TAX TIPS AUGUST 2018 - PWC
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Tax Tips
August 2018
In this issue:
New tax bill
simplifies taxation
of individual
income
New tax bill impacts
not-for-profit
entities
New tax bill
proposes changes to
the binding rulings
regime
Changes to our
international tax
regime: Six things
you need to know
Update on
the Customs and
Excise Act 2018:
Immediate action
required for
importers under
the provisional
value scheme
New tax bill simplifies taxation of
individual income
The Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Bill
contains proposed changes for the next stage of Inland Revenue’s business transformation programme.
The Bill was introduced on 28 June and has passed its first reading in Parliament.
The draft legislation follows earlier • If an individual is using an “unsuitable” 2. Making year end obligations as
consultation in June last year and builds rate for resident withholding tax simple as possible
on recently enacted changes relating (RWT) withheld from their investment
to employment and investment income income, Inland Revenue may contact Again, the changes around year end
reporting, which we discussed in our April an individual regarding this. Inland obligations hinge on Inland Revenue
2018 issue of Tax Tips. Revenue will instruct the investment receiving more timely information about
income payer to update the rate used if individuals. Simplifying the end of year
The Bill introduces changes focussed on income tax process is the key change.
the individual accepts the suggested rate
three key areas. Note that the following
or if no response is received within 20 The current process will be replaced with
proposals do not remove a taxpayer’s
working days. The proposed 20 working a pre-populated account that includes
ability to complete a paper-based form
day rule is based on the premise that the all income information Inland Revenue
should they wish to do so.
amount of money involved in the area holds about the individual. Individuals
of investment income is usually much who only earn “reportable income” will
1. Ensuring individuals are taxed
smaller than that of employment income. not have to do anything unless they know
most appropriately throughout the
Thus, there is less risk of the proposed the reportable income information is
tax year change leading to unsuitable amounts of incomplete.
The proposals in this area hinge on withholding.
Inland Revenue’s ability to use timely Only those people who earn income, or
• The current “special tax codes” will be have deductions Inland Revenue does not
employment and investment income replaced with “tailored tax codes”. A
information to determine whether already know about (“other income”), will
new online application process will be have to provide further information to
taxpayers are using the most appropriate implemented for tailored tax codes.
tax codes and rates during the year. The Inland Revenue.
Inland Revenue will be able to contact
proposals are: individuals to suggest a tailored tax code.
• If an individual who receives This proposal aims to reduce the cash
employment income is on an flow burden that secondary tax codes can
“unsuitable” tax code, Inland Revenue impose on people with multiple jobs or
may suggest a change to the tax code. income sources.
If the individual consents, Inland
Revenue will notify the employer of
this change. This builds on the current
practice whereby Inland Revenue notifies
individuals and employers of incorrect
tax codes, which must be corrected.
PwC Tax Tips August 2018 2
An individual’s tax assessment will occur
when either: Our thoughts
• they have confirmed the tax information We welcome these changes as they should make it much easier for individuals to
is complete, or interact with Inland Revenue and to ensure the right amount of tax is paid at the
• when Inland Revenue is reasonably right time.
satisfied that the information is complete. Ensuring individuals are taxed appropriately throughout the year has been a social
If Inland Revenue is not satisfied that issue for some time now, with those on secondary tax codes often feeling penalised
the information is complete, a default for having a second job. If Inland Revenue has the capacity to interact with these
assessment may be issued. individuals proactively, they will benefit from these proposed changes once enacted.
The Bill also proposes an error correction Having a pre-populated account in MyIR will also save time for many individuals,
process for adjustments made before and especially those who only have reportable income.
after an assessment has occurred. The changes to donation tax credits should result in many more people claiming
As Inland Revenue will calculate many these credits, which may encourage further charitable giving – the current process
individuals’ taxable income automatically, is onerous and discourages many taxpayers from submitting a claim.
the Bill proposes that Inland Revenue will In our submission on the discussion document last year, one of our key themes was
issue refunds automatically as well. ensuring that individuals were not absolved from taking responsibility for their
3. Donation tax credits own taxes. In our view, the proposals strike the right balance between making it
easier to interact with Inland Revenue, while still putting some responsibility on the
The Bill also introduces changes to individual to be aware of their tax position.
simplify the process for claiming donation
tax credits:
• Donation receipts will be submitted
during the year, and can be submitted
electronically.
