Remedial items


AMENDMENT TO DEFINITION OF ELIGIBLE R&D EXPENDITURE


(Clause 45)

Summary of proposed amendment

For expenditure to be eligible for the R&D tax incentive, it must be on an eligible R&D activity. This amendment proposes a clarification to ensure that expenditure must be closely connected with conducting an R&D activity to be eligible. The changes proposed are in line with the original policy intent, and are not intended to change how the expenditure rules work but instead are intended as a clarification so that claimants apply the law correctly.

Application date

The proposed amendment would apply from the beginning of the R&D tax credit scheme, which is the 2019–20 income year (1 April 2019 for most taxpayers).

Key features

It is proposed that the definition of eligible R&D expenditure for the R&D tax incentive, as prescribed in section LY 5 of the Income Tax Act 2007, be amended to clarify that only expenditure that is directly connected with an eligible R&D activity is eligible.

To be eligible, it is proposed that expenditure must be:

  • required for conducting an R&D activity;
  • integral to conducting an R&D activity; and
  • directly related to conducting an R&D activity.

The existing requirement that expenditure must be listed in schedule 21B, part A and not in schedule 21B, part B also applies.

All section references are to the Income Tax Act 2007 unless otherwise stated.

Background

The legislation currently requires that expenditure be on an activity, but does not give direction as to how closely the expenditure must be connected to the activity. Section LY 5(1) defines eligible R&D expenditure, so that expenditure or loss (“expenditure”) is eligible to the extent to which it is:

  • incurred on an eligible R&D activity in the relevant income year; and
  • described in schedule 21B, part A (which lists the categories of expenditure that are eligible for R&D tax credits); and
  • not described in schedule 21B, part B (which lists the categories of expenditure that are ineligible for R&D tax credits).

In addition to these requirements, to ensure that expenditure claimed has sufficient nexus with the eligible R&D being conducted, the proposed amendment clarifies that expenditure is only eligible if it is directly related to the R&D taking place.

Detailed analysis

The proposed amendment to section LY 5(1)(a) inserts a requirement that expenditure must be required for, integral to, and directly related to an eligible R&D activity to be eligible for the credit. These are in addition to the existing requirements that expenditure must be listed in schedule 21B, part A and not described by schedule 21B, part B to be eligible for the credit.

Directly relates to (proposed new section LY 5(1)(a)(i))

The “directly relates to” requirement clarifies that expenditure must have a direct connection to an R&D activity to be eligible. A person must make a reasonable assessment of whether their expenditure has a sufficiently close connection to R&D to be eligible. If a person’s expenditure relates to an R&D activity, but also relates to another purpose, the person must apportion the expenditure accordingly.

This requirement is intended to ensure that expenditure that is too remote from the R&D activity to which it relates is not eligible for the credit. Requiring expenditure to directly relate to an R&D activity clarifies the policy intent, which is that only expenditure that closely relates to an R&D activity should be eligible.

Example 26: Expenditure must directly relate to R&D to be eligible for the credit

LiamCo operates a mixed-use facility in Auckland, where fifty percent of the facility is devoted to R&D, while the other fifty percent is used for HR for LiamCo’s operations across New Zealand.

Expenditure on cleaning products used to clean the R&D area of the facility (while used for eligible R&D) would be eligible expenditure, because it directly relates to performing eligible R&D. However, expenditure on products used while cleaning the HR work area would not be eligible, even though HR spends some time supporting R&D staff, because these costs have no direct connection with performing R&D.

Required for and integral to (proposed new section LY 5(1)(a)(ii) and (iii))

The “required for” requirement clarifies that expenditure is only eligible to the degree it is necessary to support an R&D activity. The “integral to” requirement clarifies that expenditure must be essential to an R&D activity to be eligible. That is, the activity could not be performed or completed without the expenditure.

Similarities with supporting activity limb

These two requirements are taken from the definition of supporting R&D activity in section LY 2(3)(a). A supporting R&D activity is an activity that contributes to and is necessary for a core R&D activity (an activity that resolves scientific or technological uncertainty via a systematic method in order to produce new knowledge or things). The policy intent is that supporting activities must be very closely connected to a core activity in order to be eligible, and the tests required by the supporting R&D activity definition are designed to necessitate this close connection.

The policy intent for R&D expenditure is likewise that it must be closely connected with an eligible R&D activity to be eligible for the credit. Replicating part of the supporting R&D activity tests for the definition of eligible R&D expenditure clarifies that there must be a close connection between expenditure and an R&D activity for the expenditure to be eligible. This ensures the legislation matches the policy intent.

Example 27: Expenditure must be required for and integral to the R&D

To the extent that their duties relate to eligible R&D, expenditure on the salaries of staff at LiamCo’s Auckland facility is eligible for the credit, as it is required for and integral to the R&D taking place. This includes the salaries of LiamCo’s R&D staff, but also the salaries of the HR staff inasmuch as their duties relate to the R&D staff, as this expenditure is considered required for and integral to R&D (it relates to the performance of R&D and the R&D could not be performed without it).

However, the HR staff at the Auckland facility also perform HR duties for LiamCo’s operations nationwide. The salaries of the HR staff cannot be claimed to the extent that their duties do not relate to R&D staff, as this expenditure is not required for R&D.

In addition to their salaries, staff at the facility receive a number of employee benefits, such as discounted gym subscriptions and on-site childcare facilities. These benefits are optional and are not factored into an employee’s remuneration package. While some R&D staff may use these facilities, they are not integral to the R&D taking place; R&D could still be performed even if these benefits were not provided. Expenditure on these benefits is therefore not eligible.

"Only or main purpose” test not included

It is not proposed that all of the supporting activity tests are included in the amended eligible expenditure definition in section LY 5. In particular, it is not proposed that the “only or main purpose” requirement be included. The “only or main purpose” test would go beyond the policy intent, by requiring that expenditure be incurred only or mainly for the purpose of supporting an R&D activity to be eligible.

For example, a business does R&D in a lab, which forms part of a larger complex that also includes non-R&D facilities. The R&D portion of the total complex is twenty five percent. The policy intent is that twenty five percent of the rent be eligible for the credit; however, an “only or main purpose” test may completely exclude the rent. Therefore, the “only or main purpose” has not been included in the proposed amendment.

Businesses not obligated to minimise expenditure

As with the supporting R&D activity tests, the proposed new “required for” and “integral to” expenditure tests do not obligate a business to adopt the cheapest possible approach to its R&D. For instance, one business may want the highest possible quality for materials and equipment used in R&D, while another may be satisfied with a lower standard. In both cases the expenditure required for and integral to the R&D activity would be eligible.

Similarly, businesses may go about their research in different ways. Expenditure that is required for an approach that a business has chosen will not be disqualified simply because another business might have chosen a cheaper option.

Example 28: Business not obligated to minimise expenditure

Loud Co is performing eligible R&D to develop new drilling equipment for use in constructing tunnels. Their equipment emits noise at a volume damaging to human hearing, so, to protect its employees’ (and future customers’) health and safety, Loud Co incorporates noise-reducing technologies into the design of its drilling equipment.

At the same time, Equally Loud Co is performing R&D on similar equipment. Rather than altering the design of the equipment, Equally Loud Co addresses the problem more cheaply by buying noise-cancelling earmuffs for all of its employees working on the drill.

Both Loud Co’s expenditure on reducing the noise of the drill and Equally Loud Co’s expenditure on earmuffs are eligible for the credit. It does not matter that Loud Co could have taken a cheaper app

Existing requirements in section LY 5(1)(a) and (b) still apply

Schedule 21B, part A

To be eligible, expenditure must be described in schedule 21B, part A, which provides a list of expenditure that may be eligible for the R&D tax credit (section LY 5(1)(a)). It is proposed that this requirement continue to apply (that is, the proposed amendments to this section would not affect this requirement).

Schedule 21B, part B

If expenditure is described in schedule 21B, part B, then it is not eligible for the R&D tax credit (section LY 5(1)(b)). It is proposed that this requirement continue to apply (that is, the proposed amendments to section LY 5 would not affect this requirement).

“To the extent” test still applies

The amendment removes the “to the extent” test (which ensures that expenditure is only eligible to the extent to which it is incurred on an R&D activity) from LY 5(1)(a). The test still applies to R&D expenditure, however, because it is explicitly referred to in each of the clauses in schedule 21B, part A. Each of the clauses in this schedule stipulates that expenditure in that category is only eligible to the extent to which this expenditure relates to performing an R&D activity.

Example 29: Eligible R&D expenditure under the new requirements

GeneriCo is a company whose main business activity is performing R&D. It files its supplementary return for the 2020–21 income year.

GeneriCo can claim the costs of employees performing eligible R&D, as well as costs for other staff to the extent that their duties are required for and integral to performing R&D. For instance, GeneriCo can claim the cost of HR staff to the extent that they are supporting R&D staff, cleaning staff to the extent that they are cleaning facilities used for R&D, and payroll staff to the extent that they are paying R&D staff.

However, GeneriCo cannot claim expenditure with a less direct connection to R&D. For instance, it cannot claim the cost of payroll staff to the extent that they are paying HR staff who are supporting R&D staff, or cleaning staff to the extent that they are cleaning the offices of payroll staff who are paying R&D staff, and so on. This is because these costs do not directly relate to an R&D activity.

GeneriCo can claim rent, utilities, insurance, and other expenses necessary to operate its R&D-performing facility in Christchurch, to the extent that the expenses relate to the performance of eligible R&D activities. However, GeneriCo cannot claim the costs of its on-site cafeteria or grounds maintenance costs at the facility. These costs are not required for or integral to the performance of R&D – R&D could still take place at the facility even in the absence of these costs.

Variation of facts: Under the current expenditure rules

The legislation currently only requires that expenditure be on an activity, but does not give direction as to how closely the expenditure must be connected to the activity. Without the clarification provided by this amendment, this could allow GeneriCo to claim costs that are only loosely connected with R&D, contrary to the policy intent (which is that only expenditure that closely relates to and is reasonably necessary for performing R&D should be eligible).

For instance, GeneriCo might interpret the law in a way that allows it to claim the full cost of its staff for the credit; as GeneriCo’s main business is performing R&D, all staff costs could be considered as necessary to support the performance of R&D activities. Likewise, as they are part of the costs of a facility used solely for R&D activities, GeneriCo might interpret the law in a way that allows it to claim the costs of the staff cafeteria or maintaining the grounds at its Christchurch facility.

