Publications
FYI
Tax
12 Dec 2011
Post-Election Tax Stock-Take
With the election behind us, it is timely to review what will (and what will not) be happening on the tax policy front in the short and medium term.
Where Are We At?
The reinstalled National-led coalition government will be keen to reinstate and pass into law two tax Bills that lapsed, at various points in the parliamentary process, over the election period. It will also be keen to pick up certain tax policy initiatives, not yet at the legislative stage, signalled in the months leading up to the election.
Meanwhile, the key tax planks of Labour's (and the Greens') economic policies, ideas ranging from the bold to the misguided, will gather dust, at least for the time-being. These included:
- the introduction of a broad-based, low-rate capital gains tax;
- reintroduction of the 12.5% R&D income tax credit, brought in by the Labour-led government in 2007 and abolished by John Key's government after it was elected in late 2008 (the credit applied only for the 2008-2009 tax year);
- increasing the top individual marginal tax rate to 39%, on income over $150,000;
- zero-rating GST on fruit and vegetables.
The capital gains tax (CGT) debate is worth having, and hopefully will continue. There are strong economic arguments in favour of introducing a CGT. New Zealand is one of the few exceptions among OECD countries in not comprehensibly taxing capital gains. It is not inconceivable that cross-party support for a CGT will evolve over time.
National has rejected the R&D tax credit on the grounds that it is too expensive, not targeted at the best research and potentially subject to "gaming", preferring to focus resources on projects such as the Ministry of Science and Innovation's R&D grant programme. For as long as a National-led coalition remains in government, the R&D tax credit appears off the agenda.
The suggested GST treatment of fruit and vegetables was a poor piece of tax policy. New Zealand's broad-based, uniform GST system is one of the fairest and best operating value-added tax systems in the world. Removing GST from a narrow (yet potentially hard to define) class of food items, even if well-intentioned, would result in an undesirable distortion of that system.
Lapsed Tax Bills
Taxation (International Investment and Remedial Matters) Bill
The Taxation (International Investment and Remedial Matters) Bill was reported back by the Finance and Expenditure Select Committee (FESC) in May, but had not been passed by the time parliament went into recess. It includes significant changes to the tax treatment of inward and outward cross-border investment, most of which are intended to take effect from the beginning of the 2012-2013 tax year. We expect to see this Bill passed soon.
- The Bill will extend the active income exemption, which currently applies to interests in overseas companies controlled by a single or small group of New Zealand shareholders (controlled foreign companies, or CFCs), to certain interests in non-controlled foreign entities (foreign investment funds, or FIFs). Under the current FIF rules, if a New Zealand shareholder has a minority 15% shareholding in, say, a Chinese manufacturing company, 15% of the net income of the Chinese company would be attributed directly to the New Zealand shareholder (or the New Zealand shareholder would otherwise be taxed on unrealised and realised gains associated with its interest in the Chinese company). The Bill will remove this tax burden, provided the income of the Chinese company is active income - eg income from a manufacturing activity.
- The current "grey list" exemption from the FIF rules for greater than 10% interests held in companies resident in Australia, the UK, USA, France, Japan, Canada, Germany, Norway, and Spain, will be removed. A narrower exemption for greater than 10% interests held in Australian-resident companies meeting certain criteria will be introduced.
- The rate of approved issuer levy (AIL) on interest paid to non-resident bondholders by New Zealand issuers of certain widely held bonds will be reduced from 2% to 0%. This is intended to help increase the liquidity of the New Zealand corporate bond market.
Taxation (Annual Rates, Returns Filing and Remedial Matters) Bill
The Taxation (Annual Rates, Returns Filing and Remedial Matters) Bill lapsed before being reported back by the FESC. We would expect this Bill to be passed during the first half of 2012. Proposed changes of note in this Bill include:
- Allowing an immediate income tax deduction for the costs of an unsuccessful software development project after the project is abandoned: An unsuccessful project does not produce a software asset for which depreciation deductions can be claimed. Further, most of the costs of an abandoned project would likely be non-deductible, capital expenditure in the absence of the proposed special allowance (which will be backdated to have effect from the 2007-2008 tax year).
