TAXATION OF FOREIGN SUPER FUNDS TO CHANGE
Although the proposals to simply the tax treatment of foreign super schemes that have been introduced by the Minister of Revenue, Hon Peter Dunne, in the Officials' Issues Paper – "Taxation of foreign superannuation" were welcomed, we consider the proposed changes will not simplify the taxation treatment of foreign superannuation schemes but will instead create a different uncertainty.
We agree that the current rules for taxing New Zealand tax residents on their overseas investments are complex, and have lead to many investments being treated incorrectly. This is largely due to the difficulty in determining whether the Foreign Investment Fund ("FIF") rules apply, or whether a foreign superannuation investment is governed by dividend and trust distribution tax rules. One such area of confusion arose around United Kingdom ("UK") pensions. On 6 April 2006, the UK introduced the Qualifying Recognised Overseas Pension Scheme ("QROPS"). This scheme allowed the transfer of UK pension funds to overseas providers that meet certain requirements. Investors were required to account for income under the FIF regime unless the individual scheme rules didn't allow a transfer or imposed significant "penalties" for transferring interests out of the UK scheme; or if there was a substantial decrease in the present value of any benefits on transfer to a QROPS.
The new rules propose to tax on distributions, such as when a person receives a pension or lump sum, or transfers the sum to another scheme. The rate of tax on the lump sum will be determined by how long the person has been in New Zealand. These changes are to apply from the 2011/2012 tax year.
To remedy the varied past treatment of these investments, the rules declare all those who have applied the FIF rules for the 2011 tax year will continue to apply those rules, so long as this treatment had been declared before 31 March 2012. For those who had not applied the FIF rules, any withdrawals prior to 31 March 2011 (reaching back to 1 January 2000) will be assessed with a low tax rate, currently proposed at 15%. Any withdrawals or transfers for this period must be disclosed to the Inland Revenue Department before 1 April 2014.
How it affects you
None of the proposals will impact upon lump sum transfers from Australian superannuation schemes to New Zealand which are tax-free under the Australia-New Zealand Double Tax Agreement; nor will this affect the arrangement for Trans-Tasman portability of retirement savings.
We suggest everyone else contact their WHK advisor to discuss the potential impact for you.
REVAMP OF CUSTOMS DUTY AND GST
Significant changes have recently been made to the penalties regime for customs and import GST.
Effective from 5 July 2012, a significant increase in penalties to $200 and $50,000 will apply (previously $50 and $10,000 respectively) with a graduated scale depending on the type of offence.
The minimum penalty will generally be applied in respect of material reporting errors.
Any previously perceived leniency in approach to penalties on unpaid customs duty and GST is unlikely to continue, with increased incentives for businesses to ensure their customs entries are correct under the new regime.
The New Zealand Customs Service is no longer required to provide notification that a penalty will be applied prior to issuing it.
Other changes include the "split shipment" rule, under which an importer is now able to apply for approval for goods as if they were a single shipment, even if the shipment is required to be spread through several imports for practical reasons.
The new rule gives the New Zealand Customs Service the ability to approve one single tariff classification for such imports.
Also introduced are measures for "temporary imports", which are goods that typically enter the country for less than one year, such as super yachts or mining equipment. Treatment as a temporary import will allow depreciation to be included on calculations.
Bio-fuels manufactured for personal use will be exempt from customs and excise duty, and clarification has been provided for duty on blended bio-fuels.
Administrative changes have also come in, with customs brokers and other agents now required to keep relevant records for their clients for seven years.
How it affects you
The more stringent penalties rules are more reflective of the approach adopted a number of years ago in relation to income tax and GST and are designed to encourage people to comply with their customs and excise duty obligations.
The changes look to simplify things for exporters and importers, but increase the consequence of failing to meet obligations.
Contact your WHK advisor to discuss what, if any, impact the changes will have on your business.
POINTS OF INTEREST…
The Social Security (Youth Support and Work Focus) Amendment Act 2012 received Royal Assent on 26 July 2012, introducing new measures of income support for young people and providing a stronger work focus for the benefit scheme.
An Officials' Issues Paper released last week seeks feedback on proposals to tax lease inducement payments made by commercial landlords to tenants.
The IRD has released the new mileage rates for business use of a motor vehicle for the 2012 income year. The rate is 77 cents per kilometre.
