A Week in Review

Richard AshbyPartner, Gilligan Sheppard

New SPS on amending assessments

IR has issued SPS 20/03 – Requests to Amend Assessments, which is to replace the previous version, SPS 16/01, effective 2nd June 2020.

The standard practice statement is in essence a guidance document for both IR staff and taxpayers, reflecting how the Commissioner should exercise her discretion, when considering s.113 (TAA94) applications to have prior assessments amended to ensure their correctness.

The main take-outs from SPS 20/03 are:

  • Most s.113 requests will be considered using a four-phase process:
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    • Initial examination of request to see if the matter can be disposed of simply (either by making the amendment or not).
       
    • If it cannot, consideration of whether additional resources should be applied to consider the request further.
       
    • Determine whether a correct assessment will result from the requested amendment; and,
       
    • Finally, determine whether there is any residual reason (other than limited resources) why the requested amendment should not be made.
       
  • Most requests involving clear arithmetic, transposition or keying errors, will be accepted and processed without any further consideration by IR.
     
  • For more complex scenarios, IR’s care & management principles (s.6 & 6A TAA94) will require consideration – basically, will exercising the discretion protect the overall integrity of the tax system, and will it collect the highest net revenue practicable over time having regard to:
     
    • The resources available to the Commissioner; and
       
    • The importance of promoting compliance, especially voluntary compliance, by all persons with the Inland Revenue Acts; and
       
    • The compliance costs incurred by persons.
       
  • Note that if you are able to make the correction yourself applying either s.113A (TAA94) or proviso to s.20(3) (GSTA85), then you should not make a s.113 application (although in limited circumstances it may still be accepted). An s.113A correction provides for two scenarios where the tax involved is either income tax, GST or FBT – error of $1,000 tax or less, or where the error is not material. Materiality in this regard is determined by the tax involved being less than or equal to the lesser of $10,000 or 2% of the annual gross income/output tax (as applicable). This is a ‘per single return’ threshold test. The proviso to s.20(3) is essentially your automatic entitlement to claim any GST input tax not previously claimed, within a two year period of the earlier of the date you paid that input tax or received a tax invoice in respect of it.
     
  • The ‘residual’ reasons which may lead to IR still declining an s.113 request, include tax avoidance concerns, and where the amendment will simply change one correct assessment to another one due to taxpayer having a ‘change of mind’ (note this differs from ‘mistake / oversight’ or ‘lack of possession of all relevant facts at time’ scenarios).
     
  • S.113 requests can be made via phone or in writing (incl. via myIR), however where tax effect of amendment greater than $10,000, the request must be in writing.
     
  • For ‘qualifying individuals’ (individual who only earns ‘reportable income’ for an income year and has no other income information that must be provided to IR), they should not be using the s.113 option to amend any ‘IR finalised account’ until post the relevant terminal tax due date, as prior to this date, the individual can freely amend the income information, with each previous assessment then effectively disregarded.
     

The only available process for challenging any s.113 decision made by IR, is via a judicial review.

Tax write-off threshold increased

The threshold for writing off tax owed by a ‘qualifying individual’ (refer to definition above) has increased from the present $50 to $200, effective 3rd June 2020.

New tax bill introduced

The Taxation (Annual Rates for 2020/21, Feasibility Expenditure, and Remedial Matters) Bill (273-1) has been introduced into Parliament, targeted to support growth and assist businesses on the road to economic recovery.

So, what is in there:

  • A new deduction provision targeting feasibility expenditure, ensuring it does not become ‘black-hole’ type expenditure (for which no deduction is available under the law) and therefore discourages such investment spending. So providing the expenditure incurred in completing, creating or acquiring property, that would be either depreciable or revenue account property if completed, but is abandoned prior to completion and no other deduction is available under the Act, then deduction can be spread evenly over a five year period. Also a compliance cost saving measure, where immediate deduction available in cases where annual spend less than $10,000 (even where no abandonment of project), provided the expenditure not deducible under other provisions – i.e. cannot be used as a replacement for tax depreciation of low-value assets. Note that there will also be a claw-back, should the abandoned project be subsequently completed.
     
