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New tax bill has something for everyone

Tax Alert - September 2022

It may feel like the Taxation (Annual Rates for 2021-22, GST and Remedial Matters) Act 2021 was only just passed, but the year has continued to speed along and late last month saw the introduction of the Taxation (Annual Rates for 2022-23, Platform Economy, and Remedial Matters) Bill (we will call it “PERM”, as it seems to have curled more than a few peoples hair when the GST and KiwiSaver news hit the media, but more on that later). Technically the PERM was withdrawn and has been reissued without the GST and KiwiSaver clauses.

As always, with any annual rates bill, the first part of the PERM Bill sets the annual tax rates for the 2022-23 income year. This part of the Bill has to be enacted by 31 March 2023, as without it the Government cannot collect income tax past 31 March 2023. There have been no changes by the Government to the income tax rates or brackets, even with the constant rumblings about tax bracket creep and high inflation.

In this article, we will summarise a number of the changes or remedial matters in the PERM Bill that are not the focus of specific articles later in this issue of Tax Alert.

It would be remiss not to mention the elephant in the room for the PERM Bill, the rapid removal of the proposed introduction of GST on managed funds fees. The quick and loud reaction of those 3 million odd New Zealanders with KiwiSaver accounts resulted in the Government swiftly announcing that this proposal would not go ahead and these sections have been removed from the Bill.

So what was the fuss about? The original version of the bill proposed that from 1 April 2026 all fund manager fees and all KiwiSaver manager fees would be subject to GST at 15%, which would have raised $225 million per year. We understand the current legislative settings will continue. For KiwiSaver managers this leaves the GST position on their fees as having a GST exempt status (while KiwiSaver hasn’t been around since 1986, that’s how long this rule for retirement savings has).

For non-KiwiSaver fund manager fees, there has been a range of differing GST treatments which have arisen over the years, along with various differing views from Inland Revenue. If there is no legislative change, arguably the lack of certainty will continue in this area. Our suggestion has been that there be an acceptance that this particular area of GST is a historically messy area, and that legislative change to allow managers a degree of certainty for their current treatment would be useful. We note that the transition provisions in the original PERM Bill would have potentially provided this degree of certainty, at least until 1 April 2026. However, given the recent statements from the Government as part of the withdrawal of the Bill, it will be interesting to see if there is any potential for some sort of pragmatic and practical legislative response. Businesses involved in this area should carefully consider their current treatment for GST purposes and be aware there may be more water to go under this bridge.

Included in the Bill are measures that clarify and widen the qualifying criteria for non-active trusts. This change is positive and resolves a few issues that have emerged following the introduction of the new trust disclosure requirements. The changes, once enacted, will apply retrospectively for the 2022 and later income years.

Confusion has reigned for the past 6 months over whether a trustee needs to apply for an IRD number to file a non-active trust declaration. Many trusts may never have filed a gifting statement if formed after the abolition of gift duty, or perhaps they were created before the requirement to supply an IRD number became compulsory under the Land Transfer Act 2017 for land transactions. The legislation clarifies that it is not necessary for a non-active trust without an IRD number to apply for an IRD number simply to be able to file the declaration that it is non-active.

Pleasingly the thresholds, which income and expenditure must be under to qualify as non-active, are to be increased as follows:

  • Reasonable administration fees (e.g. bank fees etc) are being increased from $200 to $1,000;
  • The level of income that can be earned by the trust has been extended from being only bank interest of $200 up to $1,000 of “reportable income”. This means income from which tax has been withheld as if the trust was a natural person earning this income. Practically for most trusts, this would include interest and dividends subject to RWT as well as attributed PIE income. 

If a trust owns a dwelling, insurance rates and other expenditure incidental to the occupation of the dwelling which is incurred by the beneficiaries are not taken into account in determining whether a trust is non-active. The legislation is to be clarified so that interest incurred by the beneficiaries can be included as well.

For completeness, reasonable fees can also be paid to a professional trustee to administer the trust and there has been no change to this requirement as no dollar threshold was ever specified.