Application date

It is proposed that this amendment would apply from the beginning of the R&D tax credit regime, which is the 2019–20 income year. The proposed amendment is a simple clarification that expenditure must be directly connected with R&D to be eligible and is not intended as a change in policy, or to change the way the law currently operates. It should therefore not affect R&D tax credit claims already filed, and should provide future claimants with more explicit legislative direction regarding what expenditure may be eligible for the credit.


MINING DEVELOPMENT ACTIVITIES EXCLUSION


(Clause 59)

Summary of proposed amendment

The proposed amendment clarifies the current exclusions on mining activities to make it explicit that they also cover development activities relating to mining minerals, petroleum, natural gas, or geothermal energy.

Application date

The proposed amendment would apply from the beginning of the R&D tax credit scheme, which is the 2019–20 income year (1 April 2019 for most taxpayers).

Key features

Prospecting, exploring, and drilling for minerals, petroleum, natural gas, or geothermal energy are excluded from being core or supporting R&D activities (schedule 21, parts A and B, clause 5). It is proposed that development activities be added to the existing core and supporting activity exclusions.

Background

Schedule 21 of the Income Tax Act 2007 lists activities that are ineligible for the R&D tax credit. It is divided into two parts. Part A lists activities that are excluded from being core R&D activities. Part B lists activities that are excluded from being supporting R&D activities. The existing mining exclusion excludes such activities from being both core and supporting activities for the tax credit.

The policy intent is for mining activities in and of themselves to be ineligible for the credit. The proposed amendment expands on this by further excluding development activities such as developing land for the purposes of mining. This exclusion only targets development activities in and of themselves. R&D that relates to such activities may still qualify for the credit, provided it meets the other eligibility criteria.

It is not proposed that development activities be explicitly defined for the purposes of the R&D tax credit regime, although there are various related definitions in the Income Tax Act 2007 (like petroleum development expenditure, which covers activities such as acquiring or constructing petroleum mining assets). These existing definitions would help inform what is considered a development activity, and additional guidance will be published with more information on what is considered a development activity for the purposes of the R&D tax credit regime.


AMENDMENT TO TANGIBLE DEPRECIABLE PROPERTY EXCLUSION


(Clause 60(2) and (7))

Summary of proposed amendment

It is proposed that schedule 21B, part B, clause 3 be amended so that, other than expenditure/loss on developing prototypes or on employees doing core R&D, expenditure that contributes to the cost of tangible depreciable property is ineligible for the credit when it is incurred. Depreciation loss on the property may be eligible, however, if the property is subsequently used in R&D.

Application date

The proposed amendment would apply from the beginning of the R&D tax credit scheme, which is the 2019–20 income year (1 April 2019 for most taxpayers).

Key features

This proposed amendment would make two changes to the existing exclusion on expenditure or loss that contributes to the cost of tangible depreciable property (schedule 21B, part B, clause 3 of the Income Tax Act 2007).

First, a change is proposed to clarify the scope of the exception for expenditure that contributes to the cost of property intended for use as a prototype (“prototype exception”), by adding further requirements that:

  • the property must only be intended for use in performing R&D in the future; and
  • creating the property must involve a core R&D activity.

This proposed amendment would ensure the provision operates consistently with the policy intent, which is for expenditure on tangible depreciable property to be ineligible unless it is on a prototype (property that is developed through R&D, and is only used in R&D).

Second, a change is proposed to allow expenditure/loss on employees doing core R&D to be eligible for the credit, despite the exclusion for costs that contribute to tangible depreciable property (“employee cost carve-in”).

Background

Schedule 21B, part B, clause 3 currently excludes expenditure or loss that contributes to the cost of tangible depreciable property. An exception exists for expenditure that contributes to the cost of property intended for use solely in performing an R&D activity. This prototype exception is intended to capture expenditure required to produce items created by and solely used in core R&D activities, such as prototypes. Expenditure on tangible depreciable property that meets this test is still eligible for the tax credit.

This amendment proposes two changes to the exclusion. The first change would amend the prototype exception. The second would allow certain employee costs to be eligible, even if they contribute to the cost of tangible depreciable property.

Prototype exception

In addition to the current requirement that the property must only be used in performing R&D, the proposed amendment requires that the property must only be intended for use in performing R&D in the future, and that creating the property must involve a core R&D activity. This is consistent with the policy intent, which the current legislation does not satisfy.

The policy intent of the prototype exception is to allow expenditure or loss on items of tangible depreciable property created through R&D and used solely in R&D throughout their lifetime to be eligible. However, the current wording of the exception may include a greater range of expenditure than is intended. There is a risk that expenditure on assets whose construction involves some core R&D and which are used solely for that purpose in the year in which the expenditure in incurred, but which are not solely intended for use in R&D throughout their lifetime, or assets which involve no core R&D in their construction but which are intended for use in R&D, may be eligible through the exception.

Employee cost carve-in

The proposed second change would allow expenditure or loss on an item of tangible depreciable property to be eligible for the tax credit, regardless of whether it meets the above tests, to the extent to which it relates to the cost of employees performing core R&D activity. This means that a business could claim expenditure on employees that contributes to the cost of an item of tangible depreciable property for the tax credit, even where the item of property is not intended as a prototype, to the extent that the employees are performing a core R&D activity. Usually this means an identifiable separate activity incidental to the creation of a larger item of tangible depreciable property.

This is consistent with the existing inclusion for labour costs for R&D undertaken in commercial production environments, and recognises that it should be easier to identify whether labour costs directly relate to R&D compared with non-labour costs, such as electricity costs. The proposed amendment would allow more genuine R&D costs to be eligible while still ensuring any fiscal risk posed by R&D projects involving significant tangible depreciable assets is minimised.

Detailed analysis

Clarifying the prototype exception

The proposed amendment would add further tests into the clause that ensure the exception is better targeted towards the concept of a prototype. In addition to the current requirement that an item of property is only used in R&D, these tests would require that the property’s sole intended future use is in performing R&D, and that the creation of the item involves a core R&D activity:

  • Sole intended future use is in performing R&D means that a person’s intent must be that the item of property will only ever be used in performing R&D activities, and never be used for any other purpose.
  • Creation involves a core R&D activity means that, for expenditure or loss on an item of property to be eligible, the expenditure or loss must also be incurred on performing a core R&D activity (that is, the creation of the item involves resolving a scientific or technological uncertainty via a systematic method).

For expenditure or loss on an item of tangible depreciable property to be eligible, all three tests must be met.

New exception for employee costs on core R&D activity

The proposed amendment would also allows expenditure or loss on an item of tangible depreciable property to be eligible for the tax credit, regardless of whether it meets the above tests, to the extent to which it relates to employee costs on core R&D activity.

Expenditure or loss on employee costs for an item of tangible depreciable property is ineligible to the extent to which the costs do not relate to performing a core R&D activity (unless the item of property meets the tests required by the prototype exception).

Example 30: Tangible depreciable property exclusion and employee costs

Claire’s Construction is experimenting with new construction materials that would allow the construction of lighter yet sturdier bridges. The construction of their first bridge involves some eligible R&D as it requires the resolution of scientific or technological uncertainty. Assuming the R&D is successful, Claire’s Construction intends that the bridge be used for commercial transport once it is complete.

Under the new amendment, the cost of the scientists and engineers employed by Claire’s Construction to resolve the scientific or technological uncertainty involved in creating the bridge is eligible expenditure for the tax credit. However, Claire’s Construction cannot claim the cost of the workers building the bridge, nor any of the costs of materials or equipment.


OTHER AMENDMENTS TO SCHEDULE OF EXCLUDED EXPENDITURE


(Clause 60(1), (3), (4), (5), (6), (7))

Summary of proposed amendments

Various amendments are proposed to schedule 21B, part B of the Income Tax Act 2007, to clarify what expenditure is excluded from the R&D tax credit.

Application date

The proposed amendments would apply from the beginning of the R&D tax credit scheme, which is the 2019–20 income year (1 April 2019 for most taxpayers).

Key features

Several additions or changes are proposed to the categories of expenditure ineligible for the R&D tax credit set out in schedule 21B, part B. These are:

  • Changing the word “purchase” in the existing exclusion on expenditure to purchase land (clause 10) to “acquire”.
  • Changing the exclusion on professional fees incurred in determining a person’s entitlement to the tax credit (clause 13) to also cover in-house expenditure incurred in determining a person’s entitlement.
  • Inserting new clause 2B, which excludes expenditure or loss on acquiring property where the property would have been depreciable in the absence of an election to treat it as non-depreciable under section EE 8 of the Income Tax Act 2007.
  • Inserting new clause 13B, which excludes expenditure or loss incurred in performing corporate governance activities.
  • Inserting new clause 20B, which excludes expenditure or loss incurred in decommissioning.
  • Inserting new clause 20C, which excludes expenditure or loss incurred in remediating land.

Background

Changing “purchase” to “acquire” (clause 10)

Clause 10 currently excludes expenditure to purchase land. It is not appropriate to give an R&D tax credit for land acquired for use in R&D for two reasons. The first is that it is difficult to apportion what cost of the land relates to R&D, given the land could be used for non-R&D purposes later. The second reason is that land generally increases in value and therefore can be sold to recoup the cost.

This amendment would broaden the scope of clause 10 so that it excludes expenditure to acquire land, rather than merely to purchase it. This is consistent with the policy intent of the original exclusion, which is intended to exclude expenditure on obtaining land regardless of the method used to obtain it.

Excluding in-house costs on determining tax credit entitlement (clause 13)

Clause 13 currently excludes professional fees incurred in determining a person’s entitlement, or lack of entitlement, to an R&D tax credit. This exclusion covers fees paid to determine the eligibility of a person, activity, or amount of expenditure, such as amounts paid to an accounting firm to prepare a person’s R&D claim.

The proposed amendment broadens the scope of clause 13 to cover all expenditure or loss incurred in determining a person’s entitlement to the tax credit by replacing the words “professional fees” with “expenditure or loss.” This is intended to exclude in-house expenditure on determining entitlements, as well as the fees currently targeted by the exclusion. These amounts should be ineligible under current legislation because they do not directly relate to R&D (they do not relate to resolving scientific or technological uncertainty), but the proposed amendment to clause 13 provides explicit legislative guidance that these costs are not eligible for the R&D tax credit.

