find opportunity in change 2017 latest tax developments ...€¦ · aspects of gst including risk...

Find opportunity in change2017 Latest Tax Developments seminarAugust 2017

Contents

Contents ............................................................................... 1 Deloitte speakers .................................................................... 2 Presentation slides .................................................................. 4 New Zealand makes BEPS announcements .............................. 47 Material advancement and tangible progress on feasibility expenditure ......................................................................... 50 Summary of tax developments in the past year ........................ 52 Significant Inland Revenue statements and rulings ................... 56 Public Rulings work programme 2017-18 ................................. 57 Election 2017 tax policies ...................................................... 59

This paper covers a selection of recent developments in relation to income tax and GST that supports aspects of the presentation for this seminar.

This paper was prepared in August 2017.

While care has been taken in the preparation of this document, it has been prepared to provide general information only and should not be taken as a substitute for seeking professional advice.

Deloitte does not accept any liability for any loss that may arise as a result of any person relying on the information or views expressed in this paper or during the presentation.

© 2017

2

Deloitte speakers

Bruce Wallace Partner

Bruce is a corporate tax partner in the Auckland tax team specialising in international tax matters. Bruce provides tax services to a number of New Zealand’s largest corporate entities and outbound investors together with New Zealand subsidiaries of multi-national groups. Bruce is a member of the CAANZ Tax Advisory Group and is actively involved in discussions with Inland Revenue officials in relation to BEPS and other tax policy matters.

Email: [email protected] Phone: +64 (0) 9 303 0724

Annamaria Maclean Partner

Annamaria is a partner in the Auckland office and is in Deloitte’s Corporate International team. She has extensive experience in tax and has spent over 3 years as the Tax Manager at a large New Zealand listed corporate. She has assisted clients across many industries with all aspects of tax compliance and tax consulting with a particular focus on tax issues affecting New Zealand corporates and the application of New Zealand’s international tax rules.


Greg Haddon

Partner

Greg is a corporate tax partner in our Auckland practice. Greg has over 30 years tax experience and has been a partner for 20 years. Greg is the advisor to a number of large New Zealand based and Global clients. He advises on the structure of new investments and divestments and the tax implications of specific transactions. He also prepares and delivers submissions to government on proposed tax changes. Through his role as the Deputy Chair of the CAANZ Tax Advisory Group he remains at the forefront of the development of tax policy in New Zealand. Greg leads the Deloitte New Zealand Financial Services Industry Practice. He also has extensive experience in the telecommunications, oil and gas and construction industries.


mailto:[email protected]



3

Allan Bullot Partner

Allan is a partner in the Auckland office and leads Deloitte’s GST team. He has over 20 years’ experience exclusively in GST and indirect taxes. He has practised in both New Zealand and Canada. Allan has assisted clients with all aspects of GST including risk reviews, planning, disputes with Inland Revenue and assisting in obtaining significant GST refunds for clients in a number of industries. He has been listed in the International Tax Review Leaders Guide for a number of years and co-presents the GST paper at the Master of Taxation Studies Course at Auckland University.


Troy Andrews

Partner

Troy is a partner in the Auckland office with a focus on corporate tax, technology and financial services. Troy has extensive experience in treasury and international taxation and has worked both in New Zealand and the United Kingdom. Troy has provided tax advice and assistance on a broad range of issues, including significant corporate mergers and acquisitions, reorganisations and implementing cross border financing strategies.

Email: [email protected] Phone:+ 64 (0) 9 303 0729



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Presentation slides

5

Latest Tax DevelopmentsFind opportunity in changeAugust 2017

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6

International tax

ContentsLatest tax developments

01

Black hole and feasibility02

Business transformation03

GST matters04

10 tax facts in 1505

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Getting to the pointy end of the proposals

01

International tax

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8

Interest limitation rules

Transfer pricing

Multilateral Convention

PE avoidance

Hybrid mismatch arrangements

The “BEPS” package

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© 2017 Deloitte Touche Tohmatsu Limited

The problem:

• “Multinationals” using excessive levels of related party interest expense

The solution:

• Restricted transfer pricing rule

• Thin capitalisation amendments

− Subtract non-debt liabilities from asset value

− Valuation rules to be tightened− Year-end calculations permitted but

new avoidance rule− Non-residents “acting together”− Some carve-outs proposed (PPPs)− Inbound $1m deminimis

Limiting interest on related party loans

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The problem:

• Non-residents structuring to avoid a taxable presence in NZ when they have significant economic activity in NZ

The solution:

• New permanent establishment avoidance rule (turnover > EUR750m)

• Stronger source rules (NZ taxing rights)

• Range of administration measures (>EUR750m)

Permanent establishment avoidance

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Transfer pricing

The problem:

• Multi-nationals using aggressive transfer pricing strategies to shift profit out of NZ

The solution:

• Disregard legal form if not aligned to economic substance

• Adopt OECD guidelines in legislation

• Reconstruction of non arm’s length arrangements

• Increase the time bar to seven years

• Shift burden of proof to the taxpayer

• Non-residents “acting in concert”

• Codify the OECD country-by-country reporting requirements (>EUR750m)

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The problem:

When countries classify transactions and entities differently from each other under domestic rules which creates tax arbitrage opportunities

The solution:

• NZ to comprehensively adopt OECD recommendations for hybrid instruments and entities (extremely complex primary & secondary rules)

• Also affects common cross border arrangements such as branches (inbound & outbound), inter-company loans, dual resident companies, foreign trusts, limited partnerships, etc

Hybrid mismatch arrangements

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What is it?

