In a nutshell 2021 has been a story of two halves. Relative normality until…. 

The return of COVID

COVID’s re-emergence in the community has dominated the headlines, with the delta variant changing the way we live and work. And with a new variant spreading around the world, the global picture remains uncertain in 2022.  

The Government and Officials’ focus shifted accordingly. The 2020 COVID fiscal playbook was dusted off, with the wage subsidy and resurgence support payment making a reappearance. While the economic impacts of the recent lockdown are still unclear, the tax system is likely to play a pivotal role in how the Government looks to fills its COVID debt hole. 

A tax system caught in the housing spotlight

Rewinding to earlier in the year, the continued strength of the housing market had the Government reaching for the tax system as a solution in March. Its tax policy response, to tilt the market in favour of first home buyers, was:

  • extending the bright-line period for residential property acquired on or after 27 March 2021 from five to ten years 
  • denying interest deductions from 1 October 2021 for residential rental properties acquired on or after 27 March 2021, with deductions phased out by 1 April 2015 for pre-27 March properties
  • a time limited carve-out from both changes for “new build” properties.

We have reservations from a tax policy perspective. The impact, particularly of the new interest limitation rules, on housing affordability is unclear but not the additional complexity (or potential for adverse effects on the overall coherence of the tax system and unintended consequences). The proposed interest limitation rules are not simple, yet much of the target audience that will be expected to comply with them will be “mum and dad” investors. 

A landmark agreement on international tax

In July, over 130 countries including New Zealand signed up to the OECD’s “BEPS 2.0” Agreement which will change the international tax rules for large global multinationals.

Once in effect, the changes will impact both where and how much tax is paid by multinationals, including some New Zealand based ones, through a complex set of allocation rules (called “Pillar One” and “Pillar Two”). Of note is that the OECD’s timeline calls for these rules to be implemented in 2022, for application in 2023. So, watch this space!

“Business as usual” tax policy

In March, the Taxation (Annual Rates for 2020-21, Feasibility Expenditure and Remedial Matters) Bill was enacted into law. The highlights were:

  • a new Business Continuity Test for carrying forward company tax losses following a shareholding continuity breach, if there is no major change in business activities (measured by reference to the business’s assets, processes, suppliers and markets)
  • new deductibility rules for abandoned feasibility costs (i.e. expenditure incurred in creating, acquiring or completing an asset that would be depreciable or taxable) over five years and new purchase price allocation rules for vendors and purchasers (more detail on both these measures can be found here).

In September, the Taxation (Annual Rates for 2021-22, GST and Remedial Matters) Bill was introduced. This “liqourice allsorts” Tax Bill contains an assortment of GST (including updated GST tax invoice and related record keeping requirements) and other policy measures as well as a laundry list of remedial (and not so remedial) items. Equally important is what was missing initially but added subsequently to the September Tax Bill – the above mentioned residential interest limitation rules and new build definition.  

Remote working and cross-border workers

COVID has brought into sharp focus remote working arrangements, either by necessity or employee choice. Where these arrangements span different countries, this can give rise to tax consequences for both the employee (“cross-border workers”) and their (foreign) employer.

In late 2020, to the surprise of many (including us), Inland Revenue released draft operational guidance indicating non-resident employers will only have New Zealand employer tax obligations if they have sufficient presence in New Zealand. That operational position has now been confirmed. In addition, legislative changes are likely in 2022 to codify a “significant presence” test, following consultation on this and other cross-border worker tax issues in October. 

The year ahead

2022 is looking like another packed year. Here are some things to watch out for:

  • the September Tax Bill is expected to be reported back from Select Committee early next year, for enactment by 31 March 2022. We don’t expect any material changes.
  • new domestic trust disclosure requirements apply from the 2021-22 tax year onwards. These will require trustees to prepare trust financial statements to minimum Inland Revenue-prescribed standards, as well as provide additional information on settlors (such as the value of settlements) and beneficiaries (e.g. trust distributions, both taxable and non-taxable) as part of tax return filings.    
  • Inland Revenue’s High Wealth Individual research project, which started in late 2021, will continue during 2022. This targets approximately 400 individuals, their families, and related entities and is intended to “fill a gap in Inland Revenue’s knowledge of effective tax rates in relation to economic measures of income, particularly for high-wealth individuals”. The results of the research are not expected to be made public until 2023. 

The Government’s tax policy work programme for 2021-22 is also worth a look for what might be on the agenda in 2022. Some of the items we expect to make the cut next year include:

  • a new “Tax Principles Act”, establishing a reporting framework and a set of principles to measure tax system fairness against
  • Inland Revenue’s first long-term insights briefing, focused on tax, investment and productivity (you can read our submission on the initial scoping document here).
  • the development of a new social unemployment insurance scheme, announced in Budget 2021, and consideration of the tax system’s interface with the welfare system, as part of welfare reform
  • consultation on integrity measures to support the new 39% personal tax rate. While the trust tax rate remaining at 33% has received the most attention (and is the focus of the enhanced trust disclosure requirements above), the need for further policy work in this area was signaled by Officials’ last year
  • thinking into what the future tax administration could look like, leveraging Inland Revenue’s new IT and data capability due to Business Transformation. 

And finally, a fond farewell and season’s greetings

Regular readers will be aware that over many years, John Cantin has been a regular contributor to Taxmail. John started his career at KPMG in 1986 and has been an integral part of the KPMG tax team and, in particular, the tax policy team. John’s contribution was recognised in 2019, when he was awarded the Meritorious Service Award by Chartered Accountants Australia and New Zealand for his services to the tax profession.

John retires as a senior partner of KPMG in New Zealand at the end of 2021 and, on behalf of KPMG, we wish John all the best for a well-earned retirement. His keen insight and policy thinking will be missed (although we expect he will still stay involved in tax and tax policy in the years to come). 

Thanks also to all our readers for taking the time to read Taxmail and offering their feedback. We wish you all the best for the holiday season and a happy, and safe, new year.