Other policy and remedial changes

Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Bill

Officials' report to the Finance and Expenditure Committee on submissions received on the Bill

February 2001

Other policy and remedial changes

GST on outbound mobile roaming services
Income tax treatment of leases subject to NZ IFRS 16
Schedule 32 Overseas donee status
- Issue: Support for proposed additions
GST credit notes
Portability of Australian unclaimed superannuation money
Mycoplasma bovis tax issue
Individual tax write-off threshold
- Issue: Temporary increase to the automatically calculated individual income tax write-off threshold

GST ON OUTBOUND MOBILE ROAMING SERVICES

(Clauses 86, 87, 89 and 91)

Issue: Opposition to the proposal

Submission

(Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, EY, KPMG, PwC, Deloitte and Deloitte on behalf of Vodafone New Zealand Limited, Spark New Zealand Limited and 2degrees Mobile Limited)

Most submitters expressed strong opposition to the proposed changes. The reasons provided include:

The changes are inconsistent with the “destination principle”. (Chartered Accountants Australia and New Zealand)
The proposals seek to impose GST on a supply which is consumed outside of New Zealand. (Deloitte)
The changes will result in costly software upgrades for the telecommunications industry. (Corporate Taxpayers Group)
The revenue that may be obtained from this measure is minimal and not commensurate with the costs involved. (Deloitte)

One submitter stated that the implementation of these changes will not achieve the intended outcome in the short-to-medium term, and recommended the proposal be withdrawn from the Bill and reconsidered for the Tax Policy Work Programme at a later date when COVID-19 is controlled and there is greater certainty with regards to international travel. (Deloitte on behalf of Vodafone New Zealand Limited, Spark New Zealand Limited and 2degrees Mobile Limited)

One submitter expressed support in principle, where the changes are consistent with the Organisation of Economic Co-operation and Development International VAT/GST Guidelines 2017 (“OECD VAT/GST Guidelines”) and where double taxation could be avoided. (PwC)

Comment

New Zealand’s existing rules are inconsistent with international best practice. The rules should be modernised to reflect modern use of mobile phone technology, and alignment with the OECD’s VAT/GST guidelines which are considered to be international best practice. Currently, there are instances of non-taxation of New Zealand residents’ consumption of mobile roaming services.

The status quo is not a principled option under a broad-based GST framework, as neither outbound nor inbound mobile roaming services are subject to New Zealand GST. Imposing GST on outbound roaming services will resolve the issue of the potential non-taxation of mobile roaming services - recognising that New Zealand residents are purchasing mobile roaming services via their New Zealand-based mobile service provider. Compared to taxing inbound mobile roaming services, imposing GST on outbound mobile roaming services will minimise compliance costs, as a whole.

Additionally, as other countries adopt the OECD VAT/GST Guidelines, the instances of non-taxation and double taxation will reduce.

Officials acknowledge submitters’ concerns that the proposed application date of the changes will result in the imposition of additional compliance costs on telecommunication service providers at a time where there is currently, significant uncertainty as to when New Zealanders will be able to travel internationally freely. Further consideration of this specific issue is discussed in other sections of this report.

Recommendation

That the submission be noted, but the proposal still proceed, subject to officials’ comments above.

Issue: Alignment with the OECD’s VAT/GST Guidelines and overseas jurisdictions

Submission

(Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, Deloitte, EY, KPMG and PwC)

There should be a greater focus on alignment with Australia, rather than with the OECD VAT/GST Guidelines, the European Union and the United Kingdom. This is because there is little to gain for New Zealand with aligning with the OECD VAT/GST Guidelines ahead of Australia.

Additionally, comparisons should not be drawn with the European Union and the United Kingdom, as these jurisdictions operate in an essentially “borderless” way and operate in a very different landscape to New Zealand.

One submitter did note that alignment with the OECD VAT/GST Guidelines will minimise the instances of double taxation or double non-taxation (PwC).

Comment

Alignment with the OECD VAT/GST Guidelines represents a move to international best practice. The guidelines (finalised in 2015) are a set of principles and standards, with a particular focus on the trade in services and intangibles, which seek to minimise inconsistences in the application of GST where goods and services are exchanged between jurisdictions (cross-border), with a view to reducing uncertainty and risks of double taxation and non-taxation. The guidelines are known to have significant influence when tax jurisdictions are seeking to modernise their VAT/GST rules. The benefits of alignment can be significant and enduring.

Aligning New Zealand’s GST mobile roaming services rules with the OECD’s VAT/GST Guidelines will reduce the instances of double taxation and double non-taxation, globally, and officials consider this is where New Zealand’s focus should lie.

Recommendation

That the submission be declined.

Issue: Application date

Submission

(Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, EY, KPMG, Deloitte, Deloitte on behalf of Vodafone New Zealand Limited, Spark New Zealand Limited and 2degrees Mobile Limited)

Almost all submitters supported a delay in the proposal’s application date to beyond 1 April 2022, with Deloitte and the telecommunication industry submitting that, as a minimum, the proposal should be delayed until 1 April 2024. The reasons provided include the adverse impact of COVID-19 on New Zealanders’ ability to travel overseas, and the expected lead time required for the telecommunications industry to prepare their IT systems (in particular their real-time customer billing systems) to administer these GST changes.

Comment

When the proposal was first announced as part of Budget 2019, it had an application date of 1 October 2020. Subsequent to this, in part to provide more time for telecommunication services suppliers to implement the proposal, the application date was delayed by six months to 1 April 2021. In April 2020, in light of the growing impact of COVID-19 on New Zealanders’ ability to travel overseas, a decision was made to further delay the proposal’s application date by 12 months to 1 April 2022. This is the application date in the draft legislation before the Committee.

Officials acknowledge submitters’ concerns for the continuing uncertainty created by COVID-19 and, consequently, the limitations on New Zealanders’ ability to travel overseas freely. The likely continuing overseas travel restrictions during 2021 was one of the reasons why the proposal’s application date was delayed to 1 April 2022.

However, since April 2020, in light of recent announcements regarding successful COVID-19 vaccines, and an increased likelihood of travel “bubbles” with Australia and the South Pacific in the short-to-medium term, there is growing confidence that New Zealanders will be able to travel overseas freely (particularly to Australia) in the near future, and well before 1 April 2024.

