Other policy matters
- Annual setting of income tax rates
- KiwiSaver enhancements
- Tax status of public purpose crown controlled companies and public authorities
- Schedule 32 overseas donee status
- Fringe benefit tax on employment related loans – market interest rate
- Land tainting and Housing New Zealand Corporation
- Amendment to the bank account requirement – application date
- Noise mitigation expenditure
- Repeal of adverse event scheme
Summary of proposed amendment
The Bill sets the annual income tax rates that will apply for the 2018–19 tax year. The annual rates to be confirmed are the same that applied for the 2017–18 tax year.
The provision will apply for the 2018–19 tax year.
The annual income tax rates for the 2018–19 tax year will be set at the rates specified in schedule 1 of the Income Tax Act 2007.
(Clauses 216 and 231–237)
Summary of proposed amendments
A number of enhancements are proposed to KiwiSaver legislative settings, based on recommendations made in the Retirement Commissioner’s December 2016 review of retirement income policies.
The proposed amendments to allow over 65 year olds to opt-in to KiwiSaver and the repeal of the lock-in period apply on and from 1 July 2019.
All other proposed amendments apply on and from 1 April 2019.
The proposed amendments give effect to the following changes to the KiwiSaver Act 2006 by:
- introducing additional KiwiSaver contribution rates of 6% and 10%;
- reducing the maximum contributions holiday period from five years to one year;
- changing the name of the “contributions holiday” to “savings suspension”;
- allowing over 65 year olds to opt-in to KiwiSaver; and
- removing the lock-in period (which currently affects members who join KiwiSaver between the ages of 60 and 65).
The Retirement Commissioner reviews retirement income policies every three years. Her most recent review, published in December 2016, included recommendations aimed at improving the effectiveness of KiwiSaver in helping New Zealanders save for their retirement and to make KiwiSaver accessible to more New Zealanders. The proposed amendments to the KiwiSaver Act 2006 are based on recommendations made in this review.
Additional 6% and 10% KiwiSaver contribution rates
An employee can choose to contribute 3%, 4%, or 8% of their gross salary and wages to their KiwiSaver account. This is provided for in section 64 of the KiwiSaver Act 2006. It is proposed this section be amended to introduce additional 6% and 10% rates that employees can choose to contribute at.
The additional 6% and 10% rates are intended to give KiwiSaver members more flexibility to self-select onto a contribution rate more specifically aligned with their particular circumstances and the retirement outcomes they want to achieve.
Reducing the maximum contributions holiday period and changing the name of the contributions holiday
Section 104(3)(b)(i) of the KiwiSaver Act 2006 provides the maximum contributions holiday a member can take is the shorter of the period specified in the contributions holiday application, or five years. The effect of this provision is the maximum period a member can take a contributions holiday for is five years.
Taking a five year contributions holiday can have significant impact on members’ long-term savings. For many members five years is longer than necessary for their financial position to improve to a point where they could resume contributing to KiwiSaver.
It is proposed that section 104(3)(b)(i) of the KiwiSaver Act 2006 is amended so the maximum permitted contributions holiday period is reduced from five years to one year. This would apply to all contributions holiday applications made after the change comes into effect (that is, 1 April 2019). This means that an existing contributions holiday would continue until it expires.
It is proposed the KiwiSaver Act 2006 is amended to replace all references to “contributions holiday” with “savings suspension”. This name change more accurate describes what actually happens when a member takes a break from contributing to their KiwiSaver account.
Allowing over 65 year olds to opt-in to KiwiSaver
The law does not currently permit over 65 year olds to join KiwiSaver. It is proposed section 33(a) of the KiwiSaver Act 2006 is repealed, so that over 65 year olds would no longer be prevented from opting-in to KiwiSaver. This amendment would give over 65 years the benefit of access to KiwiSaver as a provider of low-cost managed funds. No changes would be made to the existing law relating to automatic enrolment in KiwiSaver or the upper age of eligibility for the member tax credit and compulsory employer contributions.
Consequential amendments to the KiwiSaver invalid enrolment rules (in sections 59A and 59B of the KiwiSaver Act 2006) will provide that an over 65 year old opting-in to KiwiSaver under section 33 of the KiwiSaver Act 2006 would no longer be an invalid enrolment. A consequential amendment to schedule 28 of the Income Tax Act 2007 will remove the rule that complying funds are required to prevent over 65 year olds from joining.
