charities are required to “transfer” their assets, as opposed to “distribute or apply”. The current wording of section HR 12 may allow deregistered charities to escape payment of the deregistration tax in certain circumstances.

LOCAL AUTHORITIES AND CONSOLIDATED GROUPS

(Clauses 64, 68(6) and (7))

Summary of proposed amendment

The proposed amendment corrects an inadvertent outcome resulting from amendments to the eligibility rules for consolidated groups in the Taxation (Savings Investment and Miscellaneous Provisions) Act 2006.

Application date

The amendment will come into force on the date of enactment. This protects tax positions taken by local authorities on the basis of the existing law.

Key features

A local authority will no longer be eligible to form or join a consolidated group from the date of the Bill’s enactment. Nor will a local authority be eligible to continue as a member of a consolidated group from the first day of the first income year (or earlier at the election of the taxpayer) commencing after the date of enactment.

Background

The correct policy intention is for a local authority to be fully taxed on income derived from its council-controlled organisations (CCOs), as if the council was the ultimate individual shareholder.

A 2006 amendment to the consolidated group rules relating to dual resident companies inadvertently permitted local authorities to enter or form a consolidated group. If a local authority forms a consolidated group with its council-controlled organisations, the local authority would not be taxed on any income derived from its CCOs. The proposed amendment corrects this unintended outcome.

LOSSES FROM SPECIFIED ACTIVITIES

(Clauses 92–94, 97, 101, 172(29), (63) and (68))

Summary of proposed amendments

The proposed amendments repeal the restriction on the use of losses from “specified activities” and incorporate any residual amounts of those losses in the general loss use and carry-forward rules in the Income Tax Act 2007.

Application date

The amendments will apply to losses from specified activities that remain at the end of the 2017–18 income year.

Key features

The current rule limiting the use of losses from specified activities to $10,000 in any one income year will be repealed.

When a taxpayer has an amount of loss from specified activities remaining at the end of the 2017–18 income year, that amount will be subtracted from the taxpayer’s net income (if any) for the 2018–19 income year before taking into account any other loss balance carried forward from the 2017–18 income year.

The amount subtracted is limited to the amount of net income for the 2017–18 income year. Any excess amounts of loss from specified activities remaining after this subtraction from net income are added to the taxpayer’s tax loss for the year. If the taxpayer has zero net income for the 2018–19 income year, the entire amount of loss from specified activities remaining at the end of the 2017–18 income year would be added to the person’s tax loss for the income year.

The use of losses from specified activities is also proposed to be subject to the ordering rule for the use of losses from the 2018–19 income year. The ordering rules ensure that, if a taxpayer with losses from specified activities is a company, the continuity and commonality rules must be satisfied in order for the company to either:

  • carry the losses beyond the 2018–19 income year, or
  • to group the losses from specified activities in the 2018–19 income year or later income year.

Background

The specified activity loss rules were introduced in the early 1980s, at a time when the top personal marginal tax rate reached 66%. Their purpose was to discourage the use of a range of primary sector activities as tax shelters. Examples of primary sector activities subject to the specified activity loss rules include: animal husbandry, bloodstock, bee farms, silviculture, viticulture, aquaculture and land leasing or licensing.

These specified activity loss rules ensured that losses incurred from these primary sector activities that were not a taxpayer’s main business activity were subject to a maximum tax deductible loss of $10,000 in each income year. Any loss exceeding that threshold was carried forward and offset, initially against any profit arising from the specified activity in the immediately following income year and then against income from other sources up to a maximum of $10,000. This process was repeated for each subsequent income year.

The reduction in the top marginal tax rates to 33% from the 1989 tax year resulted in a significant decline in the use of these primary sector activities as tax shelters. As a result, the specified activity loss rules were amended from the 1991 income year to ring-fence them from the general loss rules. The ring-fencing of these rules required any unabsorbed balance at the end of an income year to be carried forward and offset, initially against any profit arising from the specified activity in the 1991 income year and then against income from other sources up to a maximum of $10,000. This process was repeated in 1992 and subsequent income years, until the loss was extinguished.

The specified activity loss rules are now largely spent, as there are a very low number of affected taxpayers and the amount of affected losses is immaterial. The proposed amendments are to give effect to the spent nature of these rules.

TAX RATE FOR EXTRA PAYS PAID TO NON-RESIDENT SEASONAL WORKERS AND EMPLOYEES ON NON-NOTIFIED TAX CODES

(Clauses 138(1), (2) and (4), 145(1) and (4) and 181(8))

Summary of proposed amendment

Proposed amendments will ensure that employers are required to withhold tax from extra pays paid to non-resident seasonal workers and to employees on non-notified tax codes at rates of 10.5% and 45%, respectively.

Application date

The amendments will apply from the date of enactment.

Key features

Proposed amendments to section RD 10 and schedule 2, part B, table 1 provide that the amount of tax that an employer must withhold from an extra pay paid to a non-resident seasonal worker is to be calculated at a 10.5% rate.

Proposed amendments to section RD 10 and schedule 2, part B, table 1 provide that the amount of tax that an employer must withhold from an extra pay paid to an employee who has not notified their employer of their tax code is to be calculated at a 45% rate.

A proposed amendment to section RD 17, which contains the general rule for calculating the amount of tax to withhold from an extra pay, specifies that this section does not apply to extra pays paid to non-resident seasonal workers or employees who have not notified their employer of their tax code.

Background

A non-resident seasonal worker is either employed by a recognised seasonal employer under the RSE scheme or is employed in line with Immigration instructions for the foreign crew of fishing vessels instructions. These workers use the “NSW” tax code which attracts a withholding rate of 10.5% on their salary or wages. Non-resident seasonal workers are not required to file an income tax return, so the tax withheld is a final tax for them.

