Taxation (GST & Remedial Matters) Bill
The Government recently introduced the Taxation (GST & Remedial Matters) Bill into Parliament. The bill contains important changes to three areas of the GST Act.
(i) Zero-Rating on Land Sales
Last year the Government put out a discussion document on ways to combat the situation where the seller of the land is in liquidation or otherwise insolvent and is unable to pay the GST on land sales due to priority security over the land and the recipient can claim the input tax. At that time they proposed to do this by a mechanism called a Domestic Reverse Charge (“DRC”).
The feedback received on that proposal was mostly negative and commentators said that we already had a mechanism in our current legislation to deal with “phoenix schemes” (by extending the zero-rating legislation).
It is positive to see that the Government listened to this feedback and will use a zero-rating mechanism. The proposal is that where a GST registered person supplies taxable activity land to another GST registered person who will use the land in their taxable activity, the sale will be zero-rated. This means the vendor collects no GST on the sale and the purchaser will receive no GST input tax credit on the purchase. To qualify for zero-rating the vendor must obtain the purchaser’s GST registration details and confirm that they are acquiring the land to use in a taxable activity.
(ii) Transactions Involving Nominations
Nominations have been a troublesome area for GST purposes. There have been different views as to whether a nomination gives rise to supply, especially where the contract is unconditional at the time of execution.
The Government wanted to clarify the GST
treatment of nominations.
A new section 60B is inserted which proposes to simplify the treatment of nominations:
- If the supply is settled by the purchaser, there is a supply to the purchaser only, and only the purchaser can claim the GST input credit, any nomination is ignored and is treated as a separate transaction.
- If the transaction is nominated to a third party (the nominee), and the nominee pays the full price for the supply, then the transaction will be treated as being between the vendor and the nominee, and only the nominee will be able to claim a GST input credit. The vendor will issue a tax invoice to the nominee where requested.
- If the purchaser and the nominee each pay part of the purchase price, then there will be two supplies, one from the vendor to the purchaser, and then one from the purchaser to the nominee. If the purchaser has not claimed an input credit for the purchase price they can agree in writing with the nominee that the transaction is a supply to the nominee only, and therefore only the nominee can claim a GST input credit.
These changes are welcome as they reflect the commercial reality that there is often only one supply from the vendor to the nominee and clear up any confusion around nominations.
(iii) Input Tax Change of Use Rules
Currently an input tax credit is only available where a taxpayer purchases an asset for the principal purpose of making taxable supplies. The proposed amendments to the GST Act will result in a taxpayer only being able to claim an input credit to the extent the asset is intended to be used for taxable purposes.
A taxpayer is then required to make an adjustment if their actual use varies from the percentage already claimed.
Take an example where a taxpayer purchases a vehicle which they will use 40% in their taxable activity. Under the current rules no GST input is available as the asset is not used for the principal purpose of making taxable supplies (however
period-by-period adjustments can be made). However, under the new rules, an input credit will be available for 40% of the purchase price.
Whilst this seems like a win for taxpayers in that it simplifies the process to claim a GST input credit, there is also a significant responsibility placed on taxpayers to monitor their use of the asset and make a change of use adjustment when their use of the asset changes. Based on similar Australian rules, most taxpayers do not make adjustments when their use changes and therefore open themselves up for exposure to penalties if an audit occurs, whereas under the current rules period-by-period adjustments are required.
Qualifying Companies (QCs) / Loss Attributing Qualifying
The Government announced in the 2010
Budget that changes will be made to the QC / LAQC regime with effect from the first tax balance dates commencing on and after 1 April
2011. Legislation for the changes is expected
to be passed by Parliament by year-end.
Shareholders will have the following options in the transitionary rules under the proposed QC changes:
(a) Elect for the company to become a
“Look Through Company” (LTC)
If you elect LTC, any profits of the company will be taxed to the shareholders at the
shareholder’s marginal tax rate based on their shareholder interest in the company. Any tax loss transfers to shareholders based on their shareholding in a similar manner to LAQC losses, provided the shareholder’s share of the tax loss does not breach the loss limitation rules being similar to that applied to limited partners in limited partnerships. Any unused tax loss carries forward to the next tax year. The sale of shares in the LTC will be treated as a sale of that person’s share of the underlying assets and liabilities subject to a de minimus rule.
For existing QCs and LAQCs, the election to be a LTC must be signed by all shareholders and filed with Inland Revenue within six months of the existing LAQC legislation ceasing to apply, i.e. by 30
September 2011 for a 31 March 2011 tax balance date company and 30 June 2012 for a 31 December 2011 tax
balance date company.