Removing the lock-in period
Excluding other permitted withdrawals, members are eligible to withdrawal their savings when they reach the KiwiSaver end payment date referred to in schedule 1 clause 4(2) of the KiwiSaver Act 2006. The end payment date is the later of the date the member reaches the New Zealand Superannuation qualification age (which is 65 years old) or the five year qualification date.
The five year qualification date (referred to commonly as the lock-in period) only affects members who join KiwiSaver after the age of 60 (and therefore have not been a member for five years when they reach the New Zealand Superannuation qualification age).
The purpose of the lock-in period was to prevent people in the 60–65 age bracket from joining KiwiSaver to receive the $1,000 kick-start payment and then withdrawing their funds soon after. As the kick-start was repealed as part of Budget 2015, the lock-in period is no longer necessary. Allowing over 65 year olds to opt-in to KiwiSaver provides a further catalyst for removing the lock-in period, as over 65 year olds joining KiwiSaver may require access to their funds within the first five years of joining (such as if they become unable to support themselves through paid employment, or to address age-related needs).
It is proposed that schedule 1 clause 4 of the KiwiSaver Act 2006 enables members to withdraw their funds when they reach the New Zealand Superannuation age, regardless of how long they have been a KiwiSaver member (therefore effectively repealing the lock-in period).
Transitional provisions provide that over 60 year olds who join KiwiSaver prior to the repeal of the lock-in period (that is, 1 July 2019) would remain locked-in for the duration of the five year period. As over 65 year olds remain entitled to compulsory employer contributions and the member tax credit while they are locked-in to KiwiSaver, this would ensure these members are subject to the same conditions and entitlements as they were when they joined KiwiSaver.
(Clauses 33, 124, 213(26), 213(27), 222, 224 and schedule 2)
Summary of proposed amendment
It is proposed to give certain Crown controlled companies listed in schedule 4A of the Public Finance Act 1989 their own income tax exemption, and a goods and services tax (GST) provision comparable to that of public authorities to help ensure that GST input credits can be claimed back.
The qualifying public purpose Crown controlled companies (PPCCCs) will be listed in a new schedule to the Income Tax Act 2007, and there will be an Order in Council mechanism to facilitate amendments to this schedule.
For similar reasons, it is also proposed to explicitly include a number of Crown/Parliamentary entities in the definition of “public authority” in the Income Tax Act 2007 and Goods and Services Tax Act 1985.
The purpose of these amendments is to effectively reinstate the tax outcome that the companies had before a Crown Law interpretation reduced who qualifies as a “public authority”. This reinstatement will reduce compliance costs without reducing government revenue or creating economic distortions.
The proposed amendments will come into force on the date of enactment. In the interim, Inland Revenue is applying its administrative discretion to treat the companies as if they were still public authorities until the legislative changes have been made.
Based on advice from Crown Law, in 2015 Inland Revenue revised its interpretation of the definition of “public authority” for tax purposes. This resulted in fewer entities qualifying as public authorities, including most of the Crown controlled companies listed in schedule 4A of the Public Finance Act 1989.
For a company to be listed in schedule 4A, it must meet all of the following criteria:
- the Crown holds more than fifty percent of the company’s issued ordinary shares;
- the company’s shares are not listed on a registered market; and
- the company is not a Crown entity or a State Owned Enterprise.
In response to the revised interpretation, tax policy officials undertook to review whether the schedule 4A companies should be given their own income tax exemption, and a GST provision comparable to that of public authorities to help ensure that GST input tax can be claimed back. This review concluded that it was appropriate to have such provisions when the companies, or their subsidiaries, also meet the following requirements:
- The only other shareholders, if any, in the company are local authorities, that is, there are no private sector shareholders; and
- Their primary purpose is to carry out one of the Government’s public policy objectives. This does not preclude their making a profit, but any profit has to be subsidiary to the public policy objective. This requirement distinguishes such companies from state-owned enterprises (SOEs), whose primary purpose is to make a profit.
Eleven companies meet these criteria. In addition, a number of other entities were identified as warranting being deemed to be public authorities.
