Other policy items

• GST on outbound mobile roaming services
• Income tax treatment of leases subject to NZ IFRS 16
• Schedule 32 overseas donee status
• GST credit notes
• Portability of Australian unclaimed superannuation money
• Mycoplasma bovis tax issue

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GST ON OUTBOUND MOBILE ROAMING SERVICES

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(Clauses 86, 87, 89 and 91)

Summary of proposed amendment

These amendments would result in outbound mobile roaming services used by a person with a New Zealand mobile device while they are outside New Zealand becoming subject to GST at the standard rate of 15%. Currently, outbound mobile roaming services are either zero-rated (subject to GST at the rate of 0%) or not subject to GST.

These amendments would also ensure that inbound mobile roaming services used by a non-resident in New Zealand would be zero-rated or not subject to GST. Currently, inbound mobile roaming services may be subject to GST at the standard rate of 15% but are generally not subject to GST.

Application date

The proposed amendment would apply from 1 April 2022.

Key features

The amendment would add a definition to the Goods and Services Tax Act 1985 for mobile roaming services. These would be mobile telecommunications services supplied to a person’s mobile device while they are outside the country of their usual mobile network. The country of a person’s usual mobile network would be determined by the country code of the subscriber identity module (SIM) used in their mobile device.

Outbound mobile roaming services would mean mobile roaming services used by a person whole usual mobile network is in New Zealand. The amendments would result in these services becoming subject to GST at the standard rate of 15%.

Inbound mobile roaming services would refer to mobile roaming services used by a person who is in New Zealand and whose usual mobile network is outside New Zealand. The amendments would result in inbound mobile roaming services supplied to non-residents being zero-rated if supplied by a resident, or treated as being made outside New Zealand (and therefore not subject to GST) if supplied by a non-resident.

Background

In 2003 special GST rules for cross-border supplies of telecommunications services were introduced to address concerns around how the GST rules at that time applied to these services, such as mobile roaming services. These special rules use the location of the person who initiates the supply from a telecommunications supplier as a proxy for determining the place of consumption of these services.

Under the current rules for telecommunications services, outbound mobile roaming services used by a New Zealand resident travelling overseas are either zero-rated or not subject to GST. Conversely, inbound mobile roaming services used by non-residents travelling in New Zealand may be subject to GST at the standard rate of 15%. However, a special registration rule for non-resident telecommunications suppliers means inbound mobile roaming services are generally not subject to GST.[4] This non-application of GST to both outbound and inbound mobile roaming services is contrary to New Zealand’s broad-based GST framework.

Since the rules for telecommunications services were introduced, the OECD has developed the International VAT/GST Guidelines, which provide proxies for determining the place of consumption of cross-border services and intangibles. For “on-the-spot” services, where the supplier and the consumer need to be in the same place (for example, a haircut), the Guidelines suggest a place of performance test for determining the place of consumption. For remote services and intangibles, where it is not necessary for the supplier and the consumer to be in the same place (for example, a digital download), the Guidelines suggest the consumer’s usual place of residence as the test for determining the place of consumption.

The Guidelines adopt a broad definition of what is a remote service, including supplies of telecommunications services. In light of the Guidelines, the European Union and the United Kingdom both now apply VAT to outbound mobile roaming services used by their residents while overseas.

Detailed analysis

Definition of mobile roaming services

The amendments would add a definition to the GST Act for mobile roaming services. These would be mobile telecommunications services supplied to a person’s mobile device while they are outside the country of their usual mobile network. The country of a person’s usual mobile network would be determined by the country code of the subscriber identity module (SIM) used in their mobile device.

Paragraph (c)(ii) of the definition would define outbound mobile roaming services as roaming services received by a person whose usual mobile network is in New Zealand.

Paragraph (c)(i) of the definition would define inbound mobile roaming services as services received by a person who is in New Zealand and whose usual mobile network is outside New Zealand.

The definition of mobile roaming services would also include services supplied to enable a person to receive mobile telecommunications services when they are outside the country of their usual mobile network. This is intended to capture roaming deals offered by telecommunications suppliers that enable their customers to continue using their regular mobile plan while overseas for a flat daily or weekly fee.

If a person travelling overseas uses a local SIM in their mobile device, they would not be using mobile roaming services. This is because their usual mobile network would be determined by the country code of the SIM – which in this case would be the country they are travelling in.

Outbound mobile roaming services

Currently, outbound mobile roaming services are zero-rated if supplied by a resident, and treated as being made outside New Zealand (and therefore not subject to GST) if supplied by a non-resident. The amendments would result in outbound mobile roaming services becoming subject to GST at the standard rate of 15%. This would be achieved by:

• new section 11AB(2) preventing the zero-rating provision in paragraph (1)(b) from applying to outbound mobile roaming services; and
• new section 8(8B) treating supplies by non-residents of outbound mobile roaming services as being made in New Zealand.