- Treating a profit distribution plan as giving rise to a taxable dividend: Under profit distribution plans, a company makes a non-taxable bonus issue of shares to shareholders coupled with an offer immediately to repurchase the bonus issued shares for cash. Under current rules, this produces a tax-free result for a shareholder that takes up the repurchase offer. Inland Revenue's objection is that a profit distribution plan is economically equivalent to a company giving shareholders the option of receiving a cash dividend or a bonus issue in lieu of the dividend, in which case the distribution is treated as a taxable dividend whether the shareholder opts for cash or shares. The amendment aligns the treatment of profit distribution plans with bonus issues in lieu.
Taxation (Income-sharing Tax Credit) Bill
Another lapsed tax Bill is the Taxation (Income-sharing Tax Credit) Bill. This would give effect to the United Party's policy of allowing spouses and civil union and de facto partners with dependent children, to split their income, reducing their joint effective tax by having more income taxed at lower marginal rates. This Bill has been in no man's land since being reported back by the FESC last March, there being no appetite in the upper floors of the Beehive for the significant drag on the income tax take that would result (over $500 million annually).
National has agreed to reinstate the Bill in the government's upcoming reinstatement-of-legislation motion, as part of its coalition agreement with United Future. However, this may well be something of a symbolic gesture, there being no commitment on the part of the government to support the Bill on its second reading.
Other Tax Policy Developments
We now outline a number of other current tax policy matters of note.
- In August, Inland Revenue released a discussion document on the GST treatment of certain services provided by New Zealand businesses to non-resident businesses. New Zealand's GST rules, like most value-added tax regimes internationally, generally provide for GST neutrality (ie no net tax paid) in business-to-business transactions, the economic cost of GST ultimately being borne by non-business end-consumers. Coupled with this is a general principle that GST should apply only to the extent that the relevant goods or services are consumed or received in New Zealand.
Under current rules, neutrality is compromised where a New Zealand business provides a service to a non-resident business under a contract with the non-resident, but another person, such as an employee of the non-resident, receives the services in New Zealand. Because the services are received in New Zealand, the New Zealand business must charge the non-resident GST. This is a sunk cost to the non-resident business, because it does not itself make taxable supplies in New Zealand and so cannot register for GST and claim back the GST charged.
An example given in the discussion document is where a New Zealand flight-training school trains pilots employed by an overseas airline with no New Zealand operations. It is said that such airlines are disinclined to utilise New Zealand flight-training schools because of the associated irrecoverable GST cost.
The discussion document suggests a number of possible solutions. The most favoured option is a relaxation of GST registration requirements for non-resident businesses. This would enable the overseas airline in the above example to register for GST (and claim back the GST content in the flight-training school's invoices) despite having no New Zealand operations.
- New double tax agreements (DTAs) with Hong Kong and Turkey recently came into force. New DTAs with Vietnam and Papua New Guinea are being negotiated. Long-standing DTAs with Canada, the Netherlands, and the UK are currently being renegotiated.
- The current complex, inconsistent, and in some cases punitive tax treatment of interests held by New Zealand tax residents in overseas superannuation schemes is to be reviewed. A discussion document is to be released in the first half of 2012.
- Tax practitioners are eagerly anticipating the release (promised to be prior to Christmas) of IRD's long-awaited new interpretation statement draft on the general anti-avoidance provision (GAAP). This will set out IRD's views on the scope and application of the GAAP in light of its successes against taxpayers in anti-avoidance litigation over the past six or seven years (most recently the Supreme Court's decision on personal services income diversion arrangements in Penny & Hooper v CIR - see our October FYI Penny & Hooper - The Fallout). No doubt, and with some justification given recent successes, IRD sees an increasingly expansive role for the GAAP.
Authors
Paul Windeatt
Senior Associate - Tax
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In This Article:
With the election behind us, it is timely to review what will (and what will not) be happening on the tax policy front in the short and medium term.
Authors:
- Partners
- Barney CumberlandBarney Cumberland
- Stuart HutchinsonStuart Hutchinson
- Senior Associates
- Nick BlandNick Bland
- Paul WindeattPaul Windeatt
