National Party members believe that New Zealand taxpayers have been subject to bracket creep for many years. Bracket creep occurs when inflation pushes wage and salary earners into higher tax brackets, even though they are in reality no better off financially. National members believe tax bracket thresholds should be subject to adjustment for inflation.

Because this change is not factored into the annual rates for 2020-21, the National Party cannot support this bill.

The Government has introduced Supplementary Order Paper (SOP) 510 alongside the bill. The SOP proposes the addition of two other measures to the bill. The first measure seeks to modernise the Unclaimed Money Act 1971. The second measure would provide a temporary increase to the individual income tax write-off threshold for automatically calculated tax assessments.

We have examined the SOP alongside the bill. We have included recommendations for improvements to the SOP in this commentary. Because the SOP has been incorporated into the bill, any recommended amendments to the provisions in the SOP would be made to the bill.

The bill states that feasibility expenditure on a project can be deducted if a taxpayer abandons the project before it is completed (clause 16, new sections DB 66 and DB 67)). However, if that project is later reinstated, the bill contains a provision that would reverse the previously claimed deductions (clause 11, new section CH 13(1)). The provision stipulates that deductions for previously abandoned expenditure on feasibility studies would be “clawed” back as taxable income.

We are concerned that this could incentivise taxpayers to unnecessarily abandon projects. The amount of tax paid after the reinstatement of a project could be less than what would have otherwise been paid if that project was initially completed. If the amount of tax paid after abandoning a project was lower, a taxpayer would receive a more favourable tax outcome by prematurely abandoning and then reinstating a project.

We recommend amending clause 11, new section CH 13(1). Our amendment would ensure that all the deductions relating to the abandoned property made under this provision need to be clawed back if the property is reinstated (or if the expenditure is used to create, complete, or acquire a similar property). Therefore, taxpayers would not receive a favourable tax outcome by prematurely abandoning and then reinstating a project instead of initially completing it.

Clawing back all expenditure claimed would not undermine the policy intent of the bill. The bill would still contain provisions that would result in a wide range of costs being deductible for tax purposes.

The clawback provision in the bill does not include a time limit. As a result, taxpayers would need to retain records indefinitely to account for the amount of clawback in the event that a project was reinstated. Some submitters expressed concern that taxpayers would often lack the information needed to determine their tax position in such an event.

We recognise the benefits of providing certainty to taxpayers regarding their tax obligations. Therefore, we recommend amending clause 11, new section CH 13, by inserting into the provision a 7-year time limit on the clawback provision.

A 7-year time limit would be consistent with the general requirement of retaining business records for 7 years. Taxpayers are required to keep the necessary business records for 7 years after the final deduction for unsuccessful feasibility expenditure. Therefore, we consider that the clawback period should align with the standard 7-year business record retention period.

We do not expect that aligning the clawback period with the standard 7-year business record retention period would result in additional compliance costs for taxpayers.

Our amendment would help provide taxpayers with certainty as to what their record-keeping obligations are for previously abandoned projects.

The bill would allow qualifying deductions to be spread out, in equal proportions, over a 5-year period (clause 16, new section DB 66(2)). The 5-year period would start from when a project was initially abandoned.

We are concerned, however, that clause 16, new section DB 66(2) would risk allowing deductions of expenditure that could not then be clawed back. This could occur when deductible expenditure was spread across a 5-year period that took it beyond the period in which the feasibility clawback applies.

For example, a project could be abandoned in its first year. If the abandoned project was later completed in its third year, the clawback provision would be applied on deductible expenditure from years 1 to 3 of the project. However, because the bill allows deductions to be spread out over a 5-year period, in the given example expenditure that has been spread to years 4 and 5 would not be subject to the clawback provision.

We propose amending clause 16, new section DB 66(2). Our amendment would clarify that no further deductions would apply after the clawback provision is applied. Therefore, in the above example, deductions would not apply to expenditure in years 4 and 5. This amendment would ensure that a taxpayer would be bought back to the position they would be in if they had not abandoned the project.

The policy intent of clause 16, new sections DB 66 and DB 67, is to reduce tax barriers to business investment. Therefore, the drafting of new sections DB 66 and DB 67 is intentionally wide.