Inbound mobile roaming services

Currently, inbound mobile roaming services are subject to GST at 15%. The amendments would result in inbound mobile roaming services supplied to non-residents becoming zero-rated if supplied by a resident, and treated as being made outside New Zealand if supplied by a non-resident. This would be achieved by:

• new section 11AB(1)(c) adding a zero-rating provision for inbound mobile roaming services supplied to non-residents; and
• amending section 8(7) by moving the existing subsection to new paragraph (a) and adding paragraph (b) to treat inbound mobile roaming services supplied to non-residents by a non-resident as being made outside New Zealand (and therefore not subject to GST).

Section 51(1)(e) would also be repealed by the amendments. This paragraph ensured that non-residents whose only supplies in New Zealand were inbound mobile roaming services were not required to register for GST. The amendments would make this paragraph unnecessary as inbound mobile roaming services supplied by a non-resident to non-residents travelling in New Zealand would no longer be treated as being made in New Zealand.

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INCOME TAX TREATMENT OF LEASES SUBJECT TO NZ IFRS 16

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(Clauses 8, 15, 22, 23, 26, 58 (lease (10), NZ IAS 17 (11), NZ IFRS 16 (12)))

Summary of proposed amendment

The Bill proposes changes to allow taxpayers with certain leases accounted for under New Zealand Equivalent to International Financial Reporting Standard 16 Leases (NZ IFRS 16) to choose to more closely follow their accounting treatment for tax purposes.

The proposed tax changes result from the replacement of the previous accounting standard for leases, New Zealand Equivalent to International Accounting Standard 17 Leases (NZ IAS 17), with NZ IFRS 16, which applies to income years starting on or after 1 January 2019.

Application date

The proposed amendment would apply for balance dates starting on or after 1 January 2019, to align with the application date of NZ IFRS 16.

Key features

The Bill proposes to allow lessees who use NZ IFRS 16 a one-off choice to more closely follow their accounting treatment for tax. For the purpose of this commentary making this choice is referred to as “applying NZ IFRS 16 for tax” and the date it is done is called the “tax transition date”.

Income and expenditure arising from a lease would be calculated under proposed new section EJ 10B, which will apply only if the taxpayer elects to apply NZ IFRS 16 for tax under proposed section EJ 10B(1)(d). Expenditure would be deductible under proposed section DB 51C and income would be assessable under proposed section CC 14. Most amounts calculated under section EJ 10B are expected to be expenditure, but income can arise in some circumstances, such as when an impairment adjustment from a previous year is reversed through profit and loss for accounting purposes.

NZ IFRS 16 is proposed to apply for tax purposes for all operating leases of personal property that meet the proposed criteria to be an IFRS lease in section EJ 10B(1), which are that:

• the person applies NZ IFRS 16 for accounting and has chosen to apply NZ IFRS 16 for tax;
• the lessor and lessee are not associated; and
• the asset is not subleased to another person.

NZ IFRS 16 spreads certain lease expenditure, including provisions, in a way that results in the timing of recognition of this expenditure for accounting purposes being significantly different to when it would be incurred for tax purposes. Proposed section EJ 10B(2) to (4) requires adjustments to ensure this expenditure is deductible for tax at a similar time to when it would be deductible for a taxpayer not applying NZ IFRS 16 for tax.

When an IFRS lease ends, either because the lease itself ends or because it no longer qualifies to be an IFRS lease, proposed section EJ 10B(5) and (6) requires a wash-up to ensure that total deductions over the term of the lease match those that would have been deductible for a taxpayer not applying NZ IFRS 16 for tax.

Proposed section EJ 10B(7) and (8) includes transitional adjustments for certain leases when NZ IFRS 16 applies for tax after the original start of the lease. This can arise in the year a taxpayer first chooses to apply NZ IFRS 16 for tax, or in a later year for an individual lease that did not meet the IFRS lease requirements but subsequently does.

Background

Under a lease, one person (the lessor) who owns (or otherwise holds) an asset provides it to another person (the lessee) to use in exchange for payment over the term of the lease. For entities with NZ IFRS reporting obligations, the accounting treatment was previously determined under NZ IAS 17. This standard has been replaced by NZ IFRS 16 for years starting on or after 1 January 2019. It was also possible to apply the standard before this and officials are aware that some taxpayers did so.

Under NZ IAS 17, there was a difference in the accounting treatment for operating and finance leases for both lessors and lessees. NZ IAS 17 defined the distinction as:

A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership.

For lessees, NZ IFRS 16 removes the distinction between operating and finance leases for accounting purposes. Under NZ IFRS 16, lessees are required to include all leases on their balance sheet by recognising both an asset, being the right to use the leased asset for the lease term, and a lease liability, representing the obligation to pay rentals.