The election must be signed by all shareholders and, for under 18 year old shareholders, a guardian, and shareholders with legal incapacity, their guardian, holder of Power of Attorney or legal representative.
To be a LTC the company must have:
– one class of share;
– must be a New Zealand resident company;
– must have five or fewer shareholders where relatives are counted as one person.
Where a QC’s shareholders’ elect the company to be a LTC, the shareholders are jointly and severally liable for any unpaid PAYE and treated as one employer for PAYE purposes using the company’s name.
Any tax losses carried forward by an existing QC will be transferred to the shareholders in the LTC based on their effective interest. The shareholder can only use the QC tax losses against taxable income from interests held in LTCs.
(b) Transfer the QC / LAQC activity
Existing QC’s / LAQC’s can transfer into a limited partnership, ordinary partnership or natural person sole trader with no tax cost. The assets will transfer at tax values where the acquiring person is deemed to own the asset from the date the QC originally purchased it. The QC / LAQC will need to either be liquidated or be registered as a non-active company following transfer.
For shareholders in QC’s / LAQC’s with negative equity (insolvent companies), it may be necessary to recapitalise the QC /
LAQC to avoid taxable income arising on liquidation from debt remissions.
The QC status must be revoked and, prior to this, the Commissioner must receive notice that the transfer to sole trader or partnership is intended. The sole trader must be the only shareholder on
31 March 2011 or the first balance date falling after 31
March 2011 for those companies with non-31 March approved balance dates.
Similarly, the partnership acquiring the company’s activity must be made up of the same persons with the same percentage entitlements they had in the QC.
Care will need to be taken if this option is being adopted and professional advice sought.
(c) Revoke the existing QC status
Revoke the existing QC status effective from 1 April 2011 and have the company treated as a normal company for income tax purposes.
(d) Do nothing
Do nothing in which case the company remains a QC and is no longer a LAQC. This means the company pays tax on its profits (28% tax rate) and retains any tax loss for use against future taxable income. Dividends from the QC will continue to be taxable to the extent the dividend can be fully imputed and be exempt tax to New Zealand resident shareholders to the extent the dividend cannot be fully imputed.
From the announcements to-date we expect many shareholders in QC / LAQCs would likely decide to take no action and maintain the existing QC status. For those companies that are trading at a loss, and solvency issues are arising as a consequence, we would suggest shareholders / directors consider increasing the share capital of the company to such an extent that company borrowings can be repaid / reduced to a level that the company can then operate at a net profit.
The interest on bank debt that a New Zealand resident shareholder incurs in order to acquire the new shares on issue should be tax deductible to the shareholder. Any non-cash dividend that the shareholder benefits from sourced from a QC is offset against any interest deduction or share finance to fund shares in a QC that the shareholder is entitled to for income tax purposes.
For QC / LAQCs owned by trusts, the preferred option may be to revoke the QC status effective 1 April 2011 so that the company is taxed under normal rules and take appropriate action to ensure the company’s debt is reduced sufficiently to enable the company to trade at a profit. This aspect can be discussed further with us.
The nature of a LAQC’s business activity will determine the action to take. For a trading company where limited liability is important, the options are either to elect LTC status, limited liability partnership status or remain as a QC. Converting to a limited partnership may be costly as the existing LAQC must be either liquidated or be registered as non-active with the result there may be legal expenses on conveyance of property and refinancing loans from the LAQC to the limited partnership.
For those LAQCs with rental properties, if it is not possible to refinance loans to the company to shareholder loans to acquire shares, then a conversion to either LTC registration or sole trader / partnership consisting of existing shareholders in the LAQC within six months of LAQC status ceasing may be the appropriate option.
The Government is proposing a review of the tax rules for dividends paid by closely held companies and further changes to the taxation of QCs may arise at that time. In brief, a closely held company is a company where five or fewer persons hold a combined voting interest in the company of more than 50% which is similar to the rules to be a QC (i.e. shareholders limited to five, treating parents and their children as one shareholder).
A review of QC / LAQCs should also be made prior to 31 March 2011 to ascertain whether dividend distributions of equity should be made prior to the new rules coming into force, especially where the company has unimputed retained earnings and capital gains and the shareholders / directors will likely elect to revoke the company’s QC / LAQC status.
Income-Sharing Tax Credit
The Government has introduced the Taxation (Income-Sharing Tax Credit) Bill. This bill will allow couples who are married or are partners in a de facto relationship or a civil union throughout the tax year and who have responsibility for a dependent child (up to 18
years of age) to split their income from 1 April
2012. For a couple where say one spouse earns $140,000 and the other nothing the tax savings will amount to the maximum of $9080 per year.