As a new tax year begins, we thought it timely to briefly survey recent and impending tax changes of particular interest to businesses. Many of these have been discussed in more detail in earlier FYIs, as noted below.
The Taxation (Livestock Valuation, Assets Expenditure and Remedial Matters) Bill (Bill) was introduced on 12 September 2012, with a related supplementary order paper (SOP) introduced on 11 December 2012. The Bill is currently before the Finance and Expenditure Select Committee, with its second reading anticipated very shortly.
Deductibility of expenditure relating to mixed-use assets
The centrepiece of the Bill is the proposed introduction (with effect from 1 April this year) of a new set of apportionment rules aimed at restricting income tax deductions for expenditure relating to assets used partly for income-earning purposes and partly for private purposes (mixed-use assets). The proposed mixed-use asset rules were discussed in detail in an earlier FYI.
Lease inducement and surrender payments
The SOP contained proposed new rules (again with a 1 April 2013 start date) to the effect that:
- lease inducement payments (LIPs) will be treated as taxable income in the hands of the recipient tenant and deductible expenditure to the landlord (reversing the prior position in which LIPs were generally treated as non-taxable capital receipts, with varying practices as to deductibility by the landlord); and
- lease surrender payments will also be treated as taxable income in the hands of the recipient and deductible expenditure to the payer.
Please refer to our earlier FYI for more information on the LIP changes.
Fringe benefit tax
As discussed in an FYI last month, the SOP also proposed extending the application of fringe benefit tax (FBT) to certain "on-premises" car parks provided by employers to employees. This proposal received widespread criticism leading to its abandonment (as announced by the Prime Minister on 18 March).
A further proposed FBT change concerns charitable organisations. Currently, charities are exempt from FBT on most non-cash benefits provided to their employees. The exception is where the benefit is a "short-term charge facility" with a cash equivalent value of more than 5% of the employee's yearly salary or wages. Broadly, this carve-out from the FBT exemption is aimed at charities that provide their employees with a business credit or debit card, and allow them to use the card to purchase personal items. This carve-out is to be broadened (from 1 April 2014) so that:
- the provision of vouchers is explicitly included within the definition of "short-term charge facility"; and
- the safe harbour is changed to the lesser of 5% of the employee's annual salary or wages and $1,200.
This relatively narrowly targeted measure is, itself, a significant retreat from earlier proposals (discussed in our earlier FYI) to largely remove the FBT exemption in any arrangement involving implicit or explicit salary sacrifice by a charity's employees.
Business-friendly GST changes
The Bill proposes an enhanced GST registration system (from 1 April 2014), allowing non-resident businesses to register for New Zealand GST, even if they do not make taxable supplies in New Zealand. This will allow such businesses to recover GST charged on certain supplies made to them by local businesses, where GST cannot be zero-rated.
A further GST change seeks to ease compliance issues in situations in which an agent makes a taxable supply on behalf of a principal.
These two proposed business-friendly GST changes are discussed in more detail in our earlier FYI.
IRD released an officials' issues paper dealing with employee allowances in November 2012. It noted that a number of concerns had arisen in relation to the tax treatment of meal, accommodation, communication and clothing allowances. Broadly, the paper proposes that the current general tax rules in the area, which may not be applied consistently, be replaced by specific rules clarifying when particular allowances are exempt or taxable.
For the most part, the proposed rules would produce outcomes in line with the current treatment adopted by many businesses. One exception, however, was a proposal that communication allowances for employee expenditure on communication devices and associated services, generally be taxable in full if the asset has an element of private (non-work-related) use.
This proposal seemed to be based on a presumption (not supported by any hard science) that communication tools and services funded by such allowances are, in reality, used by employees predominantly for private (rather than work) purposes. Like the FBT car park proposals, the so-called "iPad tax" received widespread criticism, leading also to an apparent back-down, with the Prime Minister recently saying that there is "virtually no chance of it going ahead".
Proposals to tighten interest deductions for foreign-owned businesses in New Zealand
IRD's first new policy pronouncement for 2013 was an officials' issues paper issued in January, suggesting possible fixes to a number of perceived weaknesses in the existing thin capitalisation rules. See our February FYI for more information.
November Act reminder
The Taxation (Annual Rates, Returns Filing, and Remedial Matters) Act 2012 (November Act) was enacted in November 2012. Notable measures included:
Changes to tax record retention requirements
Generally, businesses are required to retain in New Zealand financial and other records relating to their tax positions for a period of seven years from the end of the relevant tax year or period.
Previously, if a business wished to retain records outside New Zealand, including electronically using a "Cloud" or similar provider, it would have to make an individual application to IRD for dispensation.
The November Act introduced a new regime (start date 2 November 2012) enabling service providers to apply to IRD for a general dispensation to store New Zealand businesses' tax records offshore. A business using an approved offshore provider will not have to obtain an individual dispensation.
For more detail please see our December 2012 FYI.
GST on late payment penalties
The November Act "clarified" (with effect from 1 January 2013) that the GST treatment of a one-off late payment penalty must follow that of the underlying supply, rather than being treated as either liquidated damages (not subject to GST) or a finance charge (GST exempt). Note, however, that true penalty interest (ie a finance charge accruing over time on a simple or compounding basis) will continue to be treated as GST exempt.
Profit distribution plans
The November Act reversed the previous preferential tax treatment of a so-called "profit distribution plan" (PDP) relative to commercially equivalent dividend reinvestment plans and bonus issues in lieu. From 1 October 2012, a PDP is deemed to be a bonus issue in lieu.
Deductibility of unsuccessful software development costs
A further income tax change in the November Act permits an immediate deduction for the cost of unsuccessful software development projects in the income year that the project is abandoned. Previously, such expenditure may have been so-called "black hole" expenditure, for which neither a current year deduction, nor depreciation deductions for a usable software asset, would be available.
Taxation of multinational companies
The tax-planning arrangements of certain multinational companies, and particularly their ability to freely shift profits to low tax jurisdictions, have received recent media coverage in much of the developed world. Governments and tax policy institutions are moving to address the issue of base erosion and profit shifting (BEPS) with a growing sense of urgency.The primary concern is that key assumptions underpinning the way countries have traditionally allocated taxing rights in cross-border transactions - such as a "source" country giving up the right to tax a non-resident, on the assumption that the non-resident will be taxed on the transaction in its home jurisdiction - may no longer hold.
IRD has recognised this emerging issue, releasing a short report in December 2012. This report noted that the issue is certainly one that concerns New Zealand, is broader than a particular structure, industry or country and will require a global response. The importance of a global response was similarly highlighted in a further report published by the OECD in February this year, where it was acknowledged that the issue can only be tackled via a combination of domestic law changes and complementary amendments to double tax agreements.
The risk is that the time that will inevitably be needed to formulate a coordinated global response will be unacceptable to some larger economies, leading them to break from the pack and seek to address revenue loss with blunt instruments such as new withholding and transaction taxes.
This is certainly an area to watch in 2013 and beyond.