new zealand tax update on foreign investment funds & residency, ird audit trends

© Baucher Consulting Limited February 2014 All rights reserved.

Tax Update

South Auckland Practice GroupFebruary 2014

Terry Baucher, Baucher Consulting Ltd


Today’s Topics

1.FIF update and foreign tax credits

2.Overseas companies trading in NZ

3.Residency – new developments

4.IRD’s current audit focus


FIF updateForeign tax credits


FIF Update

Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Bill received the Royal assent on 27th February

Late change allows any person who has “applied” to an overseas scheme by 31st March 2014 for a transfer to still use the 15% even if the transfer is not finalised until after 31st March 2014


FIF Update – Options for FSS holders

Pre 1 April 2014 transfers:

1. Return 15% of amount transferred in 2014 or 2015 tax return;

2. Apply “ordinary rules” at time of transfer

3. Apply FIF rules

But: Options 2 and 3 may mean UOMI payable;FIF rules may not be available


FIF Update – Comparative Value (1)

When is it compulsory to use the CV method when calculating FIF income?

Typically applies to “stapled securities” where there is an equity element and a financial arrangement

Anti-avoidance rule intended to prevent use of FDR in respect of high-yield assets

Referred to as “non-ordinary shares”


FIF Update – Comparative Value (2)

“non-ordinary share” defined in section EX 46 (10) as:

a fixed-rate share; a non-participating redeemable share investments in which 80% of assets are hedged or

fixed rate investments share determined by Commissioner as not eligible for

FDR

Losses calculated when use of CV method is compulsory ARE deductible against other income (sections EX 51(7),(8))


Did you at any time during the income year hold rights in a foreign company, unit trust, superannuation scheme or life insurance policy for which disclosure is required?

Applies where FIF is in country with which NZ does NOT have a double tax agreement

If “yes” complete form IR 447 (FDR), or IR 448 (CV)

FIF Update – Disclosure (1)


Investments in OM-IP are being targeted by IRD

OM-IP thought to be Australian but actually based in Cook Islands and therefore disclosure required

NZ and Cook Islands have signed a Tax Information Exchange Agreement

IRD knows there are 37,000 investors in the fund but has received only 3,000 disclosures

IRD are also of view that held on revenue account and therefore taxable



Foreign Tax Credits (1)Covered by subpart LJ of Income Tax Act 2007

Subpart LJ requires dividing of foreign sourced assessable income into segments and allows a tax credit in relation to each segment

Although dividends are excluded income under the FIF regime, any foreign tax credits attached can be claimed (but not Australian franking credits and tax credits on dividends received from UK)

Amount claimable limited to the New Zealand tax payable.


Foreign Tax Credits (2)

IRD reviewing foreign tax credit claims in conjunction with double tax agreements (“DTA”)

UK pension included in NZ tax return and UK PAYE claimed as foreign tax credit. Under Article 19 of UK/NZ DTA pensions taxed in country of residence. Therefore no tax credit available re UK PAYE

Client required to pay tax in respect of foreign tax credit incorrectly claimed and apply to the UK for refund of overpaid tax


Overseas companies trading

in New Zealand


Overseas companies trading in New Zealand (1)

Income derived from a business has a source in New Zealand to the extent it is wholly or partly carried on in New Zealand. (Section YD 4(2))

Income derived from a contract has a source in New Zealand if the contract is made in New Zealand or to the extent it is performed in New Zealand. (Section YD 4(3))

Section YD 5 apportions income where either business wholly or partly carried on in New Zealand or contract wholly or partly performed in New Zealand



Section YD 2: a company is resident in New Zealand if:

a)It is incorporated in New Zealand:

b)Its head office is in New Zealand:

c)Its centre of management is in New Zealand:

d)Its directors, in their capacity as directors, exercise control of the company in New Zealand, even if the directors’ decision-making also occurs outside New Zealand



If non-resident has a “permanent establishment” (“PE”) in New Zealand then under DTA business profit attributable to the PE is taxable in New Zealand

PE generally means a fixed place of business through which the business in wholly or partly carried on

PE includes a place of management, a branch, an office, a factory, a workshop, a mine, a quarry, an oil or gas well, and an agricultural, pastoral or forestry property



DTA with Australia has more expansive PE definition so even if no fixed place of business, a PE includes:

a)services performed by an individual present in a contracting state for more than 183 days in a 12-month period;

b)mineral exploration activities carried on for more than 90 days in a 12-month period;

c)the operation of substantial equipment for more than 183 days in a 12-month period.



