TAX CHANGES PROGRESSING
On 6 June 2012, the Finance and Expenditure Committee reported back to Parliament on the Taxation (Annual Rates, Returns Filing, and Remedial Matters) Bill (325-2). The Bill sets the annual rates of income tax for the 2012/13 tax year and proposes the following principal changes:
- certain filing obligations
- increasing the KiwiSaver employer, default, and minimum employee contribution rates from 2% to 3%, as announced in Budget 2011
- allowing the capital costs of unsuccessful software development to be tax-deductible
- increasing the minimum tax equity requirement for foreign-owned banks from 4% to 6%, as announced in Budget 2011
- clarifying that late payment fees charged by businesses, and the credit card service fee for tax and social service payments, are subject to GST
- changing the GST rules for the sale of second-hand goods by a non-resident, so that input credits cannot be claimed twice
- preventing liquidators and receivers from switching the basis on which they account for clients' GST obligations
The Bill also proposes various remedial amendments to ensure that the legislation operates correctly and is consistent with the original policy intent, including the following:
- amending the portfolio investment entity (PIE) rules to ensure they are applied correctly
- ensuring that the rules introduced in 2011 for look-through companies are consistent with the policy intent
- clarifying the loss limitation rules for limited partnerships
- clarifying the definition of "hire purchase agreement"
- repealing an exemption to foreign investment fund (FIF) rules, and providing an optional method of valuing certain shareholdings under the rules
- introducing new rules for the transfer of emissions units by public bodies in certain circumstances.
How it affects you
The changes are wide ranging and will impact on many taxpayers. If you have an interest in any of the matters covered, and you want to know what the changes will mean for you, contact your advisor.
FILING, WFFTC AND LTC CHANGES IN THE BILL
Three of the changes in the Bill that will affect a large number of taxpayers for the better relate to filing obligations, WFFTC entitlements, and the Look-Through Company (LTC) requirements.
First, in relation to filing obligations the rules are being amended to minimise the filing obligations for many taxpayers. The changes proposed are three-fold:
- simpler filing requirements for individuals and record-keeping requirements for businesses
- requiring taxpayers who choose to file a tax return also to file returns for the previous four tax years
- removing the requirement for taxpayers to file a return merely because of their Working for Families entitlements
Secondly, there is a change proposed to Working for Families (WFF) entitlements for shareholder-employees. The Bill proposes to extend eligibility for the in-work tax credit to unpaid shareholder-employees of a close company. The Committee has recommended that the effective date of this provision be changed from 1 April 2012 to 1 April 2011. This will mean that a shareholder-employee in a company that made a loss in the 2012 income year will not need to have received a salary to be entitled to WFF assistance. The purpose of this change is to do away with the need to pay a $1 shareholder-salary in order to entitle the shareholder in a loss making company to claim WFF assistance.
The Bill has not yet been passed, but the effect will be retrospective and therefore you should consider not filing the 2012 return if you wish to avoid the $1 salary.
Thirdly, in relation to LTCs, the changes assist in calculating the investment a look-through owner has in the LTC if it has transitioned from a QC, and also simplifies the rules regarding guarantees and the amount able to be claimed in the owner's basis. A further change is to remove a working owner from the FBT rules which will reflect the overall intent of the legislation that the company be treated as a look-through vehicle.
How it affects you
As above, the changes are wide ranging and will impact on many taxpayers. If you have an interest in any of the matters covered, and you want to know what the changes will mean for you, contact your advisor.
We will keep you posted with the progress of this Bill. It is expected it will pass into law in July this year.
POINTS OF INTEREST…
Company registration fees will be $150 - down from $153.33 as at 1 August 2012.
The PPSR search fee for website users will change to $3, while the fee to register or renew a financing statement will change to $20.
The Charities Amendment Act (No 2) 2012 (No 43) received the Royal assent on 6 June 2012. It disestablishes the Charities Commission and reassigns functions and duties under the Charities Act 2005 to a Board and to the Chief Executive of the Department of Internal Affairs.
TO THE POINT…
"I've got an idea - an idea so smart that my head would explode if I even began to know what I'm talking about".
INTEREST DEDUCTIBILITY AND LTCS
Under taxation legislation, standard companies are able to claim a deduction for all interest incurred, irrespective of what the funds have been borrowed for, or how the funds have been applied.
