The Government has introduced a Tax Bill including tax policy changes that were consulted on last year. These rules:

• Allow feasibility expenditure deductions. (Read our Taxmail here.) 
• Allow the accounting treatment to be followed for tax for leased plant and equipment when IFRS 16 is applied (Read our Taxmail here.)
• Allocate the total purchase price, for tax purposes, where the vendor and purchase have not agreed the allocation across different assets. (Read our Taxmail here.)
• Tax the sale of residential and business premises, where there is a regular pattern of buying and selling such land. (Read our Taxmail here.)
• Apply GST to outbound roaming services. (Read our Taxmail here.)

The Bill also contains a number of remedial items, including to the R&D tax credit rules.

(Note: the Taxmails cover the key policies consulted on, the Bill has differences, some of which we have highlighted below).

The Bill was due earlier this year but was understandably deferred due to the Government’s focus on COVID-19 (including responding through the tax system).

As a general comment, we welcome a return to “business as usual” tax policy, a reflection perhaps of some sense of normality resuming with the move to Alert Level 1 announced from midnight tonight. We comment below on the key policy changes in the Bill.

The Government’s announcement last year was welcome but high-level. The Bill confirms the broad parameters previously announced. It fleshes out matters of detail, including a legislative definition for “feasibility expenditure” that is broadly:

expenditure incurred in completing, creating or acquiring an asset (that would either be depreciable property or taxable on sale), if progress on the asset is abandoned prior to completion, creation or acquisition, and no tax deduction is otherwise allowed for those costs.

Such expenditure will be deductible over 5 years, starting from the year of abandonment. However, total expenditure in the year of $10,000 or less will be immediately deductible. The deduction will be clawed back if the abandoned project is subsequently reinstated. (This does not apply to the immediately deductible expenditure).

A key change to the effect of the feasibility rule is the reinstatement of commercial building depreciation from the 2020-21 tax year (see our Taxmail about that here). This is important as the feasibility expenditure proposals do not apply where the asset would have had a 0% tax depreciation rate on completion. This means feasibility costs relating to an abandoned commercial building project or acquisition will be deductible.

The rule only applies to qualifying expenditure incurred in the 2020-21 or later years. Any pre-2021 year capitalised costs will not become deductible if the project is abandoned in the 2020-21 year or later. 

The Bill gives effect to the announcement in December last year. IFRS 16 replaced the former lease accounting standard, for years beginning on or after 1 January 2019, and the tax rules have the same application.

As we noted at the time, while following accounting for tax seems attractive, certain tax adjustments will still be required (such as an adjustment to exclude land and buildings) making this less so. Also, as following accounting will have tax cashflow impacts, there will need to be a cost-benefit assessment – is the compliance saving better than the cost of any earlier tax payments? So, a case of user beware.

The Bill broadly follows the consultation document proposal. The clear onus is on parties to agree to, and follow for tax, an allocation in the sale and purchase documentation.

If no split is agreed, the vendor can determine the allocation. The allocation must not result in losses on disposal for the vendor. The vendor must notify Inland Revenue and the purchaser within two months of the change of ownership. (This is a change from the three-month timeframe proposed in the consultation document.) If that does not happen, the purchaser can determine the allocation.

The reinstatement of commercial building depreciation may reduce some disputes relating to the split between building structure (currently non-depreciable) and fitout items (which are depreciable), but not between the capital improvements and land.

There is a de minimis where an allocation has not been agreed, where parties do not have to follow the above rules. To qualify, the total purchase price must not be more than NZ$1 million and the purchaser’s total allocation to taxable property must not be more than NZ$100,000. Again, this fleshes out the consultation proposal, which was unclear on the de minimis level.

Inland Revenue can still challenge an allocation basis, if it considers it does not reflect market values. This remains an area of concern, particularly for high value transactions or where one of the parties is an exempt taxpayer. This and other questions we raised in our earlier Taxmail still apply. The legislation does not address these underlying, and what are in most cases key, commercial issues. 

The legislation follows consultation last year. The Government’s concern is that the carveouts from the residential and business premises exemptions require the same activity to be carried on in relation to the land for there to be a pattern. (It should be noted, however, that this is due to Inland Revenue’s current application of the law.) They also focus on a single person’s selling activities, ignoring their associates (such as their spouse/partner or a family trust).

The Bill proposes that any pattern of selling activity, with the focus on the regularity of sales rather than what is done while the land is held, will be sufficient for the residential and business premises exemptions to not apply. It also extends the test to groups of persons undertaking buying and selling activities together, if they all occupy the properties together as their residence (with special rules linking properties owned by a trust that is controlled by a group member).

A key concern is that this rule will be applied by Inland Revenue as a new rule for taxing a sale of land. A pattern of buying and selling is not sufficient to create a tax liability. The land being sold must still be land which is taxable on sale because it has, for example, been acquired for sale. The change is to limit the exemption for certain land sales which would be taxable. Our concern is that the change could be used as a basis to charge tax when it is not chargeable. 

The Bill:

• Applies 15% GST to mobile roaming services where a New Zealand mobile device is used overseas.
• “Clarifies” the credit note situation where GST was incorrectly charged on the original supply.

Mobile roaming

The change to mobile roaming is said to be consistent with OECD and EU approaches which tax a resident’s roaming charges. However, the rule is inconsistent with taxing “on the spot” services where they are consumed. It is clear that roaming services for a New Zealand resident can only be consumed outside New Zealand. Otherwise, there should be no roaming charge. The current zero-rating outcome is, therefore, appropriate. 

However, unlike the consultation document, the Bill proposes a symmetrical treatment.  Non-residents who roam in New Zealand will not be subject to GST. Those charges will be zero-rated, if provided by a New Zealand telecommunications provider. This is at least a more principled result than originally proposed.

The change is due to take effect 1 April 2022, which will allow some time for systems and processes to take account of the changes.

Credit Notes

We support the position for credit notes where GST has been incorrectly charged. However, this issue has arisen due to an Inland Revenue interpretation denying a GST deduction, which we (and we think many others) believe is, bluntly, not correct. That position is difficult to follow and does not attempt to make any sense of the GST rules.

Instead of accepting submissions on the correct interpretation, Officials have promoted a law change. (In the Regulatory Impact Statement in support of the law change, submissions opposing the interpretation are described as: “initial feedback that has been received supports the proposed policy change as it would align the law with common business practice.” That is not the case. The submissions were that the law was already consistent with common business practice.) The proposed change, in our view was, therefore, not necessary if a reasonable interpretation was adopted, freeing up valuable policy and legislative resource to address other matters. 

The Bill clarifies that:

• Costs incurred in creating prototypes will only be claimable if the prototype is intended solely for R&D purposes and the costs incurred are for core R&D. This confirms what we understand the policy position to always have been.
• Capitalised employee costs incurred in the creation of tangible assets will be eligible for the R&D tax credit, aligning the position with intangibles. That is supported as the distinction is arbitrary. However, we believe that the labour component of contractor costs should also be included, as there should be no distinction based on how businesses innovate. And the amendment should apply to wider than just labour costs on core R&D.