A Week In Review
Diamond case results in updated IS
For those of you familiar with the Court of Appeal decision in CIR v Diamond, which dealt with the issue of the application of the permanent place of abode test as it applied to an individual’s tax residency status, it was clear from statements made in the judge’s ruling, that it would be only a matter of time before IR would have to release an updated position. In 2014, IR had released IS 14/01 which outlined its views with respect to the tax residency tests contained in the Income Tax Act 2007, as they applied to individuals, companies and the taxation regime for trusts. In the section on the issue of determining whether or not an individual had a permanent place of abode in NZ, IR had taken the view that it was a two-step test, step one there must first be a dwelling that is available for the taxpayer in NZ, and if one existed, then step two was to consider the taxpayers continuity and duration of presence in NZ and the durability of their association with the available dwelling. The Court of Appeal however concluded that IR’s two step approach was incorrect and that the determination could not be broken down into a set of discrete questions. Instead what was required was an integrated factual assessment, directed to determining the nature and quality of the use the taxpayer habitually makes of a particular place of abode (and the court listed a number of factors (non-exhaustive) for consideration in that regard). IR has now released IS 16/03 to replace IS 14/01. It should be noted that the only change to the previous IS, is the section on the permanent place of abode test. IR has also released its operational position with respect to the application of IS 16/03, advising that as the statement now reflects the correct interpretation of the law, any taxpayer who has taken a tax position based on the permanent place of abode test analysis contained in IS 14/01 can request a review of their previous years assessments, which IR will consider in accordance with the principles set out in their standard practice statement with respect to section 113 requests.
Tainted Capital Gains
For those of you with clients who presently have locked in tainted capital gains, you may or may not be aware that some relief is on the way in the form of legislative changes proposed in the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Bill. Under the present rules, a company that sells an asset to an associated party and derives a capital gain from the transaction, has what is often referred to as a tainted capital gain. Such amounts are taxable as a dividend whenever distributed to shareholders, even during the course of the company’s liquidation. This is because the definition of “the available capital distribution amount” (which usually excludes capital gains from the dividend definition if distributed during liquidation) does not include a capital gain arising upon the disposal of an asset to an associated person. The proposed changes in the Bill, will result in the tainting issue only arising, firstly where the disposal is to another company (so disposals to non-corporate persons are excluded) where 85% commonality of ownership exists at the time of the disposal, and then secondly, that at the time of the distribution of the capital gain amount during the liquidation of the vendor company, more than 85% of the ownership interests in the asset are still owned by the original owners of the liquidating company. The focal point shifts therefore from determining the tainting issue at the time of the disposal of the asset itself (which could be some time pre the liquidation of the vendor company) to the time of the distribution of the gain to the vendor company’s shareholders during liquidation. The new rule is proposed to come into effect on the date of enactment of the Bill, and applies to any distribution made after that date (importantly “distribution” not “asset disposal”) which will effectively see existing tainted capital gains no longer retaining that status unless the 85% threshold is breached at the time of distribution.
GST on “Remote Services”
A timely reminder that the new rules apply from this weekend – 1st October 2016. Basically, where a non-resident supplies a “remote service” (essentially defined as a supply where at the time of performance of the service, there is no necessary connection between the physical location of the customer and the place where the services are performed) to a New Zealand resident non-business consumer (one not acquiring the service for use in their taxable activity), the non-resident supplier will have an obligation to register for NZ GST and charge GST on the supply, where they meet the usual registration criteria (supplies exceeding $60k in 12 month period etc). For the period 1st October 2016 through to 31 March 2017, GST returns will either be for one six month return period or for two monthly periods should the non-resident elect for the shorter filing period. Post 1st April 2017, all GST return periods will be quarterly. Non-resident suppliers who are caught by the new rules and are therefore required to apply for a NZ IRD number in order to register for GST, will be exempted from the new requirements to have an active NZ bank account. It will certainly be interesting to see what effect, if any, the new rules have on NZ resident consumers buying behaviours (now that the “GST” saving factor is likely to disappear).
Richard Ashby BBus, CA, CPA
PARTNER
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