Public purpose Crown controlled companies amendments
Proposed new section CW 38B provides a specific income tax exemption for those companies listed in the proposed new schedule 35 of the Income Tax Act 2007. The schedule lists the following eleven companies that are either fully Crown owned or Crown controlled, shareholding being measured through the standard voting interest test:
- City Rail Link Limited;
- Crown Asset Management Limited;
- Crown Infrastructure Partners Limited;
- Education Payroll Limited;
- Otakaro Limited;
- Research & Education Advanced Network New Zealand Limited;
- Southern Response Earthquake Services Limited;
- Tamaki Redevelopment Company Limited;
- Tamaki Regeneration Limited;
- THA GP Limited; and
- The Network for Learning Limited.
Nine of these companies are listed on schedule 4A of the Public Finance Act 1989, with the remaining two being subsidiaries of a section 4A company.
To expedite future changes, companies will subsequently be added to or removed from the schedule by Order in Council, which is consistent with the way companies are added to and removed from schedule 4A of the Public Finance Act 1989. Section CW 38B includes a power to make such Orders in Council. The policy criteria for an Order in Council will still be that the company is listed in schedule 4A or it is a subsidiary of a schedule 4A company, has no private sector shareholders and its primary purpose is to carry out one of the Government’s public policy objectives.
An amendment is also being made to the Goods and Services Tax Act 1985 to extend section 6(1)(b) to include PPCCCs, so as to ensure a GST treatment comparable to that for public authorities. This will help ensure that the companies can claim back the GST paid on their purchases.
Finally, a consequential amendment is proposed to section 32E(2)(k) of the Tax Administration Act 1994 so that PPCCCs will, like public authorities, be eligible for a RWT exemption certificate.
Public authority amendments
The definition of “public authority” in the Income Tax Act 2007 is being extended to specifically include:
- The New Zealand Lottery Grants Board;
- The Office of the Clerk of the House of Representatives;
- The Ombudsman;
- The Parliamentary Commissioner for the Environment; and
- The Parliamentary Service.
For the purposes of the definition of “public authority” in the Goods and Services Tax Act 1985, it is only necessary to amend that definition to include the Lottery Grants Board.
(Clause 218 and schedule 32)
Summary of proposed amendment
The Bill proposes that 13 charities are added to the list of donee organisations in schedule 32 of the Income Tax Act 2007.
The proposed amendment will apply from 1 April 2018.
It is proposed that 13 charitable organisations are added to schedule 32 of the Income Tax Act 2007. Donors to these charities will be eligible for tax benefits on their donations.
Donors to organisations listed in schedule 32 are entitled as individual taxpayers, to a tax credit of 331/3% of the monetary amount donated, up to the amount of their taxable income. Companies and Māori authorities may claim a deduction for donations up to the level of their net income. Charities that apply funds towards purposes that are mostly outside New Zealand must be listed in schedule 32 of the Income Tax Act 2007 before donors become eligible for these tax benefits.
The 13 charitable organisations being added to schedule 32 are engaged in the following activities:
Books for Cambodia Trust
Books for Cambodia Trust was established in 2007 to promote literacy and develop a culture of reading in Cambodia with a view to improving educational outcomes for children. The Trust’s activities include establishing/refurbishing libraries in schools, purchasing books to ensure libraries are adequately stocked, and provide training and support for librarians.
Children of the Light
Children of the Light has been active in Ghana’s eastern region since 2005, and in 2010 its New Zealand founder formalised the operation by registering a New Zealand charitable trust. The charity runs year-round educational programmes, including one-on-one and small group tuition, with a strong emphasis on developing literacy and numeracy skills. The charity has, unusual for the region, an extensive library to assist developing reading skills. The charity’s activities are primarily directed at children who, because of reasons of poverty, are not achieving proficiency in reading, writing or mathematics. The Trust is registered as an international non-governmental organisation (NGO) with the Ghanaian government.
Effective Altruism New Zealand Charitable Trust
The Effective Altruism New Zealand Charitable Trust was established in 2015 and is based on the international effective altruism social movement. Effective altruism organisations seek to use evidence to determine the most effective way to benefit others. Acting as a conduit, the Trust is primarily focused on alleviating global poverty by identifying effective international charities and directing New Zealand donor support to them.
