General policy statement
This taxation omnibus Bill introduces amendments to the following enactments:
Tax Administration Act 1994
Goods and Services Tax Act 1985
Stamp and Cheque Duties Act 1971
Student Loan Scheme Act 2011
Goods and Services Tax (Grants and Subsidies) Order 1992
The taxation amendments contained in the Bill aim to improve the current tax settings within a broad-base, low-rate framework. Under this framework, the tax treatment of alternative forms of income and expenditure is intended to be as even as possible. This ensures that overall tax rates can be kept low, while also minimising the biases that taxation introduces into economic decisions. This framework underpins the Government’s Revenue Strategy and helps maintain confidence that the tax system is broadly fair, which is crucial to encouraging voluntary compliance.
Although New Zealand has relatively strong tax settings, it is important to maintain the tax system and ensure that it continues to be fit for purpose. Changes in the economic environment, business practice, or interpretation of the law can mean that the tax system becomes unfair, inefficient, complex, or uncertain. The tax system needs to be responsive to accommodate these concerns.
The main policy measures within this Bill have been developed in accordance with the Generic Tax Policy Process (the GTPP). This is a very open and interactive process between the public and private sectors, which helps ensure that tax and social policy changes are well thought through. This process is designed to ensure better, more effective policy development through early consideration of all aspects, and likely impacts, of proposals, and increased opportunities for public consultation.
The GTPP means that major tax initiatives are subject to public scrutiny at all stages of their development. As a result, Inland Revenue and Treasury officials have the opportunity to develop more practical options for reform by drawing on information provided by the private sector and the people who will be affected.
The final stage is a post-implementation review of new legislation and identification of remedial issues that need correcting for the new legislation to have its intended effect. Further information on the GTPP can be found at http://taxpolicy.ird.govt.nz/how-we-develop-tax-policy.
Closely held companies
The Bill proposes changes to the look-through company (LTC) rules and the dividend rules as they apply to closely held companies. The changes are intended to simplify the rules to reduce compliance costs, while ensuring that the rules remain robust and in line with intended policy.
The Bill proposes amendments to the definitions of look-through company and look-through counted owner, to tighten the eligibility criteria for a company electing to become a LTC.
In particular, it is proposed to broaden the way that beneficiaries are counted when determining whether the requirement that there be 5 or fewer counted owners is met. The proposed new test would count any beneficiary who receives any distribution from a trust with a look-through interest, sourced from any income of the trust. Currently, the tests are limited to beneficiary income sourced from a look-through interest.
To bolster the current legislative prohibition on direct corporate ownership of LTCs, the Bill proposes that a LTC owned by a trust will lose its LTC status if the trust makes a distribution to a corporate beneficiary.
Charities and Māori authorities will be precluded from being LTC owners, directly or indirectly, under the proposed amendments. However, a trust that is a shareholder in a LTC will be able to make a distribution to a charity when the distribution is akin to a donation or is received by the charity as a residual beneficiary. Māori authorities that have ownership interests in LTCs immediately before the introduction of this Bill will be excluded from the prohibition.
The Bill proposes that the annual amount of foreign income earned by a foreign-controlled LTC be limited to the greater of $10,000 and 20% of the LTC’s gross income in the relevant income year.
The Bill also includes an amendment to the definition of look-through interest, enabling a LTC to have more than 1 class of shares, provided all shares have uniform entitlements to all distributions.
LTC entry tax
When companies convert to become LTCs the rules currently seek to tax any retained earnings, being income earned prior to conversion and retained by the converting company, using the entry tax formula. The entry tax formula calculates the income to be taxed at the company tax rate. Reliance on the company tax rate can produce over-taxation or under-taxation of the earnings, depending on a shareholder’s personal tax rate and whether the company was a qualifying company (a QC) or an ordinary company prior to becoming a LTC.
Two amendments are proposed to correct the effect. The first amendment modifies the income adjustment formula to ensure the taxable income that arises is taxed at the shareholder’s personal tax rate. The second applies to QCs converting to LTCs and ensures that the entry tax formula does not tax the owner of a QC more than the owner would have been taxed had they liquidated the QC instead.
Deduction limitation rule
The Bill proposes to remove, except for LTCs in a partnership or joint venture, the rule that limits an owner’s LTC deductions to the amount that the owner has at risk economically. The change will apply from the 2017–18 income year, and deductions previously restricted under this rule will be available for offset from then onwards. The existing anti-avoidance rule that deems a partner’s transactions to be at market value is proposed to be extended to owners of LTCs, in order to prevent excessive deductions.