Exclusion of expenditure where election made under section EE 8 (new clause 2B)

Proposed new clause 2B excludes expenditure or loss on acquiring an item of property that would have been depreciable in the absence of an election under section EE 8 of the Income Tax Act 2007. The policy intent is that expenditure on the upfront cost of large capital assets generally be ineligible for the credit. Instead, it is intended that depreciation loss on these assets over time be eligible (to the extent the assets are used in R&D), similar to the tax treatment of these assets.

Section EE 8 allows a taxpayer to elect that an item of property be treated as non-depreciable property (where, in the absence of this election, it would otherwise be depreciable property) upon acquisition or, in limited circumstances, a change in use. This could potentially allow taxpayers to bypass the exclusions for the upfront cost of depreciable property, and claim the full upfront cost of their property as eligible expenditure. This is contrary to the policy intent. The proposed amendment will ensure the legislation better satisfies the policy intent by excluding expenditure on property that would have been depreciable absent an election under section EE 8.

Exclusion of expenditure on corporate governance activities (new clause 13B)

Proposed new clause 13B excludes expenditure or loss on performing corporate governance activities. These costs should already be ineligible under current legislation, but the proposed new exclusion is intended to provide certainty and clarity to firms that they cannot claim these costs. These amounts are excluded because they do not directly relate to R&D. They are costs that have to be incurred regardless of whether R&D takes place.

Exclusion of decommissioning expenditure (new clause 20B)

Proposed new clause 20B excludes expenditure on decommissioning, such as decommissioning plant, structures, and sites. This expenditure, in and of itself, should largely already be excluded from the credit as it is unlikely to relate to resolving scientific or technological uncertainty. The intent of this exclusion is to clarify that expenditure on decommissioning is not eligible for the credit.

Note that the exclusion only relates to expenditure on the act of decommissioning itself. Expenditure on R&D relating to decommissioning is potentially eligible for the credit, providing it meets the other eligibility criteria, is an identifiable separate activity, and is incidental to the decommissioning activity.

Exclusion of expenditure on remediating land (new clause 20C)

Proposed new clause 20C excludes expenditure on remediating land. This expenditure, in and of itself, should largely already be excluded from the credit as it is unlikely to relate to resolving scientific or technological uncertainty. The proposed clause clarifies this by explicitly excluding expenditure on remediating land from the credit.

Note again that the exclusion only relates to expenditure on the act of remediating land itself. Expenditure on R&D relating to remediation could still be eligible for the credit, providing it meets the other eligibility criteria, is an identifiable separate activity, and is incidental to the decommissioning activity.


CRITERIA AND METHODOLOGIES APPLICATION DUE DATE CHANGE


(Clause 76)

Summary of proposed amendment

The proposed amendment brings forward the due date for submitting an application for criteria and methodologies (CAM) approval to six months before the end of a person’s income year.

Application date

The proposed amendment would apply from the 2021–22 income year (1 April 2021 for most taxpayers).

Key features

It is proposed that the CAM due date in section 68CC(3) of the Tax Administration Act 1994 be amended, so that CAM approval applications must be submitted on or before the last day of the 6th month before the end of the first income year to which the CAM applies (30 September for most taxpayers). Applications submitted after that date will not be considered for the relevant income year.

Background

From the 2020–21 income year, businesses must obtain either general approval or criteria and methodologies (CAM) approval. Under general approval, a business must apply for approval of each of its core and supporting R&D activities. Businesses which expect to spend more than $2m on R&D in a given year can opt out of general approval and into CAM approval. Under CAM approval, a business instead applies for approval of the criteria and methodologies it uses to determine the eligibility of its R&D activities and expenditure.

Currently, CAM approval applications are due after the end of the income year. The amendment proposes amending the due date for applying for CAM approvals, so that these are due six months before the end of the first income year to which a CAM relates (CAM approvals can be obtained for up to three income years). So, for a standard balance date (31 March) claimant in the 2021–22 income year, their year-end would be 31 March 2022, and their CAM approval application would be due on 30 September 2021 under the proposed new due date. This amendment does not require that the CAM approval process be completed by the above due date, only submitted.

The proposed earlier due date would ensure businesses have the correct R&D processes and methodologies in place when their R&D is actually occurring (during the relevant income year). This would reduce the need for businesses to have to retrospectively amend their processes and methodologies to ensure their R&D claims are correct. In addition, an earlier due date means businesses would have more time to seek general approval should their CAM approval application be declined (or only cover part of their R&D). This is important, because without general or CAM approval, a person is not eligible for the R&D tax credit regime from the 2020–21 income year.

The proposed amendment would apply prospectively from the 2021–22 income year (from 1 April 2021 for most claimants). This would ensure taxpayers (particularly those with early balance dates) intending to apply for CAM approval for the 2020–21 income year have sufficient time to plan for the new due date.


MORE TIME TO CONSIDER REQUESTS TO INCREASE R&D CLAIMS


(Clause 79)

Summary of proposed amendment

The proposed amendment would provide the Commissioner with more time to consider section 113 requests to increase claims in a taxpayer’s favour. The current legislation imposes a time bar that prevents the Commissioner from considering requests if more than a year has passed since a taxpayer’s income tax return due date for the relevant year.

Application date

The proposed amendment would apply from the beginning of the R&D tax credit scheme, which is the 2019–20 income year (1 April 2019 for most taxpayers).

Key features

It is proposed that section 108(1E) of the Tax Administration Act 1994 be amended to allow the Commissioner to adjust a person’s R&D tax credit claim upwards if the person has made a section 113 request within a year of their income tax return due date. Provided a request is initiated within this timeframe, the Commissioner could consider the request.

Background

A person can only file a request to increase their R&D tax credit claim once for each R&D tax credit claim they make (section 113E of the Tax Administration Act 1994), whether through a section 113 request or a notice of proposed adjustment (NOPA). A time bar prevents the Commissioner from increasing a person’s R&D tax credit claim if the person fails to make the request to increase their claim within a year of their income tax return due date (section 108(1E)).

The legislation currently requires a section 113 request to increase an R&D tax credit claim to be initiated and processed within a year of the relevant taxpayer’s income tax return due date. This is contrary to the policy intent, which is simply that the person must initiate the disputes process within that timeframe. By requiring the request to be processed within that timeframe, the Commissioner may not have enough time to fully consider requests.

This proposed legislative amendment would remove the requirement that the request be fully processed within that timeframe, while still requiring the request be initiated within a year of the relevant taxpayer’s income tax return due date. This would make the time bar which applies to section 113 requests consistent with the rules that apply for NOPAs, which were amended by the Taxation (KiwiSaver, Student Loans and Remedial Matters) Act 2020 in a similar way. The proposed amendment would ensure the Commissioner has enough time to consider requests consistent with the policy intent.


CONFIRMING HOUSING NEW ZEALAND BUILD LIMITED SUBJECT TO INCOME TAX


(Clause 63)

Summary of proposed amendment

The proposal is to add Housing New Zealand Build Limited, a subsidiary of Kāinga

Ora – Homes and Communities, to the schedule of state enterprises in the Income Tax Act 2007, to confirm that it is subject to income tax.

Application date

The proposed amendment would apply from 23 May 2018, when Housing New Zealand Build Limited was incorporated.

Key features

Schedule 36, part A of the Income Tax Act 2007 would be amended.

Background

The Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 updated the list of state enterprises in schedule 36 of the Income Tax Act 2007 to replace Housing Zealand Corporation with Kāinga – Homes and Communities. This change simply reflected that Kāinga Ora had absorbed the functions of Housing Zealand Corporation and like the Corporation, is subject to income tax. In the absence of being listed in schedule 36, Kāinga Ora, as a statutory entity, would be exempt from income tax.

Interpretative advice received by officials is that Kāinga Ora’s subsidiaries should also be listed in schedule 36. Therefore, a further amendment to schedule 36 is proposed to similarly confirm that its subsidiary, Housing New Zealand Build Limited, is also subject to income tax. This is not a change in tax status as the company is already being treated as taxable.

Kāinga Ora’s other current subsidiary, Housing New Zealand Limited, is already listed in schedule 36.


CHANGING THE DUE DATE FOR LOCKED-IN PORTFOLIO INVESTMENT ENTITIES


(Clauses 70, 71, 72 and 75)

Summary of proposed amendment

The Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 introduced a year-end square-up of the tax on income from multi-rate portfolio investment entities (PIEs) for natural persons. This PIE tax square-up happens alongside the year-end process for income tax. The result of the square-up is applied to the person’s end-of-year income tax position, resulting in one overall tax refund or bill, if any.

The proposed amendment brings forward the filing due date by which multi-rate PIEs that are a superannuation fund or retirement savings scheme are required to file detailed income information for their investors to 15 May, to align with that of other multi-rate PIEs.

Application date

The proposed amendment would apply retrospectively from the 2020–21 income year to align with the application date of the new PIE rules, with the first filing due date under the change being 15 May 2021.

Key features

The proposed amendment would bring forward the date by which multi-rate PIEs that are a superannuation fund or retirement savings scheme are required to file detailed income information for their investors each year to 15 May, to align with the filing due date of other multi-rate PIEs.

Detailed analysis

The Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 amended the Income Tax Act 2007 and the Tax Administration Act 1994 to provide for a year-end square-up of the tax on income from multi-rate PIEs for natural persons. This PIE tax square-up happens at the same time as the year-end process for income tax. The result of the square-up is applied to the person’s end-of-year income tax position, resulting in one overall tax refund or bill if any.

For individuals who only have reportable income,[10] the year-end process for tax on PIE income is an automated process at the same time as the auto-calculation process for income tax.

However, currently section 25K of the Tax Administration Act 1994 requires multi-rate PIEs that are a superannuation fund or retirement savings scheme to file the detailed income information for their investors by 30 June each year, whereas all other PIEs are required to file the information by 15 May each year under section 25J. This would mean that the income tax auto-calculation process including any amount resulting from the PIE tax square-up in future would have to be run much later (after 30 June) after Inland Revenue receives the PIE income details for the investors. This would affect a considerable number of individuals, as the 30 June due date applies to KiwiSaver PIEs.

The proposed amendment brings forward the filing due date for multi-rate PIEs that are a superannuation fund or retirement savings scheme from 30 June to 15 May to align with that of other multi-rate PIEs. This would avoid a delay to the year-end income tax auto-calculation process for a large number of individuals under the new PIE tax square-up.