• Donation tax credits can be claimed as
part of the income tax year end process.
• If an individual has already submitted
receipts during the year, these will
automatically be taken into account.
The individual will not have to fill in a
separate claim form.
PwC Tax Tips August 2018 3New tax bill impacts not-for-profit
entities
Several changes in the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and
Remedial Matters) Bill affect the charitable and not-for-profit sector. We acknowledge a number of the
proposed changes are intended to ensure the current rules reflect policy intent. To a large extent, the
changes are taxpayer friendly. However, not-for-profit entities need to be aware of the proposed changes
and determine whether any action is required.
Proposed changes affecting not-for- Proposed changes to • There will be a carve-out for marae assets
profit entities the deregistration rules on reservation land established under the
Te Ture Whenua Māori Act 1993 so that
• The business income exemption under The Bill proposes a number of remedial the value of the land and improvements
section CW 42 of the Income Tax Act changes to the current tax rules for on the land will be excluded from net
2007 will only apply to entities that are deregistered charities. asset calculation.
registered under the Charities Act 2005.
Under the charity deregistration tax rules, • Market value will need to be used when
• The deemed disposal provisions for the net assets of a deregistered charity calculating the entity’s net assets unless
depreciation recovery income will must be transferred or disposed of for a prescribed method is required for a
apply when a taxable entity becomes a charitable purposes or in accordance particular asset.
registered charity. with the charity’s rules contained on
• The Bill clarifies that assets transferred
• Entities seeking donee status for the Charities Services register within 12
to another charity in accordance with the
donation tax credit, gift deduction, or months. Otherwise, the value of those net
deregistration rules do not also qualify
fringe benefit tax exemption purposes assets will be subject to income tax. The
for a gift deduction thereby removing the
must obtain approval from the calculation of net assets excludes assets
ability to both reduce the deregistration
Commissioner of Inland Revenue. received from the Crown in relation to a
tax liability and be eligible for a gift
Treaty of Waitangi settlement claim or
• Entities with charitable purposes must deduction under the charitable giving
under the Māori Fisheries Act 2004 as well
be registered charities in order to obtain rules.
as any non-cash assets gifted to the entity
donee status.
when it was exempt from income tax. • There will be a de minimis threshold
• Penalties, use-of-money interest, and of $5,000 in net assets so that small
avoidance provisions will apply to The proposed changes are:
charities are excluded from the
donation tax credits that have been • Potential over-taxation of deregistered deregistration tax rules.
overpaid. charities will be prevented in group
The proposed changes, if enacted, will
• The disclosure requirements that apply structures where multiple members in
apply from 1 April 2019. However, the
to foreign trusts will also apply to foreign the group deregister together by allowing
amendments relating to marae assets
trusts that are registered charities. the value of the parent’s shares in the
and the availability of a gift deduction
subsidiary to be ignored.
The proposed changes, if enacted, may for assets transferred to another charity
• Where a charity sells an interest in a will apply retrospectively from 14 April
apply from the Bill’s date of introduction,
subsidiary at arm’s length for market 2014 (when the tax rules for deregistered
enactment date, or from 1 April 2019.
value, the deregistration tax will charities were first enacted).
Therefore, it is important that affected
not apply to that subsidiary if it is
entities act soon to ensure they do not fall
deregistered as a result of the sale. This
outside the charitable tax rules. This is
reflects the fact that no actual value
especially important in relation to donee
leaves the charitable group as market
status.
value is received for the disposal.
Get in touch
We strongly encourage not-for-profit entities to review the proposed changes
to ensure they will continue to fall within the ambit of the charitable giving
rules and determine whether they need to seek donee status.
Please get in touch with your usual PwC adviser if you would like to discuss
the potential impact of the proposed changes.
