New matters raised at Select Committee

The definition of “residential income” should be amended to ensure that residential property deductions can be used against net land sale income from residential property that is outside the ring-fencing rules because it is held on revenue account.

Comment

There is a cross-referencing error in the definition of “residential land” in section EL 3. As the definition is currently worded, deductions for residential property in the ring-fencing rules can be used against income from the property (or portfolio) and against net rental income and net depreciation recovery income from residential property that is outside the rules because it is held on revenue account. Deductions should also be able to be used against net sale income from such revenue account property.

Recommendation

That the submission be accepted.

Issue: Clarifying that amounts of residential income can only be counted once

Submission

(Matter raised by officials)

It should be clarified that amounts of residential income from residential property outside the ring-fencing rules can only be counted once for the deduction allocation rules.

Comment

The definition of “residential income” in section EL 3 includes four components. These are:

(a) rental income from the portfolio (or individual property);

(b) depreciation recovery income from the portfolio (or individual property);

(d) net rental income and depreciation recovery income from residential property that is outside the ring-fencing rules because it is held on revenue account.

As noted in Issue: Residential income that deductions can be used against, item (d) should also include net land sale income from residential property that is outside the ring-fencing rules because it is held on revenue account.

There is a clarification required, to ensure taxpayers can only count amounts of “residential income” once. This is because a taxpayer may apply the ring-fencing rules on a portfolio basis for some properties and on a property-by-property basis for another property, or they may have two or more properties on a property-by-property basis. In these situations, the deduction allocation rule is applied to each property (or a property and the portfolio) separately.

Items (a) to (c) of “residential income” are amounts from the particular property or portfolio, so cannot be counted when looking at another property or portfolio.

However, item (d) includes amounts of income from property outside the rules. On the face of it, there is nothing to preclude a taxpayer counting such amounts more than once – for example, once in ascertaining their “residential income” for their portfolio, and once in ascertaining their “residential income” for a property-by-property basis property. It should be clarified that if an amount of residential income has been counted, it cannot be counted again for allocating deductions for another property.

Recommendation

That the submission be accepted.

Issue: Unused excess deductions not released on taxable sale of portfolio or property

Submission

(Matter raised by officials)

An amendment should be made to ensure the carry forward of unused deductions that are not released on a taxable sale of a residential property or portfolio.

Comment

If a property-by-property basis residential property is taxed on sale, or if all of the properties are sold and all sales were taxed, any excess deductions remaining (after use against the rental income and net land sale income) are released from the ring-fencing rules. This means those amounts can be used against income from other sources, such as salary and wages. However, if there has been an unused excess transferred to the property or portfolio from another property or portfolio that was not taxed (or not fully-taxed) on sale, the amount transferred is not released. Currently, there is no mechanism for any unfenced amount remaining after a taxable sale to be treated as relating to (and transferred to) another property. There should be such a mechanism, as there is for excess amounts remaining after non-taxed disposals.

If this amendment is made, the opportunity could be taken to incorporate what is now section EL 8 (which deals with the treatment of previously transferred amounts on a fully-taxed disposal) into sections EL 5 and EL 7, which deal with sales of portfolios and property-by-property basis residential properties, respectively.

There is also a cross-referencing error in section EL 7(2), which should be amended.

Recommendation

That the submission be accepted.

Issue: Operation of the interposed entity rules

Submission

(Matter raised by officials)

Some amendments are required to the interposed entity rules to ensure they operate as intended.

Comment

Section EL 16(2) suspends excess interest deductions related to investing in a land-rich entity. These are deductions that exceed the person’s share of the entity’s residential income, taking into account the level of capital used to acquire the residential property.

Currently the suspended deductions are carried forward to a later income year in which the person derives residential income or a distribution from the entity (to the extent such distribution relates to residential land). But the excess deductions are then not used against either of those types of income, but rather added to the person’s interest expenditure and used against the person’s share (effectively) of the “entity’s net residential income”.

Section EL 16(2)(b)(i) and (ii) therefore do not bear any relation to the income the excess deductions can be used against. What section EL 16(2)(b) should instead do is carry the excess deduction forward to a later income year in which the entity derives residential income. Subparagraphs (b)(i) and (ii) do not serve any purpose and should be removed.

There is a related issue in respect of section EL 18(a). In that provision (which modifies the interposed entity rules for transparent entities), the person’s residential income for the year is treated as their share of “net residential income”. That is fine when the only residential property the person has is held in the entity. But the person may also hold other residential property directly. If they do, they should not be able to use excess interest deductions related to the investment in the entity against that other residential income. Section EL 18(a) should instead provide that the person’s residential income for the income year from the property held in the entity is what is treated as their share of net residential income.

Recommendation

That the submission be accepted.

TAXATION OF TRUSTS

Issue: Generic tax policy process not followed

Submission

(Chartered Accountants Australia and New Zealand, KPMG)

That the proposed amendments should be deferred for full consultation under the generic tax policy process. (Chartered Accountants Australia and New Zealand)

Only matters which are properly clarification should proceed. Other proposals should be deferred for proper consideration through the generic tax policy process.

Alignment of the legislation with IS 18/01 Taxation of trusts – income tax (a Commissioner’s interpretation statement) should not be accepted as justification for any proposed amendment. (KPMG)

Comment

All of the proposed amendments are of a remedial nature and are consistent with the policy intent.

The proposed trust remedial measures arise from a detailed administrative review of the Commissioner’s application of the existing law and do not represent a proposal to change the policy intent for the taxation of trusts. In general, the trust rules have always modified the common law approach relating to the treatment of income and capital to align the taxation of trusts with the general tax rules for the taxation of income (as defined in the Income Tax Act 2007).

Stakeholders have been extensively consulted with through the process of the administrative review and some have made further submissions on the remedial measures proposed in the Bill that reflect the outcome of that review.

In developing the Commissioner’s interpretation statement (IS 18/01 Taxation of trusts – income tax), stakeholders were consulted on the application of the current law, and their views considered in developing the Commissioner’s administrative practice for the taxation of trusts.

The Commissioner applied normal interpretive principles in arriving at her application of the law for the taxation of trusts. This review culminated with the release of an interpretation statement, IS 18/01 Taxation of trusts – income tax earlier in 2018 which identified a small number of changes in the way the Commissioner applies the existing law, within the scope of the current policy framework for the taxation of trusts.

Officials also note that the generic tax policy process contemplates that provisions in Taxation Acts need to be maintained or updated in response to changing business practices, jurisprudence or other factors (http://taxpolicy.ird.govt.nz/work-programme#remedials).

Clear, unambiguous legislation that keeps up to date with changing business and administrative practices reduces both administrative and compliance cost as it reduces uncertainty and reduces the risk of litigation being undertaken to clarify the meaning of the current law as it is applied by the Commissioner.

Recommendation

That the submission be declined.

Issue: Definition of trust and trustee

Submission

(KPMG)

The amendment to the definitions of trust and trustee made by the Trusts Act 2019 should be considered for whether amendments to the Income Tax Act 2007 are required.

Comment

Officials have followed the progress of the Trusts Bill through the legislative process and are currently reviewing the effect for taxation purposes, if any, of the changes to the definitions of trust and trustee in the Trusts Act 2019.

Recommendation

That the submission be noted.

Issue: Trusts taxed twice on New Zealand sourced income.

Submission

(nsaTax)

Section HC 15(2) of the Income Tax Act 2007 should be amended to exclude distributions of tax-paid New Zealand sourced income from the definition of “taxable distribution”.