PIE INVESTOR INTEREST EXEMPTION FOR LINES TRUSTS


(Clause 61)

Summary of proposed amendment

The Bill proposes to add lines trusts to schedule 29, part A of the Income Tax Act 2007.

Application date

The proposed amendment would apply from the date of enactment.

Key feature

It is proposed that lines trusts would be able to own up to one hundred percent of a PIE without the PIE breaching its minimum number of investor or maximum investor interest requirements.

Background

A lines trust is an existing defined term used in the associated persons rules. This definition covers trusts established under the Energy Companies Act 1992 or the Southland Electricity Act 1993. These lines trusts are commonly referred to as energy consumer trusts.

The Bill proposes to add lines trusts to schedule 29, part A of the Income Tax Act 2007. This will allow lines trusts to own up to 100 percent of a PIE without the PIE breaching their minimum number of investor or maximum investor interest requirements, which are normally 20 investors and no investor with more than twenty percent respectively.

A lines trust invests for the benefit of electricity customers and communities within its local area. Its holding of a majority interest in a PIE is therefore equivalent to the PIE itself being widely held. Schedule 29 part A already includes a number of similar vehicles, including local authorities and the New Zealand Superannuation Fund.


CUSTODIAL INSTITUTIONS: APPLICATION OF DEFINITION TO FIXED ESTABLISHMENTS


(Clauses 56 and 73)

Summary of proposed amendment

An amendment is proposed to the definition of a “custodial institution” to ensure that custodians whose New Zealand operation is a fixed establishment of a non-resident entity is able to access the investment income withholding and reporting obligations as intended.

Application date

The proposed amendment would apply from 1 April 2020.

Background

Custodial institutions act as a conduit between the payer of investment income and the ultimate owner of that income. Changes to clarify the investment income withholding and reporting obligations imposed on custodians were introduced by the Taxation (KiwiSaver and Student Loans) Act 2020 with effect from 1 April 2020. The rules also provide relaxations to the strict requirements of the withholding and reporting rules.

Only entities which meet the definition of a custodial institution may access the specific reporting and withholding rules for custodians. In order to meet the definition, a custodial institution must be able to show that its activities are regulated or supervised under New Zealand’s laws, or similar overseas laws. The applicable law will depend on whether the custodian is resident in New Zealand or in another jurisdiction.

Some custodians operate their New Zealand business by way of a fixed establishment in New Zealand. The overseas entity may meet the definition of a non-resident custodial institution, but the New Zealand fixed establishment is excluded from the non-resident limb of the definition of a custodial institution. This is because although a fixed establishment is not a resident in New Zealand for tax purposes, its activities are regulated under New Zealand’s financial markets legislation.

The exclusion of fixed establishments from the non-resident limb of the test means that those custodial institutions which use this business model are unable to access the relaxations available to other custodians. This outcome is contrary to the policy intent.


CUSTODIAL INSTITUTIONS: NON-RESIDENT WITHHOLDING TAX OBLIGATION


(Clause 56)

Summary of proposed amendment

Custodial institutions may be required to withhold resident withholding tax (RWT) or non-resident withholding tax (NRWT) when they pay or transfer investment income to the end investor. Rules which provide a framework for the withholding obligation were introduced by the Taxation (KiwiSaver and Student Loans) Act 2020, with effect from 1 April 2020.

The obligation to withhold currently refers to RWT only. The exclusion of NRWT was inadvertent. Officials propose an amendment to clarify that custodial institutions should withhold RWT or NRWT as applicable.

Application date

The proposed amendment would apply from 1 April 2020.


BENEFICIARIES AS SETTLORS


(Clause 43)

Summary of proposed amendment

This amendment would ensure that if, at the end of an income year, a beneficiary of a trust is owed more than $25,000 by the trustee and interest has not been paid on this amount at the prescribed or market rate, then the beneficiary will become a settlor of the trust.

Application date

The proposed amendment would apply from 1 April 2020.

Key features

Under section HC 27(6), if a trustee of a trust owes an amount to a beneficiary of the trust, the beneficiary will not become a settlor of the trust if the amount owed at the end of the income year is $25,000 or less or the beneficiary is paid interest on the amount at a rate equal to the prescribed rate of interest or the market rate.

New section HC 27(2)(bb) clarifies that a beneficiary that is owed money by a trust will always become a settlor if they do not meet the requirements of subsection (6). As such, a beneficiary that is owed more than $25,000 on which interest has not been paid at the prescribed or market rate will become a settlor of the trust.

Background

A settlor of a trust is typically someone that transfers value to the trust. As such, a beneficiary of a trust may become a settlor if they are owed money by the trustee and are not paid interest on this amount at the prescribed or market rate of interest.

Being a settlor of a trust has consequences for a person in a number of areas, including for social assistance and student loan repayments. As such, an amendment was made in the Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Act 2019 to clarify that beneficiaries only owed small amounts by the trustee ($25,000 or less) would not become settlors regardless of whether they were paid interest. This amendment was clarified further in the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Act 2020 and has applied since 1 April 2020.

It was always intended that beneficiaries owed more than $25,000 on which interest has not been paid would become settlors of the trust. However, a beneficiary owed more than $25,000 on which interest has not been paid may not become a settlor if they do not have sufficient knowledge of the amount they are owed or how it is being used by the trustee. While the Commissioner of Inland Revenue can determine the amount owed to a beneficiary and whether interest is being paid, it can be difficult for the Commissioner to ascertain the beneficiary’s level of knowledge. Therefore, the Bill proposes to amend the definition of a settlor so that a beneficiary owed more than $25,000 by the trustee on which adequate interest has not been paid, is deemed to be a settlor of a trust, regardless of their level of knowledge.


SETTLOR OF A TRUST MIGRATING TO NEW ZEALAND


(Clauses 41 and 44)

Summary of proposed amendment

The proposed amendments confirm that where a settlor of a trust has migrated to New Zealand, a trustee of the trust may distribute accumulated trustee income to a beneficiary as exempt income. The amendments apply if the trustee has satisfied their New Zealand tax obligations for world-wide trustee income in either of the following circumstances:

  • for an assessment of tax on world-wide trustee income arising under a voluntary disclosure; or
  • for an assessment of tax on world-wide trustee income arising under an election to pay tax on world-wide trustee income.

Application date

The proposed amendments would apply as follows:

  • for a voluntary disclosure made on, before or after 23 March 2020; and
  • for an election made under section HC 33, from 23 March 2020.

Key features

The proposed amendments would apply for a trust of which a settlor has migrated to New Zealand and:

  • has not made an election to pay tax on world-wide trustee income within a prescribed period; but
  • has taken steps under either the voluntary disclosure rules or the voluntary election rules to pay tax on world-wide trustee income for past years after the prescribed period has ended.

Voluntary disclosure

Under the voluntary disclosure process, New Zealand tax (including penalties and interest) has been assessed and paid for the earlier period or periods to which the voluntary disclosure relates.

In this circumstance, the intent of the voluntary disclosure rules is that a distribution from tax-paid accumulated trustee income for those past years is exempt to a beneficiary. However, it is possible that such a distribution may still be taxed at 45% under current law. The proposed amendment would ensure the law works as intended with effect from 1 April 2008 to protect tax positions assessed under such voluntary disclosures.

Voluntary election

A settlor of a foreign trust that migrates to New Zealand may elect to pay New Zealand tax on worldwide trustee income from a specified date. The main benefit of making this election is that there is no additional layer of tax when the tax-paid trustee income is distributed to a beneficiary. If this election is not made, distributions from the trust to a beneficiary may be taxed at 45%.

Under recent amendments, it is now clear that a trust of which a settlor has migrated to New Zealand within the previous four years may make a retrospective election to pay New Zealand tax on up to four years of earlier worldwide trustee income. However, it is unclear if this election results in an additional layer of tax when this trustee income is distributed to beneficiaries. The proposed amendment would ensure that distributions to beneficiaries from New Zealand-taxed worldwide trustee income is tax free.

Background

Voluntary disclosure

The voluntary disclosure rules permit the Commissioner to assess tax on past incorrect tax positions that have been voluntarily disclosed to Inland Revenue. A purpose of the voluntary disclosure rules is to allow the taxpayer to “put right” their past tax position, subject to appropriate penalties and interest being imposed.

The definition of complying trust in the Income Tax Act 2007 does not currently address the voluntary disclosure situation for an assessment made under voluntary disclosure for a trust of which a settlor has migrated to New Zealand and had not elected to pay tax on world-wide trustee income. The proposed amendment would confirm that a trust of this nature that has made a voluntary disclosure and satisfied the related New Zealand tax obligations can be a complying trust for those periods to which the voluntary disclosure relates.

An election under section HC 33

Recent amendments to the Income Tax Act 2007 clarified that an election may be made to pay tax on worldwide trustee income, and this may be retrospective for up to four earlier years. However, the effects of this election for a trust of which a settlor has migrated to New Zealand did not explicitly ensure that a retrospective election can result in distribution of accumulated trustee income being exempt income for the beneficiary. The proposed amendment would achieve this intended effect.


NOMINEE TREATMENT FOR TRUSTEE OF EXEMPT EMPLOYEE SHARE SCHEME


(Clause 10)

Summary of proposed amendment

The proposed amendment to section CE 6 of the Income Tax Act 2007 clarifies that a trustee of an exempt employee share scheme (ESS) can be treated as a nominee of the company providing the scheme.

Application date

The proposed amendment would apply from the date of enactment.

Key features

Section CE 6 is amended so that a trustee is treated as the nominee of a company to the extent that the trustee’s activities relate to an ESS or an exempt ESS (and as long as the other criteria of the section are met).

Background

Under section CE 6, if a trustee carries out activities related to a company’s ESS, and shares or related rights are issued or transferred under the ESS, the trustee is treated as the nominee of the company to the extent of those activities. As a nominee, the trustee acts for the company and is therefore treated the same way the company would be treated if the company were carrying out the ESS activities. This prevents tax being triggered when shares and other rights are passed between the trustee and company in legal terms but there is no substance to the transactions because the trustee is performing the role of the company itself.

Under the current wording of section CE 6, a trustee is only treated as a nominee to the extent that its activities relate to an “employee share scheme”. An “exempt employee share scheme” is not an “employee share scheme” (section CE 7(b)(i)).

