General policy statement
This taxation omnibus Bill introduces amendments to the following enactments:
• Tax Administration Act 1994
• Student Loan Scheme Act 2011
• Goods and Services Tax Act 1985
• Accident Compensation Act 2001
• Anti-Money Laundering and Countering Financing of Terrorism (Class Exemptions) Notice 2014
This Bill also revokes the Income Tax (Payroll Subsidy) Regulations 2006.
Broadly, the policy proposals in this Bill fall into 2 categories. The first of these categories is proposals aimed at modernising and improving the settings for the administration of the tax system as part of the Government’s programme of transforming the revenue system through business process and technology change (Inland Revenue’s business transformation programme). This includes measures relating to employment and investment income information, the electronic filing threshold for goods and services tax (GST), amendments to the pay as you earn (PAYE) rules, and amendments to penalty and interest rules.
The second category is proposals aimed at improving the current tax settings within a broad-base, low rate (BBLR) 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 (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.
The following is a brief summary of the policy measures contained in this Bill. A comprehensive explanation of all the policy items will be included in a Commentary on the Bill. The Commentary will be available shortly after this Bill is introduced, at http://taxpolicy.ird.govt.nz/publications/type/bill-commentary.
Employment income information
The Bill proposes to reform the administration of PAYE. The proposals are part of the Government’s plans to modernise the revenue system through business process and technology change. The proposed changes are intended to reduce compliance costs for employers by integrating the fulfilment of tax obligations into their normal business processes (for example, enabling employers to use their payroll software to meet their PAYE reporting obligations at the time they pay their employees), reduce administrative costs for Inland Revenue, enable more timely interventions by Inland Revenue to improve the accuracy of withholding and help prevent individuals getting into social policy debt, and create opportunities for Government to subsequently redesign social policies.
Requiring employers to provide PAYE information to Inland Revenue on a payday basis
The Bill proposes requiring employers to provide Inland Revenue with information about their employees’ income and deductions on a payday basis, rather than on the current monthly basis. The Bill proposes that employers over the threshold for mandatory electronic filing, employers using payroll software, and payroll intermediaries will have to provide this information within 2 working days of payday, with employers below the threshold for mandatory electronic filing not using payroll software having 7 working days from payday. The Bill proposes that reporting on a payday basis become mandatory from 1 April 2019, but permissible from 1 April 2018.
The Bill proposes lowering the threshold for mandatory electronic filing of PAYE information from $100,000 of PAYE and employer’s superannuation contribution tax (ESCT) in the preceding tax year to $50,000 from 1 April 2019. The Bill proposes that those employers above the threshold who are unable to access digital services will be able to apply for an exemption from the requirement to file PAYE information electronically. The Bill proposes to allow future changes to this threshold, and the threshold above which employers are required to remit PAYE and other deductions twice-monthly, to be made by Order in Council following consultation.
Information about new and departing employees
The Bill proposes that employers be required to provide Inland Revenue with information about new and departing employees no later than the next return of payday information. Employers using payroll software will be able to provide the information about new and departing employees direct from their software at the time the employee is added or removed. This is intended to help ensure that new employees are set up correctly from the beginning of their employment. To help ensure that identity is correctly assigned, the Bill proposes requiring employers to obtain date of birth information from new employees and pass it on to Inland Revenue. The Bill also proposes requiring employers to pass on to Inland Revenue contact details for all new employees.
The Bill contains an empowering provision that would allow regulations to be made by Order in Council, following consultation, relating to the correction of errors in employment income information, including the nature and type of errors that may be corrected, the manner in which corrections may be made, and the periods to which corrections may relate.
Consequential changes to reporting of employee share scheme benefit information
From 1 April 2017, employers will be required under the Income Tax Act 2007 and Tax Administration Act 1994 to disclose the value of share benefits employees receive under employee share schemes (and any tax they choose to withhold under the PAYE rules). This disclosure is to be captured on the employer monthly schedule as part of PAYE information reporting.
