A Week in Review

First, it was remote services GST….

Introduced to capture amongst other things, the potential missed GST on the ever-increasing acquisition of offshore digital products by NZ based consumers, the remote services (the “Netflix tax”) GST regime has effectively changed the “place of supply” rules where a non-resident supplier is involved, to now deem an NZ place of supply where the remote services are provided to NZ consumers.

Prior to the law change, you may recall that when the supplier was a non-resident, and the services were not provided by a person who was in NZ at the time the services were performed, the supply was deemed to be made outside of NZ, and consequently not subject to GST.

Even before the remote services GST rules were introduced, however, there had been ongoing discussions both within NZ, but more particularly at the OECD level as part of the BEPS project, around whether income tax source rules required some rework, to also deal with the increasing use of digital services cross-border, potentially as a mechanism by multi-national enterprises (MNE’s) to shift profits from high tax to low tax jurisdictions. The classic example, in this case, was setting up an entity to own the MNE’s core IP in a low tax jurisdiction, which then charged license fees for the use of that IP to the MNE’s subsidiaries carrying on business in the higher taxed jurisdictions. While there were still potential obligations on the subsidiary to deduct a withholding tax from the royalties paid, often this was at a rate of no more than 15%, reduced to 5% in numerous case under the terms of a double tax treaty if one existed between the two jurisdictions.

While the OECD is still working on the finer details of exactly how these cross-border digital services could be better taxed, NZ, like its Aussie cousins, has decided not to wait, and is now looking to introduce some sort of interim solution. In this regard Parliament has advised that a discussion document will be released around May 2019, so watch this space for further updates accordingly.

Depreciation Recovery Income Upon a Change in Use Event

IR has released a draft QWBA (PUB00343) to answer the question of whether depreciation recovery income may arise in relation to depreciable assets, for a business that becomes a charity and begins deriving exempt income. While the article is centred around charities, it should be noted however, that the views espoused by IR, can essentially apply to any scenario where the use of a depreciable asset changes from assisting in the derivation of assessable income (or in running a business for that purpose), to that of a private nature or in deriving exempt income.

Where such a scenario occurs, which results in depreciation deductions for the following income year being denied (because the asset loses its status as being a depreciable asset), the legislation deems a consideration equal to the market value of the asset at that time to have been received by the business, and consequently where that deemed consideration exceeds the adjusted tax value of the asset, depreciation recovery income will arise for the business (naturally capped to the level of depreciation deductions previously claimed).

This effective deemed disposal event is presently treated as occurring on the first day of the next income year, although a present tax Bill before the House, proposes changing the timing to the date immediately prior to the persons income becoming exempt.

The deadline for comment on PUB00343 is 20^th March 2019.

Received in time?

IR have now finalised their standard practice statement with respect to when tax payments will be treated as having been received in time.

SPS 19/01 applies for 1^st March 2019 and replaces SPS 14/01, the 2014 practice statement on the same issue. It should not be a surprise to any of you, that if a payment is not received at IR on or before the due date for the relevant payment, then clearly it will be late, and exposures to late payment penalties and use of money interest charges may arise.

However, the SPS did still contain a few useful takeaways:

• Ensure you understand the banks processing schedule if making your payment electronically. It’s no good setting up your payment at 7 pm on the due date if the bank only processes for that day up until 6 pm;
   
• You can pay most taxes via the use of debit/credit cards now, however, be aware the bank will charge you 1.42% as a convenience fee to do so;
   
• You cannot make cash/EFTPOS payments at IR branches now, although you can do so at any branch of Westpac, however, the bank will not accept any tax returns;
   
• Cheques received through the post must be received on or before the due date – so gone are the days where as long as your envelope was post-marked pre the due date, it was accepted in time; and,
   
• If a due date falls on a weekend or public holiday, payments will still be made on time if credited or received on or before the next working day.

TWG Final Report

Released as promised on the 21^st February, I would suggest the only real surprise was the acknowledgement that the report did not have the unanimous support of the entire group. What impact, if any, making public this aspect of the final report’s completion, coupled with Sir Winnie’s apparent “no capital gains tax under my watch” stance, will have on the Government’s written response to the report to be released in April, we shall have to wait and see. I certainly wouldn’t be as bold as some of the media commentators who have immediately come out and said: “it simply won’t happen now”. Considering I never thought the American people would ever elect the Don, or Brexit would ever be a Yes vote, I think it’s a little early to be suggesting the capital gains tax boat has just been sunk to the bottom of the deepest ocean.

So let’s stop trying to read the tea leaves, and get back to some of the key recommendations in the report:

• Will apply to all land (family home exception although note potential exposure where home also used for income-earning purposes), shares (CFC/FIF exception), intangible property and business assets. Will not apply to personal-use assets;
   
• Will apply to all disposals occurring post 1^st April 2021 (including a change of use of the asset which will trigger a deemed disposal), the gain subject to taxation in essence being an increase in the market value of applicable assets held by the taxpayer at the 1^st April commencement date , through until the date of disposal. The tax rate will be the person’s marginal tax rate;
   
• It is likely there will be a number of valuation options provided by IR for taxpayers to use for the various asset classes on Valuation Day (1^st April 2021) – for example, QV or rating valuations for land;
   
• While it has been recommended that capital losses should be able to offset taxable income, there may also be ring-fencing rules to mitigate potential abuse of the system;
   
• All NZ resident individuals and entities would be subject to CGT, and there is a recommendation to repeal the QC regime – but with transitional rules to pass out any capital gains previously derived; and,
   
• Certain rollover relief provisions are recommended, such as transfer of assets on death and for small businesses who sell business assets but reinvest the proceeds in replacement business assets.

To somewhat soften the blow, while the TWG did not recommend a reduction in the company tax rate or any change to the existing imputation system, it did recommend increasing the bottom income tax threshold to $20,000/$30,000 however with a potential increase in the second marginal tax rate from 17.5% to 21%.

Bring on April and the Government’s response.