Comment

The policy for the taxation of taxable distributions does not provide a tax credit for New Zealand tax previously paid on trustee income. This double taxation effect (tax on trustee income and tax on the beneficiary on distribution) is an intended effect.

This effect is part of the policy design of the trust rules to encourage a trustee of a foreign trust or a non-complying trust to elect to pay New Zealand tax on the world-wide trustee income (for example, to become a complying trust). This is because distributions from a complying trust are taxed only once – either as tax on trustee income or as tax on beneficiary income. All other distributions from a complying trust are not taxed to the beneficiary.

The objective of this policy in relation to New Zealand sourced income is to mitigate against the accumulation of that income offshore in a way that benefits a New Zealand resident beneficiary because the New Zealand tax on that income is limited to non-resident withholding tax rates.

Recommendation

That the submission be declined.

Issue: A person treated as a settlor under section HC 27(6) of the Income Tax Act 2007

Submission

(nsaTax)

Section HC 27(6) should be amended to clarify that the interest paid should be within 12 months after the end of the income year.

Section YB 10 of the Income Tax Act 2007 (when a person is associated with another person) should be amended to exclude persons that are settlors by virtue of section HC 27(6) of the land provisions.

Comment

Officials agree that the wording of section HC 27(6) of the Income Tax Act 2007 should be clarified to better reflect the timing issues.

Officials consider that a person who is treated as a settlor of a trust is intended to be included in the associated persons rules for the purpose of the land sales rules.

Recommendations

That the submission about the temporal element be accepted, subject to officials’ comments.

That the submission about the associated persons rules be declined.

GST ON LOW-VALUE IMPORTED GOODS

Issue: Reverse charge – GST-registered recipient returns the GST

Submission

(Matter raised by officials)

An amendment should be made so that the reverse charge in the Goods and Services Tax Act 1985 (the GST Act) only applies to a supply of goods when:

the goods are imported by the recipient of the supply in a consignment with a total value of $1,000 or less; and
the recipient does not pay GST to Customs, nor to the supplier of the goods.

Comment

The new GST rules applying to supplies of low-value imported goods by offshore suppliers contain an exclusion for supplies to New Zealand GST-registered businesses. The rationale for this is that the application of GST to business-to-business supplies is broadly revenue neutral, as GST-registered businesses purchasing goods and services will generally claim back any GST charged by the supplier as a credit in their GST returns.

However, in some cases, a GST-registered person may purchase goods from an offshore supplier for non-taxable use (for example, private use). Amendments were made to ensure that, in the situation where a GST-registered person purchases low-value imported goods from an offshore supplier for partial private use, the GST-registered New Zealand business is required to return GST under the reverse charge. However, the scope of the amendments to the reverse charge are wider than what was intended, meaning that there is potential for double taxation to occur in some instances.

To rectify this, officials recommend that the proposed amendment should apply from 1 December 2019 (the date the GST on low-value imported goods rules came into force) with an optional savings provision to ensure that taxpayers are not disadvantaged.

Recommendation

That the submission be accepted.

Issue: Interaction of marketplace rules with existing agency rules

Submission

(Matter raised by officials)

Officials recommend an amendment to provide an exclusion from the marketplace rules in the GST Act for supplies of remote services made by New Zealand-resident underlying suppliers through marketplaces operated by New Zealand residents.

Comment

The electronic marketplace rules in the GST Act currently only apply to electronic marketplaces for remotely-supplied services and digital products (remote services) operated by non-residents. A recent amendment will extend the marketplace rules to electronic marketplaces operated by New Zealand residents, so that as of 1 December 2019 New Zealand-resident marketplace operators will be liable to return GST on supplies of remote services and low-value imported goods made through their platforms by non-residents to consumers in New Zealand.

An unintended consequence of the recent amendment is that the electronic marketplace rules will also apply to arrangements that are purely domestic in nature and which are already covered by existing agency rules in the GST Act. Because there is only a very limited ability to opt out of the electronic marketplace rules, the effect is that the electronic marketplace rules will override the existing agency rules as they apply to these domestic arrangements, which was not intended.

As the suggested amendment is taxpayer-friendly and aligns the law with the policy intention, officials recommend that the suggested amendment should apply from 1 December 2019 with a savings provision to protect tax positions taken by taxpayers in reliance on the amendment made in the Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Act 2019.

Recommendation

That the submission be accepted.

Issue: Knowledge offence for consumers and underlying suppliers providing incorrect or misleading information

Submission

(Matter raised by officials)

Officials recommend an amendment to the knowledge offences in the Tax Administration Act 1994 to provide that a recipient of a supply of low-value imported goods commits a knowledge offence if he or she knowingly provides altered, false or misleading information for the purpose of avoiding paying GST.

Officials also recommend a further amendment to provide that a non-resident underlying supplier selling low-value goods through an electronic marketplace commits a knowledge offence if it knowingly provides false or misleading information which results in the operator of the marketplace underpaying GST to Inland Revenue.

Comment

Section 143A(1)(g) of the Tax Administration Act 1994 provides that a recipient of a supply of remote services commits a knowledge offence if he or she knowingly provides altered, false or misleading information about his or her residency or GST registration status to avoid being charged GST.

This provision was overlooked when the GST on low-value imported goods legislation was drafted, largely because it was presumed that section 143A(1)(c)[14] would be sufficient to cover the situation where a recipient of a supply of low-value imported goods provides incorrect or misleading information to avoid being charged GST. However, given the existence of section 143A(1)(g) for remote services, officials consider that it would be clearer and more transparent if the scope of section 143A(1)(g) was extended to low-value imported goods, or if a similar provision specifically for low-value imported goods was inserted.

The suggested amendments to the knowledge offence provisions would also be in keeping with recent amendments to the GST Act that provide the Commissioner of Inland Revenue with discretion to require a person (being the recipient of a supply of low-value imported goods or a non-resident underlying supplier selling through an electronic marketplace) to register and pay GST that should have been charged when:

the person knowingly provides altered, false or misleading information which has resulted in GST being underpaid; and
the amount of GST is substantial or the behaviour is repeated.

Officials propose that this amendment would apply from the date of enactment.

Recommendation

That the submission be accepted.

Issue: Requirement to include GST information in import documentation

Submission

(Matter raised by officials)

The requirement for a supplier of low-value imported goods to take reasonable steps to ensure that its GST registration number and information about whether GST was paid at the point of sale should only apply if GST is required to be charged on the supply of all or some of the goods in the consignment.

Comment

For the purpose of preventing double taxation, new section 24BAC requires suppliers of low-value imported goods to take reasonable steps to ensure that its GST registration number is included in the import documentation for a consignment of low-value imported goods, along with an indication of whether GST was paid at the point of sale on each item being shipped.

This requirement applies broadly to all supplies of low-value imported goods – including supplies that are generally excluded from the requirement to charge GST at the point of sale, such as supplies to GST-registered businesses. This potentially creates unnecessary compliance costs in respect of bulk shipments of many low-value items to GST-registered businesses in New Zealand where Customs will collect GST on the consignment regardless of whether this information is included in the import documentation.

Given that the proposed amendment is taxpayer-friendly and is purely administrative in nature, officials recommend that the proposed amendment should apply from 1 December 2019 to avoid imposing unnecessary compliance costs on suppliers of low-value imported goods.

Recommendation

That the submission be accepted.

Issue: Requirement to include amount of tax charged on receipt

Submission

(Matter raised by officials)

Officials recommend removing the requirement for suppliers of low-value imported goods to include the amount of GST charged on receipts issued to consumers. Given the requirement for the receipt to include an indication of which items listed on the receipt had GST charged at the point of sale and which had not, the separate requirement to include the amount of tax on the receipt is not needed and may lead to unnecessary compliance costs for suppliers in some instances.