To ensure that employers are able to meet their employee share scheme benefit information reporting obligations in the proposed new PAYE reporting environment, the Bill proposes to defer the recognition of benefits derived by an employee under an employee share scheme by 20 days from when the employee receives the benefit, with effect from 1 April 2019, in order to provide all employers with sufficient time to compile information to support the required disclosures and deduction of tax, if to be withheld. The Bill also proposes to require early adopters of payday PAYE information reporting to apply the modified employee share scheme rules early.
Abolition of the payroll subsidy
The Bill proposes abolishing the existing payroll subsidy from 1 April 2018. This subsidy is paid to listed PAYE intermediaries that carry out PAYE and related payroll functions on behalf of employers who are only required to remit PAYE deductions monthly. It is paid for up to 5 employees per employer at $2 per pay day per employee to subsidise the voluntary use of PAYE intermediaries. The subsidy incentivises only 1 model of digital provision of employment income information, potentially distorting employers’ choice given that a range of payroll products and services exist in the market.
Investment income information
The Bill proposes a number of changes to the collection of investment income information. The proposals are part of the Government’s plans to modernise the revenue system through business process and technology change. The proposed changes are intended to reduce compliance costs for recipients of investment income by enabling Inland Revenue to pre-populate their tax returns with their investment income information, enable Inland Revenue to improve the accuracy of withholding and help prevent individuals getting into debt, and create opportunities for Government to subsequently redesign social policies. The investment income information changes will apply from 1 April 2020 unless otherwise stated.
More frequent and comprehensive collection of investment income information
The Bill proposes that payers of interest, dividends and taxable Māori authority distributions will be required to provide detailed recipient information to Inland Revenue on a monthly basis, or for the months in which payments are made, if the payment frequency is less than monthly. The Bill proposes that payers may choose to file monthly from 1 April 2019, with monthly filing to become mandatory from 1 April 2020. Currently, payers of interest subject to withholding tax provide detailed recipient information to Inland Revenue, but only after the end of the tax year. No detailed recipient information is currently required to be provided to Inland Revenue for other types of investment income, such as dividends and Māori authority distributions.
The Bill proposes that payers of investment income that is exempt from withholding be required to report detailed recipient information yearly, or monthly, at the payer’s preference. The Bill proposes that portfolio investment entities (PIEs) be required to provide detailed recipient information to Inland Revenue following the end of the tax year by 15 May instead of 31 May (applying from the tax year beginning 1 April 2018), and to report investors’ prescribed investor rates 6 monthly.
To help ensure that identity is correctly assigned, the Bill proposes requiring investment income payers to provide the recipient’s date of birth to Inland Revenue as part of the detailed recipient information reporting, if it is held.
To enable jointly earned income to be split between the joint owners, the Bill proposes requiring investment income payers to provide detailed recipient information regarding each of the owners of jointly owned investments, if it is held.
The Bill proposes requiring investment income payers to file their withholding tax returns, including the detailed recipient information, electronically unless they receive an exemption from Inland Revenue.
Increase in the non-declaration rate for interest income
The Bill proposes to increase the non-declaration tax rate for interest subject to resident withholding tax (RWT) from 33% to 45%, in order to encourage non-declared interest recipients to provide their IRD number to their interest payer.
Requiring new investors in PIEs to provide their IRD number
The Bill proposes requiring investors opening new investments in PIEs to provide their IRD number (unless they are non-resident, do not have an IRD number, and provide their foreign tax identification number) within 6 weeks of making the initial investment if they are to remain a member of the PIE. This requirement will apply from 1 April 2018.
RWT exempt status
Taxpayers holding a certificate of exemption from RWT are entitled to be paid interest and dividends without having any tax deducted by the payer. The existing certificate of exemption process involves compliance costs for payers as they need to receive exemption certificates from taxpayers, check the appropriate New Zealand Gazette to see if the taxpayer’s certificate has been cancelled, and assess whether the customer can appropriately claim to be exempt under non-tax legislation.
