A Week in Review

Busy week in the High Court

Two decisions released during the week, the latter I expect likely to be of more interest to the majority of us than the former.

The first was an appeal lodged by Family First to a decision (for a second time) by the Charities Registration Board, that Family First had failed to satisfy the Board that it existed solely for charitable purposes (a key registration criteria). Family First was founded to promote its core principle that society was better off if the traditional family unit took precedence over all else, and it used a number of mediums, including pamphlet drops and conferences, in its efforts to convince others.

The High Court dismissed the appeal however, taking a view that Family First’s core purpose of promoting the traditional family unit could not be shown to be in the public benefit in a charitable sense as required by the legislation. Further, even if the core purpose was deemed charitable, the fact that Family First also had other purposes, negated its ability to register as a charity.

The charitable flavour of the first decision was then carried on into the second, where the High Court was required to settle a dispute between the taxpayer and IR, over whether a forgiveness of debt entitled the taxpayer to a donation rebate.

The taxpayer had established a charitable trust (that status not in question here) in 2007, advancing by way of loan, some $1.7m in funds. Some three years later, and then for the subsequent four income years, by deed of gift, the taxpayer forgave portions of the loan. A donation rebate was then claimed on the basis that the debt forgiveness amounted to charitable gifts of $5 or more.

Initially IR allowed the claims, however subsequently undertook a review and ultimately reversed its earlier decision, advising the funds had to be repaid. This determination was purely on the basis that the debt forgiveness was not considered to constitute a monetary gift, all other legislative criteria having been satisfied.

The High Court sided with the taxpayer, ruling IR’s determination was incorrect, and that the 2014 legislative change inserting the word “monetary” into LD 3, reflected the policy intention, that provided the amount was sum specific and pertained to money, then a rebate claim could be made. A cash payment was not required therefore, the crediting and debiting of accounts to effect the reduction of gift satisfactory.   

R&D tax credit – the verdict

Having considered all submissions received on the draft proposal, the Government has announced the likely format of the new R&D tax credit, assuming the legislation to be drafted and released into the House for its first reading within a matter of weeks, passes through relatively unharmed.

Most of the initial draft terms have remained unchanged, being:

• A ‘simple but robust” definition of R&D ensuring every man and his dog has access to the credit because they can understand the terminology;
   
• All businesses regardless of legal structure eligible; and,
   
• An expenditure cap of $120m;

Amended however is:

• A minimum annual spend of $50k, reduced from the previously proposed $100k, although no minimum spend requirement where R&D contracted out to an Approved Research Provider;
   
• SOE’s & Mixed Ownership Model companies will be eligible, previously undecided;
   
• Control & ownership criteria have been slightly relaxed, with no “bear the financial risk” criteria and recognition of group companies where one may undertake the activity with another owning the results (including an overseas company provided in a DTA jurisdiction);
   
• The credit rate is increased from 12.5% to 15%;
   
• A refundable credit for up to the first $1.7m ($255k) of expenditure will be available, subject to meeting certain criteria, with any additional credits carrying forward (the original proposal for all excess credits). There is now also the ability to receive cash under both R&D schemes, with no proposal to change the existing loss cash-out scheme.
   
• The regime is proposed to take effect from the commencement of the 2019/2020 income year. Starting in the second year, businesses will require advance approval of that year’s R&D activity, which will then be binding on IR and provide the business with confidence their credit claim will be accepted when filed.

Further detail on the final proposals can be located here – https://www.mbie.govt.nz/info-services/science-innovation/funding-info-opportunities/rd-tax-incentive/pdf-and-document-library/comparison-with-discussion-document.pdf

All may not be what it seems

To close off this week’s edition, I thought I would share a personal observation and subsequently formed opinion, having attended a talk by two members of the Tax Working Group (TWG) during the week. Naturally the focus of the discussion was on the recently released interim report, and I would suggest most attendees had made the trek to hear about the capital gains tax (CGT) proposals.

In my previous article on the interim report, I noted that the CGT issue was still under consideration, mostly around the design of taxing capital income, and whether to use an extension to the existing tax net (tax gains on assets not yet taxed), or have some sort of deemed rate of return taxing system. Regardless of the taxing methodology however, it appeared fairly clear that some sort of taxation of capital income was to be recommended by the TWG.

What did surprise me somewhat when listening to the speakers, were the concerns expressed over how many unresolved issues surrounding an introduction of a CGT there still were, the lack of time to resolve these issues, and that there was almost a pleading by the presenters to the attendees, to make submissions against the introduction of a CGT, because those empowered to consider one, actually couldn’t see the benefits, other than satisfying the political will of our new Government.

Take for example this statistic provided during the presentation (which I have taken at face value). NZ’s annual tax take is circa $90b. In its first year, CGT is expected to collect $200m. By year 10, this will have increased to $6b. Not exactly astounding returns, and these figures do not include the actual costs to the economy of implementing and managing a CGT, to which there were hints it would exceed the revenues actually generated.

Somewhat concerning therefore, so it will be interesting to see the final report in February, however now is certainly the time to have your say if you have the enthusiasm to write.

Oh, and considering the introduction of a CGT is likely to place a stick in the sand to mark the point in time that all present assets held (excluding the family home) must be valued, if you’re thinking about a new career choice, valuation could be a wise choice…..  

Richard Ashby BBus, CA, CPA
PARTNER

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