However, we are concerned that these provisions may unintentionally provide deductions for expenditure on separately identifiable assets and goodwill that would otherwise not be deductible.

We recommend amending clause 16 by including a list of expenditure that would not be deductible (clause 16, new section DB 66(1B). Any other relevant expenditure that is not on the list would qualify for tax deductions. Our recommended amendment would provide additional clarity to taxpayers as to what is, and what is not, deductible under the proposal.

Because this list would be exhaustive, the policy intent of reducing tax barriers would still be achieved.

Clauses 5, 6, and 7 of the bill refer to “groups of persons”. For the actions of a person to be covered by those provisions, another person must exhibit “significant involvement in” or “control of” that person (clause 5, section CB 16A(2C)(b), clause 6, section CB 16(5)(b), and clause 7, section CB 19(2C)(b)).

However, the terms “significant” and “control” are imprecise. It is not clear what level of involvement, or what level of control, would be required to satisfy the provisions.

We recommend amending clause 5, section CB 16A(2C)(b), clause 6, section CB 16(5)(b), and clause 7, section CB 19(2C)(b). Our amendments would clarify, for the avoidance of doubt, that if a person or group is able to direct the activities of another group, then they would have significant involvement in, or control of, the activities of that group.

The Income Tax Act 2007 uses the term “dwelling” in various provisions. The provisions help determine whether residential land or buildings are subject to various taxes or rules. These include, for example, the bright-line test, residential land withholding tax, and residential rental loss ring-fencing rules.

We are concerned that the meaning of the term “dwelling” could create confusion when determining whether various provisions of the Income Tax Act apply. The term “dwelling” implies that people are living in or regularly using the relevant property. The policy intention of the relevant provisions in the Income Tax Act is to capture all residential properties, whether they are occupied or not. Therefore, the term “dwelling” as currently defined can imply that unoccupied residential property is not subject to the relevant provisions of the Income Tax Act.

We propose inserting into the bill a clarification to the term “dwelling” (clause 58(7B), section YA 1. This would help to make it clear that residential property, regardless of whether it is occupied or not, is subject to the relevant provisions in the Income Tax Act.

This clarification of using the term “dwelling” fixes an oversight in the original drafting of the Income Tax Act. It was never intended that an unoccupied property could be outside the scope of the Act. Therefore, we recommend that our amendment should be retrospective to the introduction of the bright-line test, 1 October 2015.

Currently, Land Information New Zealand (LINZ) is able to share information collected on the Land Transfer Tax Statement (LTTS) directly with Inland Revenue. The information shared is used by Inland Revenue to help in administering the tax system.

The information in the LTTS is also used to prepare quarterly releases on property transfers. These releases contain information on the citizenship, visa status, or tax residency of people and companies involved in property transfers.

The role of preparing these reports moved from LINZ to Statistics New Zealand in May 2018. Currently, LINZ is only able to share the data collected from the LTTS with Inland Revenue in accordance with the relevant provisions in the Land Transfer Act. Inland Revenue on-shares the LTTS information with Statistics New Zealand. This process lacks transparency and results in double handling of information.

We recommend changes to the Land Transfer Act to amend the LTTS provisions. Our amendments would allow LINZ to share the information collected from the LTTS directly with Statistics New Zealand.

The Office of the Privacy Commissioner has been consulted on the proposed change. The Office did not have any concerns regarding the proposed information sharing arrangement.

Inland Revenue intends to take a proactive approach to educating taxpayers and tax agents about the new purchase price allocation rules.

We are supportive of Inland Revenue taking a proactive approach to education. The new regime is a big change from the previous arrangement, and is more likely to be successfully implemented if Inland Revenue educates taxpayers. Smaller taxpayers in particular would benefit from an education campaign.

Inland Revenue would also advocate for the standard forms often used in sale and purchase agreements to reference the new rules.

