“Liquorice allsorts” tax bill introduced

Yesterday the Government tabled the Taxation (Annual Rates for 2021-22, GST and Remedial Matters) Bill.

The Bill contains over one hundred policy and remedial amendments, although that latter classification is more appropriate for some changes than others. We have not attempted to cover them all. Below is a summary of some of the key changes. Not all will be relevant to you or your business but, given the range, it is likely that some may. That's why it is a “liquorice allsorts” type of Tax Bill. It has something for everyone.

As always, with draft tax legislation, the devil is inevitably in the detail. And at over 100 pages it will take some time to work through.  

And there is likely more to come for this Bill. In June, the Government consulted on two aspects of its March housing tax changes – the design of interest limitation rules for residential property and the “new build” exemption. We expect draft legislation on these design features will be added to the Bill later this month. The interest limitation rules apply from 1 October this year. 

The inclusion of GST in the title means that it is a key focus. The Bill:

• confirms that “cryptocurrency assets” (a new tax definition is proposed) will largely be removed from being subject to GST
• confirms the New Zealand domestic leg of international transportation services can be zero-rated
• allows all taxpayers to agree a GST apportionment methodology with Inland Revenue (currently, this is only available for larger taxpayers with annual sales over $24m). The method must fairly reflect the taxpayer’s taxable activity.
• provides a fairer outcome when assets are disposed of, when they have been used to make both taxable and exempt supplies
• contains extensive changes to modernise and update the GST tax invoice and related record-keeping requirements to better reflect modern systems and practice. These changes are quite detailed but, in general, they remove most of the prescriptive requirements and allow for much greater flexibility. There will be some education needed for businesses and their accounts team as, once the changes are made, the format of tax invoices as we know them may change. However, these changes should not affect the GST payable/receivable.

These changes were largely signalled in an issues paper released in February 2020 (yes, just before COVID hit New Zealand). There are a number of other proposed changes raised in that issues paper still under active consideration. These are some of the more challenging issues. They include the GST treatment of insurance and managed funds and further changes to the apportionment rules. 

The Bill contains an assortment of income tax changes, including:

• confirming that cryptocurrency assets are (generally) not financial arrangements for tax purposes
• allowing tax pooling to be used for tax liabilities arising from a voluntary disclosure for a greater range of tax types (including PAYE, FBT, GST, and NRWT in addition to income tax and RWT currently), if certain other conditions are met. This will allow reductions in use of money interest.
• fixes to the “Fair Dividend Rate foreign exchange hedging rules” for PIE managed funds. These are technical changes but are intended to make these rules more workable and, therefore, able to be applied more generally
• clarifying that the related party debt remission rules apply to any type of remission (not only debt forgiveness); will result in an Available Subscribed Capital (ASC) uplift for a company debtor without requiring a debt capitalisation; and extending the rule to cover remission of debt owed by a New Zealand branch within a wholly-owned group
• permitting imputation credit account (ICA) entries for a transfer of tax from a previous period to be made on the transfer request date, rather than the effective date of the transfer (subject to certain conditions). This should mean that amendments to prior ICA returns are not required.
• various remedials to the “main home” exemption in the residential property bright-line rules to confirm construction taking longer than 12 months is not counted as a potential taxable period and to clarify the intended operation of the 12-month non-taxable buffer
• allowing foreign exchange losses on foreign currency residential mortgages to be offset against future foreign exchange gains. (Currently, this is prevented due to rental loss ring-fencing).
• amending the hybrid mismatch tax rules to deal with imported mismatches. These are likely to be of narrower application but, for those in the rules, it will be important to determine their effect.
• amendments which deal with the capital gain, dividend, and ASC consequences of share-for-share transactions. These rules will affect mergers and internal restructurings.  The positive and negative aspects of these changes should be worked through.
• many administrative rule changes which clarify/amend the actions of Inland Revenue. These appear to be largely “tidy up” changes. However, they do need to be considered.

And there is one other amendment that deserves a special mention. The Bill proposes that fax will be removed as an approved method of communication with Inland Revenue, marking the end of an era.