PwC Tax Tips August 2018 4New tax bill proposes changes to
the binding rulings regime
The Taxation (Annual Rates for 2018-19, In more detail
Modernising Tax Administration, and
Remedial Matters) Bill also contains
Short-form ruling Expanding the scope of binding
amendments to the binding rulings regime
that will both: The current ruling process can be rulings
• provide a short-form means for small-to- complicated and expensive and, therefore, Under current law, the binding rulings
medium enterprises (SMEs) to obtain a out of the reach of small and medium sized regime only allows Inland Revenue
binding ruling from Inland Revenue at a taxpayers. For example, it requires taxpayers to provide rulings in relation to “an
lower cost, and to set out in the application each of the arrangement”. Practically, this has meant that
taxation laws and the propositions of law for Inland Revenue is unable to provide rulings
• expand the scope of issues that Inland which the ruling is sought, and how these on factual matters, such as a taxpayer’s
Revenue will be able to rule on (both laws apply to the facts of the taxpayer’s purpose or intention when acquiring
under the proposed short-form arrangements. This generally necessitates property, a taxpayer’s residence, or the value
application process and the process that taxpayers engaging a tax adviser to prepare of property or services.
currently exists). a detailed application, adding further cost to
the process of obtaining a ruling. The proposed amendments will introduce
The binding rulings system is an important a list of matters that Inland Revenue will
feature of the New Zealand tax system. A short-form ruling process will be available specifically be able to rule on, including:
It allows taxpayers to obtain certainty in for taxpayers where:
relation to their tax positions without the • whether a person is resident or non-
need to resort to the disputes process and • the taxpayer’s gross income for the resident in New Zealand
litigation. However, the complexity of the tax year before the year in which the
• whether a person has a fixed
process to obtain a binding ruling means application is made is $5 million or less,
establishment or a permanent
that, for many SMEs, obtaining a ruling is and
establishment in New Zealand
not a practical option. In addition, there are • the ruling relates to tax that is expected
• whether two persons are associated
currently a number of issues that Inland to be less than $1 million.
Revenue cannot rule on (in particular • whether a person acquired property with
Under the short-form ruling process, a the purpose or intention of disposal.
factual, rather than legal, issues).
taxpayer will still need to describe and
The short-form, low-cost rulings process disclose all relevant facts and documents.
should result in increasing the availability However, the taxpayer will only need to state Our thoughts
of rulings for SMEs. Further, by expanding the general tax outcome in relation to which
These amendments should increase
the scope of the issues that Inland Revenue the ruling is sought.
the utility of the binding rulings regime
can rule on, the Bill will also increase the
Currently, Inland Revenue charges fees for where currently the certainty sought
potential utility of rulings for all taxpayers.
reviewing and providing a ruling set at a GST can be undermined by the inability of
For these reasons we support the proposed
inclusive rate of $161 per hour, along with a Inland Revenue to rule on the facts.
amendments.
$322 filing fee. The proposed amendments However, the practical effect of these
will also provide Inland Revenue with the amendments will ultimately depend
ability to charge lower fees for a short-form on the reasonableness of Inland
ruling (although how low these rates will be Revenue’s approach when considering
have yet to be determined). applications on these factual issues
and, in particular, the number of the
Our thoughts assumptions that might be required in
order to provide a ruling.
We support the proposed simplified
ruling options for small and medium
sized taxpayers. It should provide SME
taxpayers with greater access to upfront
certainty on their tax positions and will
hopefully also lead to a reduction in the
number of costly, time-consuming tax
disputes that SMEs currently face.
PwC Tax Tips August 2018 5Changes to our international tax
regime: Six things you need to know
Significant changes to New Zealand’s tax regime for cross-border relationships and transactions are
now enacted. See Tax Tips December 2017 and May 2018 for the technical details of these amendments
targeting base erosion and profit shifting (BEPS).
The impact of the new rules is being felt immediately. All businesses that operate offshore, are part of an overseas based group, or are based
offshore but have a New Zealand presence in any way, shape, or form need to proactively assess how they fit into the rules. Even businesses
operating under long-established and accepted business models may need to start making changes now. The rules come into effect for income
years beginning on or after 1 July 2018.