The Bill proposes requiring Inland Revenue to make a source of information available to investment income payers that would enable them to confirm whether or not recipients have RWT exempt status. To ensure that all exempt recipients are included in this information source, the Bill proposes that recipients that are tax exempt under Acts other than the Income Tax Act 2007 be required to have RWT exempt status, in order to be treated as exempt by investment income payers.
Removal of requirement to provide end of year withholding tax certificates
The Bill proposes removing the requirement for interest payers to provide end of year withholding tax certificates to recipients of interest income who have provided their IRD number to the interest payer. If Inland Revenue receives recipients’ investment income information throughout the year and pre-populates the information for the recipients in their tax records, this will make the end of year withholding tax certificate requirement unnecessary, and removing it is intended to reduce compliance costs for interest payers.
In order to reduce compliance and administration costs, the Bill proposes that investment income payers will be allowed to correct errors in previous withholding tax returns in their next return without incurring penalties or interest, subject to restrictions for errors being corrected in the following income year.
Taxation of employee share schemes
The Bill proposes a number of changes to the taxation of employee share schemes (ESS), which are intended to modernise and improve the taxation of ESS so that it is simple, efficient, and fair. The general objective of the proposed reforms is to achieve neutral tax treatment of ESS benefits – that is, to the extent possible, the tax position of both the employer and the employee are the same whether remuneration for labour is paid in cash or shares. In other words, the policy intent underlying the proposed reforms is that ESS are not at a tax advantage or disadvantage compared to cash salary. This is consistent with New Zealand’s BBLR tax policy framework and is intended to ensure employees are remunerated in the most economically efficient (rather than the most tax efficient) form.
Value and timing of benefits under ESS
Broadly, the Bill proposes aligning the income tax treatment of employees receiving ESS benefits with the tax treatment of other forms of employment income. This means that employees would be taxable on the value of their shares when they have done everything they need to earn them and hold them like any other shareholder (for example, they are not protected from suffering a loss if there is any drop in share price). The proposed changes are intended to address the concern that, under current law, ESS can be used to give employees tax-free remuneration. In particular, an employee can be given what is economically a valuable share option without being taxed on that benefit, whereas the provision of an actual option is taxable (when the option is exercised).
Allowing deductions for employers’ costs
The Bill proposes allowing employers a tax deduction for the amount of the employee’s income, at the same time as the employee is taxable, in order to align the tax treatment of employers providing ESS benefits with the tax treatment of paying other types of employment income. There is currently no statutory deduction for the cost of providing ESS benefits, though employers have found various ways to structure so that a deduction is available.
Changes for tax-exempt widely offered schemes
To minimise compliance costs, it is proposed that the tax-exempt widely-offered ESS are retained; however, the Bill proposes some amendments to modernise the rules and to close certain loopholes that are currently being used to obtain unintended deductions.
The Bill proposes to remove the 10% deemed interest deduction (with some grandparenting), and remove the requirement for Inland Revenue to approve schemes, but require the schemes to be registered with Inland Revenue. The Bill also proposes that value of the shares when granted to the employee or trustee on their behalf must not exceed $5,000 per annum, and that the difference between the value of the shares at that time and their cost to the employee must not exceed $2,000 per annum.
The Bill contains proposed transitional rules that would, generally speaking, allow businesses 6 months after the enactment of the reforms to amend their ESS, if necessary.
PAYE rules amendments
In addition to the proposed reforms to improve the timeliness and quality of employment income information received by Inland Revenue, the Bill proposes several changes to the rules relating to the calculation of PAYE and related deductions.
To strike a balance between the desire for more accurate withholding of PAYE and the impact on compliance costs, the Bill proposes to give employers the option to tax holiday pay paid in advance (and salary or wages paid in advance) as if the lump sum payment was paid over the pay periods to which it relates, or under the existing extra pay method.
To reduce complexity and confusion for employers, the Bill proposes to align the rules in the Inland Revenue Acts about how legislated rate or threshold changes are applied across the different types of PAYE income payments and social policy initiatives administered through the PAYE system. The rates and thresholds to be applied would be those in force on the date the payment is made.