A multi-lateral international tax treaty that quickly updates the worldwide network of tax treaties without the need for each country to individually renegotiate bilateral treaties

The solution:

Key changes:

• Dual resident companies

• Preventing treaty abuse (PPT - Principal Purpose Test)

• Permanent establishment avoidance

• Transparent entities

• Dispute resolution

Multilateral convention

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What’s next?

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15

A bit of water to go under

the bridge yet?

02

Feasibility and black

hole expenditure

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1. Define “feasibility expenditure”:“Expenditure to determine the practicability of a proposal, prior to commitment to developing the proposal”

2. Exclude depreciable assets

3. Follow the accounting treatment− IFRS − Non-IFRS

4. De minimis test

5. Application date

The proposed solution

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Abandoned projects

1. Separately deal with depreciable assets

2. Abandoned projects

− Impairment testing

− Not capitalised

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20

Further consultation

1. To not follow IFRS?

2. Will likely need to understand and identify material advancement/tangible progress for capitalisation

3. For now, the interpretation statement continues to apply

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21

Is there light at the end of the tunnel?

03

Business transformation

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22

Transformation Roadmap

2016-2017Stage 1

Ensure secure digital services

2017-2019Stage 2

Streamline tax

2018 -2020Stage 3

Streamline social policy

2019 -2021Stage 4

Complete the future revenue

system

Inland Revenue is here

2016 2021

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23

• No UOMI until P3 if using the uplift method for 2018 provisional tax

• Safe harbour rule increased to $60,000 and applies to all taxpayers

• “Accounting Income Method” on track for delivery date of April 2018

Managing provisional tax has already become easier

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24

• Contractors can elect their own withholding tax rates

• More contractors can elect into withholding tax rules (with agreement of payer)

• Labour hire firms

• 1 April 2017 application date

New rules for withholding taxes for contractors in place

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• Employer monthly schedule will be replaced with payday reporting of payroll information

• Application date 1 April 2019 (optional application from 1 April 2018)

• Employers will be able to file directly from payroll system

• Reduction in electronic filing threshold to $50,000 PAYE/ESCT

• Error correction

PAYE reporting proposals not far away

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• Payers of interest, dividends & Maori authority distributions to supply information to Inland Revenue on 20th of month following payment

• Name, IRD number, DOB, tax rate, amount and type of income, tax withheld, credits attached

• 1 April 2020 application date (optional from 1 April 2019)

Investment income reporting proposals

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• Online platform has already had significant upgrades to allow individuals to better engage with IR

• Inland Revenue to proactively manage tax rates that are applied to an individual’s income during the year

• Simplify / improve rules for who needs to provide information to Inland Revenue

• Potential for automatic refunds

Individual income tax proposals

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• Proposals broadly aim to minimise “unders” and “overs” with regard to

− Working for families

− Child support

− Student loan repayments

Social policy administration proposals

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The only constant thing

is change

04

GST matters

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• Announcement to come??

GST and low value goods

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• GST services moved to new revenue system in February 2017

• Online platform has been improved – some teething problems

• Filing GST returns using accounting software

• What next?

How Business Transformation is making GST easier

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• Applies where multiple things are supplied which have different GST treatments

• For example:

− Theatre tickets purchased on a credit card with a credit car surcharge

• Viewed from recipient’s perspective

Is it a single or multiple supply?

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• Supplies of services relating to land – hard to zero-rate

• Capital raising costs

• Compulsory zero-rating (Still!)

• Anything to do with agents

Other issues

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Did you hear the one about…

05

10 tax facts in

15

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• Interpretation statement IS 16/04

• Tax treatment of lump sums with capital and revenue components

• Apportion on an objective basis, otherwise full amount is income

Treatment of lump sum settlement payments01

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• Generally considered a schedular payment to which new withholding rules apply

• However depends on who has contracted to provide directorship services (individual , partnership, company or authority)

• No requirement to withhold when director services are provided via a New Zealand incorporated company

• Still awaiting guidance for directors’ fees paid to non-residents

Directors’ fees and withholding tax obligations02

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• Law change to deal with asymmetric tax outcomes when related party debt forgiven

• No debt remission income arises under financial arrangement rules when there is no change to the net wealth of the economic group

• The debt is treated as being paid by the debtor and received by the creditor, including any accrued but unpaid interest.

