Newsletter October 2022
RECENT TAX CASES
07 Oct 2022
Christchurch Barrister, has been sentenced to 5 months home detention for failing to file 22 GST and 11 income tax returns. Total GST in question $224,850
03 Oct 2022
A Christchurch man, who was previously self-employed, was jailed for almost 3 years for filing 49 fraudulent GST returns. Total GST in question $768,507.99
06 Sept 2022
A man from Wellington, was sentenced to 10 months home detention after using forged documents to claim GST refunds. Total GST in question $243,000.
NEW DEVELOPMENTS
August and September have certainly been interesting months in terms of tax developments. In August we have seen the introduction of the Taxation (Annual Rates for 2022-2023, Platform Economy, and Remedial Matters) Bill, which was withdrawn within 24 hours due to the largely unpopular proposal to subject services supplied by managers and investment managers to superannuation schemes and managed funds to 15% GST.
This bill has now been re-introduced with modifications.
The amended Bill covers the following areas of interest:
- Platform Economy
- Cross Border Workers
- Dual Resident Companies
- GST apportionment & adjustment rules
- Fringe Benefit Tax Exemption for public transport
- Exemption from interest limitation rules for built to rent assets.
DIGITAL PLATFORMS & PLATFORM ECONOMY
The Taxation (Annual Rates for 2022-23, Platform Economy, and Remedial Matters) Bill (No2) (The Bill) proposes to implement an information reporting and exchange framework developed by OECD. These proposals will affect electronic marketplaces, such as Air BNB, Uber and the likes. GST already applies on “Remote Services (2016) “and “Low Value imported Goods (2019).
The Bill introduces rules that will require digital platform operators based in New Zealand to provide the Commissioner with information about Taxpayers that earn income on that platform if the income is earned from providing accommodation, personal services, vehicle rentals or the sale of goods. The Regime would commence in the 2024 calendar year with the first information reporting obligation (and exchange) in early 2025.
Furthermore, the Bill extends the application of electronic marketplace Rules to Listed Services which will include “Taxable Accommodation” and “Certain Transportation Services” provided in New Zealand from 01 April 2024.
Taxable Accommodation is accommodation which is taxable in New Zealand, such as short- stay accommodation, visitor accommodation, serviced accommodation, etc. Certain Transportation services are defined as ride sharing and beverage and food delivery services. Other services that are provided through an electronic marketplace and are closely connected with these services will be subject to GST at 15% if they are performed, provided or received in New Zealand.
PLATFORM ECONOMY
The consequential effect of these proposals is that the operators of electronic marketplaces, whether based offshore or in New Zealand, would need to collect GST on these types of services where they are provided through electronic marketplaces.
The operator of the electronic marketplace through which the Listed Services are provided would be deemed to be the supplier of those services and will be required to impose GST at 15% to customers. As the rules shift the accountability for GST on the electronic marketplace, the underlying supplier (such as Uber Driver or Accommodation provider) will be deemed to provide zero rated supplies to the electronic market place operator. The consequence of these amendments is that the underlying supplier will no longer be required to account for GST on that supply, but if the supplier is GST registered they will still be able to claim GST inputs when making these taxable supplies.
The Bill also proposes a Flat Rate Credit Scheme which will work in situations where the underlying supplier of services is not GST registered. In such cases the operator of an electronic marketplace will receive an input tax credit equal to 8.5% of the value of the services, to offset against the output tax payable on that supply. The Electronic Market Place Operator will be required to pass this credit onto the underlying supplier.
The Bill provides for an opt out mechanism for Large Commercial Accommodation Enterprises such as hotels that provide accommodation through these electronic marketplaces, whereby the Large Commercial Accommodation Enterprise will continue to be responsible to account for GST and not the electronic marketplace. In order to qualify as a Large Commercial Accommodation Enterprise the enterprise will need to list at least 2000 nights of accommodation through the electronic market place in a year.
DUAL RESIDENT COMPANIES
A not so recent High Court Judgement (2019) in Australia altered the way that the Australian Tax Office will apply the Central Management and Control test. The outcome of the judgement is that a foreign resident company that has an Australian based director could now be deemed an AUSTRALIAN Tax Resident Company for the purposes of Australian Domestic Tax Rules, irrespective of whether or not the business activities of that company are carried on in Australia or outside of Australia. Consequently, New Zealand Companies with Australian Directors would be resident in both countries for the purposes of domestic tax rules.
The recent amendment of corporate tax residency rules in Australia mean that more New Zealand Companies would find themselves resident in Australia. The proposed amendments in the Bill will ensure that such companies continue to be able to offset income tax losses against the profits of other group companies, have access to the consolidation regime and can maintain imputation credit accounts (ICA).