The Bill also proposes to repeal a redundant de minimis provision in relation to the tax treatment of a retrospective increase in salary or wages.
Petroleum mining decommissioning
At the end of production, a petroleum miner must incur significant decommissioning costs. This includes expenditure on the plugging of wells, and the removal of installations, pipelines and equipment. In the absence of specific rules, this expenditure would result in a loss carried forward that may be of limited or no value to the petroleum miner unless they had income from another source. The tax rules for petroleum mining currently include a spread-back mechanism, which allows returns for prior income tax periods to be reopened to include losses arising from decommissioning expenditure incurred in the current year. As the existing spread-back mechanism requires amendments to assessments for previous periods, it involves significant compliance and administration costs. To reduce compliance and administration costs, the Bill proposes to replace the existing spread-back mechanism for petroleum mining decommissioning expenditure with a refundable tax credit. This will be similar to other refundable tax credits already included in the Income Tax Act 2007, most relevantly the refundable tax credit for mineral mining rehabilitation expenditure, which was introduced in 2014.
The current spread-back results in a refund of tax paid in previous years. It was never intended that these refunds should be eligible for credit use of money interest. However, there is no provision that confirms this. To ensure that no credit use of money interest is paid before the refundable tax credit applies, the Bill also contains an amendment confirming that use of money interest will not be paid on a petroleum mining spread-back in a return filed after the introduction of the Bill.
Under current legislation, the full value of the shares in a demerged company is treated as a dividend for the shareholder. This is problematic because a demerger is, in substance, the division of a corporate group rather than a distribution of income. The problem is particularly acute for demergers by listed Australian companies. The Bill proposes an amendment to create an exclusion from the meaning of the term “transfer of value” under the dividend rules in relation to company demergers. The proposed exclusion is limited to demergers by listed Australian companies.
Bank account requirement for IRD numbers
Since 1 October 2015, tax legislation has required offshore persons to provide evidence of a functioning New Zealand bank account before Inland Revenue is able to issue them with an IRD number. Some offshore persons have encountered practical difficulties with the requirement. The compliance costs of obtaining a New Zealand bank account can be significant for offshore persons, and there can be delays. To address these problems, the Bill proposes an amendment that would provide Inland Revenue with a discretion to issue IRD numbers to offshore persons without a New Zealand bank account if satisfied with their identity and background. This is intended to give Inland Revenue sufficient flexibility to deal on a timely basis with a range of different cases.
Lloyd’s of London tax compliance simplification
Lloyd’s of London has regulatory approval to write term-life insurance business in New Zealand. Lloyd’s is an insurance market, not an insurance company. It is an institution where Members of the Society of Lloyd’s, both corporate and individual, join together in syndicates to insure risk. Members are required to be United Kingdom residents under Lloyd’s governance rules. Lloyd’s unique structure means that any amount of business in New Zealand would require its non-resident syndicate members to file tax returns in New Zealand, which would have material compliance and administrative implications. As a tax compliance simplification measure for Lloyd’s, the Bill proposes to create a special presumptive tax on premiums received by Lloyd’s in connection with sales of term-life insurance in New Zealand. Tax would be calculated and paid by Lloyd’s authorised New Zealand agents. The tax would work on the basis that 10% of premiums received by Lloyd’s on its New Zealand business would be taxable income. The company tax rate (28%) would apply to the deemed taxable income.
GST treatment of Pharmac rebates
Owing to the unique way pharmaceuticals are publicly purchased in New Zealand, associated rebates paid by suppliers to Pharmac under an agreement for listing on the Pharmaceutical Schedule can have different GST treatment depending on whether the pharmaceuticals are purchased in the community setting or the hospital setting. Currently, community rebates are not subject to GST, while hospital rebates are subject to GST. This gives rise to uncertainty and compliance costs for Pharmac and their suppliers in having to differentiate, for GST purposes, between community and hospital rebates. The Bill proposes to align the treatment of community and hospital rebates paid to Pharmac for products supplied under the Pharmaceutical Schedule by excluding these rebates from being an alteration of the previously agreed consideration under the Goods and Services Tax Act 1985.