Comment

For the purpose of preventing double taxation, new section 24BAB requires a supplier of low-value imported goods to issue a receipt if GST has been charged on a supply. This provides the consumer purchasing the goods with documentation that they can provide to Customs as evidence that GST was charged at the point of sale so that Customs does not collect GST again when the goods are imported into New Zealand.

If GST has been charged on all the goods included on the receipt, the requirement to indicate those items that had GST charged at the point of sale and those that did not can be met by simply including the total GST-inclusive price on the receipt and stating that this price includes GST – making the additional requirement to state the amount of GST charged unnecessary. As some suppliers will simply charge GST on all goods they supply to consumers in New Zealand, there is no benefit from requiring them to make changes so that their receipts will include the amount of GST charged when a statement that the price is inclusive of GST should suffice.

Recommendation

That the submission be accepted.

OTHER GST ISSUES

Issue: Removing a GST barrier to buying homes using co-ownership and rent-to-buy arrangements

Submission

(Russell McVeagh)

Co-ownership and rent-to-buy arrangements under which a third party investor (not related to the home buyer or developer of the house) co-owns the house to assist the home buyer to become a full owner over time should be afforded the same GST treatment as a “financial service”.

The current GST laws are likely to impose a barrier to using co-ownership and rent-to-buy arrangements because:

compliance with the relevant GST rules can be highly complex;
it treats a co-owner as if they were a dealer in property, whereas in substance the arrangement is to provide funding; and
there would be increased volatility that will be priced into the cost of housing for the home owner.

Comment

Officials agree that the current GST laws are likely to disadvantage these arrangements compared to more traditional mortgage financing.

However, rather than introducing an amendment to the current Bill, officials consider that further policy work and consultation would be required to:

determine whether or not “financial services” is the most appropriate GST treatment (as opposed to other policy options);
design a proposed definition or set of rules;
check that the proposal would accommodate the full range of existing and potential rent-to-buy and co-ownership arrangements. As the submitter points out, a “range of legal arrangements for co-ownership and rent-to-buy models are possible”. The Government has announced an intention to develop a progressive home ownership scheme (which could take the form of a rent-to-buy arrangement), but at this time the details of this proposal are still being developed; and
check that the proposal does not create unintended consequences such as creating a mechanism that enables property developers to avoid paying GST on their profits from their property development activities.

Recommendation

That the submission be declined, subject to officials’ comments.

Issue: GST deductions for capital raising costs – remedial reference to participatory securities

Submission

(Matter raised by officials)

A special rule allows GST deductions for capital raising costs associated with issuing equity or debt securities. A remedial amendment should be made so this rule also applies to participatory securities.

Comment

In 2017 a provision was introduced to allow a GST registered person who principally makes taxable supplies to recover GST incurred in the issue of a debt security or an equity security. However, because of an oversight, the provision does not refer to the issue of a participatory security, despite the fact that the corresponding financial services definition refers to “the issue of… an equity security or participatory security”.

Like equity and debt securities, participatory securities can be issued by businesses to raise capital. Adding a reference to “participatory securities” would be consistent with the policy intention of allowing GST deductions for capital raising costs.

The proposed remedial amendment should apply from 1 April 2017 as this is the date that the rule allowing GST deductions for capital raising costs took effect.

Recommendation

That the submission be accepted.

Issue: Clarifying the scope of an exemption for certain government grants provided to social housing providers

Submission

(Matter raised by officials)

Section 5(6F) of the GST Act should be amended to clarify that all types of payments by Government to social housing providers under a tailored agreement to provide social housing are exempt from GST.

Comment

Like other residential landlords, social housing providers are exempt from GST for their supplies of accommodation in dwellings provided to their tenants.

In 2015, a provision was added to the GST Act to ensure that payments made by the Government to social housing providers under reimbursement agreements and tailored agreements to provide social housing are treated as consideration for an exempt supply of accommodation in a dwelling.

The tailored agreements that have subsequently been agreed include several types of payment: a rent subsidy, an operating supplement, and in limited cases, a capital grant. There is uncertainty as to whether or not all of these types of payment would qualify for the existing GST exemption in section 5(6F). If the GST exemption was found to not apply to some types of payment, the Government would need to gross up these payments to social housing providers in order to subsidise the same amount of tenancies in social housing accommodation.

From a policy perspective, the overall purpose of the tailored agreement is to provide social housing tenancies so it would be appropriate to clarify that all the payments made under a tailored agreement are deemed to be consideration for an exempt supply. The proposed remedial change would provide certainty and reduce compliance costs for social housing providers and the Government. As it would align with existing practices, the remedial amendment should apply from May 2015, when section 5(6F) was introduced.

Recommendation

That the submission be accepted.

HYBRID AND BRANCH MISMATCH RULES

Issue: Disregarded hybrid payment rule – no deduction denial for reimbursement of external group costs

Submission

(Corporate Taxpayers Group, Deloitte, Russell McVeagh)

The disregarded hybrid payment (primary) rule, which is contained in section FH 5 of the Income Tax Act 2007, should be amended to ensure that the New Zealand branch of a non-resident company or a New Zealand resident hybrid entity is allowed a deduction for a payment to the extent that:

the payment reimburses third party expenditure of a group member; and
the third-party expenditure is non-deductible (in New Zealand and in the foreign jurisdiction).

This amendment should be retrospective to the application date of the provision. That is, it should apply for income years beginning on or after 1 July 2018.

Comment

Officials agree with this submission because the current rule would apply to payments that, when considered alongside the third-party expenditure described above, do not produce the net deduction-no inclusion hybrid outcome that the rule is targeted at.

However, officials believe that this amendment should only apply when the third-party expenditure is non-deductible because the income of the branch or hybrid entity is not taxable in the foreign jurisdiction.

Recommendation

That the submission be accepted, subject to officials’ comments.

Issue: Opaque election – exemption for transitional expenditure

Submission

(Deloitte)

Expenditure arising from the transition of a foreign hybrid entity (with transparent tax treatment in New Zealand) to an opaque entity under section FH 14 should not be subject to deduction denial under the hybrid and branch mismatch rules.

Comment

The opaque election rule was designed as a mismatch-eliminating option for taxpayers which would reduce their compliance costs. It is therefore inappropriate for the hybrid and branch mismatch rules to apply on a one-time basis to expenditure that arises from making an opaque election under section FH 14.

Officials consider that this amendment should be retrospective to the application date of the provision. That is, it should apply for income years beginning on or after 1 July 2018.

Recommendation

That the submission be accepted.

Issue: Defensive branch rule – counteraction should be for margin on branch charge rather than gross amount

Submission

(Corporate Taxpayers Group)

The drafting of the defensive branch rule contained in section FH 6 should be amended to ensure that the included income for the taxpayer is the margin on the branch charge, not the entire amount.

Comment

Officials have not yet seen practical examples demonstrating the problem this issue causes, and as a result the need for including an amendment to this Bill is not established. Officials will consider the issue further.

Recommendation

That the submission be declined.

Issue: Defensive branch rule – limitation of scope to foreign offset situations

Submission

(Corporate Taxpayers Group)

Consistent with the approach taken to section FH 8, the scope of section FH 6 should be limited such that it does not apply in the case of a foreign branch of a New Zealand entity that is making losses and cannot offset those losses against the income of another person or entity in the foreign country.

Comment

Recommendation

That the submission be declined.

Issue: Exemption from hybrid and branch mismatch rules for small businesses

Submission

(Russell McVeagh)

To reduce compliance costs, small businesses should be exempt from the application of the hybrid rules.

