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Special Tax Alert November 2013 - New tax bill

On 22 November 2013, the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Bill was introduced into Parliament. As the title suggests, it contains the rules clarifying the tax treatment of employer-provided accommodation and meal allowances which will be of interest to many readers. However it also contains a range of other important measures, most of which have been well signalled in issues papers throughout this year. Below, we have briefly summarised the contents and key points for your information. Look out for more in-depth analysis in our December Tax Alert. In the meantime, if you would like to discuss any of the proposals further, please contact your usual Deloitte tax advisor.

Contents:

Employee allowances
Thin capitalisation 
Black hole expenditure 
Clarifying the acquisition date of land 
Land-related lease payments 
Agreements for sale and purchase  
GST remedial reforms  
Substituting debenture rule to be repealed 
FATCA  
Charities deregistration and more
Conclusion 

 





Employee allowances


There has been much debate in the last few years over the tax treatment of employee allowances, due to a change in stance by Inland Revenue and, in particular, whether accommodation provided by employers to employees is taxable income.

After taking some time to consult and consider this issue, we are pleased to report that common sense has prevailed. In summary, the rules will operate as follows:

  • Where an employee relocates to a new work location, accommodation provided by the employer would be exempt from tax provided the deployment is expected to be for less than two years. If, during the period of the project, the expectation changes and it is clear that the deployment will last for more than 2 years (including if the employee decides they want to stay in the new work location), the accommodation will become taxable.
  • In circumstances where the employee is working on a capital project, the exemption can apply for up to three years, until it is clear that the employee will be working away from home for more than a three year period. This bright-line is extended to five years if the employment is in relation to a Canterbury earthquake recovery project.
  • Accommodation or accommodation allowances made to employees working in more than one workplace on an on-going basis are exempt from tax without an upper time limit.
  • When accommodation allowances are taxable, the taxable value will be based on the market rental value. However a specific valuation rule has been proposed for ministers of religion and for accommodation provided by the New Zealand Defence Force. Special valuation rules will also exist for employees deployed offshore to expensive locations to ensure taxable incomes are not disproportionately increased.
  • Other employment-related allowances such as meal payments which are incurred due to work related travel are exempt for up to three months, whilst meal payments and light refreshments incurred outside of work-related travel (such as at conferences) are also exempt in certain circumstances.
  • A specific exemption is proposed to make it clear that an allowance to cover the cost of buying and maintaining distinctive work clothing is not taxable. This matches the outcome for when such clothing is directly provided to employees (where an FBT exemption applies). This rule will also cover plain clothes allowances paid to members of a uniformed service who are required to wear ordinary clothing instead of their uniform.

Generally the intended application date of the proposals is 1 April 2015 with a few exceptions.

It should be noted however, in relation to the taxation of accommodation, the legislation includes a transitional provision which allows taxpayers / employers to apply the new rules dating back to 1 January 2011 provided they have not, before 6 December 2012, taken a tax position that the accommodation expenditure is taxable.

Employers should now assess whether the allowances they provide their employees would be eligible to be exempt under the specific provisions.


Thin capitalisation
 

Tightening up the thin capitalisation rules is one way New Zealand can be seen to be playing its part in tackling how multinationals are taxed and the “global base erosion and profit shifting problem”. Following the release of two issues papers this year, the bill now contains the provisions which will give effect to the majority of measures initially proposed in these issues papers. These changes could result in significant implications in certain situations.

The key change includes widening the ambit of the rules so that they apply to certain structures that currently are not subject to the thin capitalisation regime. In particular, the rules will apply to cover groups of non-residents who “act together”. Currently, the rules only apply when a single non-resident controls the investment. A group of non-resident shareholders in a company are treated as acting together, and will be known as a “non-resident owning body” if two or more non-residents have the following characteristics:

  • They have, directly or indirectly, debt in the company in proportion to their equity;
  • They have an agreement that sets out how the company should be funded if the company is not widely held;
  • They exercise their rights under their ownership interests in a way recommended by a person or persons (such as a private equity manager), or similarly a person or persons act on the members’ behalf to exercise their rights.

There are other changes, such as with regard to the inbound rules, excluding from the worldwide group debt calculation debt linked to shareholders of group entities and debt linked to persons associated with the shareholders.

The new rules will apply from the 2015-2016 income year. 


