Inside this edition:
- GST & Subdivisions of Land
- R&D – Cashing out R&D Tax Losses
- Automatic Exchange of Information
1. GST & SUBDIVISION OF LAND
Recently we have been asked a question as to whether GST applies in a case where a taxpayer subdivides a block of land into two or more lots which are subsequently disposed of.
Prior to 1995 IRD and TRA were of the view that subdivisions that resulted in a disposal of subdivided plots constituted a taxable activity and were subject to GST. In 1995 the Court of Appeal decision in Newman v CIR (1995)17 NZTC 12,097 settled this issue once and for all. This case considered a builder who acquired a block of land in Queenstown on which he intended to build a family home for himself. During the building process he carved off the surplus land to fund the building of his home.
The High Court was of the view that the subdivision process included a series of steps carried out over a certain period of time with a common purpose and that these steps constituted a continuous activity which fell within the definition of “taxable activity” which is defined as:
“Any activity which is carried on continuously or regularly by any person, whether or not for pecuniary profit, and involves or is intended to involve, in whole or in part, the supply of goods or services to any other person for a consideration…… “
The main features of taxable activity are:
· There is an activity; and
· The activity is carried on continuously or regularly; and
· The activity involves, or is intended to involve , the supply of goods or services to another person for consideration.
Despite the existence of “activity”, the Court of Appeal held that it was not necessary to dissect the subdivision activity into various steps to determine whether or not the activity was carried out continuously or regularly. Instead the Court distinguished the activity (which was that of subdivision) from all steps involved and determined that a one off subdivision which did not involve development work did not in itself constitute a “taxable activity”.
Subsequent to the Newman Decision, the Commissioner issued a policy on the application of GST to subdivisions which can be summarised as follows:
- A subdivision of land into two lots, involving no development work, will not by itself amount to a taxable activity.
- In other circumstances, whether or not the activity is “continuous” and amounts to a “taxable activity” will depend on all facts of the particular activity.
- The CIR considers that the following factors are important in determining whether or not a “taxable activity” exists
The scale of subdivision
The level of development work
The number of sales of subdivided land
The time & effort involved
The level of financial investment
The commerciality of the transaction
- Consequently the greater the number of lots created and sold, the more extensive the development work, the more time and effort is involved, and the higher the financial commitment to the subdivision project, the more likely it is that a taxable activity exists.
- One must therefore be mindful of the number of sections created, any earthworks, infrastructure expenditure, roading and the extent of financial investment in relation to the subdivision as these will determine whether or not a “taxable activity” is being carried on.
- The CIR’s interpretation statement concludes that:
- A subdivision of land into two lots, involving no development work, will not in itself constitute a “taxable activity”;
- If a lifestyle block with an original residence was subdivided into two or more lots of land, that only the newly subdivided lots of land would form part of that person’s taxable activity and not the lot with the original residence. Consequently, if that person sells the lot with the residence and curtilage, such a sale is not made in the course of furtherance of that person’s taxable activity and will not be subject to GST.
In addition, if a person carries out subdivisions, even if they are one off, but on regular basis, such activity will satisfy the definition of “taxable activity” as the definition of “taxable activity” includes activity that is carried out continuously or regularly. Furthermore, it is likely that the CIR will backdate the beginning of “taxable activity” of that person to the very first subdivision.
2. R&D CASHING OUT R&D TAX LOSSES
2015/2016 Income Tax year is the first year during which Companies can take advantage of the new regime and can apply for their tax losses which arose as a result of qualifying R&D expenditure to be cashed out, subject to meeting certain criteria. Such an application needs to be made by the respective Company by the time the Company files its corresponding tax return. This regime is elective and the Company can choose to have its tax losses arising from qualifying R&D expenditure cashed out in one year but not the next and so forth. As these rules are targeted, there are limits on what constitutes qualifying “R&D expenditure”.
Such Companies will be able, subject to meeting the respective criteria, to receive a payment of up to 28% (current company tax rate) of their tax losses from qualifying R&D expenditure in any given year. The amount of losses that can be cashed out will be capped at $ 500,000 in the 2015/2016 tax year, increasing by $ 300,000 over the next five years, to a maximum of $ 2,000,000.
For a company to be eligible to benefit from this regime it must meet the following eligibility criteria:
- It must be a company that is resident in NZ and not treated as non-resident for the purposes of an applicable Double Tax Agreement. (consequently watch out dual resident companies)
- The company cannot be a Look Through Company, Listed Company or a Company which is 50% or more owned by Crown Research Institute, Public Authority, Local Authority or State Enterprise.
- The “Wage Intensity criteria” must be met, where at least 20% of the Company’s expenditure on wages must be on qualifying R&D. This includes wages of shareholder employees as well.
- The Intellectual Property or know how from the qualifying R&D must vest (solely or jointly) in the Company. This is intended to ensure that the benefit of cashed out losses goes to the Company that is incurring the risk of investing in the R&D.