• Retrospective application

Debt remission rules03

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• New rules to ensure NRWT payments are not deferred

• Alignment between tax deductions for interest under financial arrangement rules and NRWT payments

• Rules generally apply from 30 March 2017

Non-resident financial arrangement income04

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From 1 July 2017, New Zealand “financial institutions” are required to:

• carry out due diligence to identify those accounts held by or controlled by non-residents; and

• report certain information (e.g. tax residence and financial information)

Broad definition of “financial institution” – can include partnerships, limited partnerships and trusts

Penalties for non-compliance

The Common Reporting Standard (CRS)05

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• Reporting of share scheme benefits from 1 April 2017

• Legislation proposes to change law for “option like” schemes and widely offered schemes

• Proposals for start-up businesses

New rules for employee share schemes06

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• Increased Inland Revenue activity and risk reviews

• Is it subject to PAYE or FBT?

• FBT on motor vehicles – vehicles kept garaged or left at airport while employee is on holiday are still subject to FBT

• Documentation is important!

Fringe benefit tax under scrutiny07

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• Gifts of food and drink to business contacts are subject to the entertainment tax rules (i.e. only 50% deductible)

• Potential for law change?

Entertainment rules and gifts of food and drink08

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• Question asked as to whether YouTube receipts are taxable?

• Answer: Yes – in most cases

Receipts from YouTube09

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45

And last but not least…

What tax changes might we see after

23 September 2017?

10

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New Zealand makes BEPS announcements On the 5 month anniversary of the release of 3 Base Erosion and Profit Shifting (BEPS) consultation papers in March this year, the New Zealand Government has announced its considered position on what initiatives will go forward to become legislation.

Taxpayers may be disheartened by reading the media statement from the Ministers of Finance and Revenue which stated: “For the most part, the proposals will proceed as originally devised…”; however due to the consultation process there have been some pleasing refinements to the proposals, particularly around interest limitation rules.

The final proposals Between now and the end of the year when legislation will be introduced into Parliament there will be some further consultation on some of the finer details of these proposals which are generally intended to apply to income years beginning on or after 1 July 2018.

Interest limitation rules • A new “restricted transfer pricing rule” will apply to set the level of interest rate applying to inbound

related-party loans. This rule will follow transfer pricing principles, while ignoring all surrounding circumstances, terms and conditions that could result in an excessive interest rate, and includes a rebuttable presumption that the borrower would be supported by its foreign parent. This announcement replaces the previously proposed “interest rate cap” approach; albeit a taxpayer will be able to use its parent’s credit rating as a safe harbour under the restricted transfer pricing rule. Disputes about interest rates would be subject to the Mutual Agreement Procedure under New Zealand’s Double Tax Agreements.

• When undertaking thin capitalisation calculations, non-debt liabilities (e.g. trade creditors etc) will be subtracted from the asset value. Further consultation will be undertaken on whether deferred tax liabilities should be included in this adjustment amount.

• Taxpayers with less than $1million of interest deductions may be eligible to be carved out of the thin capitalisation rules.

• Certain infrastructure projects funded entirely with third party limited recourse loans will be exempted from the thin capitalisation rules.

• Prescriptive rules will be developed allowing taxpayers to value assets for thin capitalisation purposes in a manner different from the basis used in their financial accounts (i.e. assets can be independently valued).

• Taxpayers will be able to continue to perform thin capitalisation calculations on the basis of year end positions (rather than undertaking daily or quarterly calculations), but a new avoidance rule will target taxpayers repaying loans just before year end.

The above changes are expected to net $80-$90million per year on an ongoing basis.

An application date of income years beginning on or after 1 July 2018 is considered appropriate as it is believed that related party transactions are “more easily altered compared with transactions with third parties”, and as thin capitalisation calculations are undertaken at the end of the year, taxpayers will have until at least 30 June 2019 to alter debt and asset levels.

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Taxpayers who have entered into Advance Pricing Agreements (APAs) with Inland Revenue before 1 July 2018 will have those agreements honoured for the full agreed term.

Transfer pricing and permanent establishment (PE) avoidance • There will be a new PE avoidance rule that will apply to large multinationals that structure their

businesses to avoid having a PE in New Zealand. There will be further consultation on how to best achieve this.

• Deem certain amounts to have a New Zealand source if New Zealand has the right to tax that income under any applicable DTA.

• Introduce an anti-avoidance source rule.

• Amending the life insurance source rules.

• Amending the transfer pricing rules so that:

o Legal form is disregarded if it does not align with the economic substance of a transaction.

o Allow Inland Revenue to reconstruct transfer pricing arrangements which are not commercially rational because they involve terms that third parties would not be willing to agree to.

o Specifically refer to arm’s length conditions and the OECD guidelines.

o They codify the need to comply with the OECD’s country-by-country reporting requirements.

o The time bar is increased from four years to seven years.

o The burden of proof for demonstrating that a taxpayer’s transfer pricing position aligns with arm’s length conditions is shifted from Inland Revenue to the taxpayer.

o The rules also apply when non-resident investors are “acting in concert” to effectively control a New Zealand entity, such as through a private equity manager.