The purchase price allocation amendments are currently drafted to apply from 1 April 2021. However, to allow more time for advisors and taxpayers to be educated on the new rules, we recommend a 1 July 2021 commencement date. Delaying the commencement date would also allow the Auckland District Law Society and Real Estate Institute of New Zealand to update their standard sale and purchase forms. These forms would play an important role in flagging the new rules for taxpayers.

We note that this recommendation involves several consequential date changes to existing market value provisions identified in the bill.

We recognise that the proposals contained in the bill represent a substantial departure from the current rules regarding purchase price allocations. The proposed rules are detailed and complex, and the consequences of not knowing of their existence, misunderstanding them, or ignoring them, are not pleasant. This would be especially true for purchasers.

Currently, there are few restrictions on either the vendor or the purchaser. Each party to a transaction is able to choose their own allocation, provided that both parties use the same value for trading stock, and apply market value to other assets.

We believe that the new regime should be kept under review. We encourage the Minister of Revenue to consider, within the next 6 to 12 months, whether the new approach is working as intended, and without unduly increasing the burden (both administrative and monetary) on taxpayers. We would expect any necessary adjustments to be proposed promptly.

We have, however, proposed several changes to the new regime. We expect that these changes would make the regime substantially better for taxpayers than what is proposed in the bill as introduced.

Clause 40, which sets out the rules for purchase price allocations, refers to “an item of depreciable property” (clause 40, new sections GC 20(3), GC 21(6) and (8)(a)).

The policy intent of the bill is to enable parties to allocate values to groups of assets so that they do not have to allocate an amount to every individual item in a sale.

However, submitters were concerned that the language used in the bill does not make this policy intent sufficiently clear. By referring to “items” of property, clause 40 of the bill suggests that parties would have to agree an allocation for every item of depreciable property.

We recommend amending the bill to clarify that allocation is to categories of asset, rather than individual items (clause 40, new section GC 20(1)(a) and new section GC 21(1)(a)).

In the event of a vendor making a unilateral allocation because the parties could not agree to one, that vendor would be prohibited from allocating an amount that is lower than the vendor’s tax book value (clause 40, new section GC 21(8)).

However, we heard from submitters that, in a distressed sale, the proposal to create a tax book value “floor” does not reflect commercial reality. There are many transactions where the actual market value of taxable property being sold is less than its tax book value.

The vendor can avoid this issue by agreeing prices with the purchaser. However, under the bill as introduced, it would not be possible to make an allocation at no less than the tax book values even if the sum of those book values is less than the purchase price.

We recommend amending the rule. Under our amendment, any excess of the aggregate tax book value above the purchase price would be applied first to reduce the amount allocated to non-taxable property, and second–once that amount is zero–to reduce the amount allocated to each class of taxable property pro rata.

The bill stipulates that improvements to purchased property, that have been amortised under new sections DO 4, DO 12, or DP 3, must be allocated their diminished value (clause 40, new section GC 21(9)).

Some submitters were concerned that the provision would prevent parties to a transaction allocating improvements a different value. They maintain that a party should be able to allocate a different value to an improvement if that value better reflects the true market value of the improvement.

We accept this argument. We recommend removing clause 40, new section GC 21(9), from the bill.

We believe that removing this section would not interfere with the policy intention of the bill. In tax law, a purchaser is only allowed to amortise from the diminished value. Removing this proposed provision would not change that. Therefore, it would not be problematic for the parties to allocate a different value to an improvement in order to better reflect its true market value.

The bill as introduced stipulates that a vendor has 2 months to advise the purchaser of their allocation after a change of ownership (clause 40, new section GC 21(2)).

Submitters were of the view that the 2 month timeframe would be too short. We therefore recommend extending the timeframe to 3 months.

We also recommend an additional change to this provision. If the vendor does not notify an allocation within three months, and the responsibility falls to the purchaser, the purchaser would have three months to notify the vendor of a binding allocation. In effect, that could be up to 6 months after the settlement.

After a 6-month period, the Commissioner would have discretion to intervene as they see fit. Parties could still notify the Commissioner of an allocation, and the Commissioner may choose whether to accept that allocation. If the Commissioner does not accept a late allocation, the Commissioner could impose their own allocation.

