A Week in Review
Minister of Revenue delivers early Xmas present
The Hon Stuart Nash has decided to fill all of our stockings with an early Chrissie present this year, releasing the Taxation (Annual Rates for 2019-20, GST Offshore Suppliers Registration, and Remedial Matters) Bill.
While the Bill does indeed address several remedial matters, and confirms the 2019-20 tax rates (no change to 2018-19), the big crackers that should both make a reasonable bang, are the introduction of the GST “Amazon” tax (arguably a good thing) and the ring-fencing rules to prevent the offsetting of residential investment property losses against the owners other sources of income for a particular tax year (arguably not such a good thing to put it politely).
The new “Amazon” tax will see non-resident suppliers whose sales of low value goods to NZ consumers exceed $60,000 per annum, being required to register for NZ GST and charge 15% on the goods supplied.
Presently, goods which are imported into NZ and have a value of less than $400, do not incur any GST at the border. However, the substantial increase in recent years in the quantum of these so called “low value” goods coming into the country, predominantly facilitated via on-line internet shopping, naturally has local retailers calling foul because they simply cannot compete on price.
Since the Government considers that taxation alone should not influence buyer behaviour, it is proposed that the “Amazon” tax, akin to the recently introduced “Netflix” tax on remote services, should assist in levelling the playing field.
In terms of the nitty gritty of the new regime, most of the proposals of how the system will operate, are similar in vein, if not identical, to the “Netflix” rules. To summarise the main points therefore:
- Goods with a value of $1,000 or less (excluding alcoholic beverages, tobacco and tobacco products), acquired by NZ based consumers from a non-resident supplier at a time when the goods are outside of NZ, will now be referred to as “distantly taxable goods” (“DTG”). Goods with a value in excess of $1,000 (high value goods) will still be assessed for GST by NZ Customs at the border (unless the non-resident has elected to treat these as DTG’s as well).
- B2B supplies are ignored for the purpose of the non-resident establishing whether they have or may exceed the annual $60,000 compulsory registration threshold, although if the non-resident supplier chooses to zero-rate these supplies (usually if they want to recover NZ GST costs incurred in making the B2B supplies), then the value of the B2B supplies will also be taken into account.
- As with the “Netflix” tax, electronic marketplaces and redeliverer’s are also caught under the regime. A redeliverer in case you have forgotten, is in essence a third party delivery service, utilised often because the actual supplier of the goods for one reason or another is not permitted to directly send the goods to the customers home country, so the goods are sent to the address of the redeliverer in the first instance, who then arranges the shipping to the customer. If you’ve ever tried to buy from Amazon in the US, you’ll appreciate the issue.
- Non-resident suppliers will not be required to issue tax invoices in respect of their DTG supplies. The one exception may be however in the case where a B2B supply has inadvertently being charged GST, and rather than refund the GST back to the customer (the default method), the non-resident decides to issue a tax invoice instead, enabling the GST registered customer to then claim a GST input tax deduction instead.
- GST filing will be on a quarterly basis (although an initial default 6 month period for 1st October 2019 – 31st March 2020, unless the supplier elects otherwise), there will be a simplified “pay only” return, and three timing options will exist for foreign currency conversions. Non-resident suppliers, when applying for an IRD number to enable them to register for GST, will also be exempted from the “fully functional NZ bank account number” requirement.
The regime will come into effect from 1st October 2019, so I expect around August 2019, Inland Revenue will commence accepting registration applications.
Perhaps more disappointing to see in this Bill, particularly if the TWG will indeed recommend the introduction of a capital gains tax regime, and arguably therefore “what’s the point?”, are the proposals to ring-fence residential investment property deductions.
Not satisfied with the increase of the bright-line period to 5 years, which potentially on its own would put any property “speculator” off investing in residential land (one of the arguments pitched by our Labour government for needing deduction ring-fencing – removing speculators from the market so first-time owner occupiers have a better chance of getting a home), this latest tool will see property investors no longer being able to offset residential rental property losses, against any other taxable income they have derived during a particular income year.