Flame Cambodia was set up in 2016 to assist children and young persons affected by poverty and living in the slum environments in Cambodia. The charity is active in Phnom Penh, and its objective is to integrate children affected by poverty into formal school education and maintain school attendance over the longer term. The charity also supports tertiary and vocational training for school leavers. It is registered as an international NGO with the Royal Government of Cambodia.
Forgotten Sherpas of Nepal
The Forgotten Sherpas of Nepal (the Trust) has been operating informally since 2001 and was formally set up in 2013 with the objective of improving the health and well-being of the people living in the Nepal Himalayas. The Trust funds primary healthcare services (particularly maternal and child health), education in hygiene and sanitation, and general improvements in living conditions (for example, safe lighting, smoke-free houses, clean water and access to schools). The Trust sends volunteers to Nepal who work in close association with members of a registered local NGO formed by villagers in the area. The Trust is registered as an international NGO with Nepalese central and local governments.
Global Development Group Limited
Global Development Group Limited was set up in 2015 as the New Zealand member of a wider group of charitable companies across the world that carry out humanitarian projects to provide aid and relieve poverty for the world’s poorest people. As well as providing relief in some emergency situations, they work on long-term community development projects that address the causes of poverty and help people move towards self-sufficiency.
The Good Trust was established in 2009 (initially under the name Rich Trust) to provide funds and resources to projects that improve accessibility to water, sanitation and hygiene in developing countries. Projects are proposed by partner charities, and Good Trust carries out fundraising activities in order to make financial grants or provide resources (such as, volunteer labour). Most of the charity’s funds are directed at projects in Africa and Asia, with some in Central and South America also supported.
INF Humanitarian Aid Trust
INF Humanitarian Aid Trust (the INF Trust) was set up in 2015 and is a sister trust of the International Nepal Fellowship (New Zealand) which was established in 1952. The INF Trust carries out humanitarian works in Nepal primarily for the benefit of the poor and marginalised by providing these communities targeted medical care for infectious diseases – such as tuberculosis and leprosy. The INF Trust also provides malnutrition care and prevention, and treats serious injury accidents. It is active in western and mid-western regions of Nepal.
NVADER was founded in 2011. It is an anti-human trafficking non-government organisation with operations centred in Thailand. NVADER’s purpose is to combat sex trafficking, child begging trafficking and child sex tourism, by working internationally to facilitate the prosecution of perpetrators and bolster deterrence. NVADER also assists Thai law enforcement to locate and rescue victims, and provides those victims with social welfare support and legal representation. It also pursues court proceedings against offenders for compensation.
The Nyingje Trust was set up in 2015 to raise funds for those in need in Mungod, India. The charity’s specific focus is on relieving the effects of poverty in the area by raising money to support the purchase of education resources for students, and equipment and supplies for the local public hospital.
Rwenzori Special Needs Foundation (NZ)
The Rwenzori Special Needs Foundation (NZ) (the Foundation) was set up in 2015 to assist children with developmental needs in the Fort Portal region of Uganda. The Foundation formalised a support relationship that existed between the trustees and in-country partners in Fort Portal since 2010. The charity helps children in need by funding surgical interventions for conditions such as cleft lip and palate, birth deformities, eye problems and other treatable conditions. The Foundation also promotes and supports school attendance for children with disabilities.
St Columban’s Mission Society Trust Board
The purposes of St Columban’s Mission Society Trust Board (the Society) are directed at the relief of poverty, and the Society seeks to work across all boundaries of culture and religion. The Society has been operating in New Zealand since the 1940s, and its work is directed towards humanitarian purposes world-wide, with particular emphasis on seeking social justice and dignity for those denied their rights.
Talkingtech Foundation Trust
Talkingtech Foundation Trust (the Foundation) was set up in 2008. It is involved in a number of projects in India and Cambodia. The objective of these projects is to assist communities affected by severe poverty. It also makes a number of grants to New Zealand charities. The Foundation’s core values centre on activities and projects that improve healthcare and education outcomes in developing countries, including projects that have an innovation or technology component.