• Strengthen Inland Revenue’s investigation powers when it comes to multinationals with global revenues of at least €750million (NZ$1.1billon) if they do not cooperate with Inland Revenue. Initiatives include: more readily being able to assess taxpayers based on information held; collecting any tax held from any wholly-owned group member; being able to issue information requests to offshore entities; being able to deem income to be allocated to a New Zealand group member if information requests are not adequately responded to; and imposing a civil penalty of up to $100,000 for failing to provide requested information.

The above changes are expected to net $50million per year on an ongoing basis.

It is worth noting that a Diverted Profit Tax was considered but not recommended.

As with the interest limitation rules, these new rules will apply to income years beginning on or after 1 July 2018, with grandparenting applying to APAs in place before this date. The Regulatory Impact Assessment document accompanying these announcements states that “We consider the planned application date of 1 July 2018 (for most of the measures) to be sufficiently prospective when compared with the date of the discussion document release, which is when taxpayers should be regarded to be [sic] have been notified of the Government’s intention in this area, and the scheduled date of introduction of the relevant tax bill.”

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Hybrid mismatch arrangements • Rather than tackling only hybrid arrangements which have been observed in New Zealand, it has

been announced that New Zealand will have a comprehensive adoption of the OECD recommendations related to hybrid mismatch arrangements. It is acknowledged that this will involve considerable complexity, but the intended outcome of this complexity is taxpayers choosing simpler debt and equity funding structures.

• Some concessions will be made to the OECD recommendations where is appropriate in New Zealand context. For example, simple foreign branch structures will not be caught.

• Foreign trusts will be caught within the rules in circumstances where their treatment outside of New Zealand means income of the trust is not included in a tax calculation anywhere in the world.

The rules are generally intended to apply from 1 July 2018, with some aspects slightly delayed.

The above changes are expected to net $50million per year on an ongoing basis, subject to taxpayer behaviour modifying after the implementation of the rules.

What next Between now and October there will be further consultation on aspects of the proposals. This is expected to be in the form of exposure drafts containing draft legislation. This will provide an initial opportunity to consider the workability of the announcements and to identify any major issues.

Following this process, it is intended to introduce legislation into Parliament and to start the Parliamentary process before the end of the year. The last parliamentary sitting date in 2017 is 14 December. The legislation will need to be enacted by 30 June 2018.

New Zealand has a General Election on 23 September 2017. There is general cross-party support to take action against BEPS and therefore these proposals are likely to proceed regardless of the make-up of the next New Zealand Government.

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Material advancement and tangible progress on feasibility expenditure First published in Tax Alert, June 2017 After many years (and many tax articles) of analysing the tax deductibility of feasibility expenditure based on Inland Revenue interpretation statements and case law, we have moved to a new phase of determining whether it is feasible to change the law to deal with black hole and feasibility expenditure.

On 25 May 2017, the Government released a discussion document Black hole and feasibility expenditure for consultation. This document seeks to move the law on from the current position (refer to our March 2017 Tax Alert) to a brave new world where the tax system does not create economic distortions and tax consequences are not an obstacle to businesses innovating and pursuing opportunities for growth.

This represents material advancement and tangible progress on this long standing issue.

Timelines Before delving into the detail, it’s important to note there are no application dates proposed in the document, instead submissions are sought on why the application date shouldn’t just be the date of enactment of the resulting legislation (which would probably still be a minimum of 12-18 months away).

We suggest a retrospective application date back to 27 July 2016 (the date of the Supreme Court judgment in Trustpower) would be appropriate in the circumstances.

What is proposed The discussion document contains two main proposals:

• For live projects: applying International Financial Reporting Standards (IFRS) accounting treatment to feasibility expenditure; i.e. allowing a deduction for feasibility which is expensed under IFRS, and deferring the deduction of expenditure capitalised under IFRS until depreciation deductions are available.

• For abandoned projects: allowing a deduction for previously capitalised expenditure that would have been part of the cost of a depreciable asset, had the project not been abandoned. A deduction would be available in the year in which the amount is fully expensed under IFRS rules (i.e. there has been a total impairment of the asset).

Live projects Critical to the new rules is understanding what constitutes “feasibility expenditure”. The document doesn’t go so far as to provide a draft definition for comment, rather it provides the substance of the proposed definition, being “expenditure to determine the practicality of a proposal, prior to commitment to developing the proposal”. This definition takes us back to the “good old days” prior to the Trustpower cases, but still leaves the potential for continued ambiguity and disputes unless “commitment” is itself defined.