Two retrospective changes to the debt remission rules in the context of LTCs and partnerships are proposed. The first change ensures that remission income does not arise to a person who is a LTC owner or partner and who remits a debt owed by the LTC or the partnership, which may be a limited partnership (referred to as self-remission). The second change clarifies that debt owed by a LTC upon liquidation or election out of the LTC regime must be adjusted for any credit impairment.
It is proposed that qualifying companies lose their QC status if there is a change in control of the company. A change in control will be measured using a continuity test requiring a group of persons that holds, for the continuity period, minimum voting interests in the company of at least 50% in total. The continuity period commences on the date on which the Bill receives Royal assent and runs through to the relevant income year.
Tainted capital gains
The tainted capital gains rule, under which some capital gains made by companies are treated as taxable when distributed to shareholders on liquidation of the company, is proposed to be liberalised. The changes ensure that genuine capital profits made by ordinary companies are not tainted merely because there is a transaction involving an associated party. Instead it is proposed that a capital profit on the disposal of an asset is tainted only if the purchaser is a company and the shareholders of the company disposing of the asset retain an interest in the asset of at least 85% after the disposal. This could be through their being either direct or indirect shareholders in the purchaser company.
This 85% threshold test will be applied whether there is 1 sale, or a series of sales or transactions. Whether the gain is tainted will be determined when a distribution is made by the vendor company to its shareholders as a result of liquidation.
RWT on dividends
Two amendments to reduce over-taxation of dividends are proposed. The first would allow a company to opt out of deducting resident withholding tax (RWT) from a fully imputed dividend paid to corporate shareholders. The second proposes a new formula for determining the amount of RWT payable when cash and non-cash dividends are paid contemporaneously. The formula treats the 2 dividends as a single dividend and applies if the cash dividend is equal to or greater than the RWT calculated under the formula.
PAYE and shareholder-employees
The Bill proposes that when an employee of a close company who is also a shareholder in the company, receives regular salary or wages throughout the year and also receives a further amount of income that is later allocated to them in their capacity as an employee, the employee may split the income so that the base salary is subject to pay-as-you-earn (PAYE) and the variable amount is paid out with no tax being withheld. A taxpayer will need to make an irrevocable election to apply this approach.
NRWT: Related party and branch lending
The Bill proposes changes to the non-resident withholding tax (NRWT) and approved issuer levy (AIL) rules as they apply to interest paid on debt provided by non-residents. The amendments are necessary to ensure that the tax (whether NRWT or AIL) applies consistently to transactions that are economically similar and easily substitutable consistent with the underlying policy. In particular, the proposals address issues that arise on the boundary between the application of NRWT and AIL, which can at times result in different tax outcomes based on the legal form of a loan rather than the economic reality.
Capturing arrangements giving rise to non-resident passive income
A New Zealand borrower who obtains funds from a non-resident under a financial arrangement is entitled to a deduction for funding costs under the financial arrangement rules; however, NRWT will only be required to be withheld from the interest, or AIL paid, if that arrangement involves money lent. As these definitions do not exactly align it is possible for a deduction to be obtained where the lender does not derive non-resident passive income (NRPI). To address this inconsistency, the Bill proposes to extend the definition of money lent to include funding provided to a New Zealand resident by an associated non-resident under a financial arrangement that involves expenditure being incurred under the financial arrangement by the resident.
Correcting timing mismatches between NRPI and financial arrangement expenditure
The Bill contains proposals to correct mismatches between the time at which certain NRPI is subject to NRWT and the time when the corresponding expenditure becomes deductible under the financial arrangements rules. To achieve this, the Bill proposes introducing a new concept of non-resident financial arrangement income (NRFAI) as a new category of NRPI arising under certain financial arrangements between associated parties. The calculation of NRFAI is similar to a resident’s calculation of financial arrangement income and expenditure. All other financial arrangements with non-residents continue to be taxed under the current NRWT rules, which operate on a payments basis.
Under the proposals, NRWT will be paid on NRFAI when a financial arrangement with an associated party has a sufficiently large degree of income deferral, measured by comparing cumulative payments under the arrangement (on which NRWT is ordinarily payable) with cumulative deductions. NRFAI does not arise for borrowers who make interest payments to related parties if the payments are less than a new de minimis threshold.