The bill sets out rules for when a purchaser does not make an allocation, or if they do not notify the Commissioner of one. If no allocation is made, the purchaser would be treated as if they had purchased the property for “nil consideration” (clause 40, new section GC 21(7)).

Some submitters were concerned that the purchaser would then be denied the opportunity to take a deduction. Were this the case, we believe that this rule would be overly punitive. The purchaser may not be able to make an allocation due to reasons beyond their control. (For example, the vendor may no longer exist due to liquidation following a business sale.) Further, an unwitting purchaser may be taxed on gross sale proceeds when they, in turn, sell.

Some submitters were also concerned by the purchaser’s acquisition not being symmetrical with the vendor’s. In the absence of an allocated amount, those submitters were concerned that the purchaser’s acquisition for nil would not be symmetrical with the vendor.

We note, however, that the original policy intent behind this provision was not to deny the purchaser the opportunity to make a deduction, simply to defer the opportunity. Rather than being denied the opportunity entirely, the purchaser would be entitled to claim, in their next tax return filed after they notify an allocation, the deduction they were previously denied. In the interim, there would not be symmetry between what the vendor and the purchaser could claim. However, because the purchaser’s opportunity to claim a deduction would only be deferred, the final result would be symmetry between the parties.

We believe the provision would provide sufficient incentive to prompt purchasers to make and notify allocations, which is consistent with the policy intent.

We recommend amending clause 40, new section GC 21(7)-(10), by clarifying that the purpose of the provision is to provide that provisions defer, rather than deny, deductions.

However, for consistency, we believe that the deduction deferral rule should not override the de minimis exception (clause 40, section GC 21(5)). Parties to low-value transactions concerning assets other than residential property (less than $1 million) should not be subject to the purchase price allocation rules.

We recommend amending clause 40, new section GC 21(7)-(10), to explicitly state this.

We recommend the purchase price allocation regime not apply to transactions where the only purchased property is residential land, together with its chattels, and the total purchase price is worth less than $7.5 million (clause 40, new section GC 21(2)(b)). It was never intended that the regime apply to most transactions for residential land; the tax treatment of this property means there is much less scope for revenue manipulation in residential transactions than in other transactions.

We believe the threshold of $7.5 million is sufficiently high, so the exemption would cover most transactions for residential land in New Zealand.

Clause 40, new section GC 21(2) and (3), sets out the rules for making a unilateral allocation. The bill as introduced states that parties “must” take certain actions. The original policy intent of the provision is to establish an optional unilateral allocation process. The use of the word “must” in the provision is inconsistent with that intent.

We propose replacing the word “must” in clause 40, new section GC 21(2) and (3) with the word “may”. Our recommended amendment would make it clear that the parties can agree to an allocation at any time before the first tax return for the transaction is filed.

Money that becomes unclaimed immediately after the date of Royal assent would be subject to the reforms to the Unclaimed Money Act.

We are concerned that some taxpayers may be unprepared to comply with the new rules. Some holders of unclaimed monies may require more time to update their systems to comply with the new rules.

We believe it would be appropriate to introduce a transitional provision. Holders of unclaimed money who require further time to update their systems would be accommodated. Those holders would need to apply to the Commissioner, and would be granted a period of up to two years in order to implement the necessary changes. Holders able to comply with the new rules from the date of Royal assent could do so immediately from this date. The Commissioner would work with holders during their transitional periods to ensure that the new or updated systems were appropriate.

The SOP would remove a provision in the Unclaimed Money Act that allows holders of unclaimed money to use sums under $100 for other purposes. Those purposes could be for the benefit of the holder.

We heard from submitters that some companies may need the ability to apply unclaimed monies to another purpose so that they can be wound up. For example, some institutions donate unclaimed monies to charity.

We believe that the alternative use proviso in the Unclaimed Money Act should be retained. Because the sums of money involved are so small, we see no benefit requiring such sums to be paid to Inland Revenue.

Our amendment would enable holders of unclaimed sums under $100 to use the unclaimed money for other purposes.

The proposed changes to the Unclaimed Money Act stipulate that money would not be deemed unclaimed if the owner of that money had interacted with their accounts within a 5-year period. However, the SOP is not clear on whether activity on other accounts a customer may hold with the same bank would constitute account activity.