Although telecommunication services suppliers have stated that their IT systems are complex, telecommunication services suppliers will have approximately 12 months to implement the proposed changes before 1 April 2022. It is unclear why the telecommunication services suppliers would require an additional two years (from 1 April 2022 to 1 April 2024) to complete the necessary IT changes required.

Therefore, officials do not support a further delay in the application date.

It is important to note that any further delay to the proposal’s application date would likely have a fiscal cost to the Government.

Recommendation

That the submission be declined.

Issue: GST revenue collected by the proposal

Submission

(Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, EY, Deloitte and Deloitte on behalf of Vodafone New Zealand Limited, Spark New Zealand Limited and 2degrees Mobile Limited)

Due to the impact of COVID-19, the proposal is unlikely to collect the forecasted $7 million per annum in revenue, in the short-to-medium term.

The revenue collected would, in the short-to-medium term, be disproportionate to the implementation costs expected to be borne by the telecommunication industry (estimated to be approximately $1 million). (Deloitte)

Comment

The forecasted GST revenue of $7 million represents the net GST collected as a result of the proposal and is stated as a “per annum” figure. Therefore, over the four-year forecast period, the proposal was estimated to collect approximately $22.88 million. The forecasted amount of $7 million per annum was provided by representatives of the telecommunication industry.

Officials acknowledge that, due to the impact and uncertainty created by COVID-19 and New Zealanders travelling abroad, the GST revenue collected is likely to be less than forecasted in the short-to-medium term (after the proposed application date of 1 April 2022).

However, some GST revenue is expected to be collected in the short-to-medium term because, as acknowledged by one submitter, overseas travel is expected to rebound after a successful vaccine rollout, and a sufficient portion of the population is expected to become immune to the virus. Also, in the interim, an increased likelihood of travel “bubbles” with Australia and the South Pacific means there is likely to be an opportunity for New Zealanders to travel and consume mobile outbound roaming services.

In addition, the implementation costs should be considered in the context of total long-term revenues (and not just revenue for one year), which are expected to be relatively stable once “normal” overseas travel resumes in due course.

Recommendation

That the submission be noted.

Issue: Proposals do not adhere to the destination principle and New Zealand’s GST system

Submission

(Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, Deloitte, and KPMG)

Submitters noted that the proposal is inconsistent with the “destination principle”. This is because New Zealand GST will be charged when the recipient is receiving the mobile roaming service while outside New Zealand. Likewise, GST will not be charged when mobile roaming services are received by international travellers visiting New Zealand.

Comment

One of the principles of a VAT/GST system is where to levy a tax on the final consumption of a good or service. The destination principle refers to the location where the tax should be levied (that is, the jurisdiction where the person receives the goods or services, rather than the jurisdiction where those goods or services were dispatched from).

The destination principle covers a vast majority of goods and services supplied to consumers. However, for certain services where the supplier and the consumer are not necessarily in the same place, the OECD VAT/GST Guidelines suggest that the consumer’s usual place of residence can be used as a proxy for determining the place of consumption.

The OECD VAT/GST Guidelines explicitly include telecommunication services as an example of a service that can be subject to this proxy for determining the place of consumption. This is because it is usually more practical (and minimises compliance costs for telecommunication suppliers) for such services to be subject to GST in the consumer’s usual place of residence, compared to the alternative of applying VAT or GST on the same service at different points in time, as the consumer travels between countries.

There are other examples of services that do not adhere to the destination principle, such as remote services (digital content and other forms of intangible goods).

Recommendation

That the submission be declined.

Issue: The proposal should instead be included within the remove services rules

Submission

(Chartered Accountants Australia and New Zealand and PwC)

Rather than continuing with the use of special GST rules for telecommunications services, the proposal should be embedded within the remote services rules, as consulted on as part of the policy development process.

Continuing with separate rules for telecommunication services (including mobile roaming services) will create boundary issues and may be confusing for taxpayers to determine the correct GST treatment of services, whether they relate to mobile roaming, telecommunication services and remote services.

Comment

As part of the policy consultation process, officials examined the various ways that the proposal could be legislatively drafted, including potentially embedding the rules within the GST remote services rules.

Representatives of the telecommunication industry advised officials that, rather than embedding the proposal within the remote services rules, the use of special rules for telecommunications services, and in particular, mobile roaming services, should be retained. Including the proposed rules within the remote services rules would add complexity to both the remote services rules and also the proposed mobile roaming services rules. The draft legislation in the Bill reflects this feedback.

Additionally, although the proposal seeks to amend the existing special rules, the GST Act has included special rules for telecommunication services since 2003, and so it is likely that New Zealand-based telecommunication suppliers have experience in accurately determining the GST treatment of a particular type of service.

Recommendation

That the submission be declined.

Issue: Definition of telecommunication services includes mobile roaming services

Submission

(Chartered Accountants Australia and New Zealand)

The definition of “telecommunications services” would include “mobile roaming services”. This means the proposed rules overlap with other rules in the Goods and Services Act 1985 and must be removed.

Comment

The GST Act has an existing definition for telecommunication services that is widely understood. The proposal seeks to amend the definition by adding new rules for both outbound and inbound mobile roaming services. Officials do not believe that the overlap creates any definitional issues.

Recommendation

That the submission be declined.

Issue: Definition of remote services includes mobile roaming services

Submission

(Chartered Accountants Australia and New Zealand)

The definition of “remote services” arguably also includes “mobile roaming services”. This overlap results in the proposed rules overlapping with other rules in the Goods and Services Act 1985 and must be removed.

Comment

Section 8(5) of the GST Act states that sections relating to the remote services rules do not apply to telecommunication services. This means that there is no overlap between the remote services rules and the telecommunication services rules, which includes mobile roaming services.

Recommendation

That the submission be declined.

(Clause 86)

Issue: Definition of “mobile roaming services”

Submission

(Chartered Accountants Australia and New Zealand)

Notwithstanding the issues above regarding the overlap with the remote services rules and the definition of telecommunication services, the submitter supported the proposed definition of mobile roaming services.

Recommendation

That the support for the proposed definition be noted.