Applying NRWT when a third party has been interposed to access AIL
The policy intent has always been that AIL should not be available on interest payments made to an associated party lender. This restriction does not currently apply when the lender is equivalent to an associated party in substance or when the arrangement has been structured so the direct lender and borrower are not associated, although section BG 1, the general anti-avoidance provision, may apply to the situation.
Two examples of situations to which AIL is applicable, and that are in substance an interest payment to an associated party, are back-to-back loans and multi-party arrangements. A back-to-back loan occurs when an associated party lends to a third party who subsequently on-lends the funds to an associated borrower. A multi-party arrangement achieves the same result through a more complex structure. For example, the principal portion of funding originally provided by a third party may be sold to a person who is associated with the borrower.
The Bill proposes to introduce rules addressing the problem. The rules are to apply to arrangements that have the purpose or effect of qualifying for AIL on interest which is effectively paid to an associated party. In the case of a back-to-back loan, the interposed third party is treated as having received interest payments as agent for the ultimate lender; both the borrower and the interposed third party jointly have a liability to withhold NRWT on interest attributable to the associated non-resident.
AIL is currently available if 2 or more persons who are not associated with each other or with a New Zealand borrower act together to control, and in particular to fund, that borrower, which is typically a joint venture or private equity investment structure. The Bill proposes, in some circumstances, to subject this borrowing to NRWT instead, by introducing a non-resident owning body test. The test is similar to provisions introduced into the thin capitalisation rules in 2014.
Eligibility for AIL
The Bill also introduces restrictions on the ability to register a security, in order to prevent New Zealand borrowers from falsely claiming that the lender is not associated. Otherwise, such borrowers will pay AIL, when they should withhold NRWT.
Borrowing not attributed to an onshore branch
Under the current rules, interest paid by a New Zealand resident to a non-resident is not subject to NRWT or AIL if the non-resident operates a business in New Zealand through a fixed establishment, or branch. This is known as the onshore branch exemption. The onshore branch exemption currently applies even if the non-resident’s branch has no involvement in the transaction.
Although income tax is payable on the margin earned by the non-resident, this is often much less than the NRWT or AIL that would be payable if the branch did not exist. The Bill proposes to narrow the exemption so that a payment of interest by a New Zealand resident to a non-resident will be covered by the exemption, and therefore not subject to withholding tax, only if the money lent is used by the non-resident for the purposes of a business carried on through the New Zealand branch.
The exemption will continue to apply to a New Zealand resident who borrows from a non-resident bank with a New Zealand branch if the borrower and the lender are not associated. Therefore, the proposed change will not impose NRWT or AIL on payments to acquire foreign property made by New Zealand borrowers who are not associated with a non-resident bank with a New Zealand branch.
Borrowing allocated to an onshore branch
A non-resident bank can borrow offshore for the purpose of funding its worldwide operations and allocate a portion of this funding to its New Zealand branch. When calculating its net income taxable in New Zealand, the bank can deduct, from the income generated by its New Zealand activities, an amount that is treated as interest attributable to the borrowing raised offshore and used to fund the New Zealand business.
However, New Zealand currently does not impose NRWT or AIL on any portion of the interest paid on the offshore borrowing by the bank or on the interest which the New Zealand branch is treated as paying to the non-New Zealand part of the bank that provides it with funding.
To correct this asymmetric tax outcome, the Bill proposes to make funding costs, of a New Zealand branch of a non-resident bank, subject to NRWT or AIL if the costs are deductible for income tax purposes in relation to a deemed loan to the branch by its head office.
Offshore branch exemption
The offshore branch exemption applies to interest derived from money lent outside New Zealand to a New Zealand resident using the money for the purposes of a business carried on through a fixed establishment offshore.
This exemption is intended to apply to a New Zealand resident operating an active business through a branch in another country so that the offshore branch of a New Zealand company is treated in the same way as a foreign incorporated subsidiary borrowing for an equivalent business.
However, this exemption currently also applies to a New Zealand company with an offshore branch that borrows money for the purpose of providing funding to New Zealand borrowers, who may or may not be associated with the New Zealand company. By using this exemption, a New Zealand company can borrow through an offshore branch of an associated New Zealand company without paying AIL on interest payments, whereas it would have to pay AIL if it borrowed directly from the ultimate lender.