The ring-fencing will essentially be achieved, by requiring any excess deductions (expenditure which exceeds the rental income derived for the year) to be carried forward to the following income year, only able to be offset against residential rental income in that following income year, or any income from residential land that is taxed on sale.
It is proposed that the regime operate on a portfolio basis – that is – a rental loss from one residential property may be offset against a rental profit from another residential property. A taxpayer will be able to opt out of the default method however, and elect instead to apply the rules on a property by property basis.
Excluded from the ring-fencing rules, will be the taxpayer’s main home (so home office deductions claimed), mixed-use assets (since they have their own quarantining rules) and residential land held on revenue account (as there are no untaxed gain concerns). Farmland and land that is used predominantly as a business premises, will also not be caught.
Most of the regime’s proposed definitions – “main home” and “residential land” for example – rely on the existing bright-line rules terminology definitions. There will also be an anti-avoidance rule, applying to interposed entities which are considered to be residential land-rich, targeting interest on borrowings where the debt has been structured in a certain way so it has not directly financed the residential rental property itself.
It’s all happening pretty quickly, with the proposed commencement date being the start of the 2019-20 income year, so keep an eye open for further updates in coming AWIR issues.
Finally on the Bill, sneaking in near the end of the commentary, was a proposed amendment regarding beneficiaries as settlors, and how the law would be clarified so that beneficiaries with credit current accounts with a value of less than $25,000, who did not charge the trustees interest on the balances, would not be considered a settlor of the trust.
By implication therefore, going forward, beneficiaries that do have current account balances of more than $25,000 and do not charge the trustees interest on these effective loans, are at risk of being considered settlors of the trust, with the potential unintended consequences relating to Working for Family credit entitlements and associated person issues.
Hands up those of you out there who are actively policing this area of your client’s affairs…
GST and the dead
I made mention of the draft QWBA a few months back, with the Revenue now releasing their final view of the answer to the question – when will goods and services in connection with the repatriation of human remains from NZ be zero-rated?
QB 18/15 responds, that services supplied in connection with the repatriation of human remains (cremation and embalming services for example), will qualify for zero-rating when:
- the services are supplied to a non-resident who is outside NZ when the services are performed, and
- the remains will not be received by a third party in NZ (and it was not reasonably foreseeable when the contract was entered into that a third party would receive the remains in NZ).
It should be noted that goods such as caskets and urns that are exported by the supplier, should be zero-rated.
Phew, I’m glad we finally got some clarification on that issue…
Draft SPS on voluntary disclosures
IR has released a draft standard practice statement on voluntary disclosures – ED0201.
A voluntary disclosure, if done correctly, can significantly reduce a taxpayers exposure to shortfall penalties, when, post having filing a tax return, they discover (or have a change of heart!) they have made a tax shortfall. Left unattended to, if IR instead are the party to uncover the tax shortfall at some later time, they will ask the taxpayer for an explanation as to why the tax shortfall occurred, and depending on the answers provided, will consider imposing a penalty in the range of 20% (lack of reasonable care/unacceptable tax position) to 150% (evasion) of the tax shortfall amount.
However, where the taxpayer makes a pre-notification voluntary disclosure, any subsequent shortfall penalty imposed by IR will be reduced by at least 75%, and even 100% where the shortfall penalty under consideration is either in respect of not taking reasonable care, the taking of an unacceptable tax position or for an unacceptable interpretation.
The SPS sets out the four essential elements to any voluntary disclosure as required by section 141G(1) of the Tax Administration Act 1994, being that a voluntary disclosure:
- must disclose a tax shortfall, and
- must disclose all the details of the tax shortfall, and
- must disclose something to the CIR, and
- must be made voluntarily.
Naturally the commentary contained in the draft SPS outlines what is expected by IR in respect of each element.
Feedback on the proposed SPS is requested to be provided no later than 31st January 2019.