A Week in Review
Multiple QWBA’s issued…
While five were issued, in essence from a topical perspective, there are only three, as two consider the same tax issues as two of the other releases, but on the basis that the employer took out the insurance policy as opposed to the employee.
QB 18/02 and QB 18/03 consider the income tax issues associated with term life insurance policies, whereas QB 18/04 and QB 18/05 deal with personal sickness/accident insurance policies. All four QWBA’s are in essence re-releases of the 2015 versions, but updated to account for recent amendments to ss CE 5 and CX 16 of ITA07.
Where a term life insurance policy is taken out by the employee, with the premiums then paid by the employer (QB 18/02), the associated income tax consequences (and nothing of a surprise in my view), are a tax deduction for the cost of the premiums for the employer (assuming the associated salary cost is deductible), the premium treated as part of salary/wages for the employee subject to PAYE, and any eventual pay-out under the policy will not be taxable income to the recipient. Under an alternative scenario, where the employer instead takes out the same policy (QB 18/03), the only difference in tax treatment, is that the premiums paid are subject to FBT instead of PAYE. The key element, is who has the legal obligation to make payment, with the insurance company? In the former case, it was the employee, so by the employer paying that obligation on the employee’s behalf, there is “expenditure on account of the employee” which is deemed employment income under s. CE 1(1)(b) – therefore subject to PAYE. However in the latter case, the employer directly has the obligation, so with the employee economically benefiting from having the insurance coverage, not having to pay premiums themselves, s. CX 16 (payment of a specified insurance premium) applies to subject the premiums to FBT.
Somewhat different with its income tax consequences, are insurance premiums relating to income protection and/or sickness/accident policies taken out by the employee, with the premium paid by the employer (QB 18/04). While the 100% tax deduction for the employer should be the same, apportionment issues may apply with respect to the tax treatment for the employee.
The portion of any premium that relates to income protection coverage, will usually not be subject to PAYE. This is due to the s. CW 17 exempt income exclusion, which excludes from the definition of “expenditure on account of the employee”, any expenditure where the employee, had they paid the amount themselves, would have been allowed a deduction if the employment limitation (s. DA 2(4)) did not exist. Many of you will be aware, that one of the few tax deductions employees can still claim in a tax return, are income protection insurance premiums, on the basis that any subsequent pay-out will be assessable income.
Similar to term life insurance premiums, any amount paid that relates to sickness/accident insurance coverage, will be subject to PAYE.
The taxation consequences with respect to any subsequent pay-out are also a little more complex than those for term life insurances, although only in respect of sickness/accident policies. Firstly, s. CE 11 captures as income, any amount derived by an employee under a policy of income protection insurance – pretty black and white one would suggest. However, taxability of sickness/accident policy pay-outs will depend on whether the receipt is considered to be income under ordinary concepts (s. CA 1(2)). In this respect, if the amount received is paid by a friendly society (s. CW 34(2)(a)) or it is not calculated according to loss of earnings (s. CW 34(2)(c)), it will not be income under ordinary concepts and therefore will be exempt income not subject to tax.
Alternating the above scenario to one where the employer has taken out the insurance policies (QB 18/05), differs the previous answer in respect of the employee tax effects, to one where no premium will be subject to PAYE, and instead the premiums will be subject to FBT, unless the employer has the liability to pay (or contribute to) the income protection premiums, with a subsequent pay-out to the employee taxable, in which case neither PAYE or FBT will apply.
The taxation consequences with respect to the employer’s tax deduction and taxability of subsequent claims in the employee’s hands, remain as per QB 18/04.
The final QWBA (QB 18/06) relates to the question of whether a GST registered person can issue a combined tax invoice and credit/debit note. The answer from the Commissioner’s perspective – yes if different supplies of goods and services are involved – the tax invoice relating to one supply, while the credit/debit note relates to a previous different supply. Otherwise no, two separate documents are required to be issued.
Bill received second reading…
Further to last week’s update re the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Bill, particularly the inclusion of a SOP to increase the Bright-line period from two to five years, the Bill has now had its second reading, and one would expect therefore, that’s its third and final reading and enactment is imminent.
Reportable Jurisdictions list update…
Due to having recently completed their automatic exchange of information (AEOI) implementations, Croatia and Indonesia have been added to NZ’s list of reportable jurisdictions – those territories to which IR, for reporting periods commencing on or after 1st July 2017, may provide certain information on non-residents that has been received by IR from financial institutions, in accordance with the CRS applied standard.
TWG Speech…
The Hon Sir Michael Cullen, as Chair of the Tax Working Group, gave a speech (complete with dry humour) to the NZ International Fiscal Association Conference in Queenstown. It can be located here if you would like to read it yourself – https://taxworkinggroup.govt.nz/documents/twg-spch-2018-03-02-purpose-principlespossibilities.pdf.
Sir Michael covered five aspects of the TWG in his speech, however most of it was dedicated to the soon to be released (14th March) Submissions Background Paper. That document will cover the main characteristics of the present tax system, commenting on future challenges likely to arise and possible changes to the present system to accommodate these challenges. Submissions will be due by the end of April, and an interim report to the Ministers of Finance and Revenue is due in September. Naturally I will endeavour to keep you updated of any items of interest as they come across my desk.
Richard Ashby BBus, CA, CPA PARTNER
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