Here are six things you need to know based on our observations to date:
1. 5% - 15% rise in thin capitalisation 4. Increased transfer pricing 6. Tax treaties now a sword?
ratios documentation requirements Tax treaties are traditionally thought
With the tightening of the thin The changes to New Zealand’s of as a shield from unfair double tax
capitalisation regime, and ‘safe harbour’ transfer pricing regime place a greater outcomes rather than a sword that can
calculation undertaken (broadly) net of expectation on businesses to prepare be used to impose tax. The new source
non-debt liabilities, we are seeing thin New Zealand specific documentation rules challenge this way of thinking.
capitalisation gearing ratios rise between with a clear focus on the economic Some of our overseas clients who have
5% and 15%, and even more in some substance of an arrangement rather historically taken the view that income
cases. It is critical that your business than just the legal form. To date, this linked with New Zealand in some way
forecasts its year-end results and models has resulted in (i) clients who have not does not have a New Zealand source are
the impact of these changes on your previously had documentation looking taking steps now to confirm whether
ratio, particularly where debt to asset to put the processes in place to ensure this remains the case.
ratios have been 40% to 60% in the past. compliance, and (ii) for businesses with
documentation, clients reflecting on And more change is coming …
2. Related-party debt over $10m
whether their file requires updating in
All clients subject to the new, stricter Despite some improvements in drafting
its format to align to the revised OECD
requirements of the restricted transfer and design in various areas through the
Guidelines.
pricing rule need to review the pricing submissions process, errors have been
of their related party cross-border 5. What’s next for permanent picked up as taxpayers have begun to
debt in detail. Clients we have spoken establishments? navigate the rules in practice. This clearly
with already are expecting a material Businesses that would have a deemed indicates the complexity of the new rules,
reduction in their New Zealand tax permanent establishment (PE) arise and the insufficient time allowed for testing
deductions for interest payments going in New Zealand under the new rules to ensure the rules are correct, workable,
forward. In line with policy intent, have started, or are considering options and indeed capture what and who was
in many cases an amendment of the for, restructuring their operations intended to be captured from the date of
loan agreement or refinancing of the to combat the adverse New Zealand enactment.
debt is being considered to align the tax outcomes. This is in line with the Watch this space as we expect to see the first
commercial and tax outcome of the policy intent behind the new rules. set of remedial changes later this year.
interest payments, and minimise NRWT This also has significant impact on how
inefficiencies. businesses will operate commercially We also look forward to the release of
including contractual arrangements guidance and examples from Policy Officials
3. Unexpected hybrids to clarify the scenarios that are intended to
with third parties (customer, supplier,
For 30 June balance date clients (where and employee) and updating internal be captured and those that are not. We have
the rules are in effect from 1 July), we systems to align to the new contractual strongly encouraged Officials to provide
are seeing a variety of arrangements / flows. Therefore, sufficient lead time for detailed guidance about the circumstances
structures subject to the new hybrid rules implementation is crucial. in which the rules are and are not intended
in unexpected circumstances. In some to apply - we know this guidance will be
cases, changes to the group structure or vital given the inherent complexities of the
business operations are being worked new rules.
through to mitigate the effect of the new
rules. Focus now turns to businesses with
later balance dates. In our experience,
New Zealand clients getting the required
information from overseas parties has
been sometimes burdensome, and
businesses should ensure that they allow
for sufficient lead time to assess their
operations.
PwC Tax Tips August 2018 6Update on the Customs and Excise
Act 2018: Immediate action
required for importers under
the provisional value scheme
The new Customs and Excise Act 2018 (the Act) applies from 1 October 2018. In our June issue of Tax Tips,
we reported on the rewritten legislation and summarised the main changes for businesses.
The “provisional values” scheme is one of the important new measures introduced by the Act. This is
relevant to importers who cannot establish the customs value of goods at the time of importation. It allows
those importers within the scheme to enter a “provisional value” at the time of importation and a final
value later when full information is available. Compensatory interest and penalties (also introduced by
the Act) will not be charged on any difference between provisional and final values.
Importers will qualify to use provisional An importer who qualifies automatically
values automatically if: must notify Customs that they wish to use If you are an importer
provisional values.