Some submitters were concerned that money held in a customer’s account may be erroneously deemed unclaimed money, despite it being clear that the customer has not abandoned it. If a customer is clearly active and interacting with other accounts they hold with the institution, it is a stretch to say they have abandoned the money in any of those accounts.

This could be a particular problem for accounts such as compounding term deposit accounts. Accounts such as those are designed for the goal of long-term savings. By design, such accounts are often untouched for long periods of time.

We recommend that the regime adopt an institutional approach when determining whether a customer is active or not. If a customer is interacting with any of the accounts they hold with an institution, the 5-year deeming period would not begin. Consequently, money held in an inactive account in these circumstances would not be considered abandoned.

Our recommendation does not require a specific amendment to the bill. Rather, Inland Revenue would provide guidance on this matter through a Tax Information Bulletin.

The SOP would insert new section 100D, which would replace section 4 of the Unclaimed Money Act. Due to the operation of clause 84, new section 100D(4)(2)(c), some submitters are concerned that term deposits that automatically roll over would be unintentionally caught by the definition of unclaimed money. Because of our above recommendation about taking an institutional approach to account activity, this would only affect customers who had just one account at an institution.

The SOP states that the holder of unclaimed money, such as a bank, must make reasonable efforts to locate the owner of the unclaimed money (new clause 100D, section 4(6)).

The intention of this provision is not to increase compliance costs for holders of unclaimed money. We expect that most holders would have met this requirement by the time the 5-year deeming period had expired. We recommend that Inland Revenue should clarify what constitutes a “reasonable effort”.

In most cases, it would be sufficient for holders to use their best judgement regarding what constitutes a reasonable effort. For this reason, we are reluctant to amend the bill to stipulate any formal criteria that would need to be satisfied. Rather, we recommend that further guidance on what constitutes a reasonable effort be provided in a Tax Information Bulletin.

The SOP stipulates that the holder of unclaimed money must provide to the Commissioner certain information that relates to the owner of that money (new clause 100D, section 4(7)).

The intention behind this provision is not to impose new costs on the holders of unclaimed money. Rather, the intention is to encourage holders to provide any relevant information they do have to Inland Revenue. This would assist it in locating the owner of that money.

Inland Revenue intends to implement measures with the aim of making it easier for owners of unclaimed money to find and claim funds. However, restrictions in the Tax Administration Act on what financial information can be published could prevent it from doing so.

For example, Inland Revenue would be restricted from publishing information that would help the owners of unclaimed money to find and claim funds. Currently, it can only publish the names of owners of unclaimed money and the amounts received.

We recommend inserting a specific exclusion from the confidentiality of information provisions in the Tax Administration Act (clause 83E, Schedule 7, Part A, section 13C). This would permit the publication of information to help in reuniting owners with their money.

Where a taxpayer has other liabilities due to Inland Revenue they should be able, if they choose, to request that any unclaimed money owed to them be offset against that liability.

We recommend a provision be added to the bill to allow taxpayers to voluntarily request the Commissioner to transfer any unclaimed money owing to the taxpayer to a tax liability owned by the taxpayer (clause 83B, new section 173V). Such transfer would occur at the date requested.

The KiwiSaver Act sets rules that determine what happens with KiwiSaver contributions which the Commissioner is unable to process. Most commonly, the Commissioner is unable to process a contribution if they do not know where to deposit it.

We propose amending the KiwiSaver Act so as to replace the current deeming periods with the new period of 5 years. This would align it with the reforms proposed in the SOP.

The reforms to the Unclaimed Money Act would reduce the 6 and 25 year deeming periods to a uniform period of 5 years. The 5-year period would apply regardless of the product that the money is held in. For example, the 5-year period would apply to on-call bank accounts, as well as to term deposits.

Our amendment would ensure consistency regarding rules around unclaimed money across different financial products and services, including KiwiSaver. We believe this amendment is consistent with the policy intent of the SOP.