  • Land tax provisions – an expansion of the regular pattern restrictions in the main home exclusion, the residential exclusion, and the business premises exclusion to apply to regular patterns of buying and selling land by a group of persons acting together. The amendments will ensure that taxpayers cannot structure around the regular pattern restrictions by using different people or entities to carry out separate transactions, or by varying what is done to the land in each transaction so that there is no ‘pattern’. 
     
  • Purchase price allocation rules – to prevent vendors / purchasers adopting different price allocations that results in revenue loss to IR (e.g. vendor applies larger amount to goodwill, whereas purchaser allocates smaller goodwill and larger to fixed assets/trading stock). Core elements are:
     
    • If the parties agree an allocation, must follow in tax returns;
    • If the parties do not agree an allocation, vendor entitled to determine allocation, must notify both purchaser/IR within two months of change in ownership of assets. However, vendor must allocate amounts to taxable property (depreciable / revenue account property etc) such that there is no additional loss on the sale of that property.
       
    • If vendor does not make allocation within the two-month time frame, purchaser entitled to determine the allocation, and notify both vendor / IR.
       
    • IR may challenge an allocation if considered not to reflect market values; and,
       
    • The rules will not apply to a transaction if the total purchase price is less than $1 million, or the purchaser’s total allocation to taxable property is less than $100,000.
       
  • GST on mobile roaming services – in essence use your mobile phone overseas and roaming charges still subject to GST, but equally for non-residents in NZ using their mobile phones, their roaming charges not subject to GST.
     
  • Tightening the definition of eligible R&D expenditure for the R&D tax incentive, as prescribed in s.LY 5 (ITA 07) to clarify that only expenditure that is directly connected with an eligible R&D activity is eligible – expenditure must be required for conducting an R&D activity, integral to conducting an R&D activity, and directly related to conducting an R&D activity.
     

Beneficiaries as settlors – if, at the end of an income year, a beneficiary of a trust is owed more than $25,000 by the trustee and interest has not been paid on this amount at the prescribed or market rate, then the beneficiary will become a settlor of the trust.

Final IS in short-stay accommodation guidance series released

IR has released IS 20/04: Goods and services tax: GST treatment of short-stay accommodation, the final in its series of interpretation statements to provide guidance on the income tax and GST consequences of providing short-stay accommodation through peer-to-peer websites such as Airbnb, Bookabach and Holiday Houses.

The main points I took from IS 20/04:

  • ‘Short-stay accommodation’ means accommodation provided for less than four weeks.
     
  • Confirmation the supply of short-stay accommodation by a registered person is not an exempt supply (meaning it is potentially subject to GST). Most of you will be aware that accommodation supplied in a dwelling will be an exempt supply for GST purposes, however the legislative definition of a dwelling requires that the occupier must use the property as their principal place of residence and that they will usually have rights of quiet enjoyment. Neither of these requirements will usually exist in a short-stay accommodation scenario, and therein lies the logic of why such supplies may be subject to GST (consider GST registration threshold, what other activities the owner is also carrying on, are they already GST registered, is the short-stay accommodation activity either continuous/regular etc).
     
  • Once the property is in the GST net, you have to pay GST output tax upon the subsequent sale (assuming the property is still in the GST net at that time), even if you have not claimed any GST input tax on that property (note s.21F will trigger an input tax claim entitlement however, to the extent any input tax has not yet been claimed).
     
  • Determine if the accommodation satisfies mixed use asset criteria (private/income use, left empty >62 days in the year etc). If so, then you’ll need to apply the s.20G formula when calculating input tax claims. Remember that the MUA rules are applied on an income year basis, i.e. a MUA one income year, may not necessarily be a MUA in the following or prior income year.
     
  • Be aware of your s.21 adjustment calculation provisions – actual use changes over the adjustment period; goods acquired prior to registration; wash-up adjustments for continued 100% taxable/non-taxable use; pre-1st April 2011 property purchases, and,
     

Most importantly (due to potential penalty exposures), do not forget the deemed disposal rules (GST output tax based on market value of property at the time) if you decide to cease your short-stay accommodation activity (which could include leasing the property long-term – which now satisfies the dwelling definition).