A Week in Review

Progress of Tax Bills

It was a fairly quiet week in the world of tax, so I thought it would be an opportune time to update you all on the progress of the various taxation Bills presently making their way through the Parliamentary process:

Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Bill – introduced 28th June 2018, presently awaiting its second reading

I reported on this Bill in last week’s edition of AWIR, but for those who missed that update, a quick summary of some of the changes proposed by the Bill is:

  • Simplification of the tax system for individual taxpayers with a view to removing unnecessary compliance costs, via proposals for IR to be more pro-active in ensuring correct tax codes are used throughout the year, the use of pre-populated accounts by IR (removing the existing IR3’s and PTS), resulting in automatic year-end processing for some taxpayers (including issuing refunds) where IR forms a view all required reportable income has been obtained, and the ability for taxpayers to electronically file (via MyIR) donation receipts throughout the year as received (so they are not overlooked), with an automatic year-end refund issue.
     
  • Introduction of a new short process rulings system, providing greater access to an IR binding ruling for small to medium-sized businesses – have gross income below a defined threshold, removal of the need to state both the taxation laws and the propositions of law to which the ruling is sought, and reduced application and hourly rate fees. There are also proposals to extend the scope of binding rulings, including allowing factual questions e.g. a person’s tax residency status or ruling on a taxpayer’s purpose in some cases, which under the present law is prohibited.
     
  • Changing the current criteria for determining whether an error can be included in a subsequent tax return to a combination of both a monetary ($10,000) and materiality threshold (2% taxable income or GST output tax liability) where the error is equal to or less than both thresholds. The present $1,000 threshold would also remain, applying automatically without the new qualifications.
     
  • The ability to elect into the new AIM (accounting income method) provisional tax method during an income year. This will be allowed where the taxpayer is presently using either the standard option or GST ratio method, and have made all their required payments under the prior method at the time of election into AIM.
     
  • KiwiSaver changes including new contribution rates of 6% and 10%, reducing the maximum contribution holiday period from 5 years to 1 year and allowing over 65-year-olds to opt-in to KiwiSaver.

Taxation (Research and Development Tax Credits) Bill – introduced 25th October 2018, presently at Select Committee

This Bill contains proposals to introduce research and development (R&D) tax credit from the commencement of a taxpayers 2019-20 income year, with the following features:

  • All types of NZ businesses will be eligible (although there is a list of excluded entities e.g. they receive a Callaghan Innovation Growth Grant) provided they are performing a core R&D activity in NZ, they carry on business in NZ through an NZ fixed establishment and they have R&D controlling rights in relation to their core activity;
     
  • Failure to file an income tax return within one year of its due date will result in the forfeiture of any R&D tax credit claim for that income year;
     
  • An R&D activity will include both core activities and supporting activities. A core activity is defined as one which is conducted using a systematic approach, it has a material purpose of creating new knowledge, or new or improved, processes, services, or goods, it has a material purpose of resolving scientific or technological uncertainty, and it has its day to day management conducted in NZ;
     
  • There is a list of excluded activities including market research & testing, routine software & computer maintenance, preproduction activities, and management studies;
     
  • The legislation contains a list of eligible expenditure (e.g. depreciation on items used in R&D, amounts paid to employees) and an ineligible expenditure list (e.g. R&D expenditure >$120m, interest & other financing costs);
     
  • At least $50k of eligible R&D expenditure must have been incurred for the income year;
     
  • The R&D tax credit will equate to 15% of the eligible expenditure (restricted to $120m cap), with up to a maximum of $255k refundable to those company taxpayers with an insufficient income tax liability to fully utilise the credit. Any excess credit will then be carried forward to the company’s next income year, subject to satisfying shareholder continuity requirements; and,
     
  • From the 2020-21 income year, most persons intending to apply for R&D tax credits for the coming income year must obtain approval (General approval) for their core activities by the 7th day of the second-month post the commencement of the income year in which the core activities will be undertaken. General approval can last for up to 3 years.

Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Bill – introduced 5th December 2018, presently at Select Committee

This Bill serves two main purposes:

Effective 1st October 2019, introducing new rules requiring GST to be charged on low-value imported goods, containing as its main features –

  • Offshore suppliers would be required to register for NZ GST, where their total annual value of taxable supplies of goods and services made in NZ exceeded the $60,000 registration threshold. In this regard, imported goods valued at $1,000 or lower to NZ based consumers would be defined as taxable supplies (to be known as “distantly taxable goods”);
     
  • Supplies of distantly taxable goods to NZ GST registered businesses would be excluded from the annual threshold calculations, unless the offshore supplier chose to zero-rate the supply;
     
  • Offshore suppliers would have a quarterly filing period, with a simplified “pay only” GST return available for those not looking to recover any NZ GST costs; and,
     
  • Offshore suppliers would be exempt from the requirement to provide details of a fully functional NZ bank account when applying for an IRD number.

Effective from the commencement of a taxpayer’s 2019-20 income year, rules to ring-fence losses incurred with respect to residential investment properties, from being able to be offset against the taxpayers’ other income. Some of the main features of the new rules are proposed to be:

  • The rules will apply to residential land as that term is defined for the purpose of the bright-line test. Excluded however will be the taxpayers main home, property subject to the mixed-use asset rules, certain employee accommodation and property that will be taxed upon sale;
     
  • The rules will apply on a portfolio basis, although taxpayers can elect a property-by-property basis;
     
  • Ring-fenced deductions will carry forward to the next income year, for offset against future residential rental income or income on the sale of residential land;
     
  • Anti-avoidance rules will exist to prevent abuse of the new rules via the use of interposed entities e.g. where someone has borrowed to acquire an interest in the interposed entity as opposed to that entity directly borrowing the necessary funds to acquire the residential investment property; and,
     
  • Note that the definition of residential land is not limited to land in NZ.

The Bill also includes a number of remedial amendments for social policy (student loans for example) and other reasons, however one should take note of the new provision that will deem a beneficiary of a trust who has a credit current account balance of less than $25,000, where the trustees do not pay the beneficiary interest (or at least the FBT prescribed rates), not to be a settlor of the trust.

Consequently, where the beneficiary has a credit current account balance of greater than $25,000, upon which they do not receive interest from the trustees, IR’s likely view is that the beneficiary will be deemed a settlor of the trust, which could affect that persons Working for Families credit entitlements, make them accountable for tax on the trustee income and potentially increase the number of persons deemed to be associated with the trust.

Naturally, as each of these three Bills progresses on their journey through Parliamentary processes, I will keep you updated in future editions of AWIR.