Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Bill

  • enacted

Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Bill

Government Bill

93—2

As reported from the Finance and Expenditure Committee

Commentary

Recommendation

The Finance and Expenditure Committee has examined the Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Bill and recommends by majority that it be passed with the amendments shown.

Introduction

This bill seeks to amend the Student Loan Scheme Act 2011, the Income Tax Act 2007, the Goods and Services Tax Act 1985, and the Tax Administration Act 1994. The bill would make three main changes to current laws.

Part 1 would amend the Student Loan Scheme Act to allow the Inland Revenue Department (IRD) and the Australian Taxation Office to share information on student loan borrowers living in Australia, with the aim of helping such borrowers to remain, or become, compliant with their obligations under the scheme.

Part 2 would amend the Income Tax Act 2007 to provide for a new withholding tax on sales of residential property by persons who have no or limited connection with New Zealand, within two years of purchase. The proposed residential land withholding tax (RLWT) is intended to act as a collection mechanism for the bright-line test which was introduced by the Taxation (Bright-line Test for Residential Land) Act 2015.

Part 3 would amend the Goods and Services Tax Act 1985 to provide for GST to apply to cross-border services and intangibles supplied by offshore suppliers to New Zealand-resident consumers, by requiring offshore suppliers to register and return GST on these supplies. Such “remote” services would include internet downloads and online services such as e-books, music, videos, and software purchased from offshore websites.

In Part 4, the bill would make various amendments in the Tax Administration Act 1994 to implement these changes.

This commentary covers the main amendments we recommend to the bill. It does not discuss minor or technical amendments.

Student loans

Part 1 of the bill proposes changes to the Student Loan Scheme Act 2011. It would introduce new rules around the exchange of information between the New Zealand and Australian tax authorities to address the problem of student loan borrowers who move overseas, do not keep in touch with the scheme, and default on their repayment obligations. It would also provide a requirement for the Commissioner of Inland Revenue to keep and publish a list of charities for the purpose of treating certain borrowers as being physically in New Zealand. The list was previously kept in regulations.

We propose relatively minor amendments to this part of the bill. The main change is in clause 21A, to refer to “notifying in writing” instead of “formally notifying” in section 169 of the Act (with consequential changes in clauses 26A and 26B to sections 213 and 214 of the Act). This would allow a student loan borrower to give notice by email if they wanted the chief executive of the Ministry of Social Development to determine an objection relating to their loan. This would be consistent with clause 6, which would allow a person to cancel their loan contract by electronic means.

Our other recommended amendments to this Part, in clauses 4(1) and 21, are for purposes of clarification only.

Residential land withholding tax

Part 2 of the bill would introduce a residential land withholding tax (RLWT) that would apply in conjunction with the bright-line test (and its associated definitions) introduced by the Taxation (Bright-line Test for Residential Land) Act 2015. The RLWT would apply where

  • the property being sold is located in New Zealand and defined as “residential land”

  • the seller acquired the property on or after 1 October 2015 and owned it for less than two years before selling

  • the seller is an “offshore person”.

Background

This part of the bill proposes the last in a three-part package of reforms to the rules for taxation of residential land, announced in Budget 2015.

The first part of the reforms was enacted in the Land Transfer Amendment Act 2015 and the Tax Administration Amendment Act 2015 (both derived from the Taxation (Land Information and Offshore Persons Information) Bill, on which we reported in August 2015). We reported on the second part of the reforms—the Taxation (Bright-line Test for Residential Land) Act 2015—in October 2015.

Our consideration of this bill has included giving thought to any adjustments that might be desirable in the land provisions to ensure that the various new rules work effectively together. We propose two such remedial changes at the end of this commentary.

Proposed amendments

We recommend several amendments in clauses 44 and 45. These clauses would introduce the RLWT by inserting new subpart RL in the Income Tax Act, and would define an offshore person for the purposes of that subpart. We discuss our proposed changes below.

Definition of offshore person

We considered whether the definition of “offshore person” was too broad in the case of non-individuals such as companies, trusts, and partnerships. For example, as the definition stands, a partner with a 1 percent share could make the entire partnership an “offshore person”, and therefore liable to pay RLWT. Similarly, a single beneficiary of a family trust living overseas could “taint” an entire transaction if they have received any distributions from the trust in the 6 years before the disposal of residential land, even if the distribution was unrelated to property, such as a small amount of interest or dividends.