There is no policy reason why, in this context, a trustee of an exempt ESS should not be treated the same way for tax purposes as the trustee of an ESS. The only difference between taxable schemes and exempt schemes is that exempt schemes allow the employer to grant tax-exempt share scheme benefits. This should not have a bearing on the tax treatment of a trustee administering the scheme on the company’s behalf. Therefore, the proposed amendment extends nominee treatment to trustees of exempt ESSs.


DISPOSAL OF COMPANY’S OWN SHARES BY EMPLOYEE SHARE SCHEME TRUSTEE


(Clause 13)

Summary of proposed amendment

The proposed amendment to section CW 58 of the Income Tax Act 2007 clarifies that if a trustee of an employee share scheme (ESS), while acting as a nominee for the company offering the scheme, disposes of shares the company holds in itself (“treasury stock”), any income the trustee derives from the disposal is exempt.

Application date

The proposed amendment would apply from the date of enactment.

Key features

Amended section CW 58 includes an explicit reference to section CE 6 (Trusts are nominees). If a company disposes of its own shares as the result of the application of section CE 6 – that is, through a trustee nominee – any income the trustee derives from the disposal is exempt.

Background

Under section CW 58, if a company disposes of its own shares, having acquired them without cancelling them, any income the company derives from that disposal is exempt. This is because the disposal is a partial transfer of ownership of the company to shareholders, not a sale that produces any economic gain or loss.

A company that offers an ESS may nominate a trustee to carry out activities related to the scheme, such as holding shares on trust for employees, transferring shares to employees, or reacquiring shares from employees if the company wishes to hold them as treasury stock. As a nominee of the company under section CE 6, the trustee effectively acts as the company, and should therefore be treated in that capacity the same way the company would be treated.

Since income derived by a company from disposing of its own shares is exempt, income derived by a trustee from disposing of the company’s shares while acting in its capacity as nominee of the company should also be exempt. However, the current wording of section CW 58 does not explicitly contemplate the possibility of a trustee nominee. Consequently, the section could be interpreted as not exempting that trustee income.

The proposed amendment to section CW 58 resolves this ambiguity by including a reference to section CE 6.


USE OF PRE-CONSOLIDATION IMPUTATION CREDITS


(Clauses 48 to 51)

Summary of proposed amendment

This amendment clarifies that the use of pre-consolidation imputation credits by a consolidated imputation group (CIG) is consistent with the use of pre-amalgamation imputation credits by an amalgamated company and the use of imputation credits by an individual company, which is on a first-in first-out (FIFO) basis.

Under the proposed legislation, a CIG is permitted to use pre-consolidation imputation credits of individual member companies (group companies) before using group credits, as long as shareholder continuity requirements are met.

Application date

The proposed amendment would apply for the 2008–09 and later income years.

Key features

Amended section OP 22 applies when:

  • a CIG has an imputation debit (normally because a group company is paying a dividend and wishes to attach imputation credits);
  • a group company has an imputation credit balance (pre-consolidation imputation credits); and
  • the group company’s credit balance existed before the CIG’s debit arose.

The CIG may make an election to transfer some or all of the credit balance in a group company’s imputation credit account (ICA) to the ICA of the group. This election is made by a nominated company recording the amount of the credit balance transferred as a debit in the group company’s ICA (under section OB 52), and as a credit in the group’s ICA.

Three restrictions apply:

  • The CIG and the group company must meet the shareholder continuity requirements for the carrying forward of imputation credits until the end of the day on which the debit arises in the group ICA (section OA 8).
  • Credits of the group and all group companies must be used to reduce the debit in the order in which the credits arose (FIFO).
  • The amount of credits that can be transferred from group companies to the group is limited to the amount of the imputation debit to the group’s ICA.

Background

The Commissioner’s view and practice is that current section OP 22 and its corresponding provisions in earlier legislation have always required a CIG to exhaust all its group imputation credits before it can draw on the pre-consolidation credits of the individual group companies. Tax Information Bulletin Vol 16, No 1 (February 2004) explained the policy and practice for the use of pre-consolidation imputation credits for CIGs:

As with the original consolidation provisions, the existing pre-consolidation balances of the members’ individual imputation credit accounts are not transferred to the imputation group’s consolidated imputation credit account, but continue to remain separate until such time as the imputation credit account of the imputation group has a debit to its account which it cannot offset by an existing credit within the group ICA.

This view has been contested by stakeholders from the private sector, who have argued that:

  • the general legislative framework for individual companies requires imputation credits to be used on a FIFO basis;
  • imputation credits of an amalgamated company include the pre-amalgamation credits of amalgamating companies and these may be used on a FIFO basis; and
  • there is no policy reason to depart from this principle when addressing the use of pre-consolidation imputation credits by a CIG.

Detailed analysis

Under the proposed amendment to section OP 22, a CIG may use pre-consolidation imputation credit balances in a group company’s ICA before it uses group credits. This means that imputation credits generally will be used on a FIFO basis, which is in line with the wider imputation framework.

To be used by the CIG, the pre-consolidation imputation credit balance of the group company must exist at the date of the debit to the group ICA (so shareholder continuity must be satisfied for the amount to be transferred).

The amount of the credit balance that can be transferred from group companies to the group is limited to the amount of the group’s imputation debit. This is because, when an imputation credit is transferred from a group company’s ICA to the CIG’s ICA, the date for the credit becomes the day of the credit transfer, rather than the day the tax was paid. Consequently, if the credit transfer were not limited to the CIG’s debit, credits could be carried forward that would (and should) otherwise have been extinguished due to changes in shareholder continuity calculated by reference to the date the credit originally arose.


COMPULSORY ZERO-RATING OF COMMERCIAL LAND LEASES


(Clause 88)

Remedial amendments are proposed to ensure that the compulsory zero-rating rules that apply to leases of land work as intended. All section references are to the Goods and Services Tax Act 1985 unless otherwise stated.

Remedial amendment to section 11(8D)(a) to remove “paragraph (b) does not apply”

Summary of proposed amendment

An amendment is proposed to section 11(8D)(a) to ensure that all assignments or surrenders of a lease agreement for land that meet the criteria in section 11(1)(mb)[11] are zero-rated.

Application date

The proposed amendment would apply retrospectively from 30 June 2014, being the date that amended section 11(8D) came into force under the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017.

However, as there may be instances where the relevant supplies were standard-rated, a savings provision is proposed to preserve tax positions taken under the existing section 11(8D)(a) prior to the proposed amendments being enacted.

Background

Section 11(8D)(a) ensures that lease assignments and surrenders are subject to compulsory zero-rating if they meet the requirements of section 11(1)(mb). Section 11(8D)(a) was amended in 2017, by inserting the words “and paragraph (b) does not apply” at the end of paragraph (a). This addition has significantly changed the scope of section 11(8D)(a). The change was unintended and was not referred to in any of the guidance materials.

The effect of the 2017 change seems to be that only assignments or surrenders of leases that have failed the 25 percent bright-line test in section 11(8D)(b) will be zero-rated (as opposed to all leases that met the section 11(1)(mb) criteria). Assignments or surrenders of leases that have not failed the bright-line test would be standard-rated (subject to GST at 15%).

The proposed amendment would delete the reference to “and paragraph (b) does not apply” in section 11(8D)(a). This would achieve the original policy intent which is that all assignments or surrenders of a lease agreement for land that meet the criteria in section 11(1)(mb) should be zero-rated.

Zero-rating business assets when a business is sold and the vendor’s lease is transferred or the vendor arranges a new lease

Summary of proposed amendments

Amendments are proposed to sections 11(8D)(a), (ab), (b) and (c) to clarify that, in the context of business sales, that involve a zero-rated supply relating to land leases under these provisions, any business assets that are transferred as part of that same supply or arrangement should also be zero-rated.

The proposed amendments insert references to “the supply wholly or partly consists of” and “the arrangement wholly or partly consists of”. This replicates the opening words of section 11(1)(mb) which refers to “the supply wholly or partly consists of land.”

Application date

The proposed amendments would apply retrospectively from 30 June 2014, being the date that amended section 11(8D) came into force under the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017.

However, as there may be instances where the relevant supplies were standard-rated, a savings provision is proposed to preserve tax positions taken under the existing section 11(8D) before the proposed amendments are enacted.

Background

When a registered person sells a business which includes land and other assets to another registered person, the zero-rating of land rules will zero-rate both the supply of land and the other business assets. This is achieved by section 11(1)(mb) referring to “the supply wholly or partly consists of land”. Alternatively, the sale of the business may be zero-rated as a going concern under section 11(1)(m).

The policy intent was that because the transfer of a commercial lease could be economically equivalent to a transfer of land, these transfers should also be zero-rated and should produce similar GST outcomes. So any business assets that are transferred as part of the same overall arrangement as the transfer of a lease should also be zero-rated supplies.

However, there is uncertainty as to whether the current section 11(8D) achieves this intended policy outcome.

Some taxpayers or practitioners may consider that the rules in section 11(8D) which apply to certain lease arrangements have a limited scope so that they only zero-rate the supply of the lease procurement or arranging services. This approach could mean that, in the context of a business sale, if a vendor (previous lessee) supplies other business assets to a purchaser (new lessee) alongside the services in section 11(8D), these business assets may potentially be regarded as a separate, standard-rated supply subject to GST at 15%. Standard-rating the business assets in these circumstances would represent aa different GST outcome to similar business sales where land was supplied or if an entire business was sold and zero-rated as a going concern. In both of these cases, the supplies of the business assets would be zero-rated.

Amendments are therefore proposed to sections 11(8D)(a), (ab), (b) and (c) to clarify that, in the context of business sales, that involve a zero-rated supply relating to land leases under these provisions, any business assets that are transferred as part of that same supply or arrangement should also be zero-rated.

Lease is cancelled by lessor, but lessee helps arrange a new lease for a new lessee

Summary of proposed amendment

An amendment to section 11(8D)(c) is proposed so compulsory zero-rating will apply when a lease is cancelled by the lessor and the previous lessee arranges a new lease for a new lessee.

Currently, section 11(8D)(c) only applies if the lessee cancels the lease and then provides this service.

Application date

The proposed amendments would apply retrospectively from 30 June 2014, being the date that amended section 11(8D) came into force under the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017.

However, as there may be instances where the relevant supplies were standard-rated, a savings provision is proposed to preserve tax positions taken under the existing section 11(8D)(c) before the proposed amendment is enacted.

