A Week in Review

IR Overseas Rental Property Interpretation Statements (IS)

Still in their draft form, IR closed its public consultation process for three items last week, all related to Overseas Rental Properties.

The first is PUB00310(a), which considers the income tax issues arising from ownership of overseas rental properties by NZ tax resident individuals. In my view, this IS is very generalised in its nature, in essence only identifying “consideration issues” and then referring you to numerous other IR interpretation statements (e.g. IS 16/03: Tax residence or IS 16/06: Income tax – timing – when is income from professional services derived?), so do not open the document with an expectation that it will provide you with detailed guidance in relation to everything you need to know on the topic. In saying that however, if you did then go on to read all the referred documents, I have little doubt that you would exit from that process having a well-rounded knowledge of all the potential income tax implications for your clients who owned offshore rental properties.

The second document however is more detailed in nature, PUB00310(b), which considers for income tax purposes, the application of the financial arrangements (“FA”) rules to foreign currency loans used to finance overseas rental property. The document discusses first, the two potential, although unlikely, excepted financial arrangement scenarios which would then negate your clients having to consider the application of the FA rules, it then moves on to outline the cash-basis persons test (and calculations in this regard), followed with how those non-cash basis persons should apply Determination G9A to determine their annual FA income/expenditure and concludes with a discussion on the Base Price Adjustment and its calculation methodology.

The final document, PUB00310(c), is in essence an Approval – foreign rental property amounts – currency conversion. It sets out the Commissioner’s approval of various conversion methods and exchange rate sources, with a view to minimise compliance costs for taxpayers, while at the same time protecting the integrity of the tax base. It does however only apply to individual taxpayers, including natural person trustees, and only to those who have an interest in foreign rental properties. It should be noted that the Approval does not overrule any specific Act requirements to use certain currency conversion methods (under the FA rules for example). The Approval refers to the use of either an annual or monthly methods (although only the annual method in respect to converting foreign tax paid amounts), and in the first instance to using the exchange rates published by IR, which should be able to be located on IR’s website.

Covid-19 Tax Residency Related Issues

Both IR and the OECD have recently published statements in relation to implications for both corporate and individual taxpayers, who may have unexpectedly ended up having to spend extended time in a particular jurisdiction due to the effects of global travel restrictions.

In this regard, while IR suggests most corporate taxpayers tax residence status potentially will not be impacted by these extended stays because more than simple physical presence is often required to trigger a tax residence status for these taxpayers (i.e. the wider question of how the company is managed in reality is the real test), certainly individual taxpayers are exposed to unintended tax residency determinations due to the black and white nature of the physical days presence test (183 days).

In this regard, IR has stated that provided these individuals are seen to have left NZ within a reasonable time period post any travel restrictions having been lifted, then the extra days the person has remained in NZ during the restriction period, will be ignored by IR when it undertakes any tax residency determinations.

The IR statement also covers the 92-day rule for non-resident contractors (or others earning income from the performance of personal or professional services in NZ), transitional residents and student loans.

The OECD guidance follows a similar vein to IR, DTA jurisdictions should ignore unintended extra stay days when determining their taxing rights over individuals who have been caught up in the travel restrictions.

Extension of Zero-rating Period

Naturally also as a direct consequence of the Covid-19 lock-down restrictions, IR has issued guidance with respect to the usual requirement for an exporter to export their goods outside of NZ within 28 days in order to qualify for zero-rating the supply.

In this regard, the Commissioner has always had the ability to extend the 28 day rule upon specific application by the exporter, however due to Covid-19, exporters will now have an automatic additional three-month extension to the 28-day window to complete their export. The extension commences on the day the 28-day period expires and has application to any supply of goods up to and including 31^st July 2020.