The submitter suggested in oral submission to the Committee that this exemption could take the form of a de minimis based on the turnover or net income/loss of the business.

Comment

The hybrid and branch mismatch rules, which were introduced in the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018, are based on the OECD recommendations on hybrid and branch mismatch arrangements. Those recommendations did not contain a recommendation for a small business exemption or de minimis threshold. Officials are not aware that any other countries have adopted or proposed such an approach for their hybrid mismatch rules.

The rules apply to complex cross-border structuring and this fact should generally exclude small businesses from interacting with the complexity of the provisions. Section FH 8 has a specific exclusion for New Zealand companies that operate in foreign countries through a branch or a hybrid entity but do not have the ability to offset foreign losses against the income of another entity. This exclusion is designed as a safe harbour for small businesses that conduct their operations in a foreign jurisdiction.

The OECD-designed framework of hybrid and branch mismatch rules also weighs against such an exemption. This is because of the primary and defensive rules interface; most mismatches can be addressed by more than one country. If New Zealand’s primary rule does not apply because we have an exemption, then a foreign jurisdiction’s defensive rule will apply. For this reason, a small business exemption would be unlikely to have an effect, because New Zealand’s exemption could be undone by a foreign jurisdiction’s rule. For New Zealand-based businesses, overall compliance costs could be increased by an exemption as it may become necessary to apply a foreign jurisdiction’s hybrid and branch mismatch rules instead of New Zealand’s rules.

Recommendation

That the submission be declined.

WORKING FOR FAMILIES TAX CREDIT MATTERS

Issue: Adjusting payment due dates for some Working for Families tax credit recipients

Submission

(Matter raised by officials)

An amendment should be made to adjust the payment due date for some tax credit recipients, if their income tax assessment cannot be finalised because Inland Revenue needs to complete another person’s assessment first to determine their entitlement to tax credits.

Comment

Eligibility for Working for Families requires an assessment of family income. This requires both partners to be assessed for income tax. This can result in a timing issue where one partner has an extension of time for their tax obligations. This results in some peoples’ income tax assessments being unable to be finalised by their tax due date, because they are dependent on another person’s income tax assessment being completed first. Those people affected are:

Working for Families (WfF) recipients who had a partner at any time during the year; and
those with potential entitlement to the independent earner tax credit (IETC) who were a partner of a WfF recipient during the tax year.

Under current rules, any tax payable of $100 or more is subject to penalties and interest from the original payment due date.

Officials consider that Inland Revenue should be able to adjust the terminal tax due date for some tax credit recipients, to provide 30 days to pay any debit amount, from the date their assessment is finalised.

The proposed amendment would ensure that a person will not be subject to interest and penalties from the original due date, in situations where their assessment cannot be finalised because of dependence on another person’s assessment.

The proposed change in due date would impact any payment due for that person on the terminal tax date, that is WfF, income tax, and student loan.

The proposed change would apply for assessments for the 2020 tax year onwards.

Recommendation

That the submission be accepted.

Issue: Use of current Working for Families tax credits entitlement to repay prior year overpayments

Submission

(Matter raised by officials)

An amendment should allow recipients to use their Working for Families (WfF) current entitlement to offset earlier overpayments, paid by either Inland Revenue or the Ministry of Social Development, in the year the overpayment occurred.

Comment

Current provisions allow WfF recipients to use their current entitlement to repay overpayments from an earlier year, if they received their WfF from Inland Revenue in the year the overpayment occurred. However, WfF recipients who were beneficiaries receiving their WfF from MSD in the year the overpayment occurred cannot use their entitlement in this way.

Officials consider that all WfF recipients who are receiving their payments from Inland Revenue should be able to use their current WfF entitlement to offset prior year overpayments, regardless of which agency made the WfF payments in the year the overpayment occurred.

The proposed amendment would ensure that all WfF recipients paid by Inland Revenue have the same options available to them to manage any overpayments.

The option for Inland Revenue paid WfF recipients to use their current entitlement to repay prior year overpayments would be available from the 2020 tax year onwards.

Recommendation

That the submission be accepted.

APPLICATION OF SECTION 120KBB GUIDANCE

Issue: Further guidance would be desirable

Submission

(KPMG)

We consider that further guidance and examples would be desirable on application of the “interest concession rules” in section 120KBB of the Tax Administration Act 1994.

While a Tax Information Bulletin was prepared following the enactment of those rules, there are a number of nuances and practical issues that are not covered, which could usefully be clarified so that there is consistent understanding of how the interest concession rules apply.

Comment

Officials will look at including examples in the Tax Information Bulletin that covers this Bill.

Recommendation

That the submission be noted.

CLARIFICATION FOR TAXPAYERS WHO PAY PROVISIONAL TAX IN ONE OR TWO INSTALMENTS

Issue: An interpretation issue exists with sections RC 13(3), RC 14 (2) and RC 9(9)

Submission

(Deloitte)

There is an interpretation issue with sections RC 13(3) and RC 14(2) of the Income Tax Act 2007 which reference section RC 9(9)(b) and (c).

Section RC 9(4)(c) applies where a person is liable to pay provisional tax but has not provided a return in the preceding year and whose residual income tax (RIT) in the year before the preceding year is less than $2,500. It means that sections RC 13(1)(b) or RC 14 (1)(b) will apply so that provisional tax is payable in either two or one instalment(s), depending on when the prior year’s return is filed.

It appears there is a missing link for these scenarios in sections RC 13(3) and RC 14 (3) respectively. These sections refer only to initial provisional taxpayers, so taxpayers are not provided legislative guidance as to how many instalments to pay or how to apply sections RC 13 or RC 14 in other cases.

Comment

While we understand taxpayers’ and Inland Revenue’s administrative practice is to ignore the fact that section RC 9(9) only technically applies to initial provisional taxpayers, we agree this should be corrected so that it is clear how many provisional tax instalments are payable in those situations.

For those taxpayers, use-of-money interest will apply across three instalments rather than the number of instalments. However, the distinction is important when considering the application of late payment penalties and whether taxpayers have met conditions for interest concession rules, such as the safe harbour to apply.

Recommendation

That the submission be accepted.

CLARIFYING THE AMOUNT ON WHICH INTEREST AND LATE PAYMENT PENALTIES ARE APPLIED

Issue: Inland Revenue’s systems are not calculating interest in accordance with legislation

Submission

(Tax Management New Zealand Limited)

Inland Revenue’s system is coded to use the formula found in section RC 10(2) of the Income Tax Act 2007 to calculate the amount due at an instalment. The system also replaces the term “residual income tax” (RIT) as defined in subsection 3 with the actual RIT for the year if this figure turns out to be lower.

As a result, an issue arises in situations where:

a taxpayer files the previous year’s return – which has a significantly higher RIT than the return from two years ago which they used as the basis to calculate their first instalment – between their first and second instalment dates; and
a third of the current year RIT turns out to be lower than the uplift amount due at the second instalment.

That is because Inland Revenue systems are calculating the amount payable at the second instalment based on the lesser of:

the actual RIT for the year, multiplied by two and divided by three, minus the 110 percent uplift amount at the first instalment; or
the previous year’s RIT uplifted by 105 percent, multiplied by two and divided by three, minus the 110 percent uplift amount at the first instalment.

We believe what Inland Revenue is doing operationally to calculate the amount payable at the second instalment is not consistent with section 120KBB(3)(b). Either the system or the legislation should be clarified.

Comment

This issue has been raised with officials previously by the submitter and it was confirmed to them that for the 2017–18 income year there was a programming issue with the old technology platform, FIRST. We have identified the affected taxpayers, and this is being corrected where those taxpayers have been overcharged penalties or interest. In the unlikely situation where a taxpayer has been undercharged penalties and interest no action is being taken.

