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December 2014
Tax UPDATE
A-Z Review of 2014.
As Christmas rapidly approaches, it is
time for a non-technical review of various
tax facts, highlights, and lowlights, from the
past year.
A is for avoidance:
the mainstream media continues to
comment on avoidance by multi-nationals and assert
that they are not paying ‘their fair share’ of tax.
However, as Willy DJ said “There is nothing fair or
unfair about the imposition and collection of tax. It is
merely that sum which the Parliament considers it
should exact from the income earning members of
the public...”1.
B
C
is for bankruptcy: the Inland Revenue Department
(IRD) is seeking to bankrupt Mr JG Russell having
gained judgment against him for in excess of $365
million in unpaid taxes and penalties. Mr Russell, of
Securitibank fame, and the IRD have a history of
litigation dating back to the early 1980s. Also, there
has been two decades of litigation relating to various
taxpayers who had adopted his ‘template’, which was
found to be an avoidance arrangement.
is for capital gains tax (CGT): the proposal to
implement a CGT was a major policy of Labour leading
into the election. The election result would suggest
the majority of New Zealanders do not support its
introduction.
1 Case S85 (1996) 17 NZTC 7,534 at p 7,536
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D is for disbanded:
the Rewrite Advisory Committee,
which was formed to ensure no unintended changes
arose from the rewrite of the income tax legislation
(into the Income Tax Act 2007), was disbanded in
December as it had fulfilled its purpose. Any further
unintended changes are to be dealt with by the policy
section of the IRD, as part of its usual work programme.
However, why do we get the feeling that unintended
changes which have an adverse effect on the tax take
will be dealt with promptly, but those that generate a
tax overreach will never get addressed (such as the
long-standing issue with tainted capital gains)...
E
F
is for employee allowances and benefits: changes
were enacted earlier this year, which in part change
and in part clarify the tax implications of: expenditure
on account of an employee; accommodation
allowances and employer-provided accommodation;
and employee meals. Most, but not all, of the changes
will be effective on 1 April 2015.
is for Foreign Account Tax Compliance Act (FATCA):
the deadline date of 31 December 2014 is swiftly
approaching for New Zealand financial institutions
that need to register with the United States Internal
Revenue Service (IRS) for FATCA purposes.
The deadline date arises under the intergovernmental
agreement between the United States and New
Zealand, which came into force on 1 July 2014, and
the related Memorandum of Understanding.
G is for Google tax:
the nickname given to the United
Kingdom’s proposal, announced by Chancellor George
Osborne in the half-yearly budget statement in early
December, to introduce a 25% tax on the profits of
multi-nationals that are generated “from economic
activity here in the UK which they then artificially shift
out of the country”. Australian Treasurer Joe Hockey
has announced a similar intention. Although these
statements may have a sound bite attraction politically,
how in fact these proposals would achieve the stated
aim, having regard to the tax treaty network that each
country belongs to, remains to be seen. Furthermore,
it appears that they may have the potential to undermine
the base erosion and profit shifting (BEPS) project and
create an argument over taxing rights between countries
(or the risk of double taxation to the taxpayer).
J
K
L
I
is for interest deductions: the second area coming
out of the BEPS process where the IRD is considering
domestic law reform. The reforms are likely to centre
on limiting deductions for interest, particularly where it
relates to related party, high priced debt.
is for KiwiSaver: since inception, the tax implications
of KiwiSaver have been subject to constant tweaking.
The latest, proposed in the December Taxation
(KiwiSaver HomeStart and Remedial Matters) Bill,
is to extend the scope of the first home withdrawal to
include the member tax credit.
is for land: changes enacted this year that relate to
land include: clarification of the date at which land is
acquired for the purposes of the land rules (Subpart
CB Income Tax Act 2007); extending the taxing rules
regarding lease related payment (e.g. to include
certain lease transfer payments and lease termination
payments); and excluding Glasgow leases from being
depreciable property.
Mis for mixed use assets:
the tax rules relating to
mixed use assets (in essence, land/improvements to
land, ships/boats, and aircraft which are used for
both personal purposes and for deriving income)
were extensively rewritten in 2013. This year, we
saw a number of remedial tweaks being made to
those rules.
N is for nine:
$9.3 billion is the amount of debt owed
to the IRD, including tax, student loans and child
support.
O is for online:
work is underway designing the
replacement computer system for the IRD, and with
it comes an over-riding agenda to force taxpayers to
interact with the IRD online. The ability of taxpayers
to interact with the IRD offline is becoming
increasingly limited. Face-to-face contact is virtually a
thing of the past, as local offices have been shut
down progressively over the past couple of decades.
Even telephone contact is becoming harder, with
callers facing an increasing wall of automated
responses before reaching an actual person.