The Bill proposes to impose AIL or NRWT on interest paid to a non-resident by an offshore branch of a New Zealand company to the extent that the money is then lent to New Zealand residents.
Replacement of NRWT with AIL on interest paid by a member of a New Zealand banking group to an associated non-resident
Using the branch exemptions discussed above, New Zealand banks are currently able to pay interest to non-residents without the imposition of NRWT or AIL, even when the non-resident is an associated party.
Imposing NRWT on the lending by a bank to an associated party would be inappropriate, as there are commercial reasons why a foreign bank may borrow from a third party and on-lend to its New Zealand bank subsidiary. Further, a likely result of imposing NRWT on such a loan would be that a New Zealand bank would borrow directly from third parties although, in the absence of tax, it would be economically efficient to borrow through an associate.
The proposed amendments will continue to allow a member of a New Zealand banking group to pay AIL on interest payments to an associated non-resident.
GST current issues
The Bill proposes several amendments to the Goods and Services Tax Act 1985 to address various issues.
Capital raising costs
Under current rules, input tax deductions will generally be unavailable for goods and services purchased to raise capital. The GST treatment depends on the use of the goods and services in making taxable supplies. Supplies of financial services to final consumers are exempt, and therefore do not give rise to deductions.
Amendments are proposed to enable businesses to recover GST incurred on goods and services purchased to raise capital. A deduction is available to the extent that the capital is raised to fund a taxable activity. The amendments recognise that the cost of raising the capital relates economically to the businesses’ general business activities, rather than to the consumption of the financial services themselves.
Agreed alternative methods for applying the apportionment rules
The apportionment and adjustment rules determine the input tax deductions that businesses can claim for the goods and services they purchase. The rules match the deduction with the use of goods and services by the business in making taxable supplies. However, the legislated approach can be difficult to apply for certain businesses, in particular for providers of mixed taxable and exempt accommodation such as retirement villages, resulting in high compliance costs.
An amendment is proposed to include in the apportionment and adjustment rules an alternative method, which would be available to businesses with a turnover likely to exceed $24 million in a 12-month period. The alternative method would be agreed with the Commissioner, and would be required to produce a fair and reasonable result that is similar to the outcome that would be reached if the legislative test were applied.
The amendment would also allow an industry association to agree a method with the Commissioner, which could apply to that industry or to a group of businesses within that industry. The benefit of such a method would then be extended to businesses with a lesser turnover that experience similar difficulties in applying the statutory method.
Secondhand goods and gold
Input tax deductions are available for secondhand goods acquired by a registered person, when GST is not charged on the supply but is treated as being embedded in the cost of the supply. The deduction addresses the fact that the supplier could not recover the GST incurred when the supplier purchased the good.
An exception to this rule exists to the extent that secondhand goods are composed of gold, silver, or platinum and the goods are not fine metal. The exception is intended to mitigate a potential fiscal risk that could arise if a deduction were allowed under the secondhand goods rules and an advantage could be gained by switching between supplies of fine metal and supplies of metal that is not fine metal. However, the exception may cause tax to be imposed multiple times on the consumption of some goods, such as jewellery.
The Bill includes an amendment to narrow the exception, so that a deduction is available for goods of a kind manufactured for sale to the public.
Services connected with land
Supplies of services to non-residents outside New Zealand are generally treated as being consumed outside New Zealand, and are therefore not subject to GST. An exception to this treatment applies when the services are closely connected with land in New Zealand. Such services are treated as being consumed in New Zealand.
The current rules capture supplies of services that are described as being directly in connection with land in New Zealand. However, the test does not capture all supplies of services with a close economic connection to the land. The Bill proposes an amendment to expand the current test by ensuring that supplies of services are subject to GST if they are acquired to enable or assist a change in the physical or legal nature of land in New Zealand.
A rule expressed in similar terms applies to exclude supplies of services directly in connection with land outside New Zealand from GST. The Bill proposes a new test to similarly ensure that GST does not apply to supplies of services that enable or assist a change in the physical or legal nature of land outside New Zealand.
The Bill also proposes several GST remedial amendments to:
Ensure that the rules applying to business-to-business supplies of land apply as intended. The amendments ensure that the rules apply to lease surrender payments, the novation of an existing lease, and to supplies of land to non-profit bodies. Some technical issues have been corrected in the test that determines when a commercial lease is zero-rated.
Allow businesses in certain situations to account for GST to the extent that consideration for a supply is paid, or an invoice issued, although the total consideration payable, and therefore the total GST charged, for the supply is not able to be determined at that time.