In addition, we recommend a further change to the KiwiSaver Act. Section 83 of the KiwiSaver Act stipulates that any money that the Commissioner is unable to administer will become unclaimed money once it has been in the Commissioner’s possession for a period of no less than 6 years.

Where it is not possible to associate an employee or employer contribution with a customer, the date the money is in the Commissioner’s possession should be deemed to be the last day of the month for which the Commissioner has employment income information.

We recommend amending the proposal in the SOP to enable holders of unclaimed money to file the money with Inland Revenue on a quarterly basis. Those holders would be able to apply to the Commissioner for a longer period not exceeding 6 months to file. Our amendment would allow holders to comply with the regime in a manner that suits their operational needs.

As mentioned above, the policy intent of the SOP is to simplify the rules and processes around unclaimed money. Making the regime easier to comply with helps the SOP achieve its policy intent.

The SOP defines unclaimed money by referring to “an amount” held by the third party (clause 84, new section 100D(4)(1)). We believe that the use of this could extend the application of the regime to other stores of value, such as investment vehicles.

The policy intention is that the unclaimed money regime should only apply to money. It is not intended that the rules established by the SOP should apply to anything else.

Therefore, we recommend amending the bill so that the relevant provisions refer to the use of “money”, rather than “an amount” (various references amended in clauses 100D, 100E, and 100H).

Currently, outbound mobile roaming services used by a New Zealand resident travelling overseas are either zero-rated or not subject to GST. Inbound roaming services used by a non-resident travelling in New Zealand may be subject to GST at a rate of 15 percent. However, a special rule means inbound roaming services are generally not subject to GST.

The proposal in the bill is to change the GST treatment of roaming services. The bill proposes that telecommunication services supplied to a person’s mobile device while they are outside their country of residence would be subject to New Zealand GST.

New Zealand’s existing rules are inconsistent with best practice. The proposed treatment in the bill is the same as that used in the UK and the EU, which is generally thought of as best practice. Under the status quo, neither outbound nor inbound roaming services are generally subject to New Zealand GST. This is inconsistent with the New Zealand Government’s long-standing position on GST, which is that it should be broad-based with very few exceptions. Most of us also expect that taxing outbound services would minimise compliance costs, in comparison to taxing inbound services.

However, the current New Zealand GST treatment is the same as Australia’s treatment. If the bill changes New Zealand’s GST treatment of mobile roaming services, New Zealand would be inconsistent with Australia.

The bill as introduced stipulates that a taxpayer, once they have elected to follow NZ IFRS 16 (New Zealand Equivalent to International Financial Reporting Standards 16 – Leases) for tax, must continue using that standard for all future leases. We consider this requirement to be overly restrictive.

We recommend amending Section EJ 10B(1) in clause 23(1). Our amendment would enable taxpayers to choose whether to follow NZ IFRS for tax on each eligible lease. Our amendment would allow taxpayers to follow NZ IFRS for tax on an individual lease, while continuing to follow the standard rules for other leases.

However, once a taxpayer has chosen to follow NZ IFRS on a particular lease, they must continue to follow this treatment for the duration of that particular lease.

The bill as introduced would enable a credit note to be issued when GST had been inadvertently charged on a supply of goods or services (clause 90, section 25(1)). However, the provision is limited in that it only applies in situations where GST has been applied on zero-rated supply (where the tax rate should have been 0 percent), or on supply that is exempt from GST.

We believe that the intended policy outcome would be better achieved by a more general provision. We propose specifying that a credit note could be issued for any supply of goods or services where an incorrect GST treatment was applied to the supply.

We recommend amendments to clause 90 to achieve this.

We also recommend consequential amendments to simplify the legislation as some existing specific provisions in section 25(1) of the Goods and Services Tax Act would become redundant as a result of the new general provision.

The bill would exclude mining development activities from benefiting from R&D (research and development) tax credits (clause 59, Schedule 21). We recommend several changes to this provision in the bill.

First, the bill as introduced focuses on petroleum and mining development activities. However, pre-existing definitions in the Tax Act focus on expenditure from mining or petroleum development, and not the activity itself.

We recommend amending this provision to exclude eligible expenditure. This would prevent a taxpayer from claiming a tax credit for any expenditure that is merely associated with petroleum and mining development activities.