Background

Under current law, section 11(8D)(c) applies in the context of a business sale to zero-rate the service of arranging a new lease when the old lease is surrendered by the lessee. However, the law currently doesn’t apply compulsory zero-rating to similar scenarios when the lessor has cancelled the lease. An amendment is required to ensure that the service of arranging a new lease will be zero-rated in both situations.

This accords with the policy intent which is that the same GST outcome (zero-rating) should arise regardless of whether the old lease was surrendered by the lessee (tenant) or cancelled by the lessor (landlord).


CLARIFYING THAT DIVIDENDS ARE DERIVED ON A CASH BASIS


(Clause 9)

Summary of proposed amendment

This is a minor amendment to clarify that a cash dividend (a dividend other than a non-cash dividend) is allocated to the income year in which the person receives it.

Application date

The proposed amendment would apply from the 2020–21 income year.

Key features

Dividends paid in money are assessable on a cash basis and not on an accrual basis.

Detailed analysis

This issue was raised in a “Questions We’ve Been Asked” item: When is income from a cash dividend paid on ordinary shares derived? The draft answer was that for shareholders accounting for tax on an accrual basis, the dividend will be derived when a debt in their favour is established. When the draft was sent out for comment, feedback was that the draft answer was not in line with general practice.

Currently, dividends paid in money are assessable on a cash or accrual basis (depending on which best reflects the taxpayer’s income). Many external stakeholders consider that dividends paid in money should only be assessable on a cash basis. Allowing this would simplify filing, reduce compliance costs, and better align with other legal requirements.

The proposed amendment would add a subsection to section CD 1 stating that cash dividend (a dividend other than a non-cash dividend) income is allocated to the income year in which the person receives it. This does not change when the dividend is derived, but affects when the income is allocated.


NON-RESIDENT CONTRACTORS’ TAX


(Clause 54)

Summary of proposed amendment

The amendment clarifies that when a non-resident contractor seeks an exemption from income tax for a payment, they must show that the amount derived from that payment is not “assessable income”. The section previously required them to show that the payment was not “income”.

Application date

The proposed amendment would apply from the date of enactment.

Background

This amendment relates to non-resident contractors who perform or supply services or property in New Zealand, such as someone who travels to New Zealand to provide IT services on a short-term basis to a local company. However, due to their limited links to New Zealand, there is a risk of revenue loss – the contractor may not be aware of, or comply with, New Zealand tax laws. For that reason, income received by contractors is ordinarily subject to PAYE.

A contractor may apply to the Commissioner for an exemption from PAYE under section RD 24 of the Income Tax Act 2007, as long as one or more conditions are met. Under section RD 24(1)(a) the contractor must show that the payment is not “income” and therefore no tax is payable on it. Typically, this will be because a double tax agreement exempts the payment from tax.

Arguably, a payment will be income even if it is not subject to tax. The previous formulation of the test required the contractor to demonstrate that the “income derived” was not “subject to income tax”.[12] The change to “income” was unintended. The amendment confirms that the correct test is “assessable income”. This change will clarify that Inland Revenue does not seek to withhold tax from payments to contractors if no tax is ultimately due.


RESTRICTED TRANSFER PRICING: THIRD PARTY TEST FOR EXOTIC FEATURES


(Clause 39)

Summary of proposed amendment

The third-party test in section GC 18 allows exotic features (such as subordination or terms longer than five years) in cross-border related borrowing if those features are present in significant third-party borrowing. This test effectively treats all debt other than borrowing from associated persons as third-party debt. However, cross-border related borrowing is wider than associated persons including funding such as from a non-resident owning body or a back-to-back loan. The Bill proposes to amend the test so that cross border related borrowing that is not from an associated person cannot be used to justify an exotic feature of related party debt.

Application date

The proposed amendment would apply from 1 July 2018 to align with the introduction of the restricted transfer pricing rules. However, a savings provision is proposed to apply for any taxpayer that has filed a return under the existing rules before the introduction of the Bill.

Key features

There are 12 instances of “associated persons” in section GC 18(5), (7), (8) and (9). The Bill proposes to amend each of these references so that, in these provisions, cross-border related borrowing is treated consistent with loans from an associated person. For the avoidance of doubt, these proposals do not affect which loans are covered by the restricted transfer pricing rules, which continue to apply to cross-border related borrowing.

Detailed analysis

Section GC 18(3) provides a list of features that cannot be included when pricing cross-border related borrowing. However, there is an exception to this restriction so that these features can still be included if they are also present in significant third-party debt. If a feature is present in significant third-party debt this supports there being a commercial reason for the feature’s existence.

However, the definition of a cross-border related borrowing includes loans made by lenders that are not associated with the borrower. The definition of cross-border related borrowing is in section GC 6(3B). Associated persons are covered by section GC 6(3B)(a)(i) but there are additional categories in section GC 6(3B)(a)(ii) to (iv).

The consequence of the current law is that a cross-border related borrowing that is not from an associated lender is included in the category of loans from non-associates that determines whether exotic terms can be included in that cross-border related borrowing. This creates two issues when a group has lending that is cross-border related borrowing that is not from an associated person:

  • The features of that loan partially or fully determine the appropriate features of that same loan.
  • The features of a loan within the control of people controlling the borrower are included within a third-party test to determine appropriate exotic features.

THIN CAPITALISATION REMEDIALS


(Clauses 34, 35 and 36)

Summary of proposed amendment

The Bill proposes three remedial amendments to the thin capitalisation rules. These amendments would:

  • remove certain New Zealand resident trusts from the inbound thin capitalisation rules when the only reason they were included was because a New Zealand resident settlor is associated with a non-resident company or trust;
  • introduce a separate formula for calculating apportionment of interest by an excess debt entity controlled by a non-resident owning body or trustee; and
  • update a cross-reference as a consequential amendment to one made in the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018.

Application date

The first two proposed amendments would apply from the date of enactment. The updated cross-reference would apply for income years starting on or after 1 July 2018 to align with the original amendment in the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018.

Key features

Inbound thin cap scope

Proposed new section FE 2(4B) would treat a New Zealand resident as not being associated with certain non-resident companies or trusts when determining whether a trust has been settled by a non-resident or an associated person of a non-resident. This means a New Zealand trust with a New Zealand resident settlor will not be subject to the inbound thin capitalisation rules just because that New Zealand resident settlor also has an interest in a non-resident company or trust.

Interest apportionment formula

Proposed new section FE 6(3B) and (3C) introduces a new formula for calculating the income of an excess debt entity that is controlled by a non-resident owning body or trustee. For these entities this proposed formula will apply instead of the existing formula in section FE 6(2).

Consequential to this is a change to sections FE 6(4) and (5). These subsections allow an excess debt entity with income calculated under the formula in section FE 6(2) to allocate that income to another member of their group up to the amount of interest that member has incurred. Proposed changes to section FE 6(4) and (5) will continue this position for income calculated under proposed section FE 6(3B), except that the amount able to be allocated will be limited to interest on debt owed to related parties.

Cross-reference

Section FE 12(2) sets the requirements for a worldwide group when the debt percentage of the New Zealand group is more than sixty percent, as described in section FE 5(1)(a), or seventy five percent, as described in section FE 5(1)(b). The Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 introduced section FE 5(1)(ab) for worldwide groups given by section FE 31D. However, it did not update the reference in section FE 12(2). The Bill proposes to update section FE 12(2) by replacing the reference to section FE 5(1)(a) with a reference to section FE 5(1)(a) and (ab) so the worldwide group requirements apply correctly to these groups.

Detailed analysis

Inbound thin capitalisation scope

A trust is subject to the inbound thin capitalisation rules if it satisfies section FE 2(1)(d)(i). This occurs when fifty percent or more of the value of settlements on the trust are made by a non-resident or a person associated with a non-resident.

Existing section FE 2(4)(b) treats a New Zealand resident as not being associated with a non-resident relative for the purpose of section FE 2(1)(d)(i), provided that the non-resident has not also made a settlement on the trust. For example, a family trust will not be subject to the thin capitalisation rules just because the New Zealand resident settlor has a sibling who lives outside New Zealand, unless that sibling has also made a settlement on the trust.

Proposed section FE 2(4B) extends this treatment. It provides that for the purpose of the inbound thin capitalisation rules, a New Zealand resident settlor will not be associated with a non-resident company they have made an investment in, or a non-resident trust they have made a settlement on, unless that non-resident entity has also made a settlement on the New Zealand trust. The intention of this amendment is to carve out trusts with New Zealand resident settlors that are currently only subject to thin capitalisation because the settlor is associated with a non-resident if that non-resident has no investment in or control over the trust.

Interest apportionment formula

Since the extension of the thin capitalisation rules to groups controlled by a non-resident owning body from 1 April 2015, the thin capitalisation limit for these groups has been the greater of a sixty percent debt percentage or a percentage[13] of their debt with unrelated parties. The principle is that the thin capitalisation rules should not limit deductibility of debt paid by such groups to unrelated lenders.

If the thin capitalisation debt percentage threshold is breached, income is derived by applying the formula in section FE 6(2). This formula essentially calculates the proportion of allowable debt then multiplies this proportion by total deductible interest. While this works correctly for the usual case – when there is no distinction between debt owed to related parties and unrelated parties – if it is applied to a group controlled by a non-resident owning body it implicitly assumes that the same interest rate applies to both related-party debt and unrelated-party debt.

This will often not be the case, for example because the related-party debt and unrelated-party debt were entered into at different times. In these circumstances interest that should be deductible (because it is paid to unrelated lenders) can be disallowed, or interest that should be disallowed (because it is paid to related lenders and the sixty percent debt threshold is exceeded) can remain deductible.

The Bill proposes a new formula that generates an amount of income to the extent that interest is paid to related parties on debt that is above the sixty percent threshold. This formula is:

(related interest − mismatch + FRD2) × total debt – concession × group NZ debt percentage − 60%
total debt (group NZ debt percentage − group world debt percentage)

This formula essentially multiplies pre-thin capitalisation deductible related-party interest by the proportion of total debt not eligible for the on-lending concession and by the proportion of related-party debt that is deductible under the thin capitalisation rules.