We concluded that some modifications to the definition would be appropriate, and recommend the following amendments in clauses 44 and 45(8).

Companies and limited partnerships

We consider that the test for companies should be based on the degree of control of the company that is in New Zealand, with a threshold of 75 percent. If more than 25 percent of the company’s control or ownership (that is, by directors or shareholders) is outside New Zealand, the company should be considered an offshore person.

We note that this approach would be consistent with that taken in the Overseas Investment Act 2005. We consider that the conveyancer or other withholding agent would be able to determine whether the test was met, when combined with the information requirement changes we propose below.

For partners in limited partnerships, we propose that the same percentage test should apply as for a company.

We recommend amending clause 45(8)(c) accordingly.

Partnerships and joint owners

In the case of partnerships, and for co-owners who are not in a partnership, we recommend that the test should look through to the underlying interest in the land and the consideration for its disposal. This apportionment would ensure that one overseas partner did not “taint” other partners, and would allow tax credits for RLWT to flow appropriately. We recommend amending clause 44, new section RL 1(2B) accordingly.

Trusts

In the case of trusts, we recommend amending clause 45(8) so that a trust would be considered an offshore person if more than 25 percent of the trustees, or more than 25 percent of the people with the power to appoint or remove trustees, or to amend the trust deed, were offshore persons.

We considered the position of beneficiaries of trusts under this bill. As introduced, any offshore beneficiary who had received a distribution in the last 6 years would cause the trust as a whole to be considered “offshore”. We consider this test unduly harsh, as it would make many New Zealand family trusts liable for the withholding tax, which was not the intention. Instead, we propose basing the test on the trust not having sold any other residential land in the last 4 years, and not having distributed more than $5,000 to any offshore beneficiary in any of the last 4 years. We recommend amending clause 45(8)(b)(v) and (vi) accordingly.

Terminology: offshore RLWT person

In the light of these amendments, we consider that a different term should be used to define an offshore person for the purposes of the RLWT. This would avoid confusion with an offshore person to whom land information requirements apply under the other, related, legislation.

We therefore recommend amending clause 45(8) to change the term “offshore person” to “offshore RLWT person”.

Exemption certificates

We gave careful thought to the compliance and administrative costs entailed in the bill, and its potential effect on the supply of new housing, which we would like to see encouraged and not constrained. As introduced, the bill proposes an interim claim process, but does not propose any ability for the Commissioner of Inland Revenue to exempt a vendor from RLWT.

We are concerned that this approach could lead to cash flow difficulties for developers of residential housing, additional compliance costs for vendors, and administrative costs for IRD. If there was any doubt about a vendor’s “offshore” status, they would have RLWT deducted and would then have to file an interim tax return or wait for their end-of-year return for a refund. We are aware that finance can be tight for housing developers and believe that the delay entailed in this interim claim process could constrain residential development activity.

We therefore recommend some amendments to allow the Commissioner, in specific circumstances, to issue a certificate of exemption from the RLWT. We propose that the exemption be limited to offshore developers and to offshore persons who are disposing of their main home. Moreover, a developer would need to satisfy the Commissioner that they had a good record of tax compliance and good prospects for this continuing, or they would need to provide the Commissioner with security for the payment of their likely tax obligations.

Accordingly, we recommend amending clause 44 to insert new subsection RL 1(2C) in the Income Tax Act, inserting clause 45(10B), and amending clause 72 to insert new section 54E in the Tax Administration Act.

Interim returns and repayment of RLWT

We propose a mechanism to allow the Commissioner to refund the RLWT to a taxpayer if it would result in over-taxation, if the disposal of the land was not subject to tax, or if the taxpayer had sufficient losses carried forward.

We recommend amending clause 44 to insert new section RL 6 in the Income Tax Act setting out the grounds on which a repayment would be made. That is, if it was likely that the RLWT would not be needed to meet an offshore person’s end-of-year income tax liability in relation to land, they had no outstanding tax obligations, and they had completed the appropriate interim return form including all relevant information, the Commissioner would be able to make a repayment.

We also recommend amending clause 72, inserting new section 54D in the Tax Administration Act, to provide the administrative machinery for taxpayers to file their returns on an interim basis. Although the Tax Administration Act contains some relevant general provisions, we believe a specific provision would be beneficial as the proposed interim claim process is a new approach.