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The document notes there will need to be some exclusions from the rules, such as where there are existing rules that already specifically allow deductions. It is also suggested that any expenditure on a capital project that would not be able to be depreciated should be excluded from the rules, on principle. Fortunately this notion is dismissed on the basis that it may be impossible to determine this during early stage feasibility. This sensibly leaves open the ability for expenditure kicking the tyres on potential business acquisitions (which could take place through the purchase of assets or shares) to fall within the rules. However, the document suggests that feasibility should not include expenditure that would form part of the cost of depreciable property, if the proposal is successful. Rather such expenditure would either be depreciated (if successful) or dealt with under the new abandoned project proposals if unsuccessful.

Abandoned projects The position under current rules is best illustrated in a graph taken from the document. Under current rules until a project has reached the point that there is an asset “available for use” (and therefore depreciable), if the project is abandoned any capitalised expenditure becomes black hole expenditure.

Figure 1 Feasibility expenditure in a project timetable - "material advancement or tangible progress" formulation – Taken from Black hole and feasibility expenditure: a Government discussion document (page 8)

Under the proposed rule, the capitalised expenditure would be an allowable deduction when it would have formed part of an item of depreciable property had it been completed. To qualify the item would need to be totally impaired under NZ IAS 36.8 or NZ IAS 16.7. The deduction would not be limited to feasibility expenditure but would also cover a range of other costs that had been capitalised to the asset that is abandoned.

In the event the impaired asset is reinstated as an asset in the future, any amount previously deducted would need to be returned as income.

Not using IFRS? For businesses not using IFRS, it is proposed that taxpayers can apply the same rules provided the IFRS standards would have been met, had they been applied.

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Summary of tax developments in the past year Legislation Summary of contents

Taxation (Budget Measures: Family Incomes Package) Act

• The Budget 2017 policy announcements resulted in the Taxation (Budget Measures: Family Incomes Package) Act.

• The bottom two tax thresholds are adjusted from $14,000 to $22,000, and from $48,000 to $52,000.

• The Independent Earner Tax Credit is repealed and the Family Tax Credit rates and the abatement rate are increased for children under 16. The Act also decreases the abatement threshold for Working for Families Tax Credits.

• Consequential changes are made to the provisional tax standard uplift method for the 2018-19 and 2019-20 tax years; 105% (5% uplift) is reduced to 100% (0% uplift), and 110% (10% uplift) is reduced to 105% (5% uplift).

• There are also consequential changes to the tax thresholds in FBT, ESCT, RWT, PAYE, and PIE investments.

STATUS: Received royal assent on 29 May 2017.

Taxation (Annual Rates for 2016-17, Closely Held Companies, and Remedial Matters) Act 2017

• Amends the closely held companies tax rules, including changes to the criteria for look-through company eligibility and removal of the deduction limitation rule. The tainted capital gain rule is also narrowed.

• Changes to the non-resident withholding tax (‘NRWT”) Approved Issuer Levy (“AIL”) rules as they apply to related party debt and branch lending. New rules deal with timing and quantification of income subject to NRWT in line with financial arrangement rules and change how NRWT and AIL apply to loans within branch structures.

• GST changes to capital raising costs, apportionment, second-hand goods, gold and GST on services connected with land.

• Changes to the financial arrangement rules to ensure that debt remission income does not arise when debt is forgiven by related parties in certain circumstances.

• Allows group companies to transfer imputation credits as part of loss grouping.

• Allows companies to opt out of withholding resident withholding tax for dividends distributed between corporate shareholders

• Clarification of the time bar rules for ancillary taxes (e.g. PAYE, FBT, RWT, NRWT and AIL).

• Amendments relating to the timing of aircraft engine overhaul deductions.

• Depreciation recovery roll-over relief for businesses affected by the Kaikoura earthquake.

STATUS: Received royal assent on 30 March 2017.

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Legislation Summary of contents

Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act 2017

• Concessional rules apply from the 2018 income year so that use of money interest (“UOMI”) is only applicable from third instalment where the standard uplift method is committed to for all instalments up to the final instalment.

• The safe harbour threshold before UOMI applies on provisional tax payments is extended to non-individuals (i.e. Companies). Further safe habour residual income tax threshold is increased from $50,000 to $60,000.

• A new provisional tax method will be permitted from the 2019 income year (“accounting income method”) which allows businesses to pay provisional tax periodically based on their tax-adjusted income calculated by an Inland Revenue approved software package.

• Contractors who receive schedular payments may elect their own withholding rate (subject to certain criteria) and withholding rules are extended to labour-hire firm contractors.

• The 1% monthly incremental late payment penalty on unpaid tax from GST, income tax and Working for Families tax credits overpayment is removed from 1 April 2017.