• They have a binding ruling in relation to and cannot establish
a transfer pricing agreement (such as an New Zealand Customs also has discretion customs value at the time of
advance pricing agreement (APA)) that to allow an importer to use the scheme
involves the acquisition of goods, and if the importer cannot determine the
importation of goods, you
because of that agreement the importer final Customs value of goods at the time need to consider whether
cannot determine the value of the goods of importation but does not qualify you should register for the
at the time of importation. automatically to use provisional values.
This might be the case, for example, if the
provisional value scheme.
• They use the “transaction value” method
of valuing goods and the following price paid for goods will change because New Zealand Customs has
further adjustments to the value need to of transfer pricing but the importer does announced that applications
be made after importation of goods: not have an APA or the final value and / or
contract payment are not known when the
are expected to take up to
(i) royalty or licence fees goods are first imported. 30 working days to process.
payments that the buyer
must pay (directly or Further information is available on the New This means, if you wish to
indirectly) as a condition of Zealand Customs website at: use provisional values from
sale of the goods for export https://www.customs.govt.nz/2018-act- 1 October, you will need to
to New Zealand; or education/ submit your application with
(ii) proceeds of any subsequent supporting information
resale, disposal, or use of the
goods by the buyer that are by 20 August.
to accrue to the seller.
Get in touch
If you would like to discuss provisional values or any of the other customs and excise changes, please contact your usual PwC adviser or one
of our Indirect Taxes specialists including:
Eugen Trombitas Ian Rowe Kazune Obata
Partner Director Manager
T: +64 9 355 8686 T: +64 4 462 7274 T: +64 9 355 8090
M: +64 21 493 903 M: +64 27 274 2698 M: +64 21 266 3287
E: eugen.x.trombitas@pwc.com E: ian.rowe@pwc.com E: kazune.s.obata@pwc.com
Phil Fisher Catherine Francis
Partner Director
T: +64 4 462 7159 T: +64 9 355 8801
M: +64 27 462 7505 M: +64 20 406 76744
E: phil.j.fisher@pwc.com E: catherine.d.francis@pwc.com
PwC Tax Tips August 2018 7Facts on
Tax Amplified
More content, more interaction and more networking
Excited about tax? Then register for Facts
on Tax Amplified
The tax world is constantly evolving. The Government is introducing and passing new
tax legislation regularly, the Tax Working Group is busy working, Inland Revenue is
producing a constant stream of policy documents, and the Courts are busy handing down
judgments.
Our Facts on Tax Amplified course is a perfect way to keep on top of all the changes that
are relevant to you. We will cover topical tax issues and developments so you will be
more effective in your role whilst providing you with a unique training experience.
See our website for information about dates, venue, format, topics and how to register.
Register today at training.pwc.co.nzContributors
Phil Fisher Peter Boyce
Partner Partner
T: +64 4 462 7159 T: +64 9 355 8547
E: phil.j.fisher@pwc.com E: peter.boyce@pwc.com
Eugen Trombitas Erin Venter
Partner Partner
T: +64 9 355 8686 T: +64 9 355 8862
E: eugen.x.trombitas@pwc.com E: erin.l.venter@pwc.com
Briar Williams Sandy Lau
Partner Director
T +64 9 355 8531 T: +64 4 462 7523
E: briar.s.williams@pwc.com E: sandy.m.lau@pwc.com
Helen Johnson Emma Richards
Director, PwC Legal Director, PwC Legal
T: +64 9 355 8501 T: +64 4 462 7162
E: helen.n.johnson@pwc.com E: emma.h.richards@pwc.com
Catherine Francis Briar Paterson
Director Director
T: +64 9 355 8801 T: +64 9 355 8236
E: catherine.d.francis@pwc.com E: briar.k.paterson@pwc.com
Harry Cundy Josie Goddard
Senior Manager, PwC Legal Senior Manager
T: +64 9 355 8623 T: +64 4 462 7160
E: harry.r.cundy@pwc.com E: josie.r.goddard@pwc.com
Laura Lee
Senior Associate
T: +64 9 355 8346
E: laura.e.lee@pwc.com
Connect with us
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Email us
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