This issue has been corrected in Inland Revenue’s new technology platform, again the submitter has been previously informed of that.

Recommendation

That the submission be declined.

OTHER MATTERS

Issue: Clarification to the filing rules for individuals

Submission

(Matter raised by officials)

Section 22H of the Tax Administration Act 1994 sets out the process for finalising accounts under the individuals’ income tax rules that were enacted as part of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration and Remedial Matters) Act 2019.

Officials consider that this section requires two amendments. The first is to ensure that an individual can finalise their account up to and including 7 July. The second is that a further provision is required to allow for late filing, as this has been inadvertently removed.

These proposed amendments ensure that the law will not cut short a taxpayer’s ability to file a return and will permit them to late file, if required.

The proposed application date for this change should be retrospective to 1 April 2019, the date that the income tax changes for individuals were enacted.

Recommendation

That the submission be accepted.

Issue: Clarifying when interest starts for individuals

Submission

(Matter raised by officials)

Section 120C(1)(iib), which defines the date interest starts, refers to a “qualifying individual” but this needs to be amended to “qualifying individual, or an individual who is treated as a qualifying individual”.

Comment

This amendment is necessary to ensure that the date interest starts is aligned for qualifying individuals and individuals who are treated as qualifying individuals. This accords with the policy intent which is to provide the same rules across the individuals’ income tax regime to both qualifying individuals, and individuals that have been treated as qualifying individuals.

A person is a qualifying individual if they only earn income that has been reported to Inland Revenue within a short time after the end of the tax year such as salary and interest income. If a person earns other income such as overseas income or rental income, they do not meet the definition of a qualifying individual.

In some instances, a person who is not a qualifying individual may be treated as such by Inland Revenue. The policy intent is that that person should have the same rights as a qualifying individual. That is, they would be able to make changes and update information held by Inland Revenue without being subjected to penalties or interest. This applies until the terminal tax date which is usually 7 February of the year following the end of the tax year.

The proposed application date for this change should be retrospective to 1 April 2019, the date that the income tax changes for individuals were enacted.

Recommendation

That the submission be accepted.

Issue: Clarifying when the Commissioner is required to issue a notice of proposed adjustment

Submission

(Matter raised by officials)

Section 89C requires an amendment to make it clear that the Commissioner is not required to issue a notice of proposed adjustment (NOPA) before making an assessment under section 22H(1).

Comment

Section 89C(l) was amended by the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 to say that the Commissioner does not need to issue a NOPA to amend a qualifying individual’s assessment and, in accordance with section 22G(6) can amend a qualifying individual’s assessment at any time up to the timebar by notifying the individual.

This type of amendment will occur when the Commissioner has automatically calculated a person’s tax assessment and the Commissioner subsequently becomes aware of further information that changes the person’s tax position. The Commissioner would add the additional information into the person’s tax information and would finalise their tax position based on the information held. The Commissioner would notify the person of the assessment and they would be able to challenge the assessment if they did not agree with it.

The problem that arises is that the amendment made is not the correct equivalent to the prior section. Pre-amendment the section deals with issuing an assessment, but post-amendment the section sets out the ability of the Commissioner to amend an assessment that has already been made.

An additional provision is also required specifying that the Commissioner is not required to issue a NOPA before assessing a qualifying individual. This is necessary to make it clear that the Commissioner does not have to issue a NOPA before making an amendment and finalising a qualifying individual’s tax assessment.

The proposed application date for this change should be retrospective to 1 April 2019, the date that the income tax changes for individuals were enacted.

Recommendation

That the submission be accepted.

Issue: Repealing a redundant provision that relates to “non-filing” taxpayers

Submission

(Matter raised by officials)

Section 141JA is redundant and should be repealed. This section covers the application of penalties to non-filing taxpayers and was updated in the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 to reflect a change in terminology when the law on income statements was abolished and replaced with the new individuals’ income tax regime.

The current law says that penalties will not apply to a non-filing taxpayer who has withheld their own PAYE and who is required to provide other income information where the Commissioner considers that other income information to be correct.

The problem is that a taxpayer who provides “other income” information, or one who earns PAYE income, is not a “non-filing taxpayer”. These taxpayers will be squared up at the end of the year under the new rules.

The section as drafted is in conflict because it deals with the application of penalties to a non-filing taxpayer but requires the taxpayer to provide other income information to satisfy the section (which makes them a filer).

Under previous law, there was a rationale for this section, but it no longer exists.

Comment

Officials consider that section 141JA should be repealed.

Recommendation

That the submission be accepted.

Issue: Minor amendment to the write off rules for individuals

Submission

(Matter raised by officials)

An amendment is proposed to schedule 8 of the Tax Administration Act 1994 to ensure that the Commissioner has discretion to write off small amounts of tax payable.

Schedule 8 Part B of the Tax Administration Act 1994 sets out a number of provisions that provide for a write off of tax payable. These rules largely apply from 1 April 2019. As per section 112 of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019, an updated version of schedule 8 is set to apply from 1 April 2020 to make provision for the “extra pay period” write-off which applies from that date. The updated version that comes into force on 1 April 2020 also includes a clause to allow for the Commissioner to write off small amounts of tax payable. Officials consider that this provision should have come into force on 1 April 2019.

Comment

Officials consider that Schedule 8 Part B clause 3 as contained in section 112 of the amending Act, which is set to apply from 1 April 2020, should apply retrospectively to 1 April 2019. A 2019 application date is necessary to support the efficacy of some of the other write off provisions that were enacted for 1 April 2019. For example, the policy intent is not to exclude a taxpayer from a write off under the income tested benefit write-off rule where they had a few dollars of interest income taxed at a rate lower than their marginal tax rate (schedule 8 Part B clause 1(b)(i)).

Recommendation

That the submission be accepted.

Issue: Minor amendments to the refund rules for back years

Submission

(Matter raised by officials)

Two amendments are proposed to section MD 1 of the Income Tax Act (1994 and 2004 versions). First, sections 362 and 370 of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 replace section MD 1(b) of the Income Tax Act 2004 and 1994 respectively. This is an error. The sections are intended to replace section MD 1(1)(b). Section MD 1(b) does not exist. Second, a small change is proposed to both iterations of section MD 1 to ensure that the timebar does not restrict a taxpayer’s ability to obtain a refund at any point in time, provided the Commissioner was satisfied of the taxpayer’s entitlement to the refund within the time bar period.

Comment

Officials consider that the first proposed amendment is a simple drafting matter.

For the second proposed amendment, the effect of section MD 1 as it has been amended, is that for a certain period of time refunds that arise from amended assessments are still timebarred in circumstances where they should not be. This is because the law currently requires the time bar period to have not ended for a refund to be paid out for an amended assessment. The timebar restriction to amended assessments is meant to prevent a taxpayer from amending outside the timebar period to receive a refund, not from being able to be paid out a refund outside the timebar where the Commissioner was satisfied within that timeframe of their entitlement to the refund. This amendment is necessary to ensure that taxpayers are treated fairly and can receive the refunds they are entitled to.

The proposed amendments to the Income Tax Act 1994 should apply from 1 April 2005. The proposed amendments to the Income Tax Act 2004 should apply from 1 April 2000. This accords with the application dates given to the original changes as applied in the amending Act.

Recommendation

That the submission be accepted.