As the cash out is administered through the tax system it is delivered in the form of a refundable tax credit. The amount that can be cashed out in any given year is limited to the lesser of:
- Company’s net loss from qualifying R&D starting at $500,000 which is increased progressively to $ 2 Mil over next 5 years;
- Company’s total research & development expenditure for the year, and
- 1.5 times the Company’s total R&D labour expenditure for the year.
One should be mindful that the cashed out losses are going to be extinguished. A cashed out loss is intended to provide a cash flow timing benefit only (akin to an interest free loan) which is to be repaid from the Company’s future income. The repayment will occur when the Company pays tax on its profits that would, in the absence of cashing out of R&D losses, be offset against the losses carried forward. Any loss which cannot be cashed out, due to a limitation, will be carried forward under the ordinary rules.
As mentioned earlier the regime is designed to recover the amount of cashed out losses from future profits of the Company. In addition, an early repayment of the remaining amount of cashed out losses will be triggered if any of the following events occur:
- If the company disposes of or transfers its R&D assets (intellectual property, intangible property, core technology, know how), other than through amalgamation, or other than through a disposal at market value which would otherwise be assessable income to the company;
- The Company becomes non-resident for tax purposes, or becomes a resident in a foreign country for the purposes of DTA, or
- The Company has a liquidator appointed, or
- More than 90% of the company’s shares have been disposed of since the Company first cashed out its R&D tax losses.
In the case of a disposal of an interest/ transfer of shares the repayment tax is capped at the market value of the interest transferred or disposed multiplied by the company tax rate. In the case of a disposal of the R&D asset the repayment tax is capped at the market value of the consideration for the disposal or transfer of the asset times the company tax rate. In essence the capital gain amount will be taxed. Any cashed out loss that is repaid through R&D repayment tax will be reinstated by way of deduction, which cannot be allocated to future income year. In the event that the company emigrates, becomes non-resident or a liquidator is appointed, all of the cashed out amounts must be repaid in that year. In all instances the amount of repayment tax is reduced by the amount of income tax that the Company already paid since the time the R&D losses were cashed out.
Furthermore, it is important to note that no credit will be allowed to the imputation credit account for the Company income tax paid, until such time that the cashed out R&D losses are repaid (whether through payment of income tax or via the R&D repayment tax). Care will need to be taken when allocating credits to the imputation credit account.
Whilst this regime can be beneficial to Companies with qualifying R&D activities a reasonable amount of care needs to be taken. We will be happy to provide assistance in relation to the application of this regime.
AUTOMATIC EXCHANGE OF INFORMATION
We live in a world which is becoming more and more transparent, where data and information is no longer confidential. Time and time again, tax havens are being attacked through the media. The issue is not the tax havens themselves, the problems lie in the unsophisticated domestic tax legislation of the respective country of tax residence of a taxpayer that does not provide for taxation on a worldwide basis. Instead it is easier to attribute the problem to the tax havens just because the more sophisticated tax jurisdictions do not like the secrecy and confidentiality of the traditional tax havens. With this said New Zealand is a tax haven for Foreign Trusts and Australia is a tax haven for New Zealanders moving to Australia.
In a world that is becoming smaller and smaller, OECD has initiated an Automatic Exchange of Information. As at 2 March 2016 96 countries have signed up to this initiative. The table below summarizes the intended implementation timelines of the new standard for automatic Exchange of Information.
|Jurisdictions undertaking first exchange by 2017 (55)|
|Anguilla, Argentina, Barbados, Belgium, Bermuda, BVI, Bulgaria, Cayman Islands, Colombia, Croatia, Curacao, Cyprus, Czech Republic, Denmark, Dominica, Estonia, Faroe Islands, Finland, France, Germany, Gibraltar, Greece, Greenland, Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mexico, Monsterrat, Netherlands, Niue, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Trinidad & Tobago, Turks & Caicos, United Kingdom|
|Jurisdictions undertaking first exchange by 2018 (41)|
|Albania, Andorra, Antigua and Barbuda, Aruba, Australia, Austria, The Bahamas, Belize, Brazil, Brunei Darussalam, Canada, Chile, China, Cook Islands, Costa Rica, Ghana, Grenada, Hong Kong, Indonesia, Israel, Japan, Kuwait, Marshall Islands, Macao, Malaysia, Mauritius, Monaco, New Zealand, Qatar, Russia, Saint Kitts and Nevis, Samoa, Saint Lucia, Saint Vincent & Grenadines, Saudi Arabia, Singapore, Saint Marten, Switzerland, Turkey, United Arab Emirates and Uruguay|
|Jurisdictions that have not indicated time frame or that have not yet committed (4)|
|Bahrain, Nauru, Panama, Vanuatu|
The USA is undertaking exchange of information pursuant to FATCA from 2015.
If you have clients who may have undisclosed income or investments sheltered through investment vehicles established in these countries you should consider making the necessary voluntary disclosures as there is an increased likelihood that these investments will be made available to the IRD pursuant to the Automatic Exchange of Information. We will be happy to assist with formulating the necessary voluntary disclosures and or enter into settlement negotiations with the IRD.
Should you have any questions on the content of this newsletter, please do not hesitate to contact us. We will gladly provide clarification or assistance as the case may be.