• Other business tax changes for small businesses, such as: o Allowing certain close companies to use the motor vehicle

expenditure rules in subpart DE of the Income Tax Act 2007; o An increase of the self-correction threshold for minor errors

from $500 to $1,000 from 1 April 2017; o A simplified method for calculating deductions for premises

and vehicles that are used for business and personal purposes;

o Increasing the annual FBT calculation and return threshold from $500,000 to $1 million of PAYE/ESCT;

o Allowing taxpayers to choose whether to apply the deferred payment of employment income rule (i.e. “the 63 day rule”) or not.

• The G20/OECD standard for Automatic Exchange of Financial Account Information in Tax Matters is implemented in New Zealand.

• Increased disclosure requirements for foreign trusts. STATUS: Received royal assent on 21 February 2017.

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Legislation Summary of contents

Taxation (Annual Rates for 2017-18, Employment and Investment Income, and Remedial Matters) Bill

Administration of PAYE

• Requiring employers to provide PAYE information to Inland Revenue on a payday basis from 1 April 2019 (though permissible from 2018).

• Lowering the thresholds for mandatory e-filing of PAYE information from $100,000 to $50,000 of PAYE and ESCT in the preceding tax year from 1 April 2019.

• Requiring employers to provide Inland Revenue with information about new and departing employees no later than the next return of payday information.

• Giving employers to option to tax holiday pay paid in advance as if the lump sum payment was paid over the pay periods to which it relates.

• Abolishing the existing payroll subsidy for PAYE intermediaries from 1 April 2018.

Taxation of employee share schemes • Aligning the income tax treatment of employees receiving ESS benefits

with other forms of employment income. • New rules will affect the value and timing of benefits for employees as

well as deductions available for employers. Investment income information • Requiring more frequent and detailed information on interest, dividends

and Maori authority distributions from investment income payers on a monthly basis.

• Bringing forward the due dates when portfolio investment entities are required to provide information to Inland Revenue from 31 May to 15 May (from 1 April 2018).

• Encouraging taxpayers to provide their IRD numbers to payers of investment income by increasing the non-declaration rate from 33% to 45%.

• Increasing electronic filing by making it compulsory for all investment income payers (unless it would subject the payer to unreasonable compliance costs or hardship as a result of having to file electronically). This rule applies from 1 April 2018.

• Improving the administration of RWT exempt-status by introducing an electronic database (certificates of exemption);

• Removing some requirements to provide end-of-year withholding tax certificates.

• Providing the ability to correct errors during a tax year, and to some extent, in the following tax year, without the imposition of penalties or interest. Taxpayers have an option to opt in earlier than 1 April 2020 if they so wish.

STATUS: First reading on 24 May 2017. Submissions due by 5 July 2017.

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Discussion Documents Summary of contents

BEPS finalised position The Government has recently announced its finalised positions on interest limitation, transfer pricing and permanent establishment avoidance, and hybrid mismatch arrangements. See our Tax Alert article above for more details.

PAYE error corrections and adjustments

The issues paper sets out options on how PAYE errors may be corrected and adjustments made, in the context of more frequent filing of PAYE information. Submissions are due by 15 September 2017.

Making Tax Simpler: Better administration of social policy

The discussion document proposes to ensure that Inland Revenue’s customers are receiving or making accurate social policy payments at the right time. The Government is proposing to base entitlements (Working for Families and Child Support payments) on recent actual income based on information delivered by Inland Revenue’s new computer system, START. Submissions are due by 15 September 2017.

Making Tax Simpler: Better Administration of Individual’s income tax

Published in June 2017, the document outlines a framework for how individuals’ income is taxed in New Zealand to make tax obligations simpler, open and certain. It outlines what interactions with Inland Revenue should happen during the year to assist with getting the withholding tax more accurate and what interactions could occur at year-end. Submissions closed on 28 July 2017.

Taxation of employee share schemes: start-up companies

This issues paper proposes a new deferral regime for start-up companies, to provide the ability to defer the taxation point for recognising income for employees, with a corresponding deferral of the company’s deduction. Submissions closed on 12 July 2017.

Black hole and feasibility expenditure

This paper proposes to address the problem of “black hole” and feasibility expenditure, by changing the definition of feasibility expenditure and aligning the tax treatment of such expenditure with IFRS. Submissions closed on 6 July 2017.

New Zealand’s implementation of the multilateral convention to implement tax treaty related measures to prevent BEPS

Many of the OECD’s BEPS action plans include recommendations to amend double tax agreements. The only rational way to align all DTAs within a reasonable period is for countries to sign up to a multilateral instrument (“MLI”). This issues paper explains that New Zealand will adopt the recommendations dealing with anti-abuse of treaties, PE avoidance, hybrid mismatches and effective dispute resolution. [New Zealand signed the MLI on 8 June 2017] Submissions closed on 7 April 2017.