Non-resident seasonal workers are entitled to holiday pay under the Holidays Act 2003, which is either included in the worker’s regular pay or paid as a lump sum at the end of the worker’s employment.

If the holiday pay is paid as lump sum at the end of their employment, the amount is treated as an extra pay under the PAYE rules. Under the rules for taxing extra pays, tax will generally be withheld from non-resident seasonal workers at a higher rate than 10.5%. The taxation of extra pays paid to non-resident seasonal workers at a rate higher than 10.5% is contrary to the policy intent for this class of employee, which is that the 10.5% flat rate should apply to all their employment income and be full and final.

An employee who has not provided their tax code to their employer is taxed at a withholding rate of 45% on their salary or wages. Notifying their employer of their tax code also requires an employee to provide their name and IRD number to their employer. However, under the rules for taxing extra pays, tax will be withheld at a lower rate than 45%. The taxation of extra pays paid to employees who have not notified their employer of the required information at a rate lower than 45% is contrary to the policy intent for this class of employee, which is that all employment income paid to them should have tax withheld at a 45% rate.

MULTIPLE PAYMENTS OF SALARY OR WAGES

(Clause 141)

Summary of proposed amendment

Section RD 12 of the Income Tax Act 2007 provides that where an employee receives multiple payments of salary or wages in a week or part of a week ending on a Saturday the total amounts of tax to be withheld is calculated as if all the payments were treated as one payment from one employer. Section RD 12 does not apply when an employee leaves one full time employment before commencing another and it does not apply to wages derived as a casual agricultural employee, election day worker or non-resident seasonal worker.

Clause 141 proposes to amend section RD 12 to clarify that it only applies to multiple payments from the same employer. The limitation to a week or part of a week “ending on a Saturday” has also been removed as pay periods commonly end on other days. These amendments are intended to clarify rather than change the operation of this section.

Application date

The amendment applies from 1 April 2019.

RWT FROM NON-CASH DIVIDENDS CLARIFIED

(Clauses 6, 106, 159 and 160)

Summary of proposed amendment

The proposed amendment will ensure that the taxation of non-cash dividends derived from overseas is the same, irrespective of whether the dividend is derived:

  • directly by an individual resident in New Zealand; or
  • by an intermediary acting on behalf of an individual resident in New Zealand.

The dividend rules are also being clarified to confirm that the amount of a dividend includes any withholding tax paid or withheld in relation to that dividend.

Application date

The amendment will apply to non-cash dividends distributed during the 2017–18 and later income years. The amendments clarifying that withholding taxes are included in the amount of the dividend will apply from date of enactment.

Key features

A New Zealand-resident intermediary will not be required to account for withholding tax on a distribution of a non-cash dividend derived from overseas provided that:

  • the non-cash dividend is distributed to a New Zealand resident; and
  • the distribution occurs in the same income year that the intermediary derives the non-cash dividend.

Background

When a non-cash dividend derived from a foreign company by an intermediary on behalf of an individual resident in New Zealand is distributed to that person, the distribution is resident passive income.

The current rules require the intermediary to account for RWT on that distribution. As the intermediary would have no funds to account for the withholding tax, this imposition of RWT generally results in the withholding tax being funded by the individual person receiving the non-cash dividend distributed by the intermediary.

This aspect of the RWT rules can result in different tax imposts on non-cash dividends ultimately derived by a New Zealand resident natural person, depending on whether the dividend is derived directly or indirectly via an intermediary. It is also unclear whether resident withholding tax paid for a non-cash dividend is included in the amount of the dividend.

The proposed amendments clarify the correct outcome.

MEMORANDUM ACCOUNTS: OPENING BALANCES

(Clauses 116, 117 and 121)

Summary of proposed amendments

The proposed amendment ensures that:

  • the closing balance of a memorandum account as at 31 March of any tax year is equal to the opening balance of that memorandum account on 1 of April following; and
  • the original debit or credit dates are retained for all debit or credit amounts included in the closing balance of a memorandum account (at 31 March, as memorandum accounts are required to be balanced at that date each year).

Application date

The amendments will apply from the beginning of the 2008–09 tax year.

Key features

The proposed amendments clarify that the original date on which a credit or debit is made to a memorandum account is to remain the date for that credit or debit to be carried forward in the closing balance from one tax year to the next. In addition, the references to the date of the debit or credit for an opening balance of a memorandum account are omitted from all tables in the memorandum account rules.

Together the proposed amendments ensure that the opening balance of a memorandum account cannot be interpreted as being reset to zero on 1 April of each tax year.

Background

An imputation system allows the benefit of tax paid at the corporate level to be passed through to shareholders (as tax credits attached to dividends paid) so that a shareholder’s tax liability on dividends is limited to the shareholder’s marginal rate of tax.

Our imputation system requires most New Zealand-resident companies (and some Australian companies) to maintain memorandum accounts. These memorandum accounts are balanced annually to ensure that companies do not over-distribute tax credits to shareholders.

The most common form of memorandum account is the imputation credit account. This is used to record tax paid by the company (credits to the imputation credit account) and also to record when the benefit of the tax is passed through to shareholders (debits to the imputation credit account). In general the use of imputation credits is governed by a “first-in first-out” basis and is subject to the company satisfying shareholder continuity rules.

A recent review of the rules for memorandum accounts identified some issues that could be interpreted in a manner inconsistent with the policy intention of the memorandum account rules.

Under that interpretation, the legislation could reset the opening balance of each memorandum account to zero at 1 April each tax year (except when applying the shareholder continuity rules to imputation credits). The proposed amendment makes it clear that this interpretation is incorrect.

 

7 Officials’ understanding is that even in the case of employees that have multiple workplaces the employee will be assigned to a particular cost centre or office.