Allow agents making purchases on behalf of their principals, and their principals, to treat a supply as being made between the agent and principal. The proposal is intended to reduce compliance costs incurred by agents who also make supplies on their own behalf and are currently required to distinguish between the 2 types of transaction.
Ensure that services performed on, and goods that are incorporated into, newly purchased boats and aircraft that are exported under their own power, are zero-rated.
Prevent goods that are imported into New Zealand and subsequently re-exported by a business from being effectively subjected to tax by the claw-back of deductions.
Resolve technical issues with the rules that allow non-resident businesses outside New Zealand to register and recover GST. In particular, the amendments ensure GST is not incurred on business-to-business transactions, and correct an issue with a base maintenance rule to ensure consumption in New Zealand is taxed correctly.
Fix a technical anomaly that prevents limited partnerships from being members of a GST group composed of companies and limited partnerships.
Effectively extend the time period for the Commissioner to notify a person that their GST return is being investigated, or for the Commissioner to request additional information, thereby allowing the claimed refund to be withheld. The amendment replaces the requirement that the notice be received within 15 working dates from the date of the return, with a requirement that it be issued within this time frame.
Fix technical issues with the Commissioner’s discretion to allow certain taxpayers to file 6-monthly GST returns, by imposing a more objective test.
Resolve a technical anomaly that creates an inconsistent time period for the Commissioner to refund overpaid tax.
Better align the treatment of prizes won by registered persons, who enter a horse in a race as part of their taxable activity, with commercial practice.
Extend the application of a savings provision that applies to GST-registered members of unregistered bodies corporate.
Related parties debt remission
The Bill proposes changes to the treatment of debt remission, including remission by the capitalisation of debt, when the lender and borrower are related.
The current rules can result in an asymmetric tax treatment because the borrower is obliged to pay tax on the debt remission income while the lender, as an associated person, is unable to claim a deduction for the bad debt. The debt remission income arises for tax purposes despite there being no economic gain to the persons involved when they are considered as a single economic group. The Bill proposes amendments to address this asymmetry by deeming remitted debt to be repaid in full. This ensures that the tax outcome matches the economic substance.
The amendments apply to persons who are effectively a single economic group, including:
creditors and debtors within the same wholly-owned group of companies;
a single non-corporate owner and their wholly-owned company;
multiple shareholders and a company (or partners and a partnership or limited partnership), when the debt is remitted in the same proportion as equity (or ownership).
It is proposed that the rules also apply for a loan advanced by a relative of the owner. Both the creditor and debtor are not required to be within the New Zealand tax base; the amendments apply to inbound and outbound investment.
Debt remission and available subscribed capital
It is proposed that the remission of a company’s debt to an associated creditor will increase the available subscribed capital of the company, and also increase the cost of the creditor’s investment in the debtor. This proposal provides for the same outcome as if the debt were capitalised.
Bad debts and guarantees
The Bill also proposes amendments to the treatment of bad debts, and debt guarantees, involving related parties.
In particular, the change to the treatment of bad debts addresses a situation where a double deduction could be allowed to a creditor for unpaid interest, and to the debtor for the incurred interest, with only a single stream of income being recognised. It is proposed that a bad debt deduction be denied when the creditor and debtor are part of the same economic group.
The proposed amendment to the treatment of debt guarantee payments would apply when a person makes a payment to a third-party creditor under a guarantee of an associated person’s borrowing. The defaulting debtor has remission income, and therefore a tax liability, but may be insolvent and unable to pay. In practice, allowing the guarantor a deduction would result in an asymmetric tax outcome that does not match the economic substance. Under the proposed amendment, the payments under the debt guarantee are instead treated as purchasing the debt, and the rules relating to sales of debts to associates apply (excluding the threshold value for the cost of the debt).
Loss grouping and imputation
A company that has benefited from loss grouping will pay less income tax and therefore generate fewer imputation credits. If the profit company is wholly-owned by its parent company, any dividends will not be taxable due to the exemption from tax for inter-corporate dividends. However, if the profit company and the loss company are not wholly-owned, the inter-corporate dividend exemption will not apply and the reduced level of imputation credits will mean that the dividend cannot be fully imputed.
When a shareholder of the profit company receives a partially imputed dividend, it will have to pay income tax to the extent the dividend is not fully imputed. This additional income tax effectively claws back the benefit of the loss grouping and may leave the owners of the profit company in a worse position than if the loss grouping had not occurred.
