A Week in Review

Richard AshbyPartner, Gilligan Sheppard

Increase in Minimum Wages

As most of you will probably know by now, at times I like to share little gems of information that are not exactly pure tax-related in themselves, although this item naturally has taxation considerations attached to it.

It is hard to believe that we are already into March, meaning that not only are we arguably into Autumn (still hope for another Indian summer of course!) and the daylight hours are already diminishing, but it is also the last month of most taxpayer’s income year (so start ticking off your end of year checklist).

With the new income year, therefore, commencing 1st April, the date often brings with it changes in various rates for the coming 12 month period. In this regard, the minimum wage rates for both adult workers and newbies/trainees are increasing, to:

  • $17.70 from $16.50 for adult workers; and,
  • $14.16 from $13.20 for starting-out workers and trainees.

And just in case you’re wondering:

Adult worker—

  • means a worker aged 16 years or more to whom the Act applies; but
  • does not include—
    • a starting-out worker; or
    • a trainee

Starting-out worker means—

  • a worker aged 16 or 17 years to whom the Act applies and who—
    • has not completed six months’ continuous employment with their current employer; and
    • is not involved in supervising or training other workers.
       
  • a worker aged 18 or 19 years to whom the Act applies and who—
    • has been continuously paid one or more specified social security benefits for not less than six months; and
    • has not completed 6 months’ continuous employment with an employer (excluding any employment undertaken before the worker started to be paid any 1 or more specified social security benefits); and
    • is not involved in supervising or training other workers:
       
  • a worker aged 16, 17, 18, or 19 years to whom the Act applies and who—
    • is required by their contract of service to undertake at least 40 credits a year of an industry training programme for the purpose of becoming qualified for the occupation to which the contract of service relates; and
    • is not involved in supervising or training other workers

Trainee means a worker who is aged 20 years or more to whom the Act applies and who—

  • is required by their contract of service to undertake at least 60 credits a year of an industry training programme for the purpose of becoming qualified for the occupation to which the contract of service relates; and
  • is not involved in supervising or training other workers.

Guidance Material for R&D Credit

While the Bill itself is still before Parliament, IR has released draft guidance for public consultation, which is based on the new credit rules as introduced in the Bill, to explain to businesses:

  • the R&D tax credit eligibility criteria; and,
     
  • what they need to do to facilitate the claiming of a credit.

The draft document can be located via IR’s online forum here, https://govt.loomio.nz/rdtaxcredit, and feedback is requested to be provided no later than 31st March 2019.

Non-resident Directors – scheduler withholding tax

IR has finalised and released an interpretation statement, which considers the issue of payments of fees to non-resident directors, and the accompanying scheduler withholding tax deduction obligations for the NZ payer.

IS 19/01 commences with espousing a view that there is first a need to determine whether the payment of the directors’ fee is actually a scheduled payment, and this can largely be dependent on who the payer has contracted with to provide the directorship services, and in some cases, where the services are performed.

In the first instance, if the non-resident director is employed under a contract of services to perform directorship services, as opposed to a contract for services, the amounts paid will simply be “salary or wages” or an “extra pay”, and therefore subject to PAYE.

Secondly, if the source of the directors’ fee payment is deemed to be NZ (in whole or in part), there is likely to be a requirement for the payer to withhold tax unless the non-resident is entitled to claim one of the available exclusions. Should the directors’ fees be deemed to be foreign sourced income however, the directors’ fees are unlikely to be defined as a scheduled payment.

In considering the source of the particular directors’ fee payment, where an NZ company has contracted with a non-resident individual to provide the directorship services, regardless of whether any services are actually performed in NZ or not, the directors’ fees will be deemed to have an NZ source in most cases. Note in this regard the recent addition (2018) to the source rules in s.YD 4(17D), which deems the directors’ fees to have a NZ source, where NZ has a right under a DTA to tax the income (most of NZ’s DTA’s contain a directors’ fees article, and most of these articles provide NZ with a taxing right where an NZ company is paying the fees).

I am sure most of you will have considered at one time or another, the issue of where employment income is sourced, the outcome determining whether the employee should be paying NZ tax on the employment income. A common reference point in this regard is Australian case law, which sets out three main factors that need to be weighed to determine the source, namely:

  • the place where the arrangement for the provision of the services was made;
     
  • the place where the services were performed; and,
     
  • the place from which the payment was made.

IR’s present view is that the question to be posed is, “Where would a ‘practical person’ regard the real source of the income to be?”, and it is often the second factor which will determine the answer to this question (although naturally case specific).

However when it comes to directors’ fees, the place where the services are actually performed does not take centre stage, due to IR’s conclusion that special factors exist for directors of NZ companies, namely:

  • the director has a special statutory connection with NZ – the Companies Act 1993, which includes the duties and obligations of a director, which both are owed in NZ and apply for the purposes of NZ law;
     
  • the contract is most likely formed in, and subject to, NZ law; and,
     
  • the payment is likely being made from NZ.

On the basis of the source rules, therefore, where the director is an individual and provides the services completely outside of NZ, the director’s fees paid are still likely to be scheduled payments and subject to withholding tax deductions. Should the person come to NZ to perform some of the services however, they will satisfy the “non-resident contractor” definition, which could then entitle them to claim one of the exclusions contained in the scheduler payment rules, although in most case they are unlikely to apply, because the person will not be entitled to full relief from tax in NZ under a DTA – as I alluded to above.

With respect to the contract for services being with a non-resident entity as opposed to an individual, if all the services are performed outside of NZ, the income may be foreign sourced and the payment will not, therefore, be defined as being a scheduler payment (but again fact specific – for example if the entity has an NZ PE, a different outcome could arise).

Alternatively, if the non-resident entity has an NZ PE to which the directors’ fees are attributable, or should the entity perform the services in NZ (usually through one of the entities’ employees), unless the entity can claim one of the available exclusions, an obligation for the payer to deduct scheduler withholding tax is likely to arise.

The scheduler withholding rate for directors’ fees is 33%, increased to a 45% rate where the non-resident individual has not provided the payer with an IR330C (20% for non-resident companies). The non-resident can also elect a lower withholding rate, although nothing less than 15% unless they have obtained IR approval for a lesser rate.

New Reportable Jurisdictions for CRS

Effective for reporting periods beginning on or after 1st April 2018, the following territories have been added to NZ’s reportable jurisdictions list:

Antigua & Barbuda       Aruba                            Azerbaijan                     Barbados

Belize                            Brunei Darussalam       Cook Islands                 Costa Rica

Curaçao                        Cyprus                          Dominica                       Ghana

Grenada                        Lebanon                        Macao                           Montserrat

Nigeria                          Niue                              Pakistan                        Panama

Romania                       Saint Kitts & Nevis        Saint Lucia                    Saint Vincent & Grenadines

Samoa                          Sint Maarten                 Switzerland                   Trinidad & Tobago

Turkey                          Vanuatu

Reportable jurisdictions are territories to which IR may provide certain information about non-residents that is reported to IR by financial institutions in accordance with the CRS applied standard.