Tax Bill contains a number of remedial changes to help taxpayers

The biggest tax announcement in Budget 2023 was the increase in the trustee tax rate from 33% to 39% from the 2024/25 income year, and despite this being a Budget announcement and included in Budget Day legislation, the new trustee tax rate hasn’t been fully legislated under Parliamentary urgency. Instead, the change in tax rate is one of a number of changes included in the Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Bill (‘the Bill’).

The Bill is currently with the Finance and Expenditure Committee (‘FEC’) for consideration and submissions have been called for, with the public given a deadline of 14 July to comment.

Aside from the trustee tax rate change (please refer to our separate article), what else is in the Bill?

Compared with Bills in recent history which have had well over 100 pages of legislation and long lists of policy changes, this Bill is refreshingly contained and on the whole taxpayer friendly, with the exception of the trustee tax rate change and the inclusion of complex legislation to introduce the OECD Pillar two global minimum tax.

OECD Pillar Two: Global Minimum Tax (GLoBE)

These rules will apply to multinationals with revenue in excess of €750million, so the number of businesses impacted is fairly small. New Zealand is adopting the OECD Model Rules via a reference rather than recasting the complex rules in the New Zealand legislation. This approach will save the Income Tax Act 2007 requiring a whole new volume but may make it harder for impacted businesses to understand their obligations. The OECD Model Rules run to 70 pages with another 220 pages of technical guidance notes. While adopting these rules, the Bill leaves some flexibility as to when they will apply, with the rules only coming into effect by Order in Council once the Government has determined that a critical mass of countries have adopted the GLoBE rules. The application date will be no earlier than 1 January 2024.

Taxpayers, both New Zealand headquartered or multinationals operating here, will need to register with Inland Revenue to advise they are within the scope of the rules, and file returns. Heavy penalties are being introduced to discourage non-compliance.

Taxation of backdated lump sum payments

Periodically a story pops up in the media about a Kiwi Battler who has had to fight the Accident Compensation Corporation (ACC) to obtain a payout and after years of not receiving compensation a large lump sum is awarded. The outcome of this process has been over-taxation, as the tax has been calculated based on the amount being received in a single year (i.e., it may be at least partially taxed at 39%), rather than reflecting that it may actually be the accumulation of modest amounts over an extended period. At long last, the Bill proposes to fix this anomaly with effect for payments made by ACC or the Ministry of Social Development after 1 April 2024. This is a very positive outcome for impacted taxpayers and rectifies an example of unfairness in the tax system.

Government KiwiSaver contributions for Paid Parental Leave recipients

Another Budget announcement, the Bill contains a change to facilitate the Government making matching 3% KiwiSaver contributions to recipients of paid parental leave (PPL) payments. While anyone can apply for PPL, the majority of these payments go to mothers, which is a small step forward to helping close the gap in average KiwiSaver balances, where currently men have balances, on average, 20 percent higher than women.

Taxation rollover relief

Businesses impacted by the North Island Flooding events may have had assets destroyed and may be anticipating receiving insurance proceeds to put right the damage. The standard tax rules can result in adverse outcomes for taxpayers, whereby a tax liability caused by depreciation recovery income impedes the ability of the business to then purchase replacement assets, or equally an extended insurance negotiation and recovery activity spanning years results in excessive tax compliance complications. As was done after the Canterbury and Kaikoura earthquakes, the Bill contains some time-limited optional rules including to:

• Ensure tax depreciation remains available during temporary access restrictions,

• Defer depreciation recovery income arising by rolling it into replacement assets,

• Recognise uneconomic to repair situations as triggering a disposal for tax purposes, and

• Temporarily defer disposal or repair tax events until both compensation and costs are known.

The exact mechanics for some of these concessions can be complicated, as can filtering compensation and recovery costs into the appropriate categories and treatments for tax purposes. Please contact your usual Deloitte advisor if you think you may be eligible.

Overseas donee status

Most taxation bills contain some adjustments to the list of donee organisations in schedule 32 of the Income Tax Act 2007. This Bill sees the following organisations added to the list: Butterfly Trust, Develop Together, Ekal Vidyalaya Foundation of New Zealand, the Limapela Foundation, Pasifika Safe Shelter Trust, and the Make My Name Count NZ Charitable Trust.

Extending the tax exemption for non-resident offshore oil rig and seismic vessel operators

This change extends a temporary exemption through to the end of 2029. This extension recognises that the time an oil rig or seismic vessel is required to be in New Zealand could extend beyond the 183 days they can be in New Zealand before tax starts arising under our Double Tax Agreements and mitigates the risk that the rigs will leave New Zealand before completing the relevant work.

Other remedial changes

The Bill contains a number of other remedial changes, which include:

• Correcting extra pay inaccuracy - It is proposed to change how tax on extra pay is calculated to make the calculation more accurate. The current calculation requires an employer to annualise earnings from the previous four weeks. This will change to require employers to look at the previous two paid pay periods. This change will apply from 1 April 2024 and is something that will likely require updates to payroll software.

• Sharing death information with KiwiSaver scheme providers – currently Inland Revenue is unable to notify KiwiSaver providers about deceased members. This will change from 1 April 2024.

• Charities changes – the Bill contains a number of minor changes to assist charities, including ensuring Charities are automatically exempt from RWT.

• Double tax agreement source rule – this is a positive change to remove an overreach of the DTA source rule in section YD 4(17D) that could see New Zealand taxing amounts that were not intended. This will apply retrospectively from 2018 when the rule was originally introduced.

• Transitional residents holding domestic financial arrangements – sometimes to obtain a visa a non-resident is required to make investments in New Zealand, including purchasing government bonds, before arriving in New Zealand which can result in unexpected tax outcomes. The Bill contains a technical change to ensure the tax rules apply correctly to new residents.

• 10% income interest test for access to the attributable FIF income method – this is a taxpayer friendly change to allow more taxpayers to access this calculation method in the year an investment is acquired or disposed of.

• Definition of ‘building’ – a new definition of ‘building’ is being added to the Income Tax Act 2007 in order to ensure that an interest in a unit title will be depreciable. This change is retrospective to when depreciation was reinstated for commercial buildings from 1 April 2020.

• Main home exclusion: construction period – the current 10-year bright-line test allows the time for constructing a property to be disregarded when determining whether the main home exemption applies. This Bill is inserting a similar test within the 5-year bright-line test (which applies to properties acquired between 29 March 2018 and 27 March 2021).

For more information, please contact your usual Deloitte advisor.