As another year draws to a close, we reflect on some of the key tax developments during 2022 and look ahead to 2023.
2021 Tax Bill enacted
In March, the Government passed the Taxation (Annual Rates for 2021-22, GST and Remedial Matters) Bill, introduced in September of 2021.
The main (and controversial) change in that Tax Bill was the enactment of residential interest deductibility restrictions, announced in early 2021.
That Tax Bill also introduced a number of GST changes, including changes to key terminology (e.g. replacing “tax invoice” with “taxable supply information”), scope, content, and processes (such as replacing the need to issue credit/debit notes with “supply correction information”). A late change was to shift out the application date to 1 April 2023, to provide more time for those impacted to understand and implement the changes.
Disappointingly, a theme of both the residential interest limitation and GST changes has been the need for ongoing remedial amendments. This, unfortunately, has been our experience with a number of recent law changes and, in our view, reflects the haste with which policy development and legislation has been rushed through. We hope 2023 breaks this cycle.
Company tax and dividend integrity proposals – a temporary reprieve?
Also in March, the Government released a discussion document containing proposals to:
- Tax shares sales as a dividend to the extent of any undistributed retained earnings; and
- Change features of the personal services attribution rule (which requires attribution of a company’s income to shareholders), to widen its application.
This was in response to concerns that companies were being used to avoid the 39% tax rate.
However, in response to concerns around the wide scope of the share sale proposal in particular (one of the options was for it to apply to both third party and related party share sales) and tight implementation timeline (originally, legislation was intended for introduction in August 2022 for application from 1 April 2023), Officials recommended the changes not proceed for now. However, this is likely to be a temporary reprieve.
Backlash on fund fees GST proposal
The tax headlines in August/September were dominated by the Government’s U-Turn on applying GST to certain managed fund fees.
Originally included in the Taxation (Annual Rates for 2022-23, Platform Economy, and Remedial Matters) Bill, the proposal was to apply GST in full to all fund fees, including fees charged to investors in KiwiSaver schemes. Fund and investment management fees charged to KiwiSaver schemes are currently GST exempt while, for non-KiwiSaver saving schemes, typically only 10 percent of such fees are subject to GST.
The change was initially justified on the basis of creating a level playing field across different funds. However, in response to a growing public and funds industry backlash (including suggestions the additional tax costs would be passed on to investors), the Government quickly announced that the proposal would be withdrawn. (And as a consequence, the original Tax Bill introduced at the end of August was withdrawn and re-introduced on 8 September 2022).
This does leave open the question of what the GST treatment should be going forward. Given the reaction, it seems unlikely that there will be any political appetite to revisit this issue in future.
September 2022 Tax Bill changes
While the initial headlines were dominated by GST on fund fees, the re-introduced Taxation (Annual Rates for 2022-23, Platform Economy, and Remedial Matters) Bill (the “September 2022 Tax Bill”) contains an assortment of changes:
- Introducing an exemption from FBT for employer-subsidised public transport fares (this was a recommendation of the last Tax Working Group)
- Changes to the domestic law tax rules for companies that become non-resident under a Double Tax Agreement, including various integrity measures (such as application of the corporate migration rules).
- Changes to employer tax obligations for non-resident employers with employees in New Zealand and to non-resident contractor tax.
- New information reporting requirements for digital platform operators.
- Requiring New Zealand based-electronic marketplaces to account for GST on certain sales, rather than the underlying suppliers.
- A new Build-to-Rent exemption from the residential interest limitation rules.
The September 2022 Tax Bill is currently before the Finance and Expenditure Committee, with the Committee’s report back on public submissions due in early March 2023. It is expected to be enacted before April 2023.
Further information on the September 2022 Tax Bill is available here.
BEPS 2.0 – a break through?
On 16 December 2022, it was announced that the European Union had unanimously approved the Global Anti-Base Erosion (“GloBE”) tax rules developed by the OECD as part of Phase 2 of its Base Erosion and Profit Shifting (“BEPS 2.0”) project. These rules are also known as “Pillar 2”.