Making tax simpler – Proposals for modernising the Tax Administration Act

The Government discussion document seeks to simplify and modernise New Zealand’s tax administration system. Proposals cover five areas: tax information and confidentiality, information collection, getting it right from the start, role of tax intermediaries, and role of the Commissioner and design of a new Tax Administration Act. Submissions closed on 24 February 2017.

https://taxpolicy.ird.govt.nz/sites/default/files/2017-ip-ess-start-up.pdf

https://taxpolicy.ird.govt.nz/sites/default/files/2017-ip-ess-start-up.pdf

http://taxpolicy.ird.govt.nz/sites/default/files/2017-dd-black-hole-feasibility.pdf

http://taxpolicy.ird.govt.nz/sites/default/files/2017-dd-black-hole-feasibility.pdf

http://taxpolicy.ird.govt.nz/sites/default/files/2017-ip-beps-mli-nz.pdf





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Significant Inland Revenue statements and rulings Below is a selection of the more significant and interesting items (both public and draft) published by Inland Revenue in the past year.

Item Title Date finalised

BR Pub 17/06 Fringe benefit tax – Charitable and other donee organisations and fringe benefit tax

27 April 2017

CS 17/01 Determining “value” of shares received by an employee under a share purchase agreement

28 April 2017

CS 16/02 Commissioner’s statement – Determining “market rental value” of employer-provided accommodation

24 November 2016

Calculating PAYE on non-resident seasonal workers’ holiday pay

Commissioner’s interim operational position on calculating PAYE on non-resident seasonal workers’ holiday pay

6 December 2016

Deductibility of expenditure on gifts of food and drink

Operational position on the deductibility of entertainment expenditure on gifts of food and drink for subpart DD purposes – private benefit not necessary

15 September 2016

IS 17/06 Income Tax – Application of schedular payment rules to directors’ fees 18 July 2017

IS 17/05 Income Tax – Treatment of New Zealand patents 8 June 2017

IS 17/04 Income tax – computer software acquired for use in a taxpayer’s business

11 April 2017

IS 17/03 Goods and Services Tax – single supply or multiple supplies 11 April 2017

IS 17/01 Income tax – deductibility of feasibility expenditure 23 February 2017

IS 16/05 Income Tax – When is income from professional services derived? 20 December 2016

IS 16/04 Income Tax – Treatment of lump sum settlement payments 26 October 2016

IS 16/03 Tax residence 20 September 2016

QB 16/08 Income tax – deductibility of the costs of obtaining a detailed seismic assessment of a building

19 December 2017

QB 16/07 Income tax – land sale rules – main home and residential exclusions – regular pattern of acquiring and disposing, or building and disposing

31 August 2016

QB 16/06 Income Tax - Land acquired with purpose or intention of disposal 29 July 2016

OS 16/01 Operational Statement: OECD information sharing requirements for taxpayer rulings and determinations

May 2016

Draft items Title Status

ED0199 Election to change a balance date To be confirmed

ED0198 Loss offset elections between group companies To be confirmed

PUB00305 Review of Interpretation Statement on Tax Avoidance To be confirmed

PUB00249 Fringe benefit tax – motor vehicles To be confirmed

IRRUIP10 Income tax treatment of software development expenditure To be confirmed

PUB00255 Goods and services tax – compulsory zero-rating of land rules To be confirmed

PUB00261 Income tax – taxation of trusts To be confirmed

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Public Rulings work programme 2017-18 The new work programme for the 2017-18 year was released on the 10 August 2017. The following is a summary of all items. The new items that have been added are noted below. For more information on a particular item, refer http://www.ird.govt.nz/public-consultation/work-prog/.

Items where external consultation has closed

PUB00249 FBT – Motor vehicles

PUB00255 GST – Compulsory zero-rating rules (general application)

QWB00078 GST – Taxable activity – Non-profit bodies and section 20(3K)

PUB00277 GST – Unit trust management fees

PUB00290 GST and Income tax – Treatment of bloodstock breeding partnerships.

PUB00227 Income tax – Revenue account property – Are non-income producing assets necessarily held on revenue account?

PUB00261 Income Tax – Trusts – Review of 1989 TIB on the taxation of trusts

Items currently at external consultation

PUB00305 Income tax – Review of Interpretation Statement on the application of ss BG 1 and GA 1

Items currently in progress

PUB00279 GST – Credit card charges

PUB00257 GST – Grouping rules

PUB00297 Income tax – Australian source income earned by Australian limited partnership and tax credits

PUB00171 Income tax – Deductibility – Costs associated with obtaining resource consents

PUB00274 Income tax – Depreciation – Identifying items of depreciable property

PUB00296 Income tax – Dividends – Timing of when derived

PUB00295 Income tax – Donee organisations – wholly or mainly

PUB00237 Income tax – Employment income – Farm worker allowances

PUB00293 Income tax – Insurance – Group life insurance in an employment context

PUB00286 Income tax – Land – Improvements becoming part of land

PUB00258 Income tax – Partnership – Introduction of assets to a partnership by a partner

PUB00266 Income tax – Payments derived from New Zealand by non-resident software suppliers