(Clause 89)

Issue: Inbound mobile roaming services being zero-rated

Submission

(Chartered Accountants Australia and New Zealand and KPMG)

The proposal provides for symmetry between inbound and outbound roaming services, whereby inbound mobile roaming services supplied to a non-resident while visiting New Zealand will be zero-rated.

Comment

Officials agree that if a resident of another country that has adopted the OECD VAT/GST Guidelines for mobile roaming services, uses their mobile phone service while visiting New Zealand, any mobile roaming charges they incur will be subject to VAT or GST in their home country.

Recommendation

That the support for this issue be noted.

Issue: Double taxation issues

Submission

(Chartered Accountants Australia and New Zealand and PwC)

Submitters are concerned that, for some countries that continue to impose GST on inbound mobile roaming services, there is a risk that double taxation may be incurred on a single supply of mobile roaming services.

This could occur where a New Zealand-based telecommunications services supplier is considered to provide outbound mobile roaming services to a New Zealand resident travelling overseas, and the New Zealand resident is receiving these mobile services in a foreign country where inbound mobile roaming services are subject to VAT or GST. In these circumstances, GST would be charged twice on the single supply of telecommunication services.

The issue of double taxation must be avoided for the new rules to be a success. (PwC)

Comment

The proposed rules are not intended to apply double taxation to mobile roaming services and, where they do give rise to double taxation, this should be avoided, where practicable.

With regard to the issue of double taxation with mobile roaming services, officials support, in theory, a non-double taxation rule that limits the overall VAT/GST paid on mobile roaming services. This could potentially be achieved, for example, by effectively providing an input credit for the amount of “consumption tax” paid in the other country, in recognition of the double tax effect.

Further consultation with stakeholders is required to develop a policy solution that will resolve this issue. This also gives stakeholders time in which to plan and implement any systems changes that may be required. Officials note that this would require prioritising and resourcing as part of the Government’s Tax Policy Work Programme.

Recommendation

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

Issue: Withdraw the proposal and reconsider post COVID-19

Submission

(Deloitte on behalf of Vodafone New Zealand Limited, Spark New Zealand Limited and 2degrees Mobile Limited)

Due to the uncertainty caused by COVID-19 and the likely minimal GST revenue collected for the short-to-medium term, the proposal should be removed from the Bill and reconsidered for the Tax Policy Work Programme at a later date, when the COVID-19 pandemic is controlled and there is greater certainty in the international travel industry.

Comment

Officials acknowledge that COVID-19 has had a significant impact on New Zealanders’ ability to travel overseas, and it is currently difficult to accurately predict when international travel will resume.

However, the proposal is based around the modernisation of New Zealand’s mobile outbound roaming services rules and resolving a misalignment with the OECD’s VAT/GST Guidelines. Officials do not believe that the impact of COVID-19 means the proposal should be withdrawn from the Bill.

The proposal should proceed, as current information suggests that it is likely there will be New Zealand travellers moving freely across international borders by April 2022.

Recommendation

That the submission be declined.

INCOME TAX TREATMENT OF LEASES SUBJECT TO NZ IFRS 16

(Clauses 8, 15, 22, 23, 26 and 58)

Issue: Alignment with accounting

Submission

(Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, Deloitte, EY, KPMG, PwC)

Submitters supported closer alignment between accounting and tax for lease expenditure.

Recommendation

That the submission be noted.

Issue: Optional application

Submission

(Chartered Accountants Australia and New Zealand, KPMG)

Submitters supported the IFRS 16 tax rules being optional for taxpayers to apply.

Recommendation

That the submission be noted.

Issue: Timing of proposals

Submission

(Corporate Taxpayers Group, Deloitte, EY)

The delay in introducing the proposals means many taxpayers have already had to develop systems to unwind the impact of NZ IFRS 16. This will reduce the number of people choosing to adopt NZ IFRS 16 for tax. In the future, tax legislation should be more closely aligned to timings on change in accounting policy.

Comment

Officials agree it is beneficial to align the timing of changes in tax rules with changes in accounting policies to the extent possible. These proposals have been in development for some time and there have also been delays in the Bill, due, for example to COVID-19. Officials note that the proposals have benefited from the greater understanding that arose from taxpayers having to apply the accounting standard.

Recommendation

That the submission be noted.

Issue: Adjustments should not be required

Submission

(Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, EY, KPMG, PwC)

Impairment, revaluation, make good and direct costs adjustments, which are only timing in nature, will negate the proposed compliance cost benefits. Practically, entities will have to maintain separate tax schedules recording the original interest and accounting amortisation to ensure the correct tax deduction.

Officials should explore how any adverse impacts that may arise can be managed if there are no, or minimal tax adjustments, if the leasing tax rules are fully aligned with NZ IFRS 16.

Comment

Officials are aware that the requirement to make adjustments increases complexity, but have attempted to minimise compliance costs in the design of adjustments. For example, when an adjustment is made, this will be on a straight-line basis, with no recalculation required for events such as an extension of the lease term. This means a recurring annual adjustment will only need to be calculated once. The direct cost adjustment is also optional for taxpayers who wish to forego the timing advantage of bringing forward the deduction if the compliance costs of doing so are considered too high.

It is a general principle of the Income Tax Act that business expenditure is deductible when it is incurred rather than when an impairment or revaluation provision is created. If adjustments were not made to reverse these provisions for tax purposes, this would provide a significant timing advantage for taxpayers applying the new rules compared with non-IFRS taxpayers. Accordingly, officials do not consider it would be appropriate to have a full alignment without impairment and revaluation adjustments.

However, we acknowledge the timing impact of these adjustments may be small for certain lower value and/or shorter term leases, so officials recommend de minimis thresholds below which fewer adjustments will be necessary. These are considered separately below.

Recommendation

That the submission be declined.

Issue: Adjustments for low-value assets and short-term leases

Submission

(Jim Gordon Tax Ltd)

It is understandable that tax policy officials want certain NZ IFRS adjustments to be reversed for tax purposes. This, however, has the effect of reducing, and in some cases significantly so, the simplification that can be achieved by having tax follow the financial reporting treatment. A half-way house is needed whereby only major accounting adjustments that significantly affect tax are reversed for tax purposes. However, for low value or shorter-term leases, where the effect of the NZ IFRS adjustment is less material, there seems to be no real problem in following the NZ IFRS treatment, with the proviso that a wash-up is necessary to make sure that the aggregate tax treatment over the term of the lease is appropriate.