Summary of proposed amendment
This amendment would provide an alternative definition of market interest that banks and other money lenders can elect to use for valuing the fringe benefit of a loan provided to an employee. The new definition of market interest for a given employee and loan type would be the lowest rate given around the same time by their employer in the ordinary course of business to a customer with a similar profile to the employee. The amendment is intended to address the over-taxation of employment related loans that occurs under the status quo definition of market interest.
The proposed amendment will come into force for FBT payment periods beginning on or after 1 April 2019.
The amendment will add a second option to the current market interest definition. Banks and other employers eligible to use the market interest rate for calculating FBT on employment related loans will be able to use either the current definition or the new definition of market interest.
The new definition of market interest for a given employee and loan type would be the lowest rate given around the same time by their employer in the ordinary course of business to a customer with a similar profile to the employee.
A fringe benefit arises when an employer provides a loan to an employee. There are two ways in which the benefit of an employment-related loan can be valued. Employers not in the business of lending money are required to use a prescribed interest rate provided by legislation to value the benefit of employment related loans. However, banks and other money lenders may instead elect to value the benefit of employment related loans using the market interest rate as they have the data to accurately calculate the market rate readily available.
The market interest rate for a group of employees is currently defined as the rate their employer would offer to an arm’s length group of persons with a comparable credit risk to the group of employees. Different money lenders will therefore have different market rates as the market rate is based on the rates a given lender offers to its customers.
The market interest rate rules were based on the practices banks and other lenders were using at the time the rules were developed. Money lenders would advertise rates and, in general, customers would receive these rates if they met the necessary conditions for a loan. However, some lenders would also offer discounts to certain groups of customers. For example, a bank may have offered employees of a local respected employer a discount of 0.3 percentage points below the advertised rates. The market interest rate rules would allow either the advertised rates or the group discount rates to be offered to employees as the market interest rate without banks and other similar lenders incurring FBT.
However, it is now common practice for banks and other similar lenders to individually negotiate loan rates with customers. Individually negotiated loans cannot be used for determining the market rate as the rates received by customers through this process have not been offered to a group.
As such, the true market rate, being the interest rate an arm’s length customer receives, is likely lower than the market rate calculated under the current legislation. This can result in the over-taxation of employment related loans. Furthermore, because of this over-taxation many employees of banks and other money lenders may be able to receive better loan rates from lenders other than their employer.
The proposed amendment would give employers the choice between using the existing market interest definition or a new market interest definition. The existing definition would be contained in section RD 35(5)(a) of the Income Tax Act 2007 and the new definition would be contained in section RD 35(5)(b).
As noted above, the new definition of market interest for a given employee and loan type would be the lowest rate given around the same time by their employer in the ordinary course of business to a customer with a similar profile to the employee. The various aspects of this definition are explained below.
The amendment would only allow loans made to customers with similar profiles to the given employee receiving a loan to be used for calculating market interest. An employee and a customer would have similar profiles if, on the factors considered by the money lender as relevant to the interest rates it offers to customers, they have similar characteristics. Factors a money lender may consider when offering loans include, but are not limited to, a customer’s risk profile, amount of security or loan to value ratio.
Ordinary course of business
The amendment would only allow loans given to customers in the ordinary course of business to be used for calculating the market rate. Whether a particular loan has been made in the ordinary course of business will always be a matter of fact and degree. However, some examples of what constitutes the ordinary course of business are detailed below.
Example 13: Loan made in the ordinary course of business
Carlos, an employee of Third Man Bank, wants to receive a fixed rate home loan from his employer. The lowest rate Third Man Bank has offered on this type of loan to customers who meet similar lending criteria as Carlos is 4%. Only one customer has received this rate, however, a number of other customers with similar profiles have all received loans close to this rate (4.01–4.05%). The loan made at the rate of 4% will therefore be considered as having been made in the ordinary course of business. As such, the market rate for Carlos will be 4% and FBT will only be payable if Carlos receives a rate below this.
Example 14: Loan not made in the ordinary course of business
Fernanda, a customer of Square Leg Bank, has received a home loan rate of 2% as part of a special promotion giving one lucky customer an extraordinarily low interest rate. The rate received by Fernanda has therefore not been given in the ordinary course of business and cannot be used for determining the market interest rate.