Black hole expenditure 


As part of Budget 2013, the Government announced some changes to allow deductibility of certain types of black hole expenditure. The bill contains the following measures:

  • Certain fixed-life resource consents granted under the Resource Management Act 1991 will be depreciable for tax purposes.
  • Capital expenditure incurred on applications for resource consents, patents or plant variety rights which are subsequently withdrawn, not lodged or refused, will be tax deductible. However deductions taken for aborted or unsuccessful applications will be clawed back as income if the taxpayer subsequently sell or uses the abandoned property.
  • All direct costs associated with the payment of dividends by a company to shareholders will be deductible.
  • Annual fees for listing on a stock exchange will be deductible, however it has been clarified that the initial costs of listing and costs of additional share issues are not tax deductible.
  • Annual shareholder-meeting costs will be immediately tax deductible but special shareholder meeting costs will not be.

Generally the amendments are proposed to apply from the 2014-2015 income year.


Clarifying the acquisition date of land 


If a taxpayer acquires land with an intention or purpose of disposal and subsequently disposes of that land, any profits will be taxable. The date the land was acquired is therefore important to ascertain in order to test the purchaser’s intention at the correct point in time. The rules in this regard have been clarified following an issues paper released as part of Budget 2013. The new bill clarifies that a person’s intention or purpose should be tested at the date a binding agreement is entered into. This rule is proposed to apply to disposals of land from 22 November 2013, being the date the bill was introduced.


Land-related lease payments 


An Officials’ issues paper released earlier this year had sought to radically reform and align the tax treatment of certain land-related lease payments. The proposals have been pared back from what was originally proposed with four technical amendments to the tax law relating to leases and licences of land so that lease transfer payments that are substitutable for taxable lease surrender and lease premium payments will be taxable. Changes are being made in respect of lease transfer payments, permanent easements, perpetually renewable leases (“Glasgow” leases) and consecutive leases. It is proposed that these changes will apply from 1 April 2015.


Agreements for sale and purchase 


The bill contains rules to simplify the tax treatment of agreements for sale and purchase of property or services denominated in a foreign currency that are financial arrangements. Broadly, IFRS taxpayers will be required to follow their accounting treatment which means the value of property and services and any interest included in foreign currency arrangements will follow the accounting treatment. Non-IFRS taxpayers will follow similar rules to IFRS taxpayers, based on spot exchange rates.

The reforms will have mandatory application to foreign currency arrangements entered into from the 2014-15 income year. IFRS taxpayers will be able to make a “once-and-for-all” election to apply the new rules to foreign currency arrangements entered into from the beginning of an income year commencing with the 2011-12 income year. In addition, it is proposed to validate tax positions already taken for pre-existing foreign currency arrangements if those tax positions are essentially based on the proposed new rules.


GST remedial reforms 


The bill contains a number of other remedial and technical issues, including some GST reforms that were proposed earlier this year in an issues paper. One change concerns the treatment of GST and directors’ fees. When an employee is engaged by a third party to be a director or a board member and the employee is required to account to the employer for any payments received, the employer will be treated as supplying the services to the third party.


Substituting debenture rule to be repealed 


The substituting debenture rule in section FA 2(5) of the Income Tax Act 2007 will be repealed with effect from the 2015-16 income year. This rule recharacterises debt issued by a company to its shareholders by reference to their equity (most commonly debt issued in proportion to shares held) as equity for tax purposes. This means interest paid in respect of a substituting debenture is taxed as a dividend; it is non-deductible to the company and subject to imputation. This section was introduced in the 1940s in what was a very different tax policy setting as a way of ensuring tax on the return from the paying company could be collected. This rule has become redundant and problematic in the current tax environment.


FATCA
 

New Zealand has signalled its intentions to negotiate an intergovernmental agreement (IGA) with the United States (US) to clarify the reporting obligations of New Zealand financial institutions under US law in relation to the Foreign Account Tax Compliance Act, more commonly known as FATCA. Broadly, the amendments proposed will help reduce compliance costs of FATCA for New Zealand financial institutions by helping them comply with the IGA.


Charities deregistration and more


The bill contains new rules to deal with the obligations of a deregistered charity when it ceases to derive exempt income as a result of being deregistered.

The bill also contains other remedial matters relating to controlled foreign companies, mixed-use assets, loss grouping, tax administration matters and issues arising as a result of the rewrite of the Income Tax Act 2007. 


Conclusion 


A submission date will be set once the bill has been referred to the Finance and Expenditure Committee. In the meantime, for more information, please contact your usual Deloitte tax advisor.

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