Look-through companies (LTCs) have been excluded from the definition of company for taxation purposes so as to allow the tax advantage of look-through for income and expenses. One consequence of that is LTCs are not entitled to an automatic deduction for interest incurred.
Questions therefore arise as to when interest incurred by an LTC is deductible.
The IRD has issued many interpretation guidelines on the deductibility of interest for partnerships, limited partnerships, and other taxpayer types and has now been asked to do the same for LTCs.
As a result of questions that the IRD has been asked on this point, QB 12/08 and QB 12/09 were released on 13 June 2012.
QB 12/08 relates to the situation where an LTC borrows money on arm's-length terms to repay current account loans from its shareholders. The IRD has stated that interest will be deductible to the extent the borrowing replaces current account loans from shareholders that were used directly in the LTC's assessable or excluded income earning activity or business, provided the LTC is carrying on an income earning activity or business for the purpose of deriving assessable or excluded income both at the time the funds are borrowed and at the time interest on those funds is payable. Interest will not be deductible to the extent the borrowed funds are used to replace current year income.
QB 12/09 relates to the situation where an LTC borrows money to pay out a revaluation reserve to its shareholders. Interest is said not to be deductible in these circumstances because the borrowed money is making a payment out of an unrealised asset revaluation and is not replacing and repaying amounts tangibly invested in the LTC by the shareholders.
How it affects you
There are many taxation advantages to being an LTC in the right circumstances. An ability for shareholders to access "losses" directly being the major advantage.
Because the LTC is not a company, the general deductibility rules for expenditure will apply to expenses such as interest. It is therefore important to ensure that if a shareholder is to make a claim for an expense through the "look-through" taxation treatment, that the amount is first deductible to the LTC.
SHAMS AND GST
In an earlier article, we discussed the draft statement from the Inland Revenue Department (IRD) on GST shams. This has now been finalised and the final view is contained in an Interpretation Statement released on 14 June 2012. The main conclusions are that first, an allegation of sham is serious and is akin to an allegation of fraud. An allegation of sham is not to be made lightly, and a high standard of evidence is required to prove it.
Secondly, a sham exists where the parties' to the transaction documents did not intend to create the legal rights and obligations created by those documents, and intended to mislead third parties into considering they had created those legal rights and obligations. The parties intended either to create different rights and obligations to those recorded in the documents, or to create no legal rights or obligations at all.
Thirdly, it is the parties' subjective intentions, and not with the economic substance or commercial reality of the transaction that is important.
Fourthly, a sham can exist at the time the documents are created, but can also later become shams, when, for example, the parties agree to change the terms of their transaction, but leave the original documents standing so as to give the impression that those documents continue to accurately record the terms of their transaction.
Finally, if the court is satisfied that the allegation of sham is proven, the documents are disregarded to the extent they are shams. A document may be a sham in part and, in such cases, only that part of the document will be disregarded. The true arrangement between the parties is then given effect and the parties taxed accordingly. By contrast, if the court is satisfied that the documents are not shams, the parties are taxed in accordance with the legal rights and obligations created in those documents (except where s BG 1 or another anti-avoidance provision applies).
This guideline is said not to signal a change of approach by the IRD towards shams, but has been updated to take account of subsequent court decisions, including Ben Nevis Forestry Ventures Ltd v CIR  NZSC 115,  2 NZLR 289, and insert new discussion on the onus and standard of proof where sham is alleged in the tax law context.
How it affects you
Where a transaction is held to be a sham, or is considered tax avoidance, there can be significant penalties, including shortfall penalties of up to 150% or criminal prosecution. As always, speak to your advisor if you are concerned about any transactions.
POINTS OF INTEREST…
The IRD has said that "the abusive tax position penalty under s 141D does not apply automatically where there is a "tax avoidance arrangement".
The IRD has commenced sending out letters in relation to OM-IP investments where taxpayers have not fully disclosed their holdings in prior years but now have. Disclosure was required as the OM-IP investment funds are FIFs resident in a country (the Cook Islands) which does not have a Double Tax Agreement with New Zealand.
Excise duty on petrol is to increase by 2 cents a litre from 1 August 2012.
TO THE POINT…
"Children are a wonderful gift. They have an extraordinary capacity to see into the heart of things and to expose sham and humbug for what they are. "