Finally, testamentary trusts (i.e. those created after the death of a person) with small amounts of income will not be required to file a tax return. This is to prevent any compliance costs diminishing the value of the trust. This rule would apply to a testamentary trust where:

  • Total distributions during the income year do not exceed $100,000;
  • Reportable income earned does not exceed $5,000 for the income year provided tax has been deducted at the correct rates; and
  • If the trust derives non-reportable income of $1,000 or less, deductions against that income are at least $800 for the income year.

Several remedial measures for foreign trusts have been proposed. These include:

  • Introducing a “foreign exemption trust” definition which would see the trustees of any trust which uses the foreign-sourced income exemption now be required to comply with the foreign trust disclosure rules;
  • Giving the Commissioner of Inland Revenue the explicit power to deregister a trust if it does not meet registration requirements of the Tax Administration Act 1994;
  • Require trustees to update the information provided in annual returns, if it changes; and
  • Giving the Commissioner of Inland Revenue the discretion to be able to backdate registration of a foreign trust where a trustee has made reasonable efforts to register on time. 

Whether provisional tax instalments using the standard method are calculated using the uplift factor of 5% of the preceding year’s residual income tax (RIT) or 10% of the year before the preceding year’s RIT, is determined by several factors. Namely, when the preceding income year’s tax return is filed, which instalment we are calculating provisional tax for and whether a taxpayer has an extension of time for filing.

The Bill makes it clear that if a provisional tax instalment falls due on a non-working day, such that payment can be made on the next working day, this also extends for tax return filing purposes. This means that a tax return filed on the next working day after an instalment falling due over a weekend is deemed to have been filed on that instalment date and not after it. For example, if a 2022 tax return with a March balance date was filed on 29 August, being the next working day after the first instalment of provisional tax is due on 28 August, it would mean that first instalment of 2023 provisional tax would be calculated using the 105% uplift. This change will apply retrospectively from the beginning of the 2018 and later tax year.

There have been some other remedial changes to clarify interpretative issues on whether the 110% uplift can be used for an instalment.

The Bill proposes to exempt from FBT public transport fares (train, bus, ferry, tram or cable car services) that are subsidised by an employer mainly for the purpose of their employees travelling between home and place of work. It has been specifically noted in the Officials Commentary that accompanies the Bill that there will be no exemption if employees are reimbursed directly through payroll though, as that falls under the employment income rules and not the FBT rules. Therefore to be able to obtain the benefit of this exemption an employer will need to either purchase a public transport pass directly and give them to their employees or come to an arrangement with a public transport provider to pay a portion of the fare directly to the public transport provider. Either of these options is not going to be easy for employers to implement.

Other changes include:

  • Clarification that GST is payable on all legislative charges (including fees and levies)
  • Clarification that voluntary administrators are personally liable for GST liabilities incurred during an administration
  • Clarification of the business-2-business compulsory zero-rating of land rules
  • Clarification that a GST-registered person can claim an input tax deduction to the extent that the goods/services are intended to be used by them in making taxable supplies
  • Ensuring that electricity distribution network owners apply the component items approach, rather than the network approach, for depreciation and repairs and maintenance
  • Introducing a four-year time bar to student loan repayment obligations
  • Technical changes to the business continuity test to ensure ownership continuity provisions work correctly
  • Updates to reflect that accounting standard IFRS 4 will be replaced with IFRS 17 from January 2023 for general and life insurance
  • Allowing a tax return for a deceased person to include reportable income for up to 28 days after their date of death
  • Allowing New Zealand resident investors holding an interest of 10% in an Australian Unit Trust to use the Fair Dividend Rate method to calculate the attributable FIF income
  • Technical changes to the R&D Tax Incentive multi-year general approvals and material business changes
  • Updates to charities on the overseas donee list
  • Corrects the preferential debt status of employer KiwiSaver contributions in a liquidation

There is a lot in the Bill and we encourage you to read the more detailed articles that follow, as they are very useful guides to the changes coming. Please contact your usual Deloitte advisor if you would like to discuss how the changes in the Bill will impact you or your business.

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