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Matters raised by submitters

Bank account requirement

Issue: Bank account number prerequisite

Submission

(EY)

Further consideration of this proposal is needed to determine whether it is necessary and to limit its possible application.

Comment

The intent of the bank account requirement is that it will provide Inland Revenue with more confidence that it knows who it is dealing with by ensuring that a person has first satisfied a financial institution’s anti-money laundering verification of identity requirements.

Subject to the changes recommended below, officials consider that the bill is appropriately drafted to achieve this objective.

Recommendation

That the submission be declined.

Issue: Bank account number on becoming offshore person

Submission

(Chartered Accountants Australia and New Zealand)

The requirement for a person to provide a New Zealand bank account number to Inland Revenue upon becoming an “offshore” person should be removed.

Comment

Officials consider that the requirement to provide a bank account on becoming an offshore person is an important anti-avoidance measure. If a New Zealand person were to establish such companies and sell their interests in them to offshore persons without the bank account requirement kicking in, the requirement could be easily circumvented.

The comment by the submitter that Inland Revenue will already have a bank account for the person, or have other means of accessing their bank account information will not always be the case in practice. Some companies incorporated in New Zealand will not have New Zealand bank accounts and will not have been required to provide one to Inland Revenue.

Recommendation

That the submission be declined.

Issue: Guidance on transition to bank account requirement

Submission

(PricewaterhouseCoopers)

Guidance should be produced by Inland Revenue as to whether non-individual offshore persons which already have an IRD number need to provide Inland Revenue with a New Zealand bank account number.

Comment

The provision applies only to people that apply for an IRD number on or after 1 October 2015. If a company that is an “offshore person” already has an IRD number, they will not be required to provide a bank account to Inland Revenue after that date. The only way that a person with a current IRD number can be required to provide a bank account is if they are a non-individual and become an offshore person on or after 1 October (for example, if New Zealand shareholders of a New Zealand-registered company sell their shares to offshore individuals).

Recommendation

That the submission be noted.

Issue: Preventing double provision of bank account number

Submission

(PricewaterhouseCoopers)

The proposed rule should be changed to ensure that only those non-individuals who have not previously provided Inland Revenue with a bank account number will be required to provide one.

Comment

The submission raises the issue of whether the provision of a bank account at this stage is necessary if Inland Revenue already has bank account details of that company. Officials would agree that requiring a bank account in these circumstances would be unnecessary, but only if the bank account that Inland Revenue has on file is current at the relevant time.

Recommendation

That the submission be accepted and that the legislation be amended to clarify that a bank account is not required if Inland Revenue already has a current account for a non-individual at the time it becomes an offshore person.

Issue: Timeframes of obligation to provide bank account number

Submission

(PricewaterhouseCoopers)

The obligation to provide a New Zealand bank account number to Inland Revenue could be extended to the 20th of the following month (to align with various tax return due dates), with a potential requirement to provide the account number earlier if a tax statement is completed at an earlier date.

Comment

It is necessary for the legislation to be clear about when the obligation to provide a bank account number arises. Officials consider that an immediate obligation is appropriate. Given that is the time that the interests are being transferred, it would allow the bank account requirement to form part of the transfer transaction.

Recommendation

That the submission be declined.

Issue: Bank account requirement limited to non-individuals dealing in or holding property

Submission

(PricewaterhouseCoopers)

The requirement to provide a New Zealand bank account number should be limited to non-individuals who either hold property or are in the process of actually making a property transfer.

Comment

As set out above, the policy is that it will provide Inland Revenue with more confidence that it knows who it is dealing with by ensuring that a person has first satisfied a financial institution’s anti-money laundering verification of identity requirements. It is intended that this policy apply equally to both individuals and non-individuals.