The Bill proposes to allow a loss company, or another company in a commonly owned group, to transfer imputation credits to a profit company in conjunction with a loss grouping transaction. The imputation credit transfer will allow the profit company to pay a fully imputed dividend despite engaging in loss grouping, thus removing the distortion created by the existing rules.
Existing anti-avoidance provisions relating to imputation credits will be extended to groups who undertake these transfers to prevent the inappropriate transfer of the value of imputation credits between different groups.
Remission income, insolvency, and bankruptcy
The proposed amendments seek to improve the consistency of income tax legislation with the fresh-start principle of insolvency law, under which a person released from all debt under insolvency law is encouraged to start afresh with minimal assets. The amendments also align with current administrative practice, and seek to improve the neutrality of the tax system in relation to investment decisions.
In particular, the proposed amendments will:
cancel the full amount of carried-forward tax losses of an insolvent person who is released from all provable debts under insolvency law except debt released under subpart 1 of Part 5 of the Insolvency Act 2006;
ensure that, on being declared bankrupt, assets vested in the Official Assignee are transferred at their tax values;
clarify that a bankrupt is liable to satisfy income tax obligations for income derived during the period of bankruptcy, consistent with current practice;
correct an inadvertent overreach relating to social policy legislation arising from an earlier amendment.
Aircraft overhaul reserves
The Bill introduces amendments relating to the timing of aircraft engine overhaul deductions to provide certainty and produce a better alignment of deductions and income arising from the use of aircraft. The amendments propose to treat the engine overhaul value inherent in the acquisition cost of an aircraft separately from the depreciation of an aircraft taken as a whole.
In particular, a deduction will be permitted when an engine is acquired, either separately or as part of the aircraft, for the overhaul value inherent in the cost of the engine. An amendment will also clarify that overhaul costs are an allowable deduction. Both deductions are proposed to be spread between periods according to the use of the engine during the periods. The appropriate use measures are given by the maintenance programme for the engine issued by the manufacturer, subject to changes regulated from time to time by the Civil Aviation Authority.
The Bill also provides for a transitional deduction for the proportion of the cost of an aircraft engine that relates to the overhaul value of the engine, to the extent that the proportional cost is not fully depreciated by the beginning of the 2017–18 income year.
The proposed amendments also provide for the reversal of an accounting provision that has accrued at the end of the 2016–17 income year for a future overhaul of an aircraft engine. The reversal occurs either as a reduction in the cost of the first overhaul for that aircraft engine or as an increase in the consideration on the disposal of the aircraft or separate engine, depending on whether the overhaul or disposal occurs first. On disposal of the aircraft or the aircraft engine, disposal proceeds are to be apportioned between the aircraft or engine as an item of depreciable property (the depreciation rules apply) and unexpired deductions for aircraft engine overhauls. An income recovery provision applies to disposal proceeds apportioned to the unexpired deductions for aircraft engine overhauls, similar to the depreciation recovery provisions for depreciable assets.
To reduce compliance costs, it is also proposed that IFRS taxpayers may elect, with the agreement of the Commissioner, to adopt a tax accounting approach based on IFRS accounting that results in a similar outcome to that intended by the spreading approach. Similarly, a person in business who owns 1 aircraft may elect to be allowed the aircraft overhaul expenses as a deduction when they are incurred (although associated persons who together own more than 1 aircraft are not allowed this election). If this election is made, however, the proportional cost of the engine relating to overhaul must continue to be depreciated as part of the aircraft, taken as a whole.
Clarification of empowering provision for New Zealand DTAs
It is proposed that the Income Tax Act 2007 be amended to clarify that the empowering provision for New Zealand’s double tax agreements (DTAs) does not prevent the anti-avoidance rules contained in income tax legislation from applying to a tax advantage arising under a DTA. A remedial change to this provision is also proposed to ensure that it operates as intended in relation to the process for bringing DTAs into force.
Schedule 32 donee status
The Bill proposes to amend the Income Tax Act 2007 by adding 14 charities to the list of donee organisations in schedule 32, and renaming an existing charity on the list. The Bill further proposes to remove Bicycles for Humanity, Auckland, from the list as this charity has ceased activities and has wound up.