Example 15: Loan made in the ordinary course of business
Caroline, a customer of Mid-Wicket Bank, has received an interest rate of 3.5%. No other customers with a similar profile to Caroline have received a rate that low or close to it. However, the loan was made using Mid-Wicket Bank’s ordinary processes and Caroline received no special treatment compared to other customers. This loan has therefore been made in the ordinary course of business.
Around the same time
The amendment would require employers to calculate the market rate based on loans given to customers around the same time a loan was given to an employee. In calculating the market rate for a given employee, employers would generally be required to use loans given to customers in the same quarter that a loan was given to the employee. However, if the employer lacks the ability to calculate the market rate using loans given to customers in the same quarter that a loan was given to the employee, they would instead be able to calculate the market rate using loans given to customers in the quarter immediately prior to the quarter in which the loan was given to the employee.
(Clauses 169–173, 213(9), 213(13) and 213(20))
Summary of proposed amendment
These amendments will extend the current securitisation regime in the Income Tax Act 2007 beyond financial institutions to other corporate securitisations, with appropriate modifications, and extend the scope of the regime for financial institutions.
The proposed amendments will come into force on the date of enactment.
The amendments will extend the securitisation regime so it does not just apply to financial institutions. The aim of the amendments is to reduce compliance costs and tax disincentives to undertaking securitisations, by taxing them in accordance with their economic substance – treating qualifying securitisation special purpose vehicles (SPVs) as transparent. The key features of the amended regime are:
- it will cover securitisations involving financial arrangements as well as other assets;
- the consolidation requirement will be met if the securitised assets are recognised in the consolidated financial statements of the either the originator or another company in the same wholly-owned group; and
- the regime will be elective.
A securitisation is a funding mechanism that involves issuing marketable securities that are backed by the expected cash flows from specific assets. Securitisations can have a number of commercial benefits compared with other funding mechanisms, such as risk management, balance sheet improvement, and lower cost of funding.
New Zealand businesses with assets such as large books of trade credits or other receivables may wish to raise funding by way of securitisations. To undertake a securitisation, a company (referred to as the originator) that owns income-producing assets transfers those assets to an SPV. The SPV (typically a trust in New Zealand) is usually structured to be bankruptcy remote from the originator, so that the SPV’s assets cannot be accessed by the originator’s creditors. The SPV then borrows from third parties on the strength of the assets that have been transferred to it.
An important commercial objective of a securitisation is maintaining tax neutrality while ensuring the SPV is bankruptcy remote from the originator. It is particularly important to ensure that the vehicle itself is not exposed to a tax liability, as this can affect its credit rating.
There is a concern that the current tax rules for trusts may not achieve tax neutrality for the vehicle, and so may discourage securitisations. The financial arrangement rules can also trigger a tax liability on any receivables transferred into the vehicle. There is also concern about the compliance costs the tax rules impose on securitisations.
There is currently a securitisation regime in the Income Tax Act 2007 (sections HR 9 – HR 10) that applies for certain securitisations undertaken by financial institutions. Those rules were introduced as a result of the Reserve Bank of New Zealand’s response to the global financial crisis. The effect of the rules is that no tax consequences arise from the securitisation transactions between the financial institution and the vehicle used in the securitisation. The proposed amendments will extend this securitisation regime to other corporate securitisations.
Under the proposed rules, the securitisation SPV would simply be treated as part of the originator for tax purposes. This would mean that the transfer of assets to the SPV would be ignored, and the SPV itself would not be subject to tax (with any tax on its activities being payable by the originator instead). This would remove a disincentive to securitisations, in that transfers to an SPV that is economically within a wholly-owned group of companies would not have tax implications.
Extension to assets that are not financial arrangements
Given the context in which the current rules were developed, the current regime is limited to particular financial arrangements – New Zealand residential mortgages or loans secured by such mortgages.
Non-financial institution securitisations may involve a broader range of assets, and indeed assets that are not financial arrangements, such as trade receivables and operating leases. The amended regime will, therefore, apply to securitisations irrespective of the assets that are securitised.
The current rules for securitisations by financial institutions require that the securitised assets are treated as held by the originator (the financial institution) in its consolidated financial statements under IFRS. While this requirement is suitable for securitisations involving the financial arrangements covered by the current rules, it would be too restrictive for other securitisations.