The individual terms in the formula can be described as:

  • Related interest is the equivalent of total deduction in existing section FE 6(3)(a), except it is limited to debt with counterparties that would be excluded from the worldwide group under existing section FE 18(3B).
  • FRD2 is the equivalent of FRD in existing section FE 6(3)(ab), except it is limited to fixed-rate foreign equity or fixed-rate shares that would be excluded from the worldwide group under existing section FE 18(3B) if that section applied to fixed rate foreign equity or fixed-rate shares instead of just financial arrangements.
  • Group NZ debt percentage is the total debt percentage and is identical to the group debt percentage in existing section FE 6(3)(d).
  • Group world debt percentage is the debt percentage for debt with counterparties that would not be excluded under existing section FE 18(3B).
  • Mismatch, total debt and concession are worded identically to the equivalent term in existing section FE 6(3)(aba), (b) and (c) respectively.

NRFAI DEFERRAL CALCULATION FORMULA CONSEQUENTIAL AMENDMENT


(Clause 57)

Summary of proposed amendment

The proposed amendment to section RF 2C(6)(a) of the Income Tax Act 2007 (ITA) would ensure the non-resident financial arrangement income (NRFAI) deferral calculation formula cannot produce an undefined outcome as a consequence of the insertion of the “hybrid deductions” item in this formula.

Application date

The proposed amendment would apply for income years beginning on or after 1 July 2018. This would align the application date for the amendment with that of the relevant sections in the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018.

Background

The NRFAI rules address situations where there is a sufficient degree of deferral between deductions and payments under a financial arrangement between associated parties so that non-resident withholding tax should be imposed on an accrual basis, rather than a cash basis. This ensures there is better matching between deductions for the borrower and the imposition of non-resident withholding tax on the lender.

The Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 inserted the “hybrid deduction” item in the NRFAI deferral calculation formula in section RF 2C(4) of the ITA. This amendment ensures that expenditure for which a deduction is denied under the hybrid mismatch rules in subpart FH of the ITA, is not taken into account in determining whether a loan gives rise to NRFAI. However, as a consequence of this change it is possible for the NRFAI deferral calculation formula to produce an undefined outcome. This would occur if a borrower is denied deductions for all of their relevant expenditure by the hybrid mismatch rules, resulting in a zero denominator in the NRFAI deferral calculation formula.

Section RF 2C(6)(a) of the ITA currently specifies that if the deferral calculation formula item “accumulated accruals” results in a zero denominator NRFAI will not arise. However, this rule has not been updated to take in to account the “hybrid deduction” item in the calculation of the denominator. The proposed amendment would address this gap.


FERTILISER COSTS


(Clause 21)

Summary of proposed amendment

The proposed amendment clarifies the position for a taxpayer who wishes to spread a tax deduction for fertiliser costs over one to four years under section EJ 3(5) of the Income Tax Act 2007. The proposed amendment provides the notice requirements of section EJ 3(5) will be considered satisfied when the taxpayer files their tax return on that basis.

Application date

The proposed amendment would apply from the 2020–21 income year.

Background

Section EJ 3 currently allows taxpayers to spread the cost of fertiliser over one to four years. This attempts to align the cost of fertiliser with the benefits provided by it, and is known as the “spreading” method. The section requires the taxpayer to provide “notice” to the Commissioner that they are using the spreading method but does not specifically state what form that notice should take.

Detailed analysis

The problem with the current law is that it does not specify what constitutes “notice” for the purposes of section EJ 3(5). While section 14B of the Tax Administration Act 1994 does contain some guidance on what forms notification can take, it doesn’t specifically assist with the fertiliser spreading notice.

The preference under self-assessment is to allow taxpayers to provide notice by filing their return of income for the year in which the election is made. Under the proposed amendment, doing this would satisfy the notice requirement of section EJ 3.


APPLICATION OF THE MINORS’ INCOME TAX EXEMPTION TO MINOR BENEFICIARY INCOME


(Clause 12)

Summary of proposed amendment

The proposed amendment would clarify that beneficiary income of a minor is not exempt income under the minors’ income tax exemption rule in section CW 55BB of the Income Tax Act 2007.

Application date

The proposed amendments would apply from 29 May 2012, this being the original start date of the minors’ income tax exemption.

A savings provision will apply for people who took a tax position relying on the current law in a return filed before this Bill was introduced into Parliament.

Key features

Proposed new section CW 55BB(2)(a)(iiib) would provide that income derived by a beneficiary of a trust who is a minor does not qualify for the income tax exemption in section CW 55BB (the minors’ income tax exemption).

This amendment would address the current gap in the law which allows minor beneficiaries to access the tax exemption, despite trustees being in a position to pay tax on their behalf.

Background

Referred to as the minors’ income tax exemption, section CW 55BB provides school children with an income tax exemption on income up to $2,340 each year which is not taxed at source (such as money for mowing a neighbour’s lawns). The exemption is intended as a compliance cost savings measure, which ensures children who meet the criteria do not have to file an income tax return.

The exemption is not intended to apply when there is a someone in a position to pay tax on behalf of the child. Accordingly, section CW 55BB(2)(a) sets out situations where the exemption will not apply, such as when a minor derives salary or wages, dividends or interest income.

Generally, under section HC 35, beneficiary income derived by a minor is treated as trustee income and taxed at the trustee tax rate, with the amount being excluded income to the minor. For the purpose of the trust tax rules a minor is someone who is under the age of 16 on the date of the trust’s balance date.

Section HC 35(4) sets out certain exceptions to this general rule. These include if:

  • the minor’s total beneficiary income in the tax year is $1,000 or less; or
  • no settlements on the trust have been made by the minor’s relative or guardian (or any person associated with them).

In these situations, tax should be paid at the beneficiary’s marginal tax rate. Section HC 32(3) provides that it is the trustee’s responsibility to pay this on behalf of the beneficiary.

It is possible under the current law for a minor’s beneficiary income to be treated as exempt income under section CW 55BB (as long as the payment was not in the nature of salary or wages, a dividend or interest income). However, it was never the policy intent for beneficiary income to qualify for this income tax exemption, given that trustees have an obligation to pay tax on the beneficiary’s behalf.


NZ SUPERANNUITANTS AND THE END OF YEAR AUTO-CALCULATION PROCESS


(Clause 84)

Summary of proposed amendment

The proposed amendment clarifies that New Zealand Superannuation or Veteran’s Pension recipients who incur a tax liability through the auto-calculation process as a result of the use of a tailored tax code are limited to a write-off of the amount specified in schedule 8, part B 1(a) of the Tax Administration Act 1994, which is currently $50.

Application date

The proposed amendment would apply from the 2020–21 income year.

Key features

The amendment means that any write-off of a New Zealand Superannuation or Veteran’s Pension recipient’s tax liability incurred through the auto-calculation process as a result of the use of a tailored tax code is limited to $50, as specified in schedule 8, part B 1(a) of the Tax Administration Act 1994.

Background

The new end-of-year auto-calculation rules allow taxpayers who only receive New Zealand Superannuation or Veteran’s Pension income and have a tax liability (perhaps through the under-deduction of PAYE) to have this tax liability written off. This also applies if the taxpayer has used a tailored tax code (for example, a taxpayer with tax losses carried forward that reduce their overall taxable income can get a tailored tax code to reflect that).

The underlying policy intent of these rules is that anyone using a tailored tax code should be entitled to a tax liability write-off that is limited in the same way as for the general tax codes. This is because a tailored tax code is based on a taxpayer’s estimate of their income for the year.

Schedule 8, part B, clause 1(a) of the Tax Administration Act 1994 will be amended to clarify that recipients of New Zealand Superannuation and Veteran’s Pension are limited to a $50 write-off if they have used a tailored tax code.


REMOVAL OF THE THREE-YEARLY PARENTAL TAX CREDIT REVIEW


(Clauses 46 and 47)

Summary of proposed amendment

The proposed amendment will remove the requirement to review the rate of parental tax credit (PTC) every three years, as PTC is not available for babies born on or after 1 July 2018.

Application date

The proposed amendment would apply from the date of enactment.

Key features

The requirement to review the amount of the PTC every three years would be removed as it is no longer required.

Background

Section MF 7(4) requires the Minister of Revenue, in consultation with the Minister for Social Development, to cause a review into the amounts of in-work tax credit and PTC by 30 June. The first review was in 2008 and each subsequent review is at three-year intervals.

The government stopped paying PTC for babies born on or after 1 July 2018 when it put in place the new Best Start tax credit. PTC can now only be claimed in submitting or finalising returns for previous tax years. Inland Revenue may also amend a person’s entitlement if fraud or mistakes are discovered in past years’ returns. The payment for those years would be the amount that applied then. It is extremely unlikely these amounts will be retrospectively changed. Therefore, the need to review the amount of PTC is now redundant.


BRINGING KIWISAVER EMPLOYER CONTRIBUTIONS INTO THE PENALTIES, RECOVERY AND USE-OF-MONEY INTEREST REGIMES


(Clauses 67(4), 68, 80 and 83)

Summary of proposed amendments

Amendments are proposed to the Tax Administration Act 1994 in response to legislative changes to the operation of KiwiSaver.

From 1 April 2020 the government will pay compulsory and voluntary KiwiSaver employer contributions to KiwiSaver scheme providers before the employer pays the amounts to Inland Revenue.

Voluntary employer contributions are currently not subject to the same penalties, debt collection and interest that apply to compulsory employer contributions.

The proposed amendments ensure that the same penalties and debt collection mechanisms apply to both voluntary and compulsory employer KiwiSaver contributions. It also updates a number of existing cross-references in the Act.

Application date

The proposed amendments would apply from 1 April 2021.

Key features

Voluntary employer KiwiSaver contributions are brought within the penalties, recoveries and use of money interest regimes.

Detailed analysis

Bringing voluntary KiwiSaver contributions within the penalties regime

The proposed amendment is designed to bring voluntary employer KiwiSaver contributions within the penalties regime in Part 9 of the Act.

This would be achieved by amending the definition of “tax” in section 3(1) of the Act. The proposed amendment would replace the specific reference to “compulsory employer contribution[s]” with the more generic “KiwiSaver Act 2006 employer contributions”, so it includes both compulsory and voluntary employer KiwiSaver contributions.

Additionally, in order to not imply the exclusion of voluntary employer KiwiSaver contributions, it is proposed that paragraph (a)(viii) of the definition be repealed.

Bringing voluntary employer KiwiSaver contributions within the PAYE deduction rules

The propsoed amendment is designed to ensure that the PAYE administration provisions of the Act would apply to voluntary employer KiwiSaver contributions.

