Bell Gully tax team members Partner Willy Sussman and Senior Solicitors Hugh Magee and Toa Vulangi summarise 2018’s tax highlights, including three significant cases where Bell Gully won for its clients. The writers then discuss what to expect in the new year, tax-wise.
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Frucor: tax avoidance
The Commissioner had contended that the use of intra-group convertible note financing to fund New Zealand activities was a tax avoidance arrangement and sought to deny a portion of the interest deductions claimed by the issuer of the note in New Zealand.
The High Court found in favour of the taxpayer confirming that the deductions claimed were within Parliament’s contemplation as evidenced by core elements of New Zealand’s international tax framework, including the thin capitalisation regime and the transfer pricing rules.
Canterbury Jockey Club: GST ‘suppliers’, ‘recipients’ and ‘consideration’
Arrangements resulting in who earned stake money were amended by the rules of racing. Under the amended rules, consideration (in the form of stakes) became payable by clubs to owners, jockey and trainers. As a consequence, GST ceased being a non-recoverable cost, as had been the case when jockeys and trainers charged non GST-registered owners.
In deciding in favour of the taxpayer the court considered cornerstone GST concepts.
Chatfield: cross-border information requests
Cross-border reporting of tax information started in 2018. Under the “common reporting standard” national tax authorities exchange with each other financial information concerning persons connected with the other jurisdiction.
For example, Australia may advise the IRD that a New Zealand taxpayer has a bank account in Australia and so the IRD will be able to check that interest on the account is declared in a New Zealand tax return.
The Chatfield case predates the start of the common reporting standard system. The High Court held that the IRD had not properly implemented a request for taxpayer information from another jurisdiction, on this occasion South Korea. The Court thought that the IRD had not fully evaluated the legality of the South Korean request. The case emphasises that when the IRD receives requests for information from foreign tax authorities it must first satisfy itself that the request is authorised by the relevant double tax agreement or other international agreement.
Law changes
BEPS changes
2018 saw the enactment of the so-called “BEPS Bill”, resulting in the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018. That Act introduced a number of significant income tax related changes, most of which took effect on 1 July 2018:
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- New permanent establishment (PE) avoidance rule: certain non-residents can now be deemed to have a PE in New Zealand in relation to certain “facilitated supplies” into New Zealand which have a tax avoidance purpose or effect, overriding the effect of any double tax agreement (DTA).
- New source rules: certain income attributable to a PE as well as income that New Zealand has a right to tax under a DTA are now (somewhat counterintuitively) deemed to have a source in New Zealand for income tax purposes.
- New hybrid regime: new subpart FH of the Income Tax Act 2007 is largely based on the OECD’s recommendations to counter the tax effects of certain hybrid financial instruments and entities and branch mismatch arrangements.
- Transfer pricing-related changes: the transfer pricing rules must now be applied in accordance with the OECD’s 2017 transfer pricing guidelines, with economic substance and conduct of parties forming part of a transfer pricing analysis. Certain administrative changes, such as increasing the statutory time bar for transfer pricing matters to seven years in some circumstances, have also been introduced.
- Restricted transfer pricing rules: cross-border related party loans with an accompanying high BEPS risk must now be priced based on a specified credit rating and ignoring “exotic” features applying to the loans.
MLI ratified and brought into effect
The OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the MLI), which applies to modify the terms of DTAs to which signatories to the MLI are parties, was ratified and took effect from 1 October 2018. Some of New Zealand’s key trading partners are signatories to the MLI, although the United States is a notable omission.
Bright-line for gains on the sale of residential property – extended to five years
The bright-line test has been extended from two years to five years. A disposal of residential land acquired from 29 March 2018 within five years of acquisition will be taxable under the bright line test unless it is a main home. Residential land acquired before 29 March 2018 continues to be subject to the old two year bright line test.
New rules for employee share schemes
The tax rules for employee share schemes have been overhauled. Under the new regime, an employee will be taxed on a share scheme benefit they receive on the “share scheme taxing date”, that date effectively being the point when the employee holds the shares on the same terms as non-employee shareholders.
The new rules apply to all share scheme benefits granted from 29 September 2018, with transitional rules potentially applying to benefits granted between 12 May 2016 (the date the new rules were announced) and 29 September 2018. The regime for tax exempt share schemes has been retained, although some of the relevant criteria have been relaxed.