Comment

NZ IFRS 16 already has a different treatment for low value and short-term leases which will minimise compliance costs for the lowest value leases. This is explained on page 43 of the Bill Commentary. However, officials agree that the compliance costs of the NZ IFRS 16 proposals could be reduced if certain adjustments were not required for shorter-term and lower-value leases beyond that contemplated by NZ IFRS 16. This could potentially make the new rules more concessionary than the rules applied by non-IFRS taxpayers, so should only apply where the timing difference is relatively immaterial.

While any distinction between shorter-term and longer-term leases or low and high value leases is necessarily arbitrary, officials have discussed with submitters where these thresholds should be set.

Officials recommend that the add-back adjustment, impairment and revaluation adjustment and the make-good and direct costs adjustment should not be made for an IFRS lease that has an initial right of use asset value of $100,000 and a term of four years or less. Officials note these thresholds are significantly above the value and term thresholds in NZ IFRS 16 referred to above, which are approximately a US$5,000 asset value and terms less than 12 months respectively. Officials expect this concession will cover the majority of personal property leases businesses enter into, for example, motor vehicles. Typically few, if any, adjustments would be expected for these leases, however introducing a de minimis will increase certainty for taxpayers that adjustments will not be necessary.

Recommendation

That the submission be accepted.

Issue: Carve out for real property

Submission

(Corporate Taxpayers Group, KPMG, PwC)

The carve out for real property will result in many taxpayers being less likely to adopt NZ IFRS 16 for tax. Where a taxpayer has several leases that are real property and several that are not, the processes required to determine the differences between accounting and tax will differ between the lease assets.

Comment

Real property leases are generally of higher value and for longer terms than other assets. Therefore, the fiscal cost of accelerating deductions for real property by adopting NZ IFRS 16 for tax, for real property, is significantly higher. Furthermore, real property is more likely to have impairment and revaluation adjustments, meaning the compliance costs of applying NZ IFRS 16 for tax are likely to be higher than for shorter term, lower-value assets.

Recommendation

That the submission be declined.

Issue: Irrevocable election

Submission

(EY)

Taxpayers should be allowed to cease to follow NZ IFRS 16 for tax if they perform a wash-up calculation at exit, and account appropriately for any income/expenditure that arises.

Comment

Officials consider it is appropriate for a taxpayer that elects to follow NZ IFRS 16 for tax to be required to continue to follow it for the remainder of that lease. This will prevent taxpayers going into and out of the rules to gain a favourable tax outcome. This will also minimise the number of adjustments and wash-ups required.

However, to reduce the barriers to entry to these rules, officials consider that a taxpayer should be able to choose whether to apply the new rules on a lease-by-lease basis. The consequence of this choosing to apply the new rules to some or all current leases would not prevent the taxpayer choosing not to apply it for other leases. This is covered further separately below.

Recommendation

That the submission be declined.

Issue: Transitional adjustment for early adopters

Submission

(EY)

In cases where taxpayers adopted NZ IFRS 15 and 16 early, it is possible they will have already filed at least their 2019 and 2020 income tax returns before the Bill is enacted. In order to reduce compliance costs, the proposals should allow a transitional adjustment. We suggest that the proposed spread of the transitional adjustment over a four-year period should be reduced to two years for these early adopters.

Comment

The proposed four-year spread of the transitional adjustment is designed to spread the fiscal cost of deductions being brought forward on adoption of NZ IFRS 16. If the adjustment period were reduced to two years, this would increase the fiscal cost of the proposals without significantly reducing the compliance costs of early adopters.

Officials note that the updated proposal covered below, to allow taxpayers to choose to apply the new rules on a lease-by-lease basis, will provide greater flexibility for early adopters of NZ IFRS 16 who wish to apply the new rules.

Recommendation

That the submission be declined.

Issue: Certain leases should be excluded from wash-up calculation

Submission

(EY)

A wash-up calculation will currently be required for leases that cease to qualify for the proposed treatment. Concessionary carve outs should apply to remove the need to perform a wash-up calculation in the following scenarios:

when leased assets are on-leased or sub-leased between New Zealand group entities with at least 66% commonality of ownership;
any sub-leasing between members of a tax consolidated group; and
any short-term sub-leasing to a person.

Comment

The proposed new rules align the timing of deductions for certain operating lease expenditure more closely with accounting. The purpose of the wash-up calculation is to ensure that, where deductions claimed based on this modified timing are above or below the expenditure incurred, an adjustment is made to align deductions claimed with the amount incurred. If no wash-up adjustment is made, some expenditure incurred may be deducted twice, or not deducted, in certain circumstances. The policy intention is that total deductions claimed in relation to a lease until the point of wash-up should equal the deduction available to non-IFRS taxpayers. Removing the need to perform a wash-up calculation in certain circumstances will undermine the integrity of the new rules.

Recommendation

That the submission be declined.

Issue: Effect on thin capitalisation

Submission

(EY)

The NZ IFRS 16 treatment could negatively impact thin capitalisation ratios, resulting in interest disallowances beyond the intended scope of those rules. The proposals in the Bill do not exclude the right-of-use assets and lease liabilities recognised on the balance sheet as a consequence of NZ IFRS 16 from thin capitalisation calculations. Deferred tax in relation to leases will also be included in debt-to-asset ratio calculations.

The proposals should be amended to include confirmation that thin capitalisation calculations should exclude the right-of-use asset, lease liability and associated deferred tax components; or alternatively should include a mechanism to remove any net impact of NZ IFRS 16.

Comment

The thin capitalisation debt percentage calculation is based on the accounting balance sheet using the formula:–

group debt/(group assets – non-debt liabilities)

A group’s balance sheet position is impacted by the right-of-use asset and the lease liability recognised under NZ IFRS 16. These amounts increase group assets and non-debt liabilities respectively. Accordingly, when the two amounts are equal, there is no impact on the thin capitalisation debt percentage.

However, officials acknowledge that there will be differences between the amount of a right-of-use asset and lease liability, and lease-related deferred tax assets or liabilities, that flow through to the debt percentage calculation. These impacts arise as a result of adopting NZ IFRS 16 for accounting, rather than any of the proposed tax changes in the Bill.