Information requirements for RLWT

The RLWT proposal in the bill would require the withholding agent to confirm the offshore status of the vendor, deduct the withholding tax, and provide it to the IRD. We recognise that, in practice, these agents should readily be able to determine the offshore status for individuals, but it could well be difficult for them to determine the status of a company, limited partnership, or trust.

To reflect commercial reality, we propose that one New Zealand director should be required to determine and certify the shareholding of a company selling residential land in order to show that the company is not an offshore person. Similarly, for a limited partnership or a trust, the verification would need to be done by a general partner or a trustee who was not an offshore person.

We recommend amending clause 72 to insert new subsection 54C(5) in the Tax Administration Act to this effect.

We also recommend amending clause 72 (new subsection 54C(6)) to specify that a purchaser must give a copy of this information to the Commissioner, but need not retain it thereafter.

We see value in having a “nil return” provided to the IRD even if the withholding tax payable by an offshore person was calculated at zero. We recommend amending clause 72 to insert new subsection 54B(2) to require this.

Transactions between associated persons

Where a purchaser and vendor were associated persons and neither had a withholding agent, the bill would require the purchaser to deduct the RLWT and hold it in a separate bank account pending remittance to the IRD. We see this as impractical and unnecessarily costly, and believe the same security would be achieved if the purchaser held the funds in their own bank account. We recommend amending clause 44, new section RL 3(b), to remove this requirement.

Penalties

The bill (clause 44, new section RL 2(6)) provides for penalties to be imposed on withholding agents in certain circumstances. In general, the existing penalties under Part 9 of the Tax Administration Act would apply, as for other withholding taxes. The penalties would include a penalty for late payment if the RLWT had been deducted but not remitted to the IRD on time, and civil penalties such as a lack of reasonable care, gross carelessness, or evasion. We consider it appropriate that, in extreme cases, criminal penalties could also be imposed by a Court of law.

We are aware of concern about the potential penalties that withholding agents could face if an error were made in administering the RLWT. We note that the bill seeks to make the test of whether a vendor is an offshore person reasonably straightforward, and we understand that the IRD will provide guidance. We consider it appropriate for the bill to specify a standard of reasonable reliance; that is, a withholding agent would not be liable for penalties under the Tax Administration Act if they relied, on reasonable grounds, on the form and accompanying documents provided to them by the vendor (such as evidence of a New Zealand passport), combined with meeting the person or obtaining other acceptable evidence of their recent presence in New Zealand.

We recommend amending clause 44 to insert new section RL 2(6B) to this effect.

While the bill provides for a late payment penalty, we consider that it should also include a penalty for late filing, in order to encourage withholding agents to provide RLWT statements to the IRD by the due date. We note that late filing could cause problems for a taxpayer in seeking to use their RLWT credit to offset an income tax liability or to obtain a refund. Accordingly, we recommend inserting clause 74, amending section 139A of the Tax Administration Act.

Provisional tax

We recommend inserting subclause (9B) in clause 45 to include tax credits for RLWT in the definition of “residual income tax” for the purposes of determining whether a taxpayer should fall within the provisional tax rules.

Bank account requirements for offshore persons

We are aware of some practical difficulties with the requirement for offshore persons to have a New Zealand bank account in order to apply for an IRD number. This measure was introduced in the Tax Administration Amendment Act 2015, and aims to ensure that anti-money laundering (AML) identity verification requirements apply to offshore persons.

We propose amending the bill to relieve some of the compliance costs involved in the bank account requirement, particularly where a taxpayer has limited physical presence in New Zealand, while maintaining the integrity of the requirement for AML identity verification. Officials have undertaken to continue to work on solutions, whether legislative or operational, for some of the other practical difficulties and unintended consequences.

We recommend amending clause 71 (section 24B of the Tax Administration Act) and inserting clause 70B to relax the bank account requirement in any of the following three situations:

  • Non-resident seasonal workers under the recognised seasonal employment scheme would be allowed a grace period of 1 month after arriving to get a New Zealand bank account and inform the IRD, before the higher non-notification withholding tax rate applied.

  • A person who had already had AML verification undertaken by a New Zealand reporting entity would not need to obtain a bank account, to avoid duplication of this process.

