A Week in Review ; Monday, 3 September 2018

Is Your Tax Debt Out of Control?
If the answer is yes, then IR’s recently released SPS 18/04 may be of assistance to you. The topic
is the Options for Relief from Tax Debt, and outlined is the Commissioner’s practice
when it comes to considering the options for removing or deferring the obligation to pay tax,
interest and/or penalties.

In summary, the Commissioner can exercise her discretion to:
• Collect amounts due over time (instalment arrangement), not collect amounts due (write off)
or a combination of the two. Usually a write off will occur where collection of the debt would
place the person in “serious hardship”.
• Write off amounts considered either irrecoverable or the collection of will be an inefficient
use of resources.
• Remit penalties where event/circumstance leading to the imposition was beyond the
persons control, however usually with the requirement the person has corrected the failure to
comply as soon as practicable.
• Remit interest or certain penalties where to do so would be consistent with her duty to
collect the highest net revenue over time.
When considering whether to make an application on the basis of “serious hardship”,
there are two important elements to understand. Firstly that the Commissioner must apply
a two-step process to the application, step 1 – is there in fact serious hardship? –
determined by legislative criteria and must ignore the persons tax compliance record or their
ability to maintain entertainment/social activities – and if yes, then step 2 is to determine
what relief, if any, should be granted? – where tax obligation compliance will be
considered plus the 9 factors listed at the end of SPS 18/04. Secondly, that only natural
persons can be considered under the “serious hardship” provisions.
Being pro-active can also be advantageous to your late payment penalty exposures, particularly when
you know in advance that you are unlikely to be able to meet a pending tax payment obligation by
its due date. If you apply for financial relief prior to the due date and have that relief granted,
then only a 1% late payment penalty will apply (no 4% 7 days later or 1% monthly). However interest
will always be applied as usual (at least tax deductible though whereas penalties are not).
A few other key takeaways from SPS 18/04:
• Instalment arrangements can be for periods up to 3 years usually (although no legislated
timeframe);

• GST arrangement requests can be made via MyIR, where you can instantly review a
proposed arrangements forecasted instalment amounts and receive an automatic acceptance
notification – your application must exceed the minimum payment criteria
($50wk/$100fnt/$200mth) and less than 3 years repayment period, to be likely to succeed;
• Tax losses and imputation credits are usually forfeited to some extent if a tax
debt write off application is granted; and,
• If things are really bad, the “no asset procedure” – one off process providing a fresh start
to natural persons with debts from $1,000 to $47,000 as alternative to bankruptcy.
Administered by NZ Insolvency & Trustee Service and at completion of process, IR must
write off the tax debt as irrecoverable.
SPS 18/04 applies with respect to relief considerations made post 22nd August 2018.

Paying Directors Fees to Non-Residents?
IR has released a draft interpretation statement which considers payments made to non-resident
directors, and whether those payments may be subject to schedular withholding tax.
The first question to be answered, is whether the contracted party to provide the directorship
services is an individual or an entity. While our Companies Act does require the person holding the
office of director to be a natural person, the legislation does not however prevent the NZ company
contracting with an “entity” to provide the required directorship services.
Where the non-resident is an individual, the director fees will always be considered to have a NZ
source, and consequently subject to schedular withholding, unless a particular exclusion applies.
Where the contracted party is a non-resident entity however, then unless that entity has a NZ
permanent establishment (PE), the director fees will not be considered to have a NZ source and
consequently will be outside of the schedular withholding regime.

The exclusion considerations include firstly whether the contracting party will meet the definition
of being a non-resident contractor, and if so, whether the 92 day presence or <$15k annual payment
carve-outs may apply. It should be noted here, that unless the directorship services are to be
performed in NZ, it is unlikely that the non-resident contractor definition will be satisfied. For
a non-resident individual under this scenario, the only likely exclusion from schedular withholding
therefore, will be where they have obtained and hold a valid certificate of exemption.
Once you have determined that schedular withholding should apply, you should obtain a completed
IR330C from the contracting party. Where this is not completed, you are obligated to deduct at a
45% withholding rate. Otherwise the default withholding rate is 33% for directors fees, although
this can be a lesser rate if the non-resident has elected their own rate (at least 15%) or they
have obtained a special rate certificate (<15%) from IR. Note that the deduction should be made
from the amount payable to the contracting party net of any GST and reimbursement payments.
The deadline should you wish to comment on draft PUB00302 is 5th October 2018.

Ruling on Bad Debt Write Offs Release
BR PUB 18/07 is essentially an update and reissue of BR PUB 05/01, providing the Commissioner’s
views of when a debt will be considered bad for both income tax and GST purposes, and when it will
be considered to have been written off by the taxpayer, which will usually govern the timing of the
write off’s tax treatment.