With regard to the timing of the bank account requirement, the IRD number application is a recognised point of contact for people with Inland Revenue. It is expected that the vast majority of offshore persons that are individuals and have the ability to work will either have, or will be otherwise required to obtain a bank account as part of their working arrangements. Those offshore people that are not required to get an account are more likely to be the people that the proposal is targeting, so imposing the bank account requirement is consistent with the policy.

Inland Revenue is generally not involved in the property transaction process. Making an additional contact point with Inland Revenue at that time would add compliance costs. Equally, having the bank account information routed through LINZ would add administration costs to that process. If a party to a property transaction was required to provide evidence of a New Zealand bank account as part of that transaction, it would require either:

  • The person (generally a conveyancing lawyer) registering the change of property ownership to certify that the account exists. The Bill has been drafted on the basis that the advisors (in most cases the conveyancing lawyer) will not need to certify information being provided by the vendor or purchaser as being correct. This was a deliberate policy decision to ensure that penalties for non-compliance rest with the underlying vendor/purchaser of the property, rather than their advisors. To impose obligations at the advisor level would result in increased transaction costs as advisors would require longer to certify documents and would probably require new or different tools to authenticate information their clients provide them; or
  • The lawyer providing a copy of a bank statement (or some other similar evidence) to LINZ outside of the automated Landonline registration process. The receipt and passing on of this information would be administratively cumbersome for conveyancing lawyers and LINZ and potentially for the information exchange with Inland Revenue. Whether a person is an “offshore person” is not currently a feature of the information being collated by LINZ – it is only relevant for a person’s self-assessment of whether an exemption applies.

Recommendation

That the submission be declined.

Issue: The bank account requirement may not deliver intended outcomes

Submission

(New Zealand Bankers’ Association, ANZ)

The bank account requirement may be undermined, particularly by anti-money laundering rules that allow accounts to be opened prior to completion of all due diligence.

Comment

Officials note that, under section 16(3) of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009, customer due diligence can only be conducted after the business relationship has been established if:

a) it is essential not to interrupt normal business practice; and

b) money laundering and financing of terrorism risks are effectively managed through procedures of transaction limitations and account monitoring; and

c) verification of identity is completed as soon as is practicable once the business relationship has been established.

It will be up to the financial institution to determine in any given case whether these criteria are met.

Officials consider it is appropriate for offshore applicants to go through the appropriate anti-money laundering due diligence checks (even if those are the enhanced checks for high risk customers), as that is what the Bill is designed to achieve. Officials consider that the requirement may result in increased customer numbers for financial institutions, but it is not the intention that new customers are treated differently – just that they are subject to the appropriate anti-money laundering checks. There are no extra reporting obligations imposed by these requirements.

In saying this, officials understand from the submission that the anti-money laundering rules allow a bank to open an account and then require/examine all the identity material sometime later. Until the customer goes through all the checks, the account is effectively frozen to transactions.

Officials are concerned that this scenario could pose a significant risk to the effectiveness of the rules. An offshore person could open an account with a token amount, use that account to gain an IRD number and then never actually go through the customer due diligence process. The bank would presumably close the account after trying to obtain the information, but Inland Revenue may never know of this. The customer may prefer this approach because they get an IRD number and only lose the small amount involved in the initial deposit.

Officials suggest clarifying the bill so that only an account on which customer due diligence had been completed could be used to obtain the IRD number. If the person uses a “frozen account” to obtain an IRD number they would be breaching the requirement in the bill (with associated penalties). As stated above, officials do not intend to impose any additional compliance burden on banks. It would up to the customer to only use an appropriate account in their IRD number application. The customer should know that due diligence had been completed because the account would be “unfrozen”.

As mentioned above, officials recommend that this policy be reviewed after the Phase 2 roll-out of the anti-money laundering rules, so whether this change is having the desired effect this is something that could be considered as part of that review.

Recommendation

That the submission be accepted and the bill be amended to clarify that only accounts on which customer due diligence has been fully completed should be able to be used to obtain an IRD number.