NZ IFRS 16 also changes the timing of accounting expenditure for lessees compared to the previous treatment, but total deductions are unchanged over the life of the lease. This can be shown in the simplified example in table 1 for a five-year lease, that was an operating lease under NZ IAS 17, with $100,000 per year of lease payments and a 3.7237%[5] discount rate.

Table 1: Simplified example for a five-year lease

Year	NZIAS 17 expenses	IFRS 16 expenses
1	$100,000	$106,439
2	$100,000	$103,337
3	$100,000	$100,120
4	$100,000	$96,783
5	$100,000	$93,322
Total	$500,000	$500,000

NZ IFRS 16 does not significantly change the accounting treatment of leases for the lessor. The lessor will continue to show the leased asset on their balance sheet for operating leases.

The Bill does not propose any changes for the tax treatment of lessors. Nor does it propose any changes for the tax treatment of leases for taxpayers that do not have NZ IFRS reporting obligations.

The Income Tax Act 2007 requires a different tax treatment for operating and finance leases. The tax definitions of operating and finance leases are similar but not identical to the accounting definitions. The Bill does not propose to change these tax definitions.

Detailed analysis

Updates to the tax definition of finance leases and operating leases

The definition of finance lease in section YA 1 of the Income Tax Act 2007 refers to NZ IAS 17. The Bill proposes to update the definition to refer to NZ IFRS 16.

No changes are proposed to the existing distinction between finance leases and operating leases for tax purposes.

Finance leases and the yield to maturity method

Section EW 15I allows a person who has a tax finance lease that is classified as an operating lease under NZ IAS 17 to apply the yield to maturity method. NZ IFRS 16 has removed the accounting distinction between operating and finance leases for lessees. However, the yield to maturity method will continue to be available for these leases by applying section EW 15E.

The Bill proposes updating section EW 15I to refer to NZ IFRS 16 rather than NZ IAS 17, as a lessor applying NZ IFRS 16 may still have a tax finance lease that is classified as an operating lease for accounting.

Lessors under tax operating leases for NZ IFRS taxpayers

No changes are proposed to the tax treatment of lessors.

Lessees under tax operating leases for NZ IFRS taxpayers

The changes proposed in the Bill are optional. NZ IFRS taxpayers who choose not to apply NZ IFRS 16 for tax will be able to continue to follow their existing treatment.

Optional election

The Bill proposes that a taxpayer that applies NZ IFRS 16 for accounting can make a one-off choice in section EJ 10B(1)(d) to apply NZ IFRS 16 for tax.

The Bill proposes that the election would be made by calculating deductions under the proposed rules in the income tax return for the income year the choice is made. No separate election would be required. Once a taxpayer makes this choice they would use this method for all future years that they apply NZ IFRS 16 for accounting purposes.

This election is proposed to be available in any income year, so a taxpayer can choose to first apply NZ IFRS 16 for tax in a year later than when they first apply NZ IFRS 16 for accounting.

Leases within the scope of the proposed rules

A taxpayer choosing to apply NZ IFRS 16 for tax would be required to follow the proposed rules for all qualifying tax operating leases where they are the lessee. This would apply to all new and existing leases from the start of the first year the election is made. Such leases are defined in proposed section EJ 10B(1) as an IFRS lease.

However, the Bill proposes that a taxpayer would continue to apply their existing treatment for the following tax operating leases:

• a lease of real property;
• a lease from an associated party; and
• a lease where the asset is subleased.

Real property

The Act already treats all leases of real property as an operating lease. The proposed rules mean that a lease of real property will continue to follow the existing treatment even if a taxpayer has chosen to apply NZ IFRS 16 for tax for other leases.

The existing definition of a finance lease in the Income Tax Act 2007 applies only to personal property lease assets, so that a lease of real property cannot be a finance lease. The Bill proposes to apply this same approach to exclude real property from being an IFRS lease. Real property leases will continue to be subject to the existing tax treatment.

Associated parties

The different treatment between lessors and lessees under NZ IFRS 16 means that if a taxpayer could choose to apply NZ IFRS 16 for tax for an asset they lease from an associated party, it would result in a tax timing advantage compared to purchasing it directly. To prevent this scenario the Bill proposes to continue using the existing tax treatment for all operating leases from an associated party as such a lease will not come under proposed section EJ 10B(1)(b).

Two unassociated parties might enter into an operating lease under the proposed rules and then subsequently become associated, for example because of a change in shareholding. It is proposed that the lease would no longer qualify as an IFRS lease, and the tax treatment of that lease would revert to the existing treatment including a wash-up as described below.