The GloBE/Pillar 2 rules seek to impose a minimum 15% tax on the excess income (i.e. income in excess of a routine return on assets and employees) of global multinationals. Over 130 countries, including New Zealand, had agreed in principle in late 2021 to implement the GloBE/Pillar 2 rules.
Earlier this year, Inland Revenue released a consultation document on whether New Zealand should adopt the GloBE/Pillar 2 rules and, if so, how such rules should be incorporated into domestic law.
We expect the Government to introduce draft legislation to enable the GloBE/Pillar 2 rules to be implemented sometime in 2023. The actual start date is likely to depend on global developments, such as adoption by a critical mass of countries.
Progress on Pillar 1, the development of special taxing rules for so-called user (or market) jurisdictions over the largest multinationals’ residual profits, remains less clear.
The final say on Frucor
On 30 September, the Supreme Court released its decision in favour of the Commissioner of Inland Revenue in Frucor Suntory New Zealand Limited v Commissioner of Inland Revenue  NZSC 113.
At issue was whether certain structured financing arrangements entered into by Frucor involving related parties in the early 2000s were tax avoidance arrangements and whether shortfall penalties should apply for taking an abusive tax position. The Court of Appeal had previously ruled that while the transactions were tax avoidance arrangements, shortfall penalties should not apply. While Frucor appealed on the substantive point, Inland Revenue cross-appealed the non-application of shortfall penalties.
The Supreme Court dismissed Frucor’s appeal and allowed Inland Revenue's cross-appeal.
While the facts at issue may be unique to the Frucor arrangements, the Supreme Court's approach in finding the arrangements to be tax avoidance should be of general interest, in particular the Court’s focus on economic substance.
Moreover, the Court majority’s approach allowing shortfall penalties on appeal (notwithstanding the Court of Appeal’s view, the High Court judgement in favour of Frucor and a strong dissenting judgement by Supreme Court Justice Glazebrook) is potentially significant. As a starting point, taxpayers should consider binding tax rulings (or indicative views) to mitigate risk.
Inland Revenue is expected to release an updated draft of its tax avoidance interpretation statement incorporating the Supreme Court’s decision in Frucor in the new year.
New Inland Revenue information requirements and tax governance
In November, Inland Revenue notified Tax Administration (Regular Collection of Bulk Data) Regulations 2022. This is to support 6-monthly information collection from payment service providers in relation to bulk transactions data from merchants. The new information collection rules apply from 1 April 2023. Further information is available here.
Along with the new trust disclosure requirements, the new reporting framework for digital platform operators in the September Tax Bill, and consultation on a new OECD crypto-asset reporting framework, Inland Revenue is ramping up its information collection. No doubt this will also enable better use of Inland Revenue’s technology-based compliance analytics.
In October, Inland Revenue selected a further subset of taxpayers for its tax governance questionnaire (following the inaugural questionnaire in 2021). The questions are the same as last year:
• does your business have a documented tax governance and risk management framework;
• are tax processes/systems regularly updated and tested for effectiveness; and
• is there appropriate Board-level consideration of tax matters and risk?
These questions are relevant for all businesses, not just those targeted as part of the questionnaire. If the answer to any (or all) of these questions is no, now is the time to take action.
2023 – a preview
Looking ahead to 2023, the elephant in the room is the general election.
We anticipate that tax is likely to feature prominently in the election policy debate (albeit the forecast deterioration in economic conditions during 2023 may mean there is less room for manoeuvre compared to the outlook from a few months ago).
In 2020 we published Repairing Government Finances: Some Taxing Options to stimulate debate on how to address the fiscal hole created by COVID-related Government spending, including through the tax system. The fiscal hangover remains, and the tax options are still worth debating. We await the different parties’ election (including tax) policies.
The tax policy landscape will no doubt remain crowded in 2023. In particular, we look forward to:
- The changes recommend by the Finance and Expenditure Committee in relation to the September 2022 Tax Bill, in response to public submissions.
- An early 2023 Tax Bill (content TBC)
- Seeing what, if anything, arises from the 2022 dividend integrity proposals that have been parked.
- The results of Inland Revenue’s research into the effective tax rates paid by High-Wealth Individuals.
- The Tax Principles Act, which was intended to be consulted on this year, but has been delayed.
Our thanks 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.