  • The bill already exempts non-resident suppliers of remote services from the requirement to have a bank account; we recommend that other non-resident suppliers also be exempt, as long as the IRD number was being applied for solely because they were a non-resident supplier under the Goods and Services Tax Act.

GST on online services

Part 3 of the bill would amend the Goods and Services Tax Act 1985 to apply GST to cross-border “remote services” provided to New Zealand-resident consumers. Remote services would include digital services such as internet downloads and online services, and more traditional services such as legal and accounting services that are supplied remotely. The bill would include rules for insurance and gambling services that are supplied remotely by offshore suppliers. Offshore suppliers would be required to register and return GST if their supplies exceeded $60,000 in a 12-month period, the same as the domestic threshold for GST registration.

Submitters generally supported the proposed new rules, but raised a number of technical issues about how they would apply and be enforced.

We propose several amendments to address these issues. We consider it important that the IRD monitor compliance and enforce the rules to the extent possible. It has undertaken to do so.

Commencement date

The new GST rules would come into force on 1 October 2016. We considered whether this would allow enough time for offshore suppliers to familiarise themselves with the requirements and adjust their systems. We believe the date proposed should be manageable provided there is no major delay in the bill’s enactment or in the preparation of guidance material.

We note that similar rules are proposed in Australia, commencing on 1 July 2017. However, we are not persuaded that the commencement date for the rules under this bill should be delayed to align with those in Australia.

Transitional provision for fixed-term contracts

We recognise that there could be administrative difficulties with some fixed-term contracts (such as contracts of insurance) that span the date of the rules’ introduction. We consider it appropriate to provide a transitional provision, as was done in 2010 when the GST rate was changed. This would suspend the usual GST rule, which treats periodic payments as successive supplies and applies GST to each payment. Instead, such contracts could be treated as not successively supplied for the term of the contract or 396 days, whichever was earlier.

We recommend inserting clause 68B, new section 85B, accordingly.

Marketplace rules

We recommend amending clause 66 and inserting new section 60D to extend the definition of an “electronic marketplace” to include other forms of “marketplace” as approved by the Commissioner of Inland Revenue. We recommend amending the definition of “marketplace” accordingly, by inserting clause 47(4B).

We note that some insurance services are arranged through a marketplace whereby a large number of syndicate members group together to underwrite the insurance. In the bill as introduced, the GST rules would require each syndicate member to register and return GST. We accept that allowing non-electronic marketplaces such as a marketplace for insurance to register and return GST would achieve the desired result with much lower costs of compliance.

Where an insurance structure involves a New Zealand cover-holder acting as an agent for syndicate members, we accept that it may be appropriate for the agent to be treated as making the supply of remote services. We recommend amending clause 65 to insert sections 60(1A) and (1AB) to allow this.

Gambling services

We propose amendments in clause 52, amending section 10(14B), to simplify the proposed formula for calculating GST on the supply of gambling services. Our proposed changes would also allow a non-resident supplier of gambling services to carry forward New Zealand losses and use them in a later taxable period. We consider that these changes would achieve a similar result over time and would promote compliance by reducing the complexity and cost involved in the calculations.

Zero-rating of business-to-business supplies

To reduce compliance costs and fiscal risks, the bill proposes that GST would not be charged on remote supplies from offshore suppliers to New Zealand GST-registered businesses. However, an offshore supplier and a GST-registered recipient could agree to treat the supply as being made in New Zealand, in which case it would be zero-rated. (Clause 53(1) and (2), amending section 11A(1)(j) and inserting section 11A(1)(x)).

We support a simpler approach that would remove unnecessary compliance costs by allowing an offshore supplier to unilaterally elect to zero-rate supplies to GST-registered businesses, without the need to formally seek the New Zealand firm’s agreement. We recommend amending clause 49, inserting section 8(4D), accordingly.

Currency conversions

Registration threshold

The bill proposes that an offshore supplier must register for GST if they have supplied more than NZ$60,000 worth of services in the previous 12 months, or if there are reasonable grounds to believe that the value of supplies in the next 12 months will exceed this threshold. In view of currency movements, we accept that clarification is needed as to how a supplier should make these calculations.