From time to time, existing accounting standards are updated, and new standards are introduced, that impact a taxpayer’s balance sheet, and these changes flow through to their thin capitalisation debt percentage calculations. As a test based on accounting information, the policy intent is that the debt percentage calculation is affected by these changes and the formula is not updated to reverse their impact. Officials do not support a special treatment for NZ IFRS 16.

Recommendation

That the submission be declined.

Issue: Dedicated IFRS resource

Submission

(EY)

NZ IFRS standards should be pro-actively reviewed for tax impacts ahead of the change in the standard applying, to provide NZ IFRS taxpayers with certainty on the related tax consequences. Inland Revenue should establish a dedicated project on its Policy Work Programme on NZ IFRS-related impacts.

Comment

Inland Revenue considers information from a variety of sources, including consultation with the private sector, when advising the Government on the Tax Policy Work Programme. There have been numerous legislative updates to reflect changes in NZ IFRS, and officials will continue to monitor NZ IFRS to determine further legislative change is required. This can be achieved without establishing a dedicated NZ IFRS resource.

Recommendation

That the submission be declined.

Issue: Election process

Submission

(Matter raised by officials)

Taxpayers should be able to apply the new rules on a lease-by-lease basis.

Comment

Under the rules proposed in the Bill, once a taxpayer has elected to follow NZ IFRS 16 for tax it must continue to do so for all eligible leases for all future periods. Officials now consider that this is more restrictive than necessary. Officials recommend taxpayers should be able to choose whether to follow NZ IFRS 16 for tax for each eligible lease. This would allow taxpayers to follow NZ IFRS 16 for tax for an individual lease, while continuing to follow the standard rules for other leases. Once a taxpayer chooses to follow NZ IFRS 16 for tax for a particular lease, it should continue to follow this for the life of the lease, provided the lease remains eligible under the originally proposed criteria.

Recommendation

That the submission be accepted.

Issue: Minor drafting improvements

Submission

(Matter raised by officials)

Minor drafting changes should be made to the proposed provisions as follows:

The words “other than subsection (5)” should be deleted from subsection EJ 10B(1) to clarify that the wash-up rule in subsections EJ 10B(5) and (6) applies for the income year in which an IFRS lease ends or ceases to be an IFRS lease.
The word “accounts” in subsection EJ 10B(1)(a) should be replaced with “financial statements” to align with the term used in NZ IFRS.
The words “or would use NZ IFRS 16 if that lease met the materiality thresholds for NZ IFRS 16” should be deleted from subsection EJ 10B(1)(a) because the treatment of low value and short-term leases is specified within NZ IFRS 16, so the standard will be used for these leases.
The words “leases described in paragraphs (a) to (c)” in subsection EJ 10B(1)(d) should be replaced with “IFRS lease” to simplify the drafting.
The words “a deduction for an income year for the IFRS lease equal to the amount calculated using the formula” in subsection EJ 10B(2) should be replaced with “for an income year, a deduction for a positive amount, and has income for a negative amount, for amounts calculated using the formula” to clarify that the formula result can be the amount of a deduction or income.
The term “accounting expenditure” in the formula in subsection EJ 10B(2) and in subsection EJ 10B(3)(a) should be changed to “accounting amount” because the accounting amount could be accounting expenditure or income.
The words “relevant positive or negative” should be deleted from subsection EJ 10B(3)(b) and (d) to simplify the drafting.
The words “for any income year” should be inserted after the words “add-back adjustment” in subsection EJ 10B(3)(c) to improve clarity.
The words “an amount of income or deduction” in subsection EJ 10B(5) should be replaced with “a deduction for a positive amount, and has income for a negative amount” to improve clarity.
The word “or” should be replaced with “and has” in subsection EJ 10B(7) to improve clarity.

Comment

Officials recommend these drafting changes as they will improve the clarity of the legislation.

Recommendation

That the submission be accepted.

SCHEDULE 32 OVERSEAS DONEE STATUS

(Clause 62)

Issue: Support for proposed additions

Submission

(Chartered Accountants Australia and New Zealand)

The submitter supports the addition of Active Hearts Foundation, Kiwilink and Shimshal Trust to schedule 32 of the Income Tax Act 2007, with effect 1 April 2020.

Recommendation

That the submission be noted.

GST CREDIT NOTES

(Clause 90)

Issue: The proposed amendment to allow a supplier to issue a credit note when 15% GST was incorrectly charged is unnecessary

Submission

(Chartered Accountants Australia and New Zealand, KPMG)

We disagree with Inland Revenue’s interpretation of the current law. Section 25 already allows an adjustment of the full amount of the reduction in consideration. The proposed change is being enacted to achieve an outcome that is achieved with the current GST legislation. (Chartered Accountants Australia and New Zealand, KPMG)

Comment

Officials consider the amendment is necessary. Even if the same outcome can already be achieved under the current law, it is still useful to explicitly clarify in the legislation that a credit note can be issued to adjust GST in the scenario when a zero rated or exempt supply was incorrectly standard rated. The amendment is designed to accommodate existing business practices so should increase certainty and reduce compliance costs.

Recommendation

That the submission be declined.

Issue: Supports proposal to allow a supplier to issue a credit note when 15% GST was incorrectly charged

Submission

(Chartered Accountants Australia and New Zealand, Deloitte, PwC, EY)

If Inland Revenue continues to take the view that the legislation as it stands is unclear, then the change is welcome. (Chartered Accountants Australia and New Zealand)

Supports the proposal to align this process with business practice and the proposal for retrospective application. (Deloitte, PwC)

We support the proposed simplifications that seek to align the issuing of credit notes to the assessment amendment approach, currently available. (EY)

Comment

Most submitters support the proposed amendment.

Recommendation

That the submissions should be noted.

Issue: Supports proposal, but further amendments are required to align provisions with modern business practices

Submission

(Corporate Taxpayers Group, Deloitte)

The Group submits that the suggestions it made to improve credit note requirements in its submission on the officials’ issues paper GST policy issues should be considered and implemented as part of the modifications to section 25 contained in this Bill.