The R&D tax credit exclusion should also cover exceptions for labour costs that contribute to core R&D and for prototypes. This would be parallel to the treatment of tangible depreciable property elsewhere in the Income Tax Act.

In addition, the bill refers to “listed industrial minerals” in defining what is covered by the exclusion. The list is currently in the Income Tax Act. The list is exclusive, and does not refer to minerals in a broader sense.

Therefore, miners of coal, which is not a listed industrial mineral, would not be covered by the exclusion. We recommend an amendment to the bill that would deem miners of “minerals” (as defined in the Income Tax Act), and geothermal energy, as “miners” for the purposes of this provision.

Finally, clause 5 of Schedule 21 Parts A and B of the Income Tax Act excludes “prospecting for, exploring for, or drilling for, minerals, petroleum, natural gas, or geothermal energy”. These specific exclusions would be covered by the new exclusion on petroleum and mining development. Therefore, the specific exclusions are no longer necessary and should be repealed.

The bill would allow capitalised expenditure on employees to qualify for the R&D tax credit, where the expenditure relates to performing core R&D activities (clause 60(2)). However, the bill would exclude contracted labour costs on core R&D activities from being eligible for the tax credit.

Some submitters were concerned that excluding contracted labour would disadvantage businesses and industries that tend to rely more on external labour, such as businesses in asset-heavy industries. The amendment as drafted creates a bias against businesses in certain industries, and submitters fear that this bias would result in arbitrary outcomes.

We recommend expanding the scope of clause 60(2) by including contracted labour costs that relate to core R&D activities.

The original policy intent behind the exclusion was to avoid the problem of Inland Revenue having less visibility over contracted expenditure. However, we are confident that this risk can be addressed by introducing disclosure requirements. For example, Inland Revenue could require claimants to separate out their labour costs from their other costs when submitting an invoice. Our recommended amendment would assuage fears that external labour costs would be less transparent for tax purposes.

The bill as introduced amends timeframes for taxpayers to apply for criteria and methodologies approval (clause 76, section 68CC(1) of the Tax Administration Act). The timeframes in the bill are strict, with no allowance for flexibility.

The lack of flexibility would exclude taxpayers who are unable to apply for approval in a timely manner due to their balance date being brought forward.

We recommend amending the bill by enabling the Commissioner discretion to allow a different timeframe where appropriate.

Clause 2, schedule 21B Part B of the Income Tax Act, lists types of expenditure that are ineligible for the tax credit. Any “expenditure or loss incurred in acquiring depreciable property” is ineligible.

The policy behind this provision is to exclude expenditure or loss incurred on obtaining depreciable property through any method other than making the property. However, “acquire”, in the context of depreciable property, is defined in subpart YA 1 of the Income Tax Act to include “make”.

Therefore, costs incurred in making depreciable property would be inadvertently excluded from being eligible for tax credits. We recommend amending clause 2 to clarify that “acquire” in this context does not include “make”. Our amendment would ensure that taxpayers involved in making depreciable property could enjoy the benefits of tax credits.

Expenditure that is related to a grant made by the Crown or a local authority is excluded from receiving R&D tax credits (Schedule 21B, Part B, clause 21 of the Income Tax Act). The purpose of this exclusion is to prevent a person from claiming multiple forms of government R&D funding for the same expenditure.

By excluding any expenditure that is “otherwise related to” government grants, the Income Tax Act creates very wide exclusion criteria.

However, there are some situations in which a taxpayer may receive a government grant to perform R&D, but they may also use additional expenditure that is not funded by a grant. In those situations, the additional expenditure would be ineligible for the tax credit. This outcome would be contrary to the broader policy intent of the tax incentive, which is to incentivise and support businesses to increase their expenditure on R&D.

We therefore recommend inserting an amendment into the bill modifying clause 21 of Schedule 21B Part B. Our amendment would narrow the grant-related exclusion criteria. It would ensure that expenditure that is not funded by a government grant would be eligible for a tax credit, as intended by the policy.

