TAX UPDATE 19 Oct 2012
WHAT IS A "SUPPLY"? – AUSTRALIAN GST DEVELOPMENTS
Although the New Zealand and Australian GST rules have differences, one of the fundamentals of both sets of rules is that GST relates to a "supply". Often there has been a debate about whether there has been a supply, but usually in cases where there are settlements of disputes, or compensation being offered for loss.
A recent Australian case involving Qantas Airways Ltd (Qantas) has recently challenged ideas for what constitutes a "supply" under Australian GST law. In Commissioner of Taxation v Qantas Airways Ltd  HCA, it was held that GST can apply even in circumstances where the customer forfeits the flight. The result will see Qantas lose out on a $34 million refund from the Australian Tax Office for fares from passengers who failed to fly.
The GST amounts in question relate to amounts collected from customers who purchased fares, but failed to take the flights for which reservations had been made. No refund of fares for flights not taken was given.
The conclusion was reached by the Court that Qantas did not provide an unconditional promise to carry the passenger and baggage on a particular flight, but rather something less than that. The Court determined that the "taxable supply" was Qantas using its best endeavours to carry the passenger and baggage, with respect to the business operations of the airline. The airline engaged in a practice of booking more passengers on a flight than seats available, in the expectation that not all customers booked would be able to make the flight.
Although the Court's view may well have been reached with Qantas' practice of "overbooking" in mind, it does seem to be an unexpected outcome. The dissenting judgment of Heydon J suggested that a taxable activity was the actual provision under contract of air travel. This approach would perhaps seem more logical from the perspective of what you have paid for. The fact that the fare is not refunded does perhaps leave it open to the majority's interpretation of what the airline provides, rather than what the passenger believes they are signing up for.
How it affects you
Although this is an Australian case, and this approach has not been adopted in New Zealand, it will be interesting to see if a case testing this approach is taken in New Zealand. The outcome of this case, if applied in New Zealand, would have a vast impact on goods and services supplied but not actually used, where no refund was provided - potentially impacting such things as pre-booked concert tickets, gym memberships, and online vouchers left unused.
TAX AVOIDANCE LEGAL
There has been a recent suggestion that New Zealand has become a tax haven for many foreigners transferring significant assets to trusts in New Zealand to avoid or evade tax.
On 8 October 2012, the Minister of Revenue, the Hon Peter Dunne, dismissed claims that New Zealand is a tax haven for foreign trusts stating that "I think the term 'tax haven' is a gross exaggeration because it implies illegality, it implies evasion, rather than legitimate tax avoidance,". He stated that "the key identifying characteristics of tax havens are secrecy and lack of transparency". The Minister said that "these are not factors in New Zealand as our legislation for taxing trusts is fully transparent. Further, we note that New Zealand's taxation rules have a robust set of rules regarding the taxation of income earned by trusts and paid to beneficiaries".
The Minister also announced that New Zealand will sign the Convention on Mutual Administration Assistance in Tax Matters, as amended by the 2010 Protocol, which is a multilateral treaty. The Convention will give the Inland Revenue Department in New Zealand the ability to request help from other tax authorities in detecting and preventing tax evasion, and collecting outstanding tax debts from absconding taxpayers. The Minister said that this is an important step and consistent with New Zealand's approach to tax matters and "makes a mockery of tax haven assertions".
The taxes covered by the Convention include all forms of compulsory payments to the general government except for customs duties, and taxes on income, profits, capital gains, and.
and net wealth levied at the central government level, amongst other things. Generally, rights and safeguards under national law remain applicable and the Convention expressly recognises a number of limitations to the obligation to provide assistance. Information obtained under the Convention may be relevant for other purposes such as pursuing serious financial crimes.
How it affects you
The use of trusts has been prolific in New Zealand which led to the Law Commissions' review on the use of trusts and the possible reform of our trust laws. The thought that New Zealand has become a tax haven for foreigners "hiding" assets in New Zealand to keep them safe from tax in their home countries seems ironic in light of that review.
What this debate has led to confirm however, is that the Inland Revenue Department is getting better tools to seek out information regarding taxpayers and to identify any income that is not being taxed in New Zealand that should be.
POINTS OF INTEREST…
The IRD has released a provisional depreciation determination for specialised buildings and plant used for growing mushrooms commercially (Determination PROV24).
Proposed rules around the reporting of KiwiSaver funds have gone out for public consultation.
The Employment Relations Authority has moved for the Employment Court to determine whether parties can agree that the KiwiSaver compulsory employer contribution need not be paid in addition to an employee's gross salary or wages.