TO THE POINT…
"I don't like people who take drugs... customs men for example".
ARRANGEMENTS TO PAY TAX EXTENDED
Under s 177 of the Tax Administration Act 1994, the Inland Revenue Department ("IRD")is able to consider an application for financial relief by entering into an instalment arrangement. The IRD will negotiate with the taxpayer to determine what method of payment best suits the taxpayer's financial circumstances. However, s 177B states that the IRD must not enter into an instalment arrangement with a taxpayer (being a natural person) to the extent that the instalment arrangement would place that person in serious hardship.
"Serious hardship" is defined as meaning significant financial difficulties that arise because of:
- the taxpayer's inability to meet minimum living expenses according to normal community standards; or
- the cost of medical treatment for an illness or injury of the taxpayer or the taxpayer's dependant(s); or
- a serious illness suffered by the taxpayer or the taxpayer's dependant(s); or
- the cost of education for the taxpayer's dependant(s).
In order to apply for relief, you need to have your returns up to date because the outstanding tax covered by an instalment arrangement request needs to be quantified through a return or an assessment for the penalty suppression under s 139BA to apply, and to enable the IRD to commence negotiation.
From July 2012, an exception to the need to file a return has been introduced. That exception is provisional tax payable, in which case it must be calculated in accordance with the rules in subpart RC of the Income Tax Act 2007 for an arrangement to be entered into.
This change has allowed taxpayers to enter into an arrangement to pay provisional tax which had not previously been available.
How it affects you
This is a welcome extension of the instalment arrangement relief as many people have found that meeting the lump sum provisional tax instalments has been tough on cashflow.
If you cannot meet your provisional tax instalments, we suggest you contact your WHK advisor as soon as possible.
TAX POOLING AS AN ALTERNATIVE
Tax pooling has been around for a number of years. It is essentially a mechanism for taxpayers to minimise their out of pocket cost if tax is short paid or late paid.
Tax pooling is effectively the use of an intermediary that has acquired a pool of paid tax that can be purchased if taxpayers find themselves short.
If a taxpayer has underpaid tax or has failed to pay tax in any period, it may be possible to use a tax pooling intermediary to reduce the use of money interest cost associated with that shortfall. For example, if a taxpayer had a liability of $20,000, income tax at 31 March 2011, but had paid nothing, use of money interest and late payment penalties would accrue. If a tax pooling intermediary had funds available at 31 March 2011, it would be possible to purchase tax at that date.
Although a tax pooling intermediary charges a commission, the cost is inevitably lower than the late payment penalties and use of money interest charged by the IRD.
Initially, tax pooling was only available to cover a shortfall in income tax. Over time, it has been extended to cover other tax types.
From 29 August 2011, the rules were made easier.
The time limit for meeting provisional or terminal tax liabilities was extended from 60 to 75 days from the terminal tax due date for purchased funds. The time limit restriction no longer applies to the use of own deposited funds, provided the return is filed on time.
Taxpayers are able to use purchased funds for payment of a future provisional or terminal tax liability if certain criteria are met.
The changes allow members in a group of companies to use pooling deposits, made or purchased by any member of the same group, in certain circumstances.
It is still not a right to reverse a tax pooling transfer request but the IRD does consider such requests on a case-by-case basis taking into account how the error arose, why it arose, and whether the correction of the error is possible under the tax pooling rules. Sufficient evidence needs to be provided by the taxpayer and/or tax pooling intermediary to show that an error has occurred.
How it affects you
If you have underpaid or late paid your tax and you want to explore possibilities for minimising the cost to you in catching up payments, we recommend you speak to your WHK advisor regarding the possibility of using tax pooling to assist in meeting that liability.
POINTS OF INTEREST…
Supplementary Order Paper ("SOP") No 98 to the Taxation (Annual Rates, Returns Filing and Remedial Matters) Bill addresses a range of issues, including matters relating to the Canterbury earthquakes as well as changes to ensure that the international tax rules are working as intended.
The SOP also amends the Goods and Services Tax Act 1985 to remedy an asymmetry in the GST treatment of premiums for and receipts under a contract of insurance.
Naomi Ferguson has been appointed the new Commissioner of Inland Revenue.
TO THE POINT…
"A promise made is a debt unpaid."
Robert W. Service