BUILD TO RENT EXEMPTION
The Bill proposes an exemption from the interest deduction limitation in relation to Built to Rent Assets (BTRA). This will allow the investor to claim interest deductions in relation to BTRA loans indefinitely as long as the following qualifying criteria are met in relation to a development:
- The development is owned by the same person and it has 20 or more dwellings
- Each dwelling has a tenancy to which the Residential Tenancies Act 1986 applies
- Every tenancy has the option of a 10 year term, and provides the tenant with the ability to give a 56 day notice of termination
- Every tenancy includes a personalisation policy, and
- At no time after it meets the the above criteria fails to meet those requirements
The policy is intended to apply to new and existing developments. It is unlikley that developments that are in existence today will provide 10 year tenancies. The existing BTRA’s will have till 01 July 2023 to comply with these requirements.
GST APORTIONMENT
Current GST apportionment rules are complex and require numerous GST adjustments in relation to assets used for taxable and non-taxable purposes. The proposals in the Bill are designed to simplify the compliance burden. Some welcome proposals include:
- Allowing GST registered persons to elect to treat certain assets that have mainly private or exempt use as if they only had private or exempt use. This would cover minor use of personal assets or dwellings (such as home office in a dwelling). Whilst GST registered persons would be able to claim GST inputs in relation to operating costs (such as rates, insurance, etc), they will not be required to account for GST output at the time the asset is sold, provided that GST input tax was not claimed. Those who claimed GST input tax in relation to the business use of the asset will have time, under transitional rules, to return the GST input tax so that the ultimate disposal of the asset will qualify as an exempt supply.
- Introduce (or bring back) the principal purpose test for assets acquired for $ 10,000 or less. If these are principally acquired for business (use more than 50%) purposes the GST registered person will be able to claim 100% GST input tax credit as opposed to applying the GST apportionment rules.
- Number of GST adjustments in relation to mixed use assets, mainly land, will be capped at 10 as opposed to unlimited adjustments under current rules. The threshold for two (2) and five (5) GST adjustments will also increase to 10,001-20,000 and 20,001 to $ 500,000 respectively.
- Currently if there is a 100% change of use the final wash up GST adjustment in 21FB can be made in 2nd GST adjustment period. It is proposed that for 100% change of use or any permanent change of use, that GST adjustment can be made in 1stGST adjustment period. GST registered persons will no longer have to wait for the 2nd GST adjustment period to perform the wash up calculation pursuant to s 21FB.
Rules should apply to adjustment periods on or after 01 Apr 2023.
CROSS BORDER WORKERS
The Bill proposes to modernise and provide clarification for employers in relation to the application of PAYE, FBT, ESCT and NRCT rules in relation to cross border workers. Current rules are not flexible enough to take into consideration the various forms of employment arrangements (short term, long term, remote, overseas, NZ vs foreign resident employer/ employee) and could give rise to incorrect application.
The Bill introduces a new definition of “Cross Border Employee”, that will cover:
- NZ employee of a non-resident employer providing services in NZ, or
- NZ resident employee providing services outside of NZ
Introduction of a 60 day grace period which will enable the employer to meet or correct their PAYE, FBT and ESCT obligations, where they have taken reasonable measures to manage employment -related tax obligations.
Under the proposed amendments, a volunatry disclosure will not be required where an employer or employee meets or corrects the tax due within the grace period. UOMI and penalties will not be imposed if underpayment is corrected within the grace period.
The Bill provides for the IR and the Employer of Cross Border Employees to agree on payment of PAYE obligations annually in certain circumstances and to repeal the PAYE bond provisions, which are rarely used.
The Bill introduces safe-harbour provisions for non-resident employers who have incorrectly assessed their employment related obligations. Where the safe harbour provisions are met and the employer does not have sufficient presence in NZ, the employer would be protected from the application of penalties and UOMI. Where the non-resident employer does not have the PAYE obligation, proposed s CE1F(3) clarifies that the obligation to pay and report PAYE, FBT and ESCT transfers to the employee. In addition any shortfalls in amounts withheld by the employer must be withheld by the employee s RD21.
Amendments would take effect on 01 Apr 23.
REMEDIAL PROVISIONS RELATING TO LAND
INHERITED LAND
- Amendment to clarify that disposal of inherited land by ultimate beneficiary is excluded from Brightline Rules.
CHANGES IN CO-OWNERSHIP OF RESIDENTIAL LAND
- Amendment to clarify that the date of acqusition for Brightline Purposes for conversions of ownership of residential land from joint tenancy to tenancy in common or vice versa runs from the date of acquisition and not from the date of conversion.
MIXED USE ASSETS – APPORTIONMENT OF INTEREST FOR DISALLOWED RESIDENTIAL PROPERTY
- The proposed amendments would ensure that interest incurred by a person, including a close company, on disallowed residential property (DRP) that is a mixed use asset (MUA) is apportioned, separately from any other expenditure, under MUA rules.
PARTITIONING OF THE LAND AMONG CO-OWNERS
- Proposed amendments would ensure that allocation of subdivided land among co-owners of the original undivided block of land does not constitute a disposal for the purposes of land sale provisions, provided that the value of the allocated properties under the partition aligns with the co-owner’s interest in the original undivided parcel of land including the contribution to development and subdivision costs.
- Any difference would represent a change of economic ownership and actual disposal subject to tax.
OTHER NOTICES
We have noticed that IRD’s processing time in relation to correspondence has been improved. If you are still experiencing issues please let us know and we will try our best to assist.