Issue: New provision required to be added to the Income Tax Act 1994 – refund rules

Submission

(Matter raised by officials)

The Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 added a number of provisions for back year periods that provide that, where the law previously acted as an impediment to a refund, that amount may now be refunded. The provisions added do not cover the period from 1 October 2004, the start of the inconsistent refund period, to 1 April 2005, the date that section 364 of the amending Act starts its coverage for. An additional provision is proposed to cover the period from 1 October 2004 to 31 March 2005 to ensure that taxpayers that are seeking refunds in respect of this period are not treated unfairly.

Recommendation

That the submission be accepted.

Issue: Investment income reporting – dividends paid by a listed PIE

Submission

(Matter raised by officials)

The Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 added section 25G to the Tax Administration Act 1994 (“TAA”), which, as part of a wider reporting framework, requires payers of dividends to report “investment income information” in relation to the payments. An unintended consequence of the provisions is that information in relation to dividends paid by a listed PIE is not required to be reported.

An amendment is proposed to ensure that dividends paid by listed PIEs fall under the definition of investment income. The amendment should apply from 1 April 2020, being the date that mandatory reporting for investment income applies from.

Recommendation

That the submission be accepted.

Issue: Definition of “custodial institution”

Submission

(Matter raised by officials)

A definition of “custodial institution” should be added to the Income Tax Act 2007 and the Tax Administration Act 1994 so that the obligations of custodians can be clarified and distinguished from those imposed on payers of investment income. This provision will be optional from 1 April 2020 and mandatory from 1 April 2021.

Comment

A custodial institution acts as a conduit between an investment income payer (for example, a company paying a dividend) and an investor. Custodians undertake various functions including settlement services and asset management.

Inland Revenue has received feedback that where a custodian is interposed between the payer and the investor, the investment income withholding and reporting rules are a poor fit for custodians’ business models. As a result, officials seek to clarify how the withholding and reporting rules apply to custodial institutions. A definition of a “custodial institution” is required for this purpose and will be introduced at Select Committee.

Recommendation

That the submission be accepted.

Issue: End investor treatment of foreign custodians and aggregation of the underlying investors

Submission

(Matter raised by officials)

Officials propose that a foreign custodial institution is treated as an end investor for investment income withholding and reporting purposes. Officials further propose that where the foreign custodian is treated as an end investor, withholding and reporting is undertaken at an aggregated level.

It is proposed that these changes should be voluntary from 1 April 2020 (which is the date that the investment income reporting regime applies) and compulsory from 1 April 2021.

Comment

Treating a foreign custodian as the end investor for withholding and reporting purposes

Officials propose that a foreign custodian is treated as the end investor for investment income withholding and reporting purposes. This means that the investment income payer is only required to report that the payment has been made to the foreign custodian, and is not required to report details of each underlying investor. The end investor proposal is intended to reduce the compliance burden on the New Zealand custodian whilst ensuring the obligation for accurate withholding is retained. Further, officials note that Inland Revenue does not need to obtain details of a non-resident investor for investment income reporting purposes.

Officials are of the view that requiring a custodian to look through the foreign custodian for withholding and reporting purposes would create an undue compliance burden.

Officials note that custodial institutions are subject to international tax compliance and other requirements which form a safeguard preventing misuse of the proposed relaxation. These requirements include reporting requirements under the Common Reporting Standard and US Foreign Account Tax Compliance Act which ensure that information which identifies investments is passed to the ultimate investor’s country of residence.

Aggregate level withholding and reporting

Officials propose that where a New Zealand custodial institution pays income offshore to another custodial institution the withholding is operated at an aggregated level. In many cases, a non-resident investor’s liability to New Zealand tax is fully satisfied by NRWT or AIL and the taxpayer will not be required to file a return. This means that where the payment passes into the hands of another custodial institution, which is treated as the end investor, the withholding would only take account of types of investment income (for example, dividends or interest) and classes of taxpayers (for example, for a dividend, those investors entitled to the benefit of particular treaty rates and those subject to NRWT in full).

Example

Tony is tax resident in the United Kingdom. He has invested via custodians into Savoury Mints Ltd, a New Zealand listed company.

Figure 2

Savoury pays a gross dividend of $100 to the New Zealand custodian as the New Zealand custodian has RWT exempt status. The New Zealand custodian treats the United Kingdom custodian as the end investor for withholding and reporting purposes.

For reporting purposes, the report will only contain the details necessary to identify the United Kingdom custodian as the recipient of the payment. Tony’s details do not need to be provided to the New Zealand custodian or to Inland Revenue.
For reporting purposes, the United Kingdom custodian has told the New Zealand custodian that the ultimate investors are all United Kingdom tax residents entitled to the benefit of a 15% rate of withholding under the NZ-UK Double Taxation Agreement. The New Zealand custodian therefore withholds NRWT at the 15% rate and remits this to Inland Revenue

This proposal is subject to the condition that the New Zealand custodial institution that operates aggregate level withholding must be satisfied that the foreign custodian has supplied sufficient information to support the rate of withholding.

Recommendation

That the submission be accepted.

Issue: Transfer of investment income withholding and reporting requirements for RWT and NRWT

Submission

(Matter raised by officials)

Officials recommend that provisions are introduced into the Income Tax Act 2007 and Tax Administration Act 1994 to clarify how the withholding and reporting obligations for investment income will pass from the payer to a custodial institution.

It is proposed that these provisions are voluntary from 1 April 2020 (which is the date that the investment income reporting regime applies) and compulsory from 1 April 2021.

Comment

Under current law, the investment income payer is required to withhold tax from investment income and remit it to Inland Revenue. Under certain conditions, that obligation can be passed on to a custodial institution interposed between the payer and the end investor. However, the current provisions lack clarity where custodial institutions sit between the payer and the ultimate investor, particularly where the income passes through the hands of more than one custodial institution before being paid to the ultimate investor.

There is also an obligation for investment income payers to report to Inland Revenue, but there is no ability under current rules to permit a payer to pass on the reporting obligation.

Accurate reporting of withholding tax is an important part of Inland Revenue’s ability to automatically assess refunds and tax to pay. Providing for transferable obligations will support this objective. The framework will have the following features:

Withholding and reporting will be undertaken by one entity. An ability to provide for variations to this rule will be provided.
Withholding and reporting must take place before the income passes to the end investor. The end investor may be a direct investor (New Zealand resident or non-resident) or a foreign custodian.
If the payer and subsequent custodians do not determine which has the obligation for withholding or reporting, the custodial institution which pays to an end investor (whether a direct investor or a foreign custodian) will be responsible for the payment of RWT and NRWT and reporting to Inland Revenue.

Recommendation

That the submission be accepted.

Issue: Relaxation of investment income reporting requirements for custodial institutions

Submission

(Matter raised by officials)

In order to support officials’ proposal to allow reporting requirements to be transferred to custodial institutions, it is further proposed to limit the reporting requirements for custodial institutions to information that they hold or can reasonably obtain.

It is proposed that these amendments should be voluntary from 1 April 2020 (which is the date that the investment income reporting regime applies) and compulsory from 1 April 2021.

Comment

The reporting requirements for investment income information are set out in Schedule 6 of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018. Under current law, the payer must provide the prescribed information.

A custodian may not have access to the same information as a payer and may be unable to obtain this information through reasonable efforts. It is proposed that the reporting requirement be relaxed where the information cannot reasonably be obtained by the custodial institution.

Recommendation

That the submission be accepted.

Issue: Clarification of the investment income error correction rules in relation to approved issuer levy

Submission

(Matter raised by officials)

Officials propose an amendment to clarify how the error correction rules apply in relation to approved issuer levy (AIL). It is proposed that section RF 12 of the Income Tax Act 2007 be amended to clarify that an AIL election must have been received prior to an interest payment for a 0% NRWT rate to apply. Officials propose that this provision would apply from the date of enactment.