The following New Zealand donee organisations with overseas purposes are proposed to be added to the list of donee organisations in schedule 32 of the Income Tax Act 2007:
Astha Childrens Home (Nepal/New Zealand);
Cambodia Trust (Aotearoa-New Zealand);
Destiny Rescue Charitable Aid Trust;
Fountain of Peace Children’s Foundation New Zealand;
Hornsby Pacific Education Trust;
Mercy Mission of New Zealand Trust Board;
Microdreams Foundation New Zealand Humanitarian Trust;
NPH New Zealand Charitable Trust;
Orphans Refugees and Aid (ORA International) of New Zealand Charitable Trust;
Solomon Outreach Society;
Toraja Rural Development Charitable Trust.
It is also proposed that The Destitute Children’s Home, Pokhara Charitable Trust, which has donee status, be renamed as the Youth Education and Training Initiatives (YETI) Nepal Trust.
Land tainting and council controlled organisations
The land tainting rules impose tax on certain disposals of land by an associate of a person who deals in, develops, subdivides, or improves land. Land held on capital account by an affected person is treated as being held on revenue account and any gains on sale are subject to income tax.
The rules, which were introduced to prevent tax avoidance, are overreaching in the context of council groups by taxing capital account land when tax avoidance is not a concern. The Bill proposes an exemption from the rules for organisations controlled by, or associated with a local authority.
This exemption does not apply to entities associated with a local authority under the tripartite relationship test in section YB 14 of the Income Tax Act 2007. The exemption also does not apply to entities outside the council group that are associated with a developer of land, unless that association occurs under section YB 14.
Loss offsets by mineral miners
The Bill proposes to effectively restore the position as it was prior to amendments effective from 1 April 2014, by allowing mineral miners to utilise the benefit of losses incurred by non-mining companies within the same group of companies. Mineral miners will continue to be unable to make losses available to, or receive subvention payments from, non-mining companies within the same group of companies.
The Bill also proposes to clarify that a mineral miner that was a loss-attributing qualifying company (LAQC), before the repeal of the LAQC rules in 2011 was required to attribute its loss to its shareholders. Owing to the ring-fencing of mineral mining losses, it was not clear whether a LAQC could attribute a mining loss to its shareholders, consistent with the broad policy objective of attributing losses to shareholders of a LAQC. A savings provision ensures that a LAQC that did not attribute a mining loss to its shareholders, and does not request to amend its tax position, will not be required to do so.
Working for Families Tax Credits
Parental tax credit entitlement
A parental tax credit (PTC) rule was introduced on 1 April 2008 that was intended to ensure recipients who have a parental entitlement that overlaps 2 tax years can receive their PTC entitlement as a lump sum in the end of year assessment for the first tax year. However, the ability to receive the PTC as a lump sum for that first year is not explicitly provided for in the Working for Families tax credits (WFFTC) entitlement provisions. The proposed amendments will ensure that this PTC entitlement rule applies as intended.
Parental tax credit abatement
The PTC abatement formula was changed as part of Budget 2014 to better target the PTC rule and to align it with the way other WFFTC are abated. However, the new abatement formula and its related rules could mean that some PTC recipients, who have a parental entitlement period that overlaps 2 tax years, or whose WFFTC entitlement changes during their parental entitlement period, are subject to a larger amount of abatement than the Government intended. The Bill proposes amendments to ensure that PTC recipients in these situations are subject to the correct amount of abatement, as announced in Budget 2014.
Employees who have received short-term charge facilities, such as vouchers, from their employer are required to include an amount for the facility in:
their family scheme income, which is used to determine WFFTC, community services card, and student allowance entitlements; and
in their adjusted net income, which is used to determine student loan repayment obligations.
The amount must include the amount of fringe benefit tax (FBT) paid by their employer, if any. However, an employer may refuse to, or be unable to, provide the information needed for the employee to include the correct FBT amount in their family scheme income or net adjusted income. The Bill proposes to enable employees in this situation to give a figure based on the maximum FBT rate on their short-term charge facilities.
Information sharing under an approved information sharing agreement
Section 81A of the Tax Administration Act 1994 provides for an exception to tax secrecy that allows the Commissioner of Inland Revenue to share personal information about an identifiable individual under an approved information sharing agreement (AISA) made under Part 9 of the Privacy Act 1993. The Bill proposes to extend this exception so that it allows the sharing of non-personal information under an AISA. The change will allow for a fairer and more equitable enforcement of obligations and support the integrity of the public sector.