The legislation should be modernised to explicitly allow a document to simultaneously be a tax invoice, credit note and debit note. This would align with common business practice which is designed to ensure invoicing documentation is streamlined and one document can deal with all scenarios.

Although the intention to align the legislation with modern business practice is commendable, section 25 will still remain outdated and not fit for purpose after this amendment is made. For example, it is not technically possible to issue a valid credit note if there is an error on the corresponding tax invoice (that is, the wrong entity is being invoiced) but the consideration and GST amounts on the tax invoice are correct. (Corporate Taxpayers Group, Deloitte)

Comment

The points raised by submitters require wider reforms to modernise the invoicing provisions. Proposed reforms to modernise invoicing are intended to be introduced in the next omnibus taxation bill. The submitters’ points will be considered for inclusion in that Bill. As with other policy reforms, inclusion in the Bill will require officials’ consideration, ministerial approval and finally Cabinet approval.

Recommendation

That these submissions be noted, subject to officials’ comments.

Issue: Scope of the proposed provision should be broadened

Submission

(PwC)

A further amendment should be made to clarify that a credit note can also be issued for a transaction where GST was inadvertently charged despite there being no supply at all. For example, if GST was charged in error in relation to a compensation payment not subject to GST.

Comment

Under the current GST Act, a credit note can only be issued when a GST-registered person has made a supply of goods and services. Allowing a credit note to be issued when there has in fact been no supply would require a complete redrafting of the credit note provisions, so could be considered as part of the package of changes to modernise the invoicing provisions, which are planned to be included in a subsequent taxation Bill.

In considering this submission, officials have identified that the proposed specific provision that was included in the Bill as introduced is too narrow, as it is limited to credit notes issued when a supplier has mistakenly charged GST on an exempt or zero-rated supply. The intended policy outcome would be better achieved by a more general provision which clarifies that a credit or debit note can be issued for any supply of goods of services where an incorrect GST treatment was applied to the supply. Officials recommend including this more general provision in the current Bill.

Recommendation

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

Issue: Consequential amendments to similar provisions

Submission

(PwC)

Existing sections 25(1)(ab) and (abb) allow a credit note to be issued in relation to a supply which should have been zero rated under two specific zero-rating rules. Following the introduction of new section 25(1)(aaa), consideration should be given to amending sections 25(1)(ab) and (abb), as the supplies to which these subsections apply may now be adjusted under the new, more general section 25(1)(aaa).

Comment

Officials note that the proposed general provision will make the existing specific provisions in sections 25(1)(ab) and (abb) effectively redundant. Officials recommend amendments that would allow those specific provisions to be replaced by the new general provision.

Recommendation

That the submission be accepted.

Issue: Proposed time limit on issuing a credit note

Submission

(Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, Deloitte, EY)

The change should not proceed. The Commentary to the Bill states that the amendment is being introduced because there is a fiscal risk to the current rules. We question the size of such a risk. Any GST input tax claimed is merely passed on to the recipient and is not retained by the supplier. The supplier would be able to retain the refund if the price paid was GST-inclusive, but this will be determined by the original agreements, not by any subsequent decision to issue a credit note. The issue of a credit note remains the most practical means for correcting an error in the pricing of the supply. To require suppliers to apply to the Commissioner to obtain a refund would create additional compliance costs. Conversely, to not allow the supplier to obtain a refund would be inequitable. (Chartered Accountants Australia and New Zealand)

The Group does not support the proposal to align the time limit for issuing a credit note with the time bar that applies to GST refunds. The reason for this is that it is not uncommon for an amount of an invoice to remain in dispute for an extended period of time, which may exceed four years. Taxpayers should retain the ability to correct tax invoicing, via a credit note, at the conclusion of a commercial dispute. If a time limit is to be placed on credit notes, this should be a period of eight years. This would align with the rules for GST returns which are incorrect due to a clear mistake or simple oversight. (Corporate Taxpayers Group, Deloitte)

Although we recognise the Government’s concern around the fiscal risks of unlimited ability to issue credit notes, we do not support the proposed time limits as they are currently drafted. A better outcome would be to align the time limit for issuing credit notes consistent with the input tax rules; that there be no time limit where a credit note is required to be issued due to a simple mistake or oversight. If Inland Revenue is worried about the integrity of the system, we recommend that officials consider whether increased disclosures could alleviate the risk to the tax base. (EY)

Comment

Officials consider it is necessary to provide a time limit on issuing a credit note to limit the potential fiscal risks from a change in how the GST treatment of a supply is interpreted by the GST-registered person or Inland Revenue. The proposed time limits are four years or eight years (when the credit note is issued to correct a clear mistake or simple oversight) and are consistent with the corresponding time limits for amending the original GST return that the relevant supply had been included in. This time bar on amending tax returns is an accepted approach of providing certainty for taxpayers and Inland Revenue, and in the absence of a similar time limit on credit notes, the credit note provisions could be used to defeat the intent of the time bar.

Without a time limit on credit notes, it would be possible for GST-registered persons to claim large tax refunds in relation to positions taken more than four or eight years ago. Other options for addressing this fiscal risk, such as increased disclosures or a value-based limit could be ineffective or unfair.

Recommendation

That the submissions be declined.

PORTABILITY OF AUSTRALIAN UNCLAIMED SUPERANNUATION MONEY

(Clauses 58(3) and 93)

Issue: Support for proposed amendments

Submission

(Anthony Harper, Chartered Accountants Australia and New Zealand, Financial Services Council of New Zealand Incorporated, and Navtej Singh)

The submitters voiced their support for the proposed amendments.

Recommendation

That the submission be noted.

Issue: Commencement date

Submission

(Anthony Harper, Financial Services Council of New Zealand Incorporated)

Two of the submitters noted that the proposed commencement date for the amendments is the date that relevant amendments to the Trans-Tasman Retirement Savings Portability Arrangement between Australia and New Zealand (the Arrangement) come into effect. Amendments to this Arrangement will be made only once reciprocal changes are made to Australian domestic legislation. The submitters encouraged New Zealand and Australian Governments to pursue these changes as soon as practicable.

Comment

The relevant Australian legislation was passed on 11 December 2020. New Zealand officials will continue to engage with their Australian counterparts as changes to the Trans-Tasman Retirement Savings Portability Arrangement are agreed.