Electronic filing threshold for GST returns
GST-registered persons can currently choose to file their GST returns on paper or in electronic form. Processing of paper returns is slower and more expensive, and paper returns are more prone to errors compared with electronically filed returns. To enable further encouragement of electronic uptake, if necessary in the future, the Bill contains an empowering provision that would allow for a threshold for mandatory electronic filing of GST returns to be set by Order in Council following consultation. The Bill proposes that GST-registered persons above the threshold who are unable to access digital services will be able to apply for an exemption from the requirement to file their GST returns electronically. In addition, the Bill proposes a $250 penalty for GST-registered persons who are required to file their GST returns electronically but fail to do so.
Penalties and interest amendments
The Bill proposes several amendments that would modify the current rules around penalties and interest for taxpayers. They deal with when tax credits arise, the date use of money interest starts and the due date for default assessments. The proposed amendments are intended to simplify the rules and encourage voluntary compliance.
A taxpayer who has paid excess tax may request to transfer the excess credit to another period or another tax type. The Bill proposes to alter the time that an excess credit arises for GST purposes, in order to address voluntary compliance issues that exist under current legislation. The amendment will more appropriately deal with a situation where a taxpayer who files their return early or late has access to the credit.
The date interest starts for a GST refund is determined by the latest of several dates, one of which can be the 15th working day after the taxpayer provides a tax return for the return period to which the GST refund relates. The Bill proposes to change the date interest starts for a GST refund by reducing the number of working days after a return is filed from 15 to 10, to reflect the shorter time period that will be required to process returns with the introduction of Inland Revenue’s new computer system, START.
Currently, electronic default assessments (EDAs) and non-electronic default assessment (NDAs) have different due dates for payment, and also different treatments for when any tax payable from a subsequent amendment is payable. For one type a new due date is set, while for the other the original due date applies until an amendment is made to that default assessment, in which case the taxpayer is given a new due date. In both cases a non-compliant taxpayer gets a benefit over a compliant one, which is not conducive to voluntary compliance. To address this, for taxes that have been migrated to the new START system and where incremental penalties have been removed from the particular tax type, the Bill proposes to align the treatment of default assessments so that they are due and payable at the original due date for the tax as under the current treatment for an EDA, and change the treatment for all default assessments that are reassessed so that any subsequent reassessment of the default assessment when the taxpayer files their tax return is also due at the original due date.
Trustee capacity amendments resulting from recent cases on corporate trustees
Two recent High Court decisions, Concepts 124 Ltd v Commissioner of Inland Revenue  NZHC 2140 and Staithes Drive Development Ltd v Commissioner of Inland Revenue  NZHC 2593, have changed how the voting interest test, which is used to measure the ownership of companies, including their association, is applied to corporate trustees. The Court decisions may result in overreach of the application of the associated person rules. This comes about because the Court held that the voting interests in the relevant companies were held by the legal owner of shares, and effectively ignored the capacity in which those shares were held. This means that the voting rights attached to shares owned by a corporate trustee are attributed to that corporate trustee’s natural person shareholders in their personal capacity. Applying this approach, if a solicitor holds shares in a trustee company, which in turn holds shares on trust in a number of unrelated client companies, the client companies would be associated for tax purposes, which would be contrary to the policy intent. The Bill proposes an amendment to align the legislation with the original policy intent, which is that a corporate trustee should not be looked through when testing association. The proposed amendments address this by introducing a general rule for trustee capacity and some consequential changes to defined terms and operative provisions.
Schedule 32 donee status
The Bill proposes to amend the Income Tax Act 2007 by adding 5 charities to the list of donee organisations in schedule 32. New Zealand charities that support activities overseas must be listed in schedule 32 in order for their donors to be eligible for tax benefits (in particular, the donations tax credit). The proposed new additions to schedule 32 are Byond Disaster Relief New Zealand, Flying for Life Charitable Trust, Médecins Sans Frontières New Zealand Charitable Trust, Tony McClean Nepal Trust, and Zimbabwe Rural Schools Library Trust.