Section 4A(3) of the Act extends the PAYE withholding and deduction rules to a range of deductions prescribed under other pieces of legislation. While section 4A(3)(bc) includes compulsory employer KiwiSaver contributions, it does not mention voluntary employer KiwiSaver contributions.

The proposed amendment would replace the current reference to “compulsory employer contributions” with the more generic “KiwiSaver Act 2006 employer contributions”.

Bringing voluntary employer KiwiSaver contributions within the recoveries rules

The recoveries provision in section 157 of the Act allows the Commissioner to make deductions from any amounts payable to a taxpayer who has overdue income tax. Section 157(10) includes its own definition of “income tax”.

This definition includes compulsory employer contributions, but not voluntary. The proposed amendment would add “KiwiSaver Act 2006 employer contributions” to the definition, thus extending it to include voluntary KiwiSaver employer contributions.

Bringing voluntary KiwiSaver employer contributions within the use of money interest regime

Use of money interest (UOMI) compensates the Commissioner when taxpayers either pay less tax than they are required to or delay payments to Inland Revenue.

Part 7 of the Act contains the UOMI rules, but section 120B(bb) specifically excludes unpaid compulsory employer KiwiSaver contributions.

The proposed amendment to section 120B(bb) repeals this exclusion. This, coupled with the amendment to the definition of “tax” (above), will bring both compulsory and voluntary employer KiwiSaver contributions under the UOMI regime.

Minor cross-referencing error corrected

It is proposed that reference to section 101I(5) of the KiwiSaver Act 2006 in paragraph (a)(iii)(CD) of the definition of tax in section 3(1) of the Act be replaced with section 141(5) of the KiwiSaver Act 2006. The same amendment is made to sections 120B(bb) and 157(10) of the Act, which also refer to section 101Iof the KiwiSaver Act 2006.

The reason for this amendment is that section 101I was repealed on 1 December 2014 by section 90 of the Financial Markets (Repeals and Amendments) Act 2013. The equivalent section is now section 141(5) of the KiwiSaver Act 2006.


AMEND THE DEFINITION OF DEFERRABLE TAX


(Clause 67(2))

Summary of proposed amendment

The proposed amendment alters the definition of “deferrable tax” to include consequential amendments from an amended assessment.

Application date

The proposed amendment would apply from the date of enactment.

Key features

The definition of deferrable tax would be changed to include consequential amendments from an amended assessment that is in the disputes process.

This would reduce the compliance and administrative costs of also challenging those consequential assessments.

Background

When a taxpayer has a dispute with Inland Revenue, they are only required to pay a proportion of the tax owing until the dispute is settled. The current rules do not deal well with the situation where an amendment to the liability of one taxpayer affects an associated taxpayer.

For example, a company may have part of its expenditure disallowed as a deduction, which alters the amount of a loss offset made to another company in the same group. In that situation both entities must object or challenge the assessments. This imposes undue compliance and administrative costs and lengthens the dispute process.

Detailed analysis

Sections 128 and 138I of the Tax Administration Act 1994 state that a taxpayer is not liable to pay deferrable tax related to tax in dispute.

However, the current rules mean that when there are consequential amendments to related taxpayers, those taxpayers cannot defer their tax. They are required to object or otherwise challenge that consequential assessment. This results in increased administrative and compliance costs for those taxpayers.

The proposed amendment would alter the definition of deferrable tax to include consequential amendments resulting from an amended assessment that is in the disputes process.


RESTRICTING THE ABILITY TO CHALLENGE A TAX POSITION


(Clauses 77 and 78)

Summary of proposed amendment

The proposed amendment closes a potential loophole in the disputes rules whereby taxpayers could circumvent the time limit for challenging an assessment. Under the current rules, taxpayers could attempt to reopen an entire tax assessment by making a voluntary disclosure for a particular item within the period.

Application date

The proposed amendment would apply from the date of enactment.

Background

There is arguably a loophole in the current disputes procedures which allows a taxpayer to circumvent the time limit for challenging an assessment. This involves the taxpayer making a voluntary disclosure for a particular item, which arguably, could allow them to reopen the entire original assessment. This would have the effect of circumventing the four-month time limit for challenging an assessment.

Detailed analysis

Section 89D of the Tax Administration Act 1994 outlines when a taxpayer can issue a notice of proposed adjustment (NOPA). Section 89D(1) states:

If the Commissioner-

(a) Issues a notice of assessment to a taxpayer; and

(b) Has not previously issued a notice of proposed adjustment to the taxpayer in respect of the assessment, whether or not in breach of section 89C,-

The taxpayer may, subject to subsection (2), issue a notice of proposed adjustment in respect of the assessment except to the extent to which the assessment takes into account amounts arising under subpart HB of the Income Tax Act 2007.

This means that if a taxpayer issues a voluntary disclosure and then receives a notice of assessment when they have not previously been issued a NOPA, they can then issue a NOPA for the entire return even if they are outside the four-month time limit for issuing a NOPA.

A similar rule is contained in section 89DA.

Example 31

Kstew Winers Limited (KWL) is a company that specialises in the sale of cheap imported wine. KWL files its 2020 tax return and receives an assessment on 20 April 2021. KWL has four months to object to or challenge the assessment, which expires on 24 August 2021.

On 6 October 2021 KWL makes a voluntary disclosure for the 2020 tax return indicating it had overclaimed expenses of $5,000 relating to personal air travel to Paris. The Commissioner accepts the voluntary disclosure and issues an amended assessment on 4 February 2022. On 11 March KWL files a notice of proposed adjustment to the Commissioner’s assessment arguing that some unrelated income is not taxable as it was a capital gain.

By making the voluntary disclosure KWL has been able to extend the four-month challenge time limit for its original tax return.

In the reverse circumstance the Commissioner is prevented from doing this by section 138B(1) which restricts the Commissioner to the “particular” of the amended assessment.

The proposed amendment would mean that if a taxpayer issues a NOPA for an assessment from a voluntary disclosure they are limited to the issues raised in the voluntary disclosure, which is identical to the position that applies to the Commissioner.


ALIGNING THE DEFINITION OF BENEFIT


(Clauses 58(13), 64 and 65)

Summary of proposed amendment

The proposed amendment would align the definition of a main benefit in the Acts administered by Inland Revenue with that used in the Social Security Act 2018.

Application date

The proposed amendment would apply from the date of enactment.

Key features

The proposed amendment would align the definition of a main benefit in the tax Acts with that used in the Social Security Act 2018. The proposed amendment:

  • adds a new definition of main benefit in section YA 1 of the Income Tax Act 2007;
  • removes the definition of “specified living allowance” as it is redundant; and
  • makes consequential amendments.

Background

The tax Acts and the Social Security Act both contain lists of various benefit payments in their definition sections. However, the defined terms are different for the same list of payments.

Aligning the definitions between the Acts would reduce confusion and misunderstanding of the law.


CLARIFYING THE COMMISSIONER’S POWERS TO TAKE COPIES OF DOCUMENTS


(Clause 69)

Summary of proposed amendments

The proposed amendment would clarify that the Commissioner’s powers to take copies and the like in relation to documents produced under various sections of the Tax Administration Act 1994 (the Act) also extend to documents produced in the course of the Commissioner’s inquiries under section 17I of the Act.

Application date

The proposed amendments would apply from the date of enactment.

Key features

The proposed amendment would extend the Commissioner’s powers under section 17C to take copies and the like in relation to documents provided under other sections of the Act to documents which are produced in the course of the Commissioner’s inquiries under section 17I.

The proposed amendment would also make minor changes to better reflect the interaction of the sections with one another.

Background

The various information collection provisions in the Act were rewritten and consolidated as part of the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019. As part of this exercise, section 17C was introduced to consolidate the various provisions relating to the ability of the Commissioner to take extracts from documents and the like.

Section 17I (which allows the Commissioner to conduct inquiries to obtain information) did not contain rules for taking extracts and the like and therefore was not included within the scope of section 17C.

There is no policy reason why the Commissioner should not have the power to take an extract from a document, make a copy of a document, or remove a document from a place for inspection as part of her inquiry powers.

Detailed analysis

All section references are to the Tax Administration Act 1994.

Sections 17 to 17M primarily deal with the collection of information. These provide the Commissioner with broad and wide-ranging powers to obtain information in specific circumstances. For example:

  • section 17B allows the Commissioner to require information or the production of documents;
  • section 17G allows the Commissioner to obtain information from large multinational groups; and
  • section 17H permits the Commissioner to apply to the District Court for an order requiring the provision of information.

Operating in concert with these sections is section 17C(1). This section provides the Commissioner with the power to take extracts or copies of documents produced by a person under sections 17, 17B, 17G and 17H.

However, there is another section under which the Commissioner may require a person to produce documents. Section 17I allows the Commissioner to conduct inquiries in relation to a person’s tax liability. Under this section, the Commissioner may require a person to produce documents in their position or control.

Unfortunately, section 17C(1) does not contain an explicit reference to section 17I. The absence of a reference to section 17I within section 17C(1) makes it unclear whether the Commissioner has the same powers over documents produced under section 17I such that she is able to, for example, take extracts or copies of documents produced under section 17I in the same way as she is under sections 17, 17B, 17G and 17H.

The proposed amendment to section 17C(1) would address this issue by incorporating a specific reference to section 17I within section 17C(1). This would make it clear that the Commissioner is able to take extracts or copies of documents produced under section 17I.

Minor amendments

The proposed amendment would also make minor changes to better reflect the interaction of the sections with one another. These are:

  • replacement of the term “provided” with “produced” in section 17C(5);
  • replacing the reference within section 17C(1) to section 17H with the more specific, section 17H(6); and
  • repealing the reference within section 17C(1) to section 17G as documents are not provided or produced under this section.
 

[10] Reportable income is income that Inland Revenue receives regular information about, typically from third-party payers such as employers. It is defined in section 22D(3) of the Tax Administration Act 1994 for the purposes of this Act and the Income Tax Act 2007.

[11] This section provides, in broad terms, that a supply of land between registered persons used for the intention of making taxable supplies is zero-rated for GST purposes.

[12] Income Tax (Withholding Payments) Regulations 1979, cl 5(1A)(a).

[13] This percentage was originally 110% but was reduced to 100% by the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 with effect from income years beginning on or after 1 July 2018.