Issue: Compliance costs

Submission

(New Zealand Bankers’ Association, ANZ)

Other potential impacts could be that it will be harder for foreign investors to open accounts and there may be increased dormant accounts. The 1 October effective date is challenging.

Comment

It is not the intention of these rules to make it harder for offshore persons to open accounts, just that they do so. Equally, it is not the intention that this requirement imposes significant compliance costs on banks. Although dormant accounts may increase in number, officials expect banks to handle these accounts using existing processes. It is not necessary for the account to remain open indefinitely.

The 1 October date is an important component of these changes, because there are a suite of changes all occurring on that date. Alignment is seen as crucial so that the start date of information provision requirements matches that for other measures.

Recommendation

That the submission be noted.

Issue: Communication strategy for bank account requirement

Submission

(PricewaterhouseCoopers)

Inland Revenue should develop a communication strategy to ensure that persons affected by the new bank account requirement are sufficiently aware of their new obligations upon commencement.

Comment

Inland Revenue and LINZ are coordinating to ensure that advisors most likely to be involved in property transactions are aware of any obligations that their clients may be under following the introduction of these rules. The IRD number application form will be updated so that, post 1 October 2015 the bank account requirement will be clearly signalled for offshore applicants.

Recommendation

That the submission be noted.

Issue: Banks requiring IRD number before opening account

Submission

(Chapman Tripp)

Offshore persons may have difficulty providing a New Zealand bank account number in order to obtain an IRD number because some registered banks will require an IRD number before they will allow a bank account to be opened.

Comment

Officials understand that the absence of an IRD number should not prevent a person from opening a bank account. A bank could open an account irrespective of whether the person has the number. The practical difference is, as the submitter points out, that the “non-disclosure” tax rate will apply to the account until an IRD number is attached to it. The non-disclosure rate is the top personal marginal rate of 33%.

However, if a person opens an account and then applies for an IRD number, the IRD number can then be taken back to the bank and attached to the account. It is recognised that this extra transaction with the bank will have some compliance costs, but these are not expected to be significant. Also, given the timeframes, if these actions are taken promptly, it is unlikely that the higher rate will be in place for any meaningful period of time and so should not impact on interest payments made in respect of the account.

Recommendation

That the submission be noted.

Issue: Post-implementation review of bank account requirement

Submission

(Chartered Accountants Australia and New Zealand)

A post-implementation review is done in two-three years’ time on the requirement to provide a New Zealand bank account number in order to obtain an IRD number.

Comment

A post implementation review is a recognised part of the generic tax policy process.[2] The submitter has raised the issue that the bank account requirement may be superseded by Phase 2 of the anti-money laundering legislation, which is expected to apply to solicitors, real estate agents and conveyancers.

Officials agree that unnecessary duplication of information is undesirable and so, subject to other Government priorities, agree that the effect of the bank account requirement be reviewed following Phase 2 of the anti-money laundering reform.

Recommendation

That the submission be noted.

Issue: Definition of offshore person

Submission

(Chartered Accountants Australia and New Zealand, Chapman Tripp)

Reconsider the first two parts of the definition of offshore person (for an individual), those being New Zealand citizens not in New Zealand within the previous three years and resident class visa holders not in New Zealand in the last 12 months. (Chartered Accountants Australia and New Zealand)

For the purposes of being under a positive obligation to provide a bank account number, the definition should align with the “overseas person” definition in the Overseas Investment Act. (Chapman Tripp)

Comment

A definition linked to immigration status was chosen because it is easier for most people to understand than the concept of tax residence. Although a person’s tax residence and immigration status are often the same, this is not always the case. In marginal cases, tax residence can be difficult to determine, whereas immigration status is generally clearer.

However, officials consider it is important that there is not a blanket exemption from the bank account requirement for New Zealand citizens. If a person has no meaningful connection with New Zealand their treatment should be the same irrespective of their immigration status.