Recommendation

That the submission be noted.

Issue: Implementation implications

Submission

(Financial Services Council of New Zealand Incorporated)

Open dialogue with the KiwiSaver scheme provider industry must be maintained to ensure that any implementation issues (examples of possible issues the submitter provided relate to system changes, possible anti-money laundering issues and ensuring funds are correctly applied to the right member) are appropriately worked through, and suitable implementation timeframes are provided prior to commencement.

Comment

Officials agree that it is important to work closely with KiwiSaver scheme providers on the implementation of the proposed amendments.

With both nations progressing the needed legislative changes domestically, it is not possible to include a specific date for commencement in this legislation. It would not be appropriate to have a commencement date that does not match Australia’s. However, in order to increase certainty for taxpayers, officials are recommending a a time limit to the commencement of this provision. This would specify that the relevant amendments would commence with the exchanging of diplomatic notes or 12 months after the legislation receives Royal Assent. Such an approach would echo that taken by Australia in introducing their complementary legislative changes and increase certainty for KiwiSaver scheme providers. Officials also note that linking the commencement date for the amendments to the date diplomatic notes are exchanged between Australia and New Zealand (rather than prescribing a set application date at this time) will ensure that there is the flexibility to set a commencement date that gives scheme providers sufficient lead-in time to implement the changes. It is also possible to defer the date of application for a set time after the notes have been exchanged.

The application date for the original portability legislative amendments was similarly linked to the date that an exchange of diplomatic notes brought the Trans-Tasman Retirement Savings Portability Arrangement into effect (see: section 2(25) of the Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Act 2010).

Recommendation

That the submission be noted.

MYCOPLASMA BOVIS TAX ISSUE

(Clause 33)

Issue: Support for the proposal

Submission

(Chartered Accountants Australia and New Zealand, Federated Farmers of New Zealand Incorporated, Jim Gordon Tax Ltd, Navtej Singh)

That the proposal is supported and should proceed.

Comment

Officials note the general support for the proposal. Some of the submitters made further points which are dealt with below.

Recommendation

That the submission be noted.

Issue: Retrospective application

Submission

(Chartered Accountants Australia and New Zealand)

It is appropriate that the legislation be backdated to the 2017–18 income year, given some farmers may have had to cull livestock in the 2017–18 income year because of Mycoplasma bovis.

Comment

Officials note the general support for the proposed retrospective application date.

Recommendation

That the submission be noted.

Issue: Generic provision

Submission

(Federated Farmers of New Zealand Incorporated, Jim Gordon Tax Ltd)

That either the Mycoplasma bovis proposal be made generic to all biosecurity events, or that all event-specific relief legislation for adverse events be reconsidered with a view to making it generic, and applicable to Mycoplasma bovis impacted situations.

Comment

The current proposal is confined to the culling of livestock as part of eradicating Mycoplasma bovis in New Zealand and therefore terminates before the 2028–29 income year. Officials agree in principle that there should be an equivalent generic provision to cover future biosecurity events that lead to the culling of livestock valued under the national standard cost scheme or cost price method. This would expedite addressing the tax implications of such events and create more certainty for livestock owners.

Officials have discussed the possible criteria for a separate generic provision with submitters, and the matter has been included on the tax policy work programme. It may therefore be feasible to include a generic provision covering future biosecurity events in a tax bill in 2021, which would enable wider public submissions on the proposal. In the meantime, the Mycoplasma bovis specific provision should proceed.

Recommendation

That the submission be noted.

Issue: Unwinding of income equalisation deposits

Submission

(Chartered Accountants Australia and New Zealand, Federated Farmers of New Zealand Incorporated, Jim Gordon Tax Ltd)

Mycoplasma bovis affected farmers should be allowed to reconsider past income equalisation deposits if they retrospectively elect to use the Mycoplasma bovis spread.

Comment

Income equalisation deposits are a way of smoothing farmers’ incomes. This is achieved by deposits being deductible for tax purposes, and withdrawals being income. Deposits in any one income year are capped at the amount of net income from the qualifying activity for that year.

Some farmers whose herds have been affected by Mycoplasma bovis will have, in the absence of other options, made deposits into the scheme to mitigate the income arising from their herds being culled.

Income equalisation deposits are, however, not an effective mechanism to mitigate the unexpected income effects when farmers need the cash to restock their breeding herds, as the deferred income is then brought to account around a year later. The proposed six-year spread will be far more effective in such cases. Therefore, some farmers will now prefer to retrospectively unwind the tax effects of their earlier income equalisation deposits and instead take up the income-spreading option. Unwinding the tax effects of a deposit requires specific additional legislation. However, it does not involve unwinding the deposit, on which interest would have likely already been paid.

Points of difference

In principle, officials agree with the submission but the matter is still under consideration given that there are some fiscal implications.

Recommendation

That the submission be noted.

Issue: Removal of reference to “owner” in proposed section EZ 4B(1)

Submission

(Chartered Accountants Australia and New Zealand)

That the proposed section EZ 4B(1) should apply to farming businesses, rather than the owners, and that the section should be rewritten to reflect this.

Comment

Proposed section EZ 4B(1) begins with the wording: “This section applies when a person who owns or carries on a business has mixed-age cows on hand at the start of the income year”. The submitter is concerned that this proposed wording by referring to “owners”, will encompass the shareholders of a company when it is the company, not the shareholders, that returns the income. Officials consider that this interpretation is not correct. In the example, the company is the “person” carrying on the business and will be entitled to use the spread, provided the various other criteria are met.

Officials note that section EZ 4B(1) is based on wording already used in those parts of the Income Tax Act that deal with the valuation of livestock and trading stock in general. It is difficult to envisage a scenario in which a business is not being carried on, even in the case of a trust or individual. However, officials are reluctant to recommend what could prove to be narrower wording that inadvertently precludes someone from being able to use the spread.

Recommendation

That the submission be declined.

Issue: Generally rewording proposed section EZ 4B(1)

Submission

(Chartered Accountants Australia and New Zealand, Jim Gordon Tax Ltd)

That the eligibility criteria in proposed section EZ 4B(1)(a)(i) should be reworded to better reflect the criteria for spreading, or alternatively deleted.