Often in corporate securitisations the securitised assets are de-recognised by the originator but are recognised in the consolidated financial statements of another group company.
Therefore, under the expanded rules, the consolidation requirement will be met if the securitised assets are recognised in the consolidated financial statements of the originator or another company in the same wholly-owned group. Also, if the group entity that recognises the securitised assets in its consolidated financial statements is separate from the originator, the transfer of the receivables by the originator will also be disregarded. These settings will mean the benefits of the regime can apply more broadly.
The current regime is not framed as being elective; however, there is no particular policy reason why it should not be as it removes a tax barrier. The proposed expanded regime will be elective for financial institutions and other corporates alike.
(Clauses 105–109, 120, 121, 154 and 155)
Summary of proposed amendment
The Income Tax Act 2007 is being amended to exclude the Housing New Zealand Group (HNZ) from the land tainting rules.
The proposed amendments will apply from 1 July 2017.
Proposed new section CB 15D of the Income Tax Act 2007 will mean Housing New Zealand Corporation and companies in the same wholly-owned group as Housing New Zealand Corporation are excluded from the land tainting rules in sections CB 9(2), CB 10(2) and CB 11(2).
Wholly-owned and consolidated groups
Amendments are proposed to section CV 1 and proposed new section CB 15D to ensure that income does not arise under the wholly-owned group rules for transactions that would otherwise be exempt under section CB 15D(1).
A similar amendment is proposed to sections CV 2, FM 9 and proposed new section CB 15D to prevent income from arising under the consolidated group rules.
Transactions between associated persons
Proposed new section CB 15D excludes Housing New Zealand Corporation and companies in the same wholly-owned group as Housing New Zealand Corporation from the application of section CB 15(1).
Amortising property and revenue account property
An exclusion from section FM 15 is proposed for Housing New Zealand Corporation and companies in the same consolidated group as Housing New Zealand Corporation.
The land tainting rules in sections CB 9(2), CB 10(2) and CB 11(2) provide that land owned by an associate of a person who deals in, develops, subdivides, or improves land is “tainted” if the land is acquired or improved at the time the dealer, developer, sub-divider or builder was in business. The “taint” means that this land will be taxable if disposed of within 10 years of acquisition or improvement, despite not ordinarily being taxable. The rules were introduced to prevent taxpayers from undermining the land sale rules, but are leading to an incorrect policy result for the HNZ group by imposing tax on sales that are not a policy concern. For example, a sale of a property in HNZ’s rental portfolio may become taxable under the land tainting rules because of the development or building activities of another group member, despite not being ordinarily taxable under the land sale rules and there being no concern that HNZ is trying to undermine the rules. This could impede HNZ’s ability to implement the Government’s building programme, as well as distorting the decision-making of the group and imposing excessive compliance costs.
Wholly-owned and consolidated groups
Section CV 1 applies to treat an amount as income when a company that is part of a wholly-owned group derives an amount that would not ordinarily be income of the company but would be income of the wholly-owned group if it were one company.
Section FM 9 does the same thing as section CV 1, but for consolidated groups. The amount is then income of the company under section CV 2.
These provisions are intended to prevent intra-group arrangements where assets are transferred and re-characterised to avoid tax.
The effect of these sections is that any land sold by an entity in the Housing New Zealand Group (wholly-owned group or consolidated group, as applicable), even if excluded from the land tainting rules under proposed new section CB 15D, would be taxable to the group because of the development or building activities of another group member. The amendments to these sections outlined above prevent this from happening.
Transactions between associated persons
Section CB 15 governs the transfers of land between associated persons. It was introduced to ensure that the substantive provisions which render land disposals taxable are not circumvented by transfers between associated persons.
It provides that where there is a transfer of land between associated persons, any amount that the transferee of the land derives from its subsequent disposal (if that amount is greater than the cost of the land to the transferee) will be taxed to the transferee under whichever of sections CB 6 to CB 14 would have applied to the transferor had the intermediate transfer not taken place.
In May 2018, HNZ established a subsidiary, called Housing New Zealand Build Limited, to undertake its building activities. Without this proposed amendment, all capital gains derived by HNZ since the purchase of social housing properties from Housing New Zealand Build Limited would be subject to tax on disposal under sections CB 7 (business relating to land) and/or CB 11 (building business), despite not being taxable if HNZ purchased the properties from a non-associated party.