Comment

Payers of investment income and custodians are uncertain whether the current investment income error correction rules can be used to remediate NRWT previously withheld in favour of a late election into AIL.

Officials consider that the proposed clarification will make it clear that the error correction rules cannot be used to allow remediation of a failure to meet the requirements for AIL treatment. It is intended that the error correction rules only be used to correct a tax position in circumstances where the correction will put the taxpayer into a position to which they were always entitled. For example, error correction could be used where on the payment date the payer of AIL understood that 47% of investors were eligible for AIL treatment, but after the payment it becomes apparent that 51% were eligible.

Recommendation

That the submission be accepted.

Issue: RWT – additional foreign exchange rate

Submission

(Matter raised by officials)

Officials propose an amendment to allow payers and custodians to withhold and report investment income at the foreign exchange rate on the transaction date. Officials propose that this provision would apply from the date of enactment.

Comment

Under current law, where RWT is withheld in a currency other than New Zealand dollars (NZD), the amount of RWT to be paid to Inland Revenue is calculated at the close of trading spot rate on the first working day after the month in which RWT was withheld, or if the withholding is an Australian imputation credit account company, a specific conversion rate chosen by the company.

Payers and custodians will typically use a transaction date foreign exchange rate in investor statements. This means that the investor may see a different NZD value in their investment statement from the value in myIR. This can result in the investor having to make an adjustment for any difference.

Under the proposed amendment, the payer will have the option to withhold and report investment income to Inland Revenue using the foreign exchange rate which applied on the date of the transaction. Aligning the rate provided to Inland Revenue with the rate reported to the investor will aid accurate pre-population of taxpayers’ accounts. This means that a taxpayer will be less likely to have to account for any difference in their tax return at year end.

Recommendation

That the submission be accepted.

Issue: Repeal of information sharing legislative provision

Submission

(Matter raised by officials)

The current information sharing provision between Inland Revenue and the Serious Fraud Office (Schedule 7, clause 7 of the Tax Administration Act 1994) must be repealed to avoid conflicting legislation with the serious crime approved information sharing agreement (AISA) between Inland Revenue (and the New Zealand Police, currently being extended to include the Serious Fraud Office and New Zealand Customs Service.

Comment

Officials from Inland Revenue, the Serious Fraud Office and Customs are working on extending the current serious crime information sharing agreement between Inland Revenue and the Police agreement under the Privacy Act 1993. The agreement extension will enable information from Inland Revenue to be shared with these two agencies to tackle serious crime.

The current legislation governing information sharing between Inland Revenue and the Serious Fraud Office will need to be repealed with effect from the same date the new AISA applies from. The date the AISA will apply from will be determined by Order in Council. If the provision is not repealed then it will conflict with the AISA, affecting its operation.

Cabinet approved the repeal on 23 September 2019.

The Parliamentary Counsel Office will prepare Orders in Council, which will approve the information sharing agreement, in accordance with the Privacy Act 1993, as well as the consequential Order to repeal the existing sharing legislative provision between Inland Revenue and the Serious Fraud Office.

Application date is the date of assent.

Recommendation

That the submission be accepted.

Issue: Fringe benefit tax and private vehicle use

Submission

(Tim Hewitt)

The exemption from fringe benefit tax for work-related vehicles should be repealed. The current exemption for work related vehicles creates incentives for businesses to purchase or lease vehicles such as utes, which have a generally larger carbon footprint than cars which are typically non-exempt.

Comment

Officials note that this submission raises issues that would require prioritising and resourcing as part of the Government’s tax policy work programme.

Recommendation

That the submission be declined.

Issue: The number of remedial amendments

Submission

(Corporate Taxpayers Group)

The number of remedial amendments is a concern. While tax is a complex subject area and remedial amendments will always be necessary, the volume of amendments suggests that the policy development process is not always working as required.

That a thorough consultation process needs to be undertaken, where appropriate, to prevent remedial changes in the future.

Comment

Officials agree that the complexity of tax does mean that a number of remedial amendments will be necessary to ensure that the tax legislation is consistent with the policy intent. This in turn helps ensure that the tax system continues to be fit for purpose. Officials do not agree that more consultation would necessarily reduce the number of remedial amendments, as many of the amendments contained in the Bill have arisen as a result of ongoing consultation. The Business Transformation change process within Inland Revenue has also identified many remedial issues and some of these are included in this report.

Recommendation

That the submission be noted.

Issue: Securitisation vehicle amendments

Submission

(PwC supplementary)

That there should be an ability (but not a requirement) to make a formal election into the transparency regime at the time an arrangement is established and the assets are transferred. For existing special purpose vehicles (SPVs) established before the new rules came into effect, there should be an ability (but not requirement) to make a formal election into the transparency regime from the date of the election or from the beginning of the subsequent income year.

That the requirement that all originators be members of the same wholly-owned group of companies be removed from the definition of “originator” in section YA1 of the Income Tax Act 2007. The key requirement should be that assets appear on the consolidated financial statements of the person assuming the tax obligations of the SPV, or the consolidated financial statements of a wholly-owned group company.

Alternatively, if the restriction on third party originated receivables is not completely relaxed, the definition of “originator” should be amended so that the requirements are only required to be met form the effective date of the election.

Comment

Officials note that the submission raises issues that would require prioritisation and resourcing as part of the Government’s tax policy work programme.

Recommendation

That the submission be declined.

Issue: Amend sections RC 29 and RC 33 to ensure provisional tax is correctly calculated

Submission

(Matter raised by officials)

Sections RC 29 and RC 33 of the Income Tax Act 2007 outline how a new consolidated group or amalgamated company should calculate their standard method uplift amount of provisional tax.

The standard method uses either 105% of the preceding year current year-1 (CY-1) or 110% of the year prior to the preceding year (CY-2). Currently both sections RC 29 and 33 only refer to the CY-1 calculation. These should also refer to the CY-2 year where the entities forming the group or amalgamated company have yet to file their CY-1 tax return and can therefore only base their provisional tax on the CY-2 residual income tax.

It is recommended sections RC 29 and 33 be amended to refer to both the CY-1 and CY-2 calculations “as applicable” for the 2020–21 and later income years.

Comment

Although taxpayers have practically been applying this rule it should be corrected in the legislation. A number of tax agents have raised this with us as an issue that should be clarified.

Recommendation

That the submission be accepted.

Issue: Standardise the term “person with an initial provisional tax liability”

Submission

(Matter raised by officials)

A person with an initial provisional tax liability is essentially a person who is in the provisional tax regime for the first time. The Tax Administration Act 1994 and the Income Tax Act 2007 use a number of different terms for a “person with an initial provisional tax liability” including “new provisional taxpayer” and “person with a new provisional tax liability”.

This can create confusion when all these terms mean the same thing.

It is recommended these terms be standardised as “person with an initial provisional tax liability”, to avoid confusion, from the 2020–21 and later income years.

Recommendation

That the submission be accepted.

Issue: Ensure the definition of “taxable activity” includes partners in a partnership and members of unincorporated bodies

Submission

(Matter raised by officials)

In determining whether a person has an initial provisional tax liability the definition of “taxable activity” is used to determine if someone has started a business.

This definition refers to the definition in the Goods and Services Tax Act 1985. This Act, however, excludes partners of partnerships and members of other unincorporated bodies as, for GST purposes, it is the partnership/unincorporated body which is carrying on the taxable activity. This appears to be a loophole which is not consistent with the framework of the provisional tax regime as these entities are look-through entities they are not themselves subject to provisional tax.