The proposed test that a citizen will become an offshore person if they have not been in New Zealand in the previous three years (12 months in the case of residence class visa holders) is replicated in the Electoral Act 1993. Officials consider this test will be simple for people to apply and is appropriate in terms of differentiating between citizens and residents that have retained some connection with New Zealand and those that have not.

With regard to the Chapman Tripp submission, officials consider that applying one rule for individuals and a different rule for individuals that have interest in a New Zealand company/trust may incentivise people to ether apply for an IRD number directly or as a shareholder in a company, depending on which route provides the more favourable outcome. To the extent possible, officials consider it desirable to limit these types of behavioural distortions.

Recommendation

That the submissions be declined.

Issue: Clarification on “been in New Zealand”

Submission

(Chartered Accountants Australia and New Zealand)

Clarification is needed for the concept of having “been in New Zealand”

Comment

The expression “been in New Zealand” is intended to be interpreted at face value. It is not intended to impose a time limit on a person’s stay in the country, merely provide recognition for having entered the country.

Recommendation

That the submission be noted.

Issue: Exception for inbound short-term employees

Submission

(Chartered Accountants Australia and New Zealand)

Inbound short-term employees who work in New Zealand should be provided with an exemption in the definition of an offshore person.

Comment

Officials understand that the vast majority of people entering New Zealand on visas allowing employment will either be required to, or will chose to, open a New Zealand bank account in any event as a recipient account for their New Zealand wages. Therefore, although the proposal will require a different sequence of events (obtaining the bank account first and the IRD number second), the additional compliance costs on these immigrants is expected to be relatively low.

Some non-resident workers are engaged on short-term assignments, for example to install or maintain specialised machinery. These visa-holders may be exempt from New Zealand tax if either they never become tax resident under our domestic law or if they are treated as non-resident by the operation of a double tax agreement. If they are not subject to New Zealand tax they are not required to get an IRD number, and so the bank account requirement would not apply to this group.

It is also important to note that no class of visa restricts the ability of the person to purchase New Zealand residential property. The policy objective of this initiative is to increase compliance of New Zealand’s tax laws as they relate to property transactions. Therefore, in order for an exemption to be considered, there would need to be a clearly identifiable group that posed no real revenue risk from a property compliance perspective. The intent of the policy could be defeated if there was an immigration status that was exempt from the bank account requirement and property investors could access this status.

Recommendation

That the submission be declined.

Issue: Shifting identification verification onus onto other parties in land transactions

Submission

(New Zealand Bankers’ Association, ANZ)

The bank account requirement should be removed and replaced with a verification of identification obligation to be placed on parties that will already have relationships with overseas purchasers of land, such as real estate agents and lawyers. Additionally, Phase 2 of anti-money laundering reform should be expedited.

Comment

At present, New Zealand’s anti-money laundering rules do not apply to professional bodies such as real estate agents, conveyancers and solicitors. However, it is anticipated that these professionals will be subject to the customer due diligence requirements as part of Phase 2 of the anti-money laundering rules. To impose due diligence obligations on such people as part of this bill, prior to Phase 2 of the anti-money laundering reform, could be seen as subverting the planned roll-out of the anti-money laundering rules.

As set out above, officials consider it would be appropriate to review these rules once anti-money laundering Phase 2 has occurred to see if there is unacceptable duplication of information at that time.

Inland Revenue and LINZ officials understand that the Ministry of Justice are considering timing for Phase 2 roll-out.

Recommendation

That the submission be declined.

Issue: Drafting error

Submission

(EY)

The cross-reference to the Overseas Investment Act in clause 9(3)(b) refers to sections 7(2)(b) – (e) of that Act. It should refer to sections 7(2)(b) – (f).

Comment

Officials agree that the cross-reference contains an error.

Recommendation

That the submission be accepted.

 

[2] Further information about the generic tax policy process can be found here: http://taxpolicy.ird.govt.nz/how-we-develop-tax-policy