Amortising property and revenue account property
The consolidated group rules in subpart FM are intended to ensure that a consolidated group of companies are treated as a single company for tax purposes. This enables tax-free intra-group asset transfers to take place and is designed to simplify the tax administration of a group of companies.
Section FM 15 provides that where property is transferred between two companies in a consolidated group, the transferee is treated as acquiring the property at the original acquisition cost and acquisition date of the transferor.
Without an amendment, capital gains accrued by HNZ would effectively become taxable in the hands of the group’s building company (New Co) on a later disposal of that property by New Co to a third party. This is because the deduction available to New Co on land acquired from HNZ and held on revenue account will be limited by section FM 15 to HNZ’s original acquisition cost of the land.
Summary of proposed amendment
An amendment made by the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 gives the Commissioner discretion to issue an IRD number to an offshore person without a New Zealand bank account if she is satisfied with their identity and background. The amendment replaced section 24BA of the Tax Administration Act 1994 with new section 55B. This amendment was primarily made to assist taxpayers with meeting their New Zealand tax obligations. This Bill proposes to change the application date of this amendment to 15 October 2015, the date of the original requirement that offshore persons need to provide the Commissioner with their New Zealand bank accounts to obtain an IRD number.
The proposed amendment will apply for applications for IRD numbers made by or for offshore persons on or after 15 October 2015, under section 24BA or 55B of the Tax Administration Act 1994.
(Clauses 115, 130, 139–143, 213(6) and 215)
Summary of proposed amendment
The proposed amendment will ensure that the expenditure incurred by businesses for remediating noise is deductible under section DB 46 of the Income Tax Act 2007, on the same basis as other pollution remediation expenditure.
The proposed amendment will apply to expenditure incurred from the 2018–19 and later income years.
Section DB 46 states that certain expenditure incurred for pollution is deductible. Currently, noise pollution is not included – as a result, businesses incurring expenditure to remediate the effects of noise cannot use this provision to deduct such expenditure. This effect is created through the combination of section DB 46, schedule 19 and the definition of “contaminant” in section YA 1 of the Income Tax Act 2007. Additionally, the expenditure may not create an asset for the taxpayer, so would not be depreciable.
Therefore, noise remediation may result in “black hole” expenditure, being business expenditure that taxpayers are unable to deduct for income tax purposes, either immediately or over time.
To remedy this inconsistency between noise and other pollution remediation expenditure, it is proposed to amend sections CB 28, DB 46, EK 2, EK 11, EK 12, EK 20, EK 23, YA 1 and schedule 19 of the Income Tax Act 2007.
In accordance with current section DB 46, the proposed deduction will be spread over the expenditure’s useful life under the pollution remediation rules. Taxpayers using the provision will be required, from the application date, to spread the cost of new remediation expenditure.
(Clauses 114, 128, 131, 135–138, 152, 185 and 213)
Summary of proposed amendment
The proposed amendments repeal the adverse event scheme and transfer existing balances in the scheme to the main income equalisation scheme.
The proposed amendments will apply to the first income year that commences after the date of enactment.
The adverse event scheme is a tax relief mechanism for farmers who are forced to dispose of livestock as a result of a localised adverse event (for example, damage caused by a flood on a farming unit).
The scheme is based entirely on the action of a farmer (person carrying on a farming or agricultural business on land in New Zealand) that involves the farmer:
- self-assessing that a localised adverse event has occurred; and
- disposing of livestock because of that self-assessed adverse event and does not replace that livestock in the same “accounting year” (a defined term).
A review of the provisions of the adverse event scheme relating to deposits and withdrawals indicted they are inflexible when compared to the corresponding provisions in the main scheme.
As a result, few farmers have used the adverse event scheme, instead preferring to make income equalisation deposits into the main scheme to take advantage of its more flexible terms for deposits and withdrawals.
The amendments propose that:
- future deposits as a result of forced sales be made under the main scheme from the application date;
- existing deposits in the adverse event scheme be transferred to the main scheme on the application date; and
- some minor clarifications be made to the mechanics of the main income equalisation scheme for certain deposits and withdrawals that relate to the replacement of livestock following a localised adverse event.