Ancillary taxes and time bar
The Bill proposes to clarify that the time bar applies to ancillary taxes including PAYE, fringe benefit tax, resident withholding tax and non-resident withholding tax, and the approved issuer levy. The time bar provides certainty for taxpayers in respect of their past tax positions by preventing the Commissioner from increasing an amount included in a relevant return four years after the tax year in which the return has been filed (subject to certain exceptions). Therefore, the amendment will provide certainty for taxpayers filing returns for ancillary taxes.
Confirmation of annual rates for the 2016–17 tax year
The Bill sets the annual rates of income tax for the 2016–17 tax year, at the same rates that apply for the 2015–16 tax year.
A number of remedial matters are addressed in the Bill. In addition to fixing minor faults of expression, readers’ aids, and incorrect cross-references, the following specific issues are dealt with by:
clarifying that the pay and allowances of Employment Relations Authority members are subject to PAYE;
amending the taxable bonus issues rules to clarify that imputation credits attached to taxable bonus issues are not included in the available subscribed capital of a company;
providing a cost base for shares in a company that are acquired by way of a taxable bonus issue;
amending the imputation credit provisions relating to tax pooling transactions to ensure they work as intended;
clarifying the priority of different methods for calculating foreign investment fund income;
correcting cross-reference errors in the rules relating to calculation of depreciation recovery income and in the definition of consideration;
correcting cross-reference errors in the depreciation rules relating to partial business use of an asset, and including a saving provision to preserve a tax position taken before the Bill is introduced;
repealing redundant foreign dividend payment provisions;
rationalising the foreign tax credit provisions;
repealing a remaining reference to a new start grant in the Income Tax Act 2007 as it is no longer part of the suite of responses that Government uses for a primary sector adverse event;
ensuring the Commissioner’s obligation to issue income statements does not include the issuing of statements to employees who do not have to file an income tax return when their employer fails to withhold and pay PAYE to Inland Revenue;
providing ordering rules for the payment of R&D repayment tax when multiple loss reinstatement events take place in a single income year;
clarifying that, when a taxpayer with a R&D loss tax credit has a loss reinstatement event for loss of continuity, the calculation of R&D repayment tax includes all share disposals and transfers that gave rise to the loss of continuity;
amending the taxation rules for life insurance business that were introduced in 2010, including changes to clarify the treatment of investment management fees as they arise between the shareholder base and the policyholder bases for calculating tax, confirming the deductibility of interest expense in connection with reinsurance arrangements with a non-resident life reinsurer, making a number of technical changes to remove ambiguities in the current law, and dealing with other legislative housekeeping matters;
confirming that the initial cost of repurchased shares is added to the remaining shares of the same class when shares are repurchased by a company;
changing the formula that applies when a person changes their balance date, to ensure the calculation of the basic tax rate results in the person’s tax liability being neither understated nor overstated;
clarifying that providing transport to an employee in a work vehicle is not a fringe benefit if the vehicle is a heavy goods vehicle;
ensuring that a disposal of livestock on the sale of a business is taxable from the beginning of the 2005–06 income year, as intended, including a savings provision to protect tax positions taken before the amendment;
clarifying the circumstances in which an amalgamated company is able to carry forward its own tax losses after an amalgamation;
clarifying that the calculation of the available capital distribution amount does not include deductible depreciation losses arising on a disposal of a capital asset;
clarifying that when a debit balance of a company’s imputation credit account is carried forward from one year to the next year, the debit balance is not subject to a second charge of further income tax;
ensuring that the Commissioner is able to exercise a discretion to allow a late election by a company to make its tax losses available under the loss grouping rules;
clarifying that a refund of income tax due to an imputation credit account company (ICA company) does not exceed the ICA company’s credit balance in its imputation credit account at the end of the previous tax year;
ensuring that a company can elect to spread its excess foreign investor tax credits to any 1 or more of the 4 years prior to the year in which the foreign investor tax credit arises;
removing an overlap between 2 provisions in the Income Tax Act 2007 relating to the treatment of land disposed of together with other land;
correcting a cross-reference from the definition of non-filing taxpayer to operative provisions in subpart RB and making minor drafting improvements to those operative provisions;
clarifying that for income derived by a non-resident from personal services income to be exempt from New Zealand tax, the person must not be present in New Zealand for more than 92 days in a 12-month period;
preventing inappropriate interest deductions when a limited recourse loan matures.