TO THE POINT…
There's two things, going back to my days at University, tax evasion and tax avoidance
TAX UPDATE 27 Oct 2012
PENNY AND HOOPER DISCLOSURES
For many practitioners, it must seem like we have been living under the cloud of Penny and Hooper for far too long. Since the Supreme Court delivered its decision last August, a challenge for practitioners has been how best to manage the "fall out" for their clients. The Inland Revenue Department ("IRD") offered the option of a little relief by announcing that if a voluntary disclosure was made in relation to tax positions taken prior to 24 November 2011, an adjustment would be required for only two years (rather than four), and there would be no penalties (albeit use of money interest would still apply).
A key issue that arose where the 2011 tax return was filed after 24 November 2011, was whether making a disclosure was sensible as that would mean the disclosure would relate to the 2009 and 2010 income years, and accordingly 2011 would also need to be dealt with.
For those with clients that had filed the tax return for 2011 before 24 November 2011, the question became purely a mathematical one. How much is at stake, and what is the risk of detection?
Having dealt with the past (or not), another question became: what do we do going forward? Is it a case of paying out 80% of the income to the "employee", or are there other, perhaps even better, options?
Underpinning all of this is the hardest question of all: who should I be looking at this issue for? The medical profession is obvious, but what about other professionals? Would the same
position apply to accountants, lawyers, quantity surveyors, and architects? And what about personal service providers that are not "professionals", such as IT consultants and engineers. Our view is that the same type of risks apply.
The IRD has recently announced that only 170 taxpayers have made disclosures to date. That does not seem at all high given the number of medical practitioners in New Zealand. An extension of time has now been given to allow practitioners to work with clients regarding what position to take.
How it affects you
If you are a medical practitioner trading through a company or a trust, be aware that if you have not yet made a voluntary disclosure, the time for doing so is to come to an end on 31 March 2013. Practitioners with clients that may be affected, but that have not yet made a disclosure, will also need to make sure that they have worked through this by that time.
LUMP SUM PAYMENTS - LEASES
Earlier in the year we published an article regarding the IRD's proposed changes in relation to the taxation treatment of lease inducement payments (and certain other arrangements having similar effect).
Broadly speaking, the changes would see lease inducement payments being treated as taxable income in the hands of lessees. That income was to be spread on a straight-line basis over the term of the lease or the period to the first rent review (whichever was shorter). Initially it was suggested that the changes were to be made effective from the date of the IRD's announcement.
Since that time, and as a result of much public comment, particularly concerning the apparent retrospective nature of the reforms, changes to the proposals have been announced.
The key changes, are firstly, the retrospective implementation date has been abandoned. The reforms are now intended to apply to inducement arrangements in respect of commercial leases which are entered into on or after 1 April 2013.
Secondly, income and expenditure arising from lease inducement payments will be spread evenly over the term of the lease, and there is no longer a reference to the first rent review date.
Thirdly, a specific provision entitling lessors to a deduction for lease inducement payments will be introduced into the Income Tax Act 2007, to remove any doubt as to the ability of lessors to deduct those amounts.
Finally, the proposals will be extended to lease surrender payments. Historically, lease surrender payments have been regarded as income to lessors but non-deductible to lessees. The proposals will see lease surrender payments made on or after 1 April 2013 becoming deductible to lessees (and income for lessors).
How it affects you
As was noted when the proposals were first announced, these changes will effectively result in a further limitation on negotiating commercial outcomes. Although the historic taxation treatment may have been advantageous in some circumstances, it was the "fat" that allowed parties to negotiate terms that were satisfactory to all parties.
If you are a landlord, you will want to consider the impact of these changes on the way you negotiate with tenants. If you are a tenant wanting into or out of a lease, you will need to seek advice on what the effect of that will be from a taxation perspective.
POINTS OF INTEREST…
The IRD has agreed to continue a concession for 'Penny and Hooper' type voluntary disclosures until 31 March 2013.
The Court of Appeal have determined that timing of registration determines priority (rather than timing of perfection) for security interests over the same asset.
ACC last week commenced its consultation period seeking feedback on its proposed levy rates for 2013/14. ACC is proposing:
• a 13% decrease in the levy for employers and self-employed;
• a 12% decrease in the levy for earners;
• no change to the average motor vehicle levy.
TO THE POINT…
"A resolution to avoid an evil is seldom framed until the evil is so far advanced as to make avoidance impossible".
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