With respect to determining whether a debt is in fact “bad”, the reasonably prudent commercial
person test continues as the guiding principle to be applied. Under this test, the question is
whether such a person would conclude that there is no reasonable likelihood that the debt will be
paid in whole or in part by the debtor. In this regard, a debt will not be “bad” when its payment
is merely doubtful, or when the amount payable is still in dispute between the parties.
Factors that may assist in concluding a debt is bad include length of time outstanding, collection
efforts to date, other known information about the debtor, debtor untraceable or the debt has
become statute barred. Naturally, the onus of proof with defending the tax position taken in
relation to the debt and recognising an amount as bad, rests with the taxpayer.

Having established the debt is “bad”, the timing of the write off will be determined in accordance
with the nature of the record keeping systems of the taxpayer, in all cases requiring
some physical act of an appropriately authorised person – for example, in a computer based
system, an appropriate entry made recording the debt as written off.
The physical write off of the debt must occur prior to the end of the relevant income year or GST
return period for which the bad debt claim is made, and evidence of back-dating of the debt write
off will not be permitted by the Commissioner if discovered.
The Ruling is to apply for an indefinite period commencing 1st September 2018.

Personal Attribution Rules IS Finalised
IR has issued its finalised version of an interpretation statement on the rules surrounding the
attribution of personal services income (“PSI”) – IS 18/03. For those of you who may not be aware
of the rules, essentially it applies once certain thresholds are exceeded, when an individual
(the working person), who performs personal services, is associated with an entity (the
associated entity) that provides personal services to a third person (the buyer).
The threshold test can basically be called the 80% rule – earn 80% or more of PSI from one buyer
(includes their associates) and do 80% or more of the work yourself (including your
relatives) and do not use “substantial business assets” for earning the PSI, then where your
net income for the year would exceed $70,000 if including the PSI attribution, you potentially have an attribution issue. The exemptions
from the rules are limited, the prime one being where the amount of PSI to be attributed is less
than $5,000.

The associated entity does not have to be a company, the rules having equal  application to trust and partnership arrangements.
Whether the associated entity is considered to use substantial business assets to derive the PSI,
is determined by application of a threshold test, being the lesser of depreciable property costing
$75,000 or at least 25% of the entities PSI for the relevant income year. Note the private use of
assets qualifications here however, to ensure you are still entitled to claim the carve-out.
As a final note, the rules are an annual test, so while attribution may apply one income year, it
may not the next, and so on.

BEPS Guidance – Have Your Say
For those of you who follow BEPS (Base Erosion Profit Shifting), you will be aware of the
legislative changes enacted in June 2018, containing various measures to counter BEPS
strategies used by multi-national enterprises – artificially high interest rates, PE avoidance,
hybrid mismatch arrangements etc.
Further to the new legislation passing, IR has issued draft guidance documentation covering the new
rules on interest limitation, hybrid mismatch arrangements, transfer pricing, permanent
establishment avoidance and administrative measures.
Public feedback is now being sought on the guidance material, and should you wish to make a
submission, the closing date is 28th September 2018, with plans to issue the finalised version
early in 2019.

 

GST Zero-rating of Land Related Services
Effective from 1st April 2017, were amendments to the GST legislation (s.11A(1)(e) & (k)) to
clarify when a NZ GST registered supplier of services related to land (both within and outside NZ)
could zero-rate the supply. Critical in this regard is the presence of the non-resident recipient
of the services, who must be outside NZ at the time the services are performed, and once
qualified, whether then the services are directly in connection to the land, or simply in
connection with the land, intending to enable or assist a change in the physical condition,
ownership or other legal status of the land.
Further to the legislative change (old rules only considered the “directly in connection” aspect),
IR has now issued draft interpretation statement PUB00299, which sets out the Commissioners
interpretation of the new provisions.
The item discusses the meaning of the terms – “non-resident”, “outside of NZ at time services
performed”, “types of land interests”, “directly in connection with land” and if not,
application of the remaining connection with land provisions.

Without having to read the devil in the detail, the prime takeaway to appreciate from this
article, is the
potential widening of the standard-rated GST application to a number of service
providers including accountants, construction & earthworks contractors, surveyors, real estate
agents and valuers.
Should you wish to comment on PUB00299, the deadline is 12th October 2018.

 

Richard Ashby BBus, CA, CPA
PARTNER
Em: [email protected]
Ph: +64 9 365 5532
Fx: +64 9 309 5260
Mb: +64 21 823 464