Confirmation of annual rates of income tax for the 2017–18 tax year
The Bill sets the annual rates of income tax for the 2017–18 tax year at the same rates that apply for the 2016–17 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 the meaning of “employer’s workplace” for the purposes of the exemption from income tax for payments made to employees for certain work-related meals when the employee is required to work away from their employer’s workplace;
• clarifying that the PAYE rule that requires multiple payments of salary or wages made to an employee in a week to have the same total amount of tax withheld as if 1 combined payment had been made only applies to payments made by the same employer;
• ensuring that extra pays paid to non-resident seasonal workers and employees on non-notified tax codes have tax withheld at rates of 10.5% and 45% respectively, consistent with the policy intent for these classes of employees;
• clarifying that non-resident investment funds are exempt from tax on their gains made on the sale of New Zealand securities;
• providing taxpayers with a foreign tax credit in relation to attributable controlled foreign company (CFC) income when the foreign income tax is paid by the taxpayer’s parent or another member of the taxpayer’s group;
• allowing taxpayers to use part-year accounts in the year of acquisition or disposal to calculate a CFC’s ratio of passive income to total income under the accounting standards test, provided that other standard requirements for the accounting standards test are met;
• removing the 30 June 2009 ownership requirement from the Tax Administration Act 1994, allowing taxpayers with insurance company CFCs acquired after 30 June 2009 to apply to Inland Revenue for a determination that the insurance company CFC passes the active business test;
• ensuring that a non-cash dividend derived from a non-resident company by an intermediary on behalf of natural persons resident in New Zealand is not over-taxed when the dividend is on-paid to that shareholder;
• adding notification requirements to the Tax Administration Act 1994 for when a PIE elects a calculation methodology;
• requiring a provisional tax PIE that is carrying forward losses before electing to use the quarterly or exit calculation method to treat those losses as a formation loss;
• restricting PIEs from holding investments with a market value over 20% rather than just voting interests over 20%;
• removing the “trust that would be a unit trust” entrance criteria for collective schemes and foreign PIE equivalents;
• adding Animal Control Products Limited and Kordia Group Limited to the list of State enterprises in part A of schedule 36 of the Income Tax Act 2007;
• clarifying that donation tax credits for donations made to community housing entities can only be claimed for the period the entity qualifies for the income tax exemption for community housing entities;
• clarifying that the net assets tax relating to charities applies to the accumulated assets and income of non-registered entities with an income tax exemption that cease being charitable at law;
• clarifying that entities that cease to be charitable at law must transfer their accumulated income and assets for charitable purposes;
• correcting an inadvertent drafting error to reinstate the prohibition on local authorities from being eligible to form or join a consolidated group;
• repealing the largely spent rules relating to specified activity net losses (which arose prior to 1992), and incorporating residual specified activity net losses into the general loss use and carry-forward rules;
• ensuring that the memorandum account provisions work as intended for the carrying forward of the balance of a memorandum account from year to year;
• clarifying the relationship between dividends and gains relating to attributing interests in a foreign investment fund, which are disregarded in calculating assessable income, and the core provisions of the Income Tax Act 2007;
• ensuring that the provisions in the Income Tax Act 2007 that limit the use of pre-consolidation imputation credits, and that set out the eligibility requirements to form or join a consolidated group, or to continue to be part of a consolidated group, reflect the pre-rewrite law set out in the Income Tax Act 2004;
• correcting an unintended change to the reciprocal shipping exemption in the Income Tax Act 2007 that arose during the process of rewriting the Act;
• clarifying that incentive payments to prisoners who participate in prisoner employment activities are not treated as income for the purpose of granting the exemption for prisoners from payment of financial support under the Child Support Act 1991;
• denying a deduction for an excepted financial arrangement (EFA) acquired on revenue account by a company that forms a consolidated group with the issuer of the EFA and subsequently the EFA is cancelled.