H is for hybrid mismatches:
one of two areas coming
out of the OECD’s work on BEPS where the IRD is
considering domestic law reform. The reforms are
likely to centre on limiting the effect of a particular
transaction/scenario being characterised as one thing
in New Zealand and as something else in another
country (e.g. as an equity security generating dividends
in one country and as a debt security generating
interest in the other).
is for Jennings Roadfreight2: at issue in this case
was the priority that the IRD receives (as compared to
other creditors) in the scenario where a company had
deducted tax under the pay-as-you-earn (PAYE) rules
but not returned those amounts to the IRD by the due
date at the time it entered liquidation. The Court of
Appeal finding meant that the IRD got a super-priority,
but the Supreme Court reversed that decision. In
short, the Supreme Court found that, as a result of the
operation of section 167(2) of the Tax Administration
Act 1994, the priorities set out in Schedule 7 of the
Companies Act 1993 trumped the trust status that
applies to PAYE deductions (which arose under
section 167(1)).
P
is for property speculation: time and time again
we hear cries that a CGT is needed to curb property
speculation and rising Auckland house prices.
Of course, those who make these cries conveniently
forget that the proceeds from property speculation
are classified as income under current tax law, so the
profits are taxable at the taxpayer’s marginal tax rate.
2 Commissioner of Inland Revenue v Jennings Roadfreight Limited (In Liquidation) - [2013] NZCA 455
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Q is for Qatar:
Qatar and the United Arab Emirates
shared 1st place for ease of paying taxes in the
World Bank’s latest annual Doing Business 2015:
Going Beyond Efficiency report. New Zealand was
in 22nd place.
R
S
T
is for residency: New Zealand bases its right to tax
income on the twin grounds of residency and source.
The decision of the High Court in the Diamond3 case
in August found Mr Diamond, who had ceased living
in New Zealand in 2003, was not resident for income
tax purposes in the tax years ending 2004 to 2007.
This overturned the somewhat bizarre decision of the
Taxation Review Authority (TRA), which had held he
was resident under the permanent place of abode test
due to co-owning residential rental properties with his
ex-wife (even though he had never lived in them).
is for sugar tax: often advocated for by health
professionals in New Zealand, along with other forms
of fat tax. Mexico introduced a tax on sugary drinks
this year, whereas Denmark has repealed its fat tax
after only one year.
is for (financial) transactions tax: the drive by
Germany and France to introduce a financial
transactions tax on banks across the European Union
appears to have failed to get the support needed for
this to be imposed. The United Kingdom was a major
opponent of the new tax. The proponents of the tax
are now looking for a voluntary adoption by countries
that support the concept, but this is unlikely to occur
due to the market distortions that would flow from a
piecemeal adoption of it.
U is for unclaimed monies:
money that has sat
untouched for six or more years with a bank or
financial institution may be classified as unclaimed
money, which is placed within the control of the IRD.
The IRD lists the name of the account-holder and the
amount held on its website. A quick check of the list
should be common practice for anyone who is
appointed as the executor of the estate of someone
who was mentally infirm and may have lost track of
their affairs. This may provide an unexpected
Christmas present for the beneficiaries of the estate.
V is for value for money:
The return from each $1
spent by the IRD on its enforcement action is stated
to be, in relation to:
Wis for Woodward v R :
Mr Woodward, an accountant,
was convicted in the Tauranga District Court in 2013
on multiple counts of tax evasion and one count of
perjury. In April 2014, his appeal on the perjury
conviction was rejected by the Court of Appeal.
The charge related to an interview of Mr Woodward
by the IRD, conducted pursuant to section 19 of the
Tax Administration Act 1994, at which he was required
to produce documents relevant to the subject matter
of the interview. The IRD was of the view that his
answers were misleading, and the Court of Appeal
agreed. The case highlights the fact that section 19
specifically states that there is no privilege against
self-incrimination at such interviews. It also provides
that statements made are generally inadmissible in
criminal proceedings, except for a charge of perjury.
4
X is for Xmas gifts:
if giving Xmas gifts to your
employees, remember to consider whether these will
attract fringe benefit tax. If giving a cash bonus,
remember this will need to go through the PAYE
system. So if you want to give a crispy $100 note to
an employee, you will be grossing it up for tax
purposes.
Y
Z
is for yesteryear: being what tax litigators long for.
In 2014 (with two weeks left), there have been 14
reported TRA decisions and 46 court decisions with a
tax focus. Going back ten years to 2004, there were
30 reported TRA decisions and 61 court decisions
with a tax focus. Going back 20 years to 1994, to
before the current ‘disputes procedure’ was enacted,
there were 38 reported TRA decisions and 71 court
decisions with a tax focus5.
is for zeolite, zinc and zircon: These are three of the
approximately 50 listed industrial minerals. The rules
dealing with income from mineral mining were
modified with effect from 1 April 2014, for the
2014-2015 and subsequent income years.
If you have any questions or require further information
regarding any aspect of this update, please contact us.
Contacts
Lynette Smith
Special Counsel
+64 9 300 3812
[email protected]
(i) overdue student loans - $16 (Minister for Tertiary
Education, Skills and Employment, 1 December
2014);
(ii) property speculation - $8 (Minister of Revenue,
27 November 2014); and
(iii) tax fraud - $3.73 (Minister of Revenue,
3 December 2014).
3 Diamond v Commissioner of Inland Revenue [2014] NZHC 1935
4 Woodward v R (2014) 26 NZTC 21-068
5 Reported refers to cases reported in the CCH New Zealand Tax Library
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