Submitters raised with us a number of concerns regarding apparent anomalies with hybrid and branch mismatch rules. To ensure the rules work fairly, and to meet the policy intent of the rules regarding hybrid remedials, we have recommended that several provisions be added to the bill.

To ensure the following recommended provisions apply appropriately, the amendments should all be retrospective to the application date of the provision. That is, they should all apply for income years beginning on or after 1 July 2018.

Taxpayers who have taken a tax position under the existing law would, if relevant, be able to request the Commissioner amend the assessment in order to take advantage of the recommended changes.

Our recommended amendments are:

Clause 44, section HC 30, would amend the rules that apply to foreign trusts, when the settlor of a foreign trust becomes a New Zealand resident. The clause ensures that distributions of an amount from such a trust are made from a complying trust.

A complying trust in this provision is one for which the trustee has paid tax on the trustee income, when that income has been derived overseas. However, a complying trust may have made a capital gain. Capital gains are not taxable under the Income Tax Act, and so would not be taxed from the relevant trust.

We recommend inserting clause 44A, section HC 33, to refer to an “amount”, instead of income. This would mean that the non-taxation of such a gain would not affect the complying trust status.

The COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 increased the provisional tax threshold from $2,500 to $5,000.

In doing so, a change was made to the definition of “initial provisional tax liability” in section YA 1 of the Income Tax Act. A result of this change is that taxpayers who were over the old threshold, but under the new threshold, could become initial provisional taxpayers again.

Such treatment may be adverse to the affected taxpayers and was unintended. We therefore recommend an amendment to ensure the section correctly deals with the change in the provisional tax threshold for those taxpayers who, in the previous four years, had residual income tax of more than $2,500 but not more than $5,000.

Inland Revenue undertakes an information match with the New Zealand Customs Service for the purpose of verifying whether a borrower is in New Zealand or overseas. Interest is payable on student loans for borrowers who are based overseas, and is not on the loans of New Zealand-based borrowers. Inland Revenue use this information to determine whether borrowers should be treated as New Zealand or overseas based.

The legislation governing the information match allows Inland Revenue to share the borrower’s name, date of birth, and IRD number with Customs. We believe that adding the borrower’s passport number to this information would help improve the accuracy of the match because passport numbers are a unique identifier used by Customs.

We therefore recommend adding clause 92B, section 208(2)(d) to the bill.

Bonus Bonds will be wound up, and in the year that it is wound up, Bonus Bonds will have to distribute income derived to beneficiaries. Under current law, income distributed by a trust that is derived in the same income year, or within a certain period after the end of the income year, is considered beneficiary income, and as such is taxed at the beneficiaries’ marginal tax rates.

We recommend amending the bill by inserting section HC 6(2)(ab). Our amendment would ensure that all distributions by an approved unit trust (of which Bonus Bonds is the only one) would be treated as trustee income and taxed at 28% consistent with other income derived over the life of Bonus Bonds.

Section IZ 8 of the Income Tax Act contains temporary loss-carry-back rules. The rules allow a company with net losses in the 2019-20 or 2020-21 income years (the “loss year”) to carry losses back to offset taxable income in the immediately preceding income year (the “profit year”). Special rules apply for companies that are part of wholly-owned corporate groups.

To be eligible for the loss-carry-back, a company that is not in a wholly-owned corporate group must have a net loss in the “loss year”, and must also have taxable income in the “profit year”.

While this rule works for most taxpayers, it is problematic for a company that is in a non-wholly-owned corporate group (that is a group where the companies have at least 66 percent, but less than 100 percent, common ownership) that is in loss in both the loss and profit years, but would like to use the loss-carry-back to effectively share its losses with a group member who has taxable income in the profit year. Under current rules, a company that has losses in both the loss and profit years cannot use the loss-carry-back even if it has a group member with taxable income in the profit year.

This is contrary to the policy intent of the COVID-19 Response (Taxation and Other Regulatory Urgent Measures) Act. The intention behind the Act is for a company that has 66 percent or more common ownership with another company to be able to carry back and offset its losses against the other company’s taxable income in the profit year.

We recommend inserting clause 44E, section IZ8(1), (2), and (3) to the bill.