It is recommended this definition be amended to ensure that for the purposes of the provisional tax rules partners and members of unincorporated bodies are considered to be undertaking the taxable activity rather than the partnership from the 2020–21 and later income years.

Recommendation

That the submission be accepted.

Issue: Ensure the early payment discount applies as intended

Submission

(Matter raised by officials)

Inland Revenue’s legal team have identified an issue with the legislation and the application of the early payment discount to taxpayers who meet the criteria. Inland Revenue’s systems are currently applying the law as it should apply, however, to improve certainty for taxpayers we recommend that the legislation be aligned.

It is proposed that section RC 37 of the Income Tax Act 2007 is amended to ensure that the early payment discount applies as intended by changing the wording “not liable to pay provisional tax” to “liable to pay provisional tax under section RC 3(1)(a) but not obligated to make any payments under section RC 3(3)”.

The proposed amendment would apply from the 2020–21 and later income years.

Recommendation

That the submission be accepted.

Issue: Clarify the definition of “provisional tax”

Submission

(Matter raised by officials)

The current wording of section 120L of the Tax Administration Act 1994 refers to “provisional tax” which is not defined. This item should include both provisional tax and any late payment penalties on that provisional tax.

It is proposed that section 120L of the Income Tax Act 2007 is amended to ensure that the term “provisional tax” includes any late payment penalties in relation to that provisional tax from the 2020–21 and later income years.

Recommendation

That the submission be accepted.

Issue: Align the treatment of overpaid tax by a company using the accounting income method (AIM) with tax paid on behalf of AIM shareholders

Submission

(Matter raised by officials)

There are two ways in which an AIM company can transfer overpaid tax to its shareholders.

The first is where the company creates a provision for shareholder employees’ salary and pays tax on that on behalf of the shareholders to enable the company to take a tax deduction for the provision. In this situation the company acts as an “agent” for the shareholder employee and the tax is “transferred” as a tax credit reducing the shareholder employee’s residual tax liability.

The second situation is where the company overpays tax most likely because shareholder remuneration is not deducted by the company until the end of the year in which case the overpayment transfers at the shareholder’s provisional tax dates.

These rules should be standardised to simplify them for taxpayers and reduce compliance and administration costs.

It is proposed that the treatment of overpayments by an AIM company be standardised so that in both situations the transfer will reduce the residual income tax of the shareholder employee (subject to the safeguards that already exist to reduce the ability to game the rules).

The proposed amendment would apply from the 2019–20 income year.

Recommendation

That the submission be accepted.

Issue: Inclusion of a tolerance for provisional tax instalments

Submission

(Matter raised by officials)

The Tax Administration Act 1994 contains a safe harbour provision from the application of use-of-money interest (UOMI) to some provisional taxpayers.

The safe harbour applies where a taxpayer has residual income tax that is less than $60,000, they have used the standard uplift provisional tax calculation method and they paid all their instalments as required.

The result of this concession is that no UOMI is charged on any unpaid tax until the taxpayer’s terminal tax date (which is generally February of the year after the income year where the liability arises).

If the safe harbour does not apply, then UOMI would generally apply from the date of their final instalment of provisional tax for the income year in question. This is generally nine months earlier than the terminal tax date. Thus, the safe harbour provides a significant concession to those who fit the criteria.

Some issues have arisen the result of which is that a small underpayment is providing an adverse result to taxpayers that is disproportionate to the error being made. In one case a taxpayer who accidently underpaid their instalments by 30 cents resulted in a UOMI bill of $2,400 because of the loss of the protection of the safe harbour.

It is proposed that a tolerance be included in the legislation to deal with these issues. This tolerance will allow taxpayers to retain the benefits of the safe harbour even though they underpaid by a small amount.

We recommend the amount of the tolerance be $20 per instalment which aligns to the amount of the small balance write-off amount (for tax other than auto-calculation assessments ). This will ensure that a person who underpays by small amounts will not be disproportionately penalised for that omission.

Officials also recommend this amendment be retrospective to the 2017–18 income year to address the existing cases where this adverse outcome had occurred.

Recommendation

That the submission be accepted.

Issue: Amend the definition of “START tax type” in the Tax Administration Act 1994 to include Release 4 tax types

Submission

(Matter raised by officials)

Release 4 of Business Transformation will migrate more tax types onto Inland Revenue’s new technology platform, START. Section 183C of the Tax Administration Act 1994 deals with rules around the cancellation of interest. These rules are specific to the START platform only and as taxes migrate to that platform the rules for cancellation of interest change over what was done in the old technology platform, FIRST.

It is necessary to include those tax types that are being migrated to START as part of Release 4 in the definition of “START tax type” so that the cancellation of interest rules are applied correctly.

It is proposed that these tax types be included in the definition of START tax types in the Tax Administration Act 1994:

PAYE deductions;
child support deductions made by an employer;
student loan deductions made by an employer;
KiwiSaver deductions made by an employer;
compulsory employer KiwiSaver contributions; and
specified superannuation contribution tax (SSCWT or ESCT or both).

The proposed amendment would apply from 1 April 2020 when Release 4 of Business Transformation goes live.

Recommendation

That the submission be accepted.

Issue: Adding START tax types to section 184A(5) of the Tax Administration Act

Submission

(Matter raised by officials)

Officials recommend an amendment to section 184A(5) of the Tax Administration Act 1994 to include reserve schemes and unclaimed monies in the definition of tax, for the purpose of this section.

Comment

As part of the Business Transformation Release 4, new tax types are being introduced into START. With the inclusion of the new tax types Inland Revenue is able to direct credit returns through section 184A. However, some of the tax types included in Release 4 do not fall within the definition of tax in section 184A(5) but should be added.

The proposed new tax types to be included are:

reserve schemes (income equalisation schemes and environmental restoration account schemes); and
unclaimed monies for the purpose of the Unclaimed Money Act 1971.

The proposed amendment would apply from the date of assent.

Recommendation

That the submission be accepted.

Issue: Income tax treatment of Nga Whenua Rahui kawenata

Submission

(NSA Tax)

Amounts received in respect of a Nga Whenua Rahui kawenata for a specified term pursuant to section 77A of the Reserves Act 1977 should be excluded from being income.

Comment

The intention of the current amendment is to ensure that payments for the grant of a permanent easement are not subject to tax. This submission suggests that a separate exclusion should be provided for a Nga Whenua Rahui kawenata. Officials consider that this submission raises further issues that would require prioritising and resourcing as part of the Government’s tax policy work programme.

Recommendation

That the submission be declined.

Issue: The monetary system

Submission

(John Tax)

The submitter raised a number of concerns with the monetary system generally.

Comment

Officials consider these concerns to be out of the scope of a tax bill.

Recommendation

That the submission be declined.

Issue: Tax rates

Submission

(John Tax, R Craig)

Submitters proposed a flat rate of tax to reduce the complexity of the tax system (John Tax) and introducing a tax-free threshold to assist low income earners. (R Craig)

Comment

It is unlikely that a flat rate of tax would significantly reduce the complexity of the tax system. Much of the complexity of the tax system is because of the need to define what is taxed, rather than the rate at which it should be taxed.

If the objective of introducing a tax-free threshold is to assist low income households, then a tax-free threshold is unlikely to be the most effective policy. Transfers (for example, welfare benefits or tax credits) are generally better targeted than income tax reductions for this group.

Recommendation

That the submission be declined.

[14] Section 143A(1)(c) provides that a person commits a knowledge offence if the person “provides altered, false, incomplete, or misleading information to the Commissioner or any other person in respect of a tax law or a matter or thing relating to a tax law”.