IRD are tightening procedures around companies with no director with an IRD number



Companies Office has also tightened its procedures for incorporating companies with overseas shareholders and directors

Now require certified copies of director and shareholder consent forms together with certified copies of passports and of proof of residential address (dated within three months of application)

If shareholder overseas entity must supply a copy of the Certificate of Incorporation and a certified copy of the resolution to become a shareholder


Residency update


Residency update (1)

Section YD 1(2) Income Tax Act 2007

“Despite anything else in this section, a person is a New Zealand resident if they have a permanent place of abode in New Zealand, even if they also have a permanent place of abode elsewhere”.



What is a “Permanent Place of Abode”?

IRD draft interpretation statement INS 0117 – Income Tax Residence to replace PIB 180 from 1989

Draft interpretation statement now regards availability of dwelling as a prerequisite

An available dwelling includes a property which is let but not on a fixed term basis

Contrary to OECD model convention which refers to “at all times continuously”



Previously thought per PIB 180 and a QWBA item from 1999 that three year absence sufficient

The interpretation statement changes these previous examples “so conclusion is consistent with case law”

Redrafted examples give no guidance as to how long an absence before PPOA lost

A fixed term contract to work overseas may therefore not result in a loss of PPOA

Interpretation statement to be finalised shortly


Residency – TRA Case 43/11 (1)

[2013] NZTRA 10 (judgement 5 December 2013)

Related to 2004 to 2007 income years

Former soldier who on leaving NZ Army in July 2003, went first to PNG, before going to Iraq in October 2004 to work as a security consultant. Finally left Iraq in April 2012 and moved to Australia

Spent an average of 42 days per tax year in NZ


Residency – TRA Case 43/11 (2)

Soldier and wife separated in 1994 but didn’t actually divorce until March 2009 and had good relationship.

In 2000 soldier and wife formed a partnership to own rental properties (transferred in 2006 to LAQC)

Soldier’s relationship with four children deteriorated over time because of absence abroad

Accepted that had been out of NZ for more than 325 days as required under OE 1(3) [YD 1(5)]


Residency – TRA Case 43/11 (3) Held that soldier had a permanent place of abode for following reasons:Investment property purchased in 1998 (in which he never lived) was an available dwelling;

No contemporaneous documentation that intention in 2003 was to leave NZ permanently;

Continuing relationship with wife and children including financial support “significant factor”


Residency – Conclusions TRA Case 43/11 likely to reinforce harder line of

Inland Revenue

Doubtful if Interpretation Statement will change substantially when it is finalised shortly

Result will be very difficult to break residency

Most at risk are those moving to countries without a double tax agreement with New Zealand


IRD audits - current trends


IRD audits - current trends (1)

Property Compliance Programme (“PCP”)

Credit cards issued by foreign banks

ICA and loss reviews

Foreign tax credits review

Foreign Account Tax Compliance Act (“FATCA”)

Base erosion and profit shifting (“BEPS”)



PCP very targeted especially in Auckland, Christchurch and Queenstown

Credit card review typically involves preparation of IR 110 statement of assets and liabilities

No time bar for ICA review resulting in $300,000 adjustment for shareholding change in March 2000

Foreign tax credits: co-operating with HMRC

IRD already exchanging information with IRS and FATCA may accelerate this trend



“My client received a letter from his bank advising that they had been requested to provide bank statements for his account using S17 of the Act (the Tax Administration Act 1994). The letter came from the Community Compliance team.” The IRD supervisor reiterates what her staff member is saying which is that this is a compliance check of the engineering industry – it is just a study!!!!!!!!!!

IR are quite frequently using the compliance teams to prepare low level investigations of taxpayers using S17(1) and circumnavigating tax agents.


“Just as a heads up, IRD are accessing all my emails with regard to XXXX to about May 2013, they will be going through them all. They have determined that as I am not a CA I cannot claim any form of privilege over them, unless there is advice relating to me personally they are claiming they can do what they want. “



For further information please contact Terry Baucher

09 486 6200

[email protected]

www.baucherconsulting.co.nz

new zealand tax update on foreign investment funds & residency, ird audit trends

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