‘Foreign buyer ban’ for residential land
On 22 October 2018, the so-called ‘foreign buyer ban’ rules came into effect. The new rules have brought residential land (as classified under the local district valuation roll) into the regime requiring overseas people to get consent from the Overseas Investment Office before acquiring such land. The new rules also provide concessionary pathways for overseas people’s applications to be consented where they are genuine migrants, increasing the New Zealand housing stock or using the land in a business for non-residential purposes. Perhaps not surprisingly, buyers who spend sufficient time in New Zealand will no longer be ‘foreign’ – but that may also have tax consequences.
What does 2019 have in store?
GST on low-value imports
An omnibus tax bill introduced to Parliament on 5 December 2018 proposes to introduce a so-called “Amazon tax”. This will require offshore sellers who deliver their sales to buyers in New Zealand whose sales are $60k or more to register and charge GST on those sales. Only end users’ purchases are subject to GST and count towards the $60k.
Ring-fencing of rental property losses
The same omnibus tax bill proposes that tax losses on residential rental properties (other than the taxpayer’s home – they may for example have flatmates) will no longer be able to set off against the taxpayer’s other income (e.g. salary or wages). It is proposed the rules would take effect from the start of the 2019 income year (1 April 2019 for those with a standard tax balance date).
A capital gains tax?
In its September Interim Report, the Tax Working Group discussed two alternative methods for taxing capital gains:
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- A traditional capital gains tax (CGT) model which taxes a gain on disposal or deemed disposal of an asset.
- Applying an annual risk-free nominal rate of return to capital assets to ascertain a taxpayer’s gain, similar in principle to the “fair dividend rate” method which can apply to foreign investment fund interests.
We expect that at least some members of the Tax Working Group will recommend introduction of a CGT based on one of these models when the Final Report due in January 2019 is issued.
Purchase price allocation
The Government’s tax policy work programme for 2018-19 includes work on reforming purchase price allocations for business sales. Inland Revenue is concerned that vendors and purchasers are adopting different valuations for the assets included in those sales. We expect Inland Revenue to propose reform in this area during 2019.
Changes to individual income tax reporting
An omnibus tax bill – the Taxation (Annual Rates for 2018-2019, Modernising Tax Administration, and Remedial Matters) Bill – is presently in the Select Committee stage. The bill proposes significant changes to the administration of individuals’ income tax, intended to simplify year-end income tax filing obligations and ensure that more appropriate withholding rates are applied to income during the year.
Current filing mechanisms, such as personal tax summaries and IR3 forms, will be replaced by a pre-populated account that includes all income information the IRD holds about the individual. Only those who earn income or have deductions that IRD does not already know about will be required to provide further information to the IRD.
Research and development tax credits
The Taxation (Research and Development Tax Credits) Bill is presently before Select Committee and proposes a new research and development tax credit. The tax credit will replace the “Growth Grants” that are presently administered by Callaghan Innovation.
Please contact the authors if you have any queries in relation to this article.
Bell Gully Partner Willy Sussman has over 30 years’ experience and is New Zealand’s only specialist GST lawyer. Willy has advised clients on all aspects of GST and has successfully lobbied for changes to the GST law affecting the oil and gas, telecommunication, bloodstock, air transportation, freight, land development, importation and film industries. He regularly provides second opinions for clients and provides expert evidence in GST disputes. In his customs and excise practice, Willy advises a broad range of clients in the oil and gas, clothing, wines and spirits, tobacco, power generation and IT sectors. Willy also leads the firm’s Private Client and Immigration team and he has assisted many of New Zealand’s most notable new migrants to obtain permanent residence in New Zealand and to ensure that their tax affairs are in order. His team also assists corporates bringing staff to New Zealand on a temporary basis. Contact Willy at willy.sussman@bellgully.com or connect via LinkedIn.
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Hugh Magee is a Senior Solicitor at Bell Gully. Contact Hugh at hugh.magee@bellgully.com or connect via LinkedIn.
Toa Vulangi is a Senior Solicitor at Bell Gully. Contact Toa at toa.vulangi@bellgully.com or connect via LinkedIn.