PUB00287 Income tax – Research & Development

PUB00288 Income tax – Tax credits – Payments made to schools

Items not currently being worked on

PUB00256 GST – Compulsory zero-rating rules (some specific interpretative issues)

PUB00291 GST – Payments made by parents or guardians of students to state schools

PUB00308 GST – Supplies of dwellings and other real property

PUB00306 GST – Tax invoice requirements

PUB00307 GST – Trophy fees

PUB00281 GST – Trusts – Supplies from trusts to beneficiaries

PUB00299 GST – Zero-rating of services connected to land

PUB00303 GST and Income tax – Short term accommodation

PUB00226 GST and Income tax – Tax treatment of crypto-currencies

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PUB00309 Income tax – Deductions – Sharemilkers

PUB00310 Income tax – Deductions – Tax credits – Overseas rental properties

PUB00168 Income tax – Deductibility of private/revenue expenses

PUB00300 Income tax – Deductions – Bad debt

PUB00311 Income tax – Excessive payments to spouses

PUB00312 Income tax – Exempt income – Dutch ABVP Pensions

PUB00317 Income tax – Exempt income – Visiting entertainers and sportspeople

PUB00283 Income tax – Income – Amounts derived from land use

PUB00301 Income tax – Income attribution

PUB00314 Income tax – Land – Main home exemption and lifestyle blocks

PUB00315 Income tax – Land - Main home exemption and subdivided land

PUB00316 Income tax – Land – Meaning of “premises”

PUB00313 Income tax – Land – Business involving land

PUB00265 Income tax – Timing – Deductibility of costs of land development and other expenses

PUB00302 Income tax – Withholding tax treatment of directors’ fees paid to non-residents

Completed items

PUB00267 Income tax – Withholding tax treatment of directors’ fees

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Election 2017 tax policies The 2017 New Zealand General Election will be held on Saturday 23 September 2017 to determine the membership of the 52nd New Zealand Parliament. We summarise the major parties’ tax policies below.

Party Summary of tax policies

National Party

• Budget 2017 Election – tax threshold for bottom two tax thresholds raised

• No changes to corporate tax rate • Repealed Independent Earners’ Tax Credit • Families Income Package • Tighter foreign trust rules • Tighten rules to ensure people buying and selling property for profit pay

their fair share of tax (details yet to be disclosed) • BEPS announcements above which were developed by current National

Government

Labour Party

• Introduce a diverted profits tax on multinationals to raise over $300 million in unclaimed revenue

• Flexible voluntary withholding tax for businesses • Provisional tax threshold increased from $2,500 to $5,000 • Remove late payment penalties on provisional tax • Housing policies that impact tax include increasing bright-line test to five

years, banning foreign speculators from buying existing New Zealand homes, and ring-fencing losses on rental properties so that losses cannot be offset against other income.

• Extend Working for Families entitlement, introduce “Best Start” ($60 a week for each child in their first year after Paid Parental leave ends), and a “Winter Energy Payment” (grants for families to upgrade insulation and heating)

• Reinstate Independent Earners’ Tax Credit • Regional fuel tax at 10 cents per litre • Royalties for bottled water, irrigation schemes and other commercial

uses.

ACT

• Lower personal income tax rates and end stealth taxation. Proposed rates to be: 10% for income below $14,000; 15% for income between $14,000 - $48,000; and 25% for income above the $48,000

• Cut corporate tax rate to 25% • Abolish the “charitable purpose” tax • Cut back corporate welfare, including R&D growth grants

New Zealand First

• Exempt GST liability from all food products • Give back GST paid by tourists to the region in which it was spent, and

25% of royalties and taxes collected for mining, petroleum and water, will go back to the provinces where they came from

• Wage subsidy for businesses taking on job seekers • Deductions for professional expenses incurred when starting a new

business • Replace income tax system • Replace KiwiSaver with KiwiFund • Crack down on black economy and e-economy

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Party Summary of tax policies

Green Party

• Exempt electric vehicles and public transport passes from FBT in order to alleviate traffic intensity

• Implement a “water levy” of 10 cents per litre on sales or exports of bottled, stilled and sparking water

• Increase all benefits by 20%, raise minimum wage and boost Working for Families

• Reduce bottom tax rate to 9%, and new top tax rate of 40% on income over $150,000

• Introduce a tourist tax of $20 to raise funds for the Department of Conservation

United Future

• Introduce “FlexiSuper” which allows individuals to receive Superannuation at reduced rates from ages 60 – 64

• Compulsory KiwiSaver for all New Zealanders.

Conservative Party

• Tax free income threshold of $20,000 • Reduce upper tax bracket to 25% • No introduction of capital gains tax • Repeal Emissions Trading Scheme • Introduce income splitting and undeveloped land tax

The Opportunities Party (TOP)

• Deem a minimum rate of return on all productive assets, including housing and land

The Maori Party

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