We recommend inserting clause 60B (section 51(1B)) to allow a supplier to use any fair and reasonable currency conversion method for calculating the value of services previously supplied. (For example, when testing whether previous supplies exceeded the threshold they could use the exchange rate at the time of supply, or at the time of testing, or an average exchange rate over the previous period.) For testing whether supplies are likely to exceed the threshold over the coming 12 months, the calculation could be based on the exchange rate at the start of the 12-month period. We would, however, expect the method chosen to be used consistently.

Converting foreign currency amounts supplied

Rather than requiring a non-resident supplier to convert each transaction into New Zealand currency, the bill (clause 68, replacing section 77) would allow them to choose to express the price of the remote services in a foreign currency at the time of supply, and then to convert the aggregate amount into New Zealand currency at the due date for filing their GST return. Submitters supported this flexibility. A supplier would, however, be required to use the chosen method consistently for at least 24 months, to reduce the possibility of “gaming” exchange rate movements.

We recommend amending clause 68 (proposed subsections 77(3) and (4)) to provide additional flexibility. We propose that a supplier could convert on the last day of the relevant taxable period or, if the Commissioner of Inland Revenue agreed, choose a different date for making the currency conversion. They would need to apply the method chosen consistently for 24 months unless the Commissioner agreed otherwise.

Converting tax invoices for business-to-business supplies

As we noted above, GST would not be charged on remote supplies from offshore suppliers to New Zealand GST-registered businesses. Non-resident suppliers would therefore not be required to provide tax invoices on their supplies of remote services. However, if an offshore supplier inadvertently charged GST to a GST-registered business and the payment for the supply was less than $1,000, clause 57 (section 24) would allow them to provide a tax invoice so that the registered business could deduct the GST charged.

For clarity, we recommend amending clause 57 to specify that the $1,000 threshold for the option to issue tax invoices would be calculated in New Zealand currency at the time of supply.

Determining residence and status of remote service recipients

Clause 50 would insert new section 8B setting out how an offshore supplier would determine whether a recipient of remote services is resident in New Zealand and should therefore be charged GST. Where the evidence was inconclusive as to a recipient’s residency status, new subsection 8B(3) would allow the Commissioner of Inland Revenue to exercise discretion and to prescribe or agree to an alternative method for determining this.

We recommend inserting new subsection 8B(3B) in clause 50 to provide guidance about matters the Commissioner may take into account in exercising this discretion.

Services to be consumed outside New Zealand

We considered the possible situation of a New Zealand resident purchasing a voucher online from an offshore supplier for a service that would be consumed outside New Zealand. We can see some grounds for excluding such a transaction from the definition of “remote service” to which GST would apply, since GST is a tax on consumption in New Zealand. However, we note that under international practice and OECD guidelines, the place of residence of the customer is considered the appropriate proxy for the place of consumption, and so forms the basis for taxation. Departure from this international norm could result in some supplies being double-taxed and some not taxed in any jurisdiction.

We propose that officials should monitor closely how the rules apply in practice, and any developments in international thinking on this issue.

Remedial amendments: land provisions

The Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 introduced rules for determining the date on which land is acquired. The general rule is that land is acquired when a person first acquires an interest in the land. In the case of land acquired through an option it was unclear how the general rule applied. We recommend inserting clause 37B to amend section CB 15B(3) of the Income Tax Act 2007 to make it clear that, when land is acquired through the exercise of an option, the first interest in land is acquired at the time the option is exercised.

We also recommend inserting clause 37C to make a remedial amendment to section FB 3A(3) of the Income Tax Act 2007, which deals with the date of acquisition of residential land when land is transferred on a settlement of relationship property. This change would add references to sections CB 6A(2)–(4), which are also relevant for section FB 3A(3).

Appendix

Committee process

The Taxation (Residential Land Withholding Tax, GST on Online Services, and Student Loans) Bill was referred to the committee on 8 December 2015. The closing date for submissions was 26 January 2016. We received and considered 19 submissions from interested groups and individuals. We heard 14 submissions.

We received advice from the Inland Revenue Department and our specialist tax advisor, Therese Turner (Chartered Accountant).

Committee membership

David Bennett (Chairperson)

Andrew Bayly

Chris Bishop

Hon Clayton Cosgrove

Julie Anne Genter

Stuart Nash

Rt Hon Winston Peters

Grant Robertson

Jami-Lee Ross

Alastair Scott

David Seymour