Comment

Currently, proposed section EZ 4B(1(a)(i) refers to mixed-age cows held “for the purposes of sale or exchange in the ordinary course of business”. Officials recommend that the proposed provision should be reworded to better reflect the intended coverage of the spread, which is stock used for breeding.

Officials do not recommend that the provision should be deleted, as it is necessary to have a reference to using the livestock in the business. Being clearer on the intended type of business should be sufficient.

Recommendation

That the submission to amend the wording of section EZ 4B(1(a)(i) to more specifically reflect the intended coverage of the spread be accepted, but the submission to delete section EZ 4B(1(a)(i) be declined.

Issue: Use of the word “choose” rather than “elect” in section EZ 4B(2)

Submission

(Chartered Accountants Australia and New Zealand)

That the word “choose” in proposed section EZ 4B(2) should be replaced with “elect”.

Comment

Taxpayers will need to make an election to use the income spread. Proposed section EZ 4B(2) sets out the requirement. It is standard drafting style to use “choose” as the verb rather than “elect” when referring to an election in the Tax Acts. Therefore, officials do not agree with the submission.

Recommendation

That the submission be declined.

Issue: Business cessation

Submission

(Chartered Accountants Australia and New Zealand)

That the requirement for allocation on death of a business owner is unnecessary and the draft section EZ 4B(4) should be reworded.

Comment

The proposed provision spreads the income evenly over a six-year period. However, proposed section EZ 4B(4) requires that, if a business ceases or a natural person owner dies, any remaining spread income at the time of cessation or death is allocated to the year of cessation or death. This is consistent with the standard requirement for tax matters to be brought to account on death or cessation of business.

The submitters are concerned that the reference to death of an owner will mean that companies that continue after the death of one of their owners will be required to bring the unallocated spread income to account at that stage. Officials agree that the crucial test is whether the person stops owning or carrying on the business, and the provision should just reflect that. For example, the death of a sole trader will mean that the person has stopped owning or ceased their business. Officials recommend the draft legislation should be clarified in this area.

Recommendation

That the submission be accepted.

Issue: Shareholder salaries

Submission

(Chartered Accountants Australia and New Zealand)

That taxpayers who meet the criteria to use the spreading method should be able to adjust prior year shareholder salaries to reflect the spreads impact on business profits. In particular, Inland Revenue should consider whether a change to the tax position as a result of a legislative change falls within the parameters of Standard Practice Statement (SPS 18/01): Retrospective adjustments to salaries paid to shareholder employees.

Comment

Many farming businesses pay shareholder-employees a salary, which may be linked to the level of business profits. The submission notes that Inland Revenue’s Standard Practice Statement outlined the circumstances in which the Commissioner will allow a retrospective adjustment of previously paid shareholder salaries. Those circumstances focus on when the company profit can be shown to be in error, or when the salary shown in the company accounts was not the amount agreed at the time of the salary and wages. An error in the company profit can include when a company has a policy of declaring salaries at no more than the company’s profit in any year, and it is found, subsequent to declaring a salary, that the company’s profit was overstated. The Standard Practice Statement may, therefore, enable some companies who can apply the spread retrospectively to also make retrospective adjustments to salaries, as past profits will then have been overstated.

Officials therefore recommend reminding taxpayers of the Standard Practice Statement through the Tax Information Bulletin following enactment.

Officials recommend any retrospective adjustment of salaries should be limited to the circumstances specified in the Standard Practice Statement.

Recommendation

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

Issue: Amendment to spread formula term “number”

Submission

(Matter raised by officials)

That proposed section EZ 4B(8)(b) be revised to refer to the number of livestock of that class that the person had on hand at the start of the cull year and valued under the national standard cost scheme or the cost price method, in the income year before the cull.

Comment

Proposed section EZ 4B(8) defines the term “number” for the purposes of the spread formula. “Number” is the number of livestock that are eligible to be included in the spread calculation. Officials are suggesting a change to this term to ensure the spread formula works as intended when there are additional livestock numbers in the cull year. The change would exclude those additional livestock from the spread by limiting “number” to being no more than the number of livestock of that class that the person had on hand at the start of the cull year, which were valued under either the national standard cost scheme or the cost price method.

Officials have discussed this submission with Federated Farmers of New Zealand Incorporated, who confirm that it would be an unnecessary complication for the spread to factor in adjustments for expanding herds in the cull year, and that, in practice herd numbers have been generally stable or contracting.

Recommendation

That the submission be accepted.

INDIVIDUAL TAX WRITE-OFF THRESHOLD

Issue: Temporary increase to the automatically calculated individual income tax write-off threshold

Submission

(Chartered Accountants Australia and New Zealand)

That the amendment is supported but the write-off should be extended to all individuals with tax to pay of less than $200.

The amendment applies only to those individuals whose assessments are automatically calculated by Inland Revenue. For those whose assessments are not automatically calculated, such as those who are required to file an IR 3 return, the measure will not apply.

The rationale for the change is to ease financial pressure for individuals following COVID-19. Return filers are under the same financial pressure as those whose assessments are calculated automatically.

Comment

The current $50 write-off threshold only applies to individuals whose assessments are automatically calculated, not all taxpayers, so this temporary change targets individuals who received only reportable income (that is, income that has already had tax withheld at source). In such cases, income tax obligations are automatically calculated by Inland Revenue and any assessed refund or tax to pay would be due to the income payer not withholding the correct amount of tax. By contrast, other taxpayers’ tax assessments are due to their income that may not be taxed at source at all.

Officials note that increasing the write-off threshold was designed both to remove compliance costs for taxpayers seeking to have the tax written off under the financial hardship rules and to reduce the administrative burden for Inland Revenue who were under pressure with regular work and implementing COVID-19 measures. As part of the auto-calculation process, Inland Revenue calculated around 154,000 tax assessments for tax liabilities of between $50 and $200 and, as a result of the increased write-off threshold, did not have to deal with customer contacts about these liabilities. Inland Revenue knows from previous experience that auto-calculation customers who receive a tax bill contact Inland Revenue to understand why. Taxpayers who do not qualify for the automatic write-off can still use the current mechanisms available to help people in financial hardship. Extending the write-off threshold increase to all taxpayers will also have a fiscal cost.

Recommendation

That the submission be declined.