Subleases

Under NZ IFRS 16, when an asset is subleased to a second person, and the sublease of the lessor is a finance lease for accounting, the asset in the first person’s balance sheet changes from a right-of-use asset to a finance lease receivable. If the tax treatment followed the accounting treatment, the lessor would not be entitled to deductions for the amortisation of a right-of-use asset. To resolve this situation the Bill proposes to continue the existing tax treatment for all operating leases when the asset is subleased to another person, as such a lease will not come under proposed section EJ 10B(1)(c).

If an asset is subleased to another person part-way through a lease term, it is proposed that the lease would no longer qualify as an IFRS lease, and the tax treatment of that lease would revert to the standard treatment and include a wash-up as described below. The exclusion of real property leases from the proposed rules is expected to significantly reduce this situation occurring.

Leases that previously did not meet the definition of an IFRS lease

For a lease that would not have qualified before the tax transition date but does qualify at the transition date there are no additional complications. In other words, this lease will transition into applying NZ IFRS 16 for tax in the same way as leases that have always qualified.

For a lease that did not qualify after the tax transition date (either because it never met the definition of an IFRS lease or because it no longer met the definition and was therefore subject to a wash-up as described below) but that subsequently meets the IFRS lease definition (for example, the lessee and lessor are no longer associated and therefore the lease is not excluded under proposed section EJ 10B(1)(c)) the lessee will apply NZ IFRS 16 for tax from the date it meets the definition but will be required to apply the transitional adjustment in proposed section EJ 10B(7) and (8).

Leases that do not follow NZ IFRS 16

A lessee that follows NZ IFRS 16 for accounting may have individual leases that are not accounted for on their balance sheet. Examples of this could include short-term or low-value leases. The accounting treatment of these leases will still be in accordance with NZ IFRS 16, and any accounting expenditure recognised through the profit and loss account will be deductible. The accounting treatment for these specific leases is expected to be similar to the existing tax treatment.

Adjustments

The proposed rules are not intended to significantly accelerate tax deductions compared to those available under the existing rules.

It is proposed that tax adjustments set out in table 2 may be required when a taxpayer chooses to apply NZ IFRS 16 for tax.

Table 2: Results of spreading and the proposed tax adjustments that may be required

If the spreading results in accounting deductions that are…	...then it is proposed that a tax adjustment is made
before the expenditure is incurred (for example, impairment or revaluation amounts, or make-good costs)	to ensure that tax deductions are only available in a similar period to when the expenditure is incurred.
later than when the expenditure is incurred (for example, certain direct or mobilisation costs)	to ensure tax deductions are available in a similar period to when the expenditure is incurred, and it would be optional, so that a taxpayer who would incur higher compliance costs in making the adjustment than the perceived value of that adjustment will not be required to do so.

The formula in proposed section EJ 10B(2) includes three adjustment amounts: add-back adjustment, impairment and revaluation adjustment, and make-good and direct costs adjustment:

• Add-back adjustment decreases the tax deduction by the total increase in impairment or revaluation adjustments for a lease when they are recorded or amended through profit and loss (and likewise increases the tax deduction if these impairment or revaluation adjustments are reversed through profit and loss). This is necessary as these impairment or revaluation adjustments do not reflect expenditure that has been incurred. These adjustments are referred to in paragraphs 33 and 35 of NZ IFRS 16. There is no equivalent adjustment for fair value movements referred to in paragraph 34 of NZ IFRS 16 as these relate to investment property, which will be excluded from applying NZ IFRS 16 for tax as it is real property.
• Impairment and revaluation adjustment increases the tax deduction by the amount of the add-back adjustment spread in equal proportions over the remaining term of the lease, taking into account part-years on a pro rata basis (and likewise decreases the tax deduction if the add-back adjustment increases the tax deduction). This is designed to approximate the accounting (and therefore tax) deductions that would have been available had the impairment or revaluation adjustment not been made.
• Make-good and direct costs adjustment realigns the tax impact of these costs that are required to be spread over the lease term under NZ IFRS 16 but are incurred at a single point (or points) for tax purposes. The adjustment decreases the tax deduction by the amount of make-good costs described in paragraph 24(d) and the amount of direct costs described in paragraph 24(c) of NZ IFRS 16. These are nominal amounts (not discounted). The amounts are spread in equal proportions over the remaining term of the lease, taking into account part-years on a pro rata basis. Make-good costs are the costs of restoring the leased asset and are spread over the term of the lease under NZ IFRS 16 but are tax deductible when they are incurred, which is typically at or near the end of the lease. A make-good cost adjustment is proposed to be compulsory to prevent expenditure being deductible before it is incurred. Direct costs are the costs of obtaining or setting up the leased asset and are spread over the term of the lease under NZ IFRS 16 but, in some circumstances when they are not required to be capitalised into the asset value, would be tax deductible when they are incurred, which is typically at or near the beginning of the lease. A direct cost adjustment is proposed to be optional, so if a taxpayer would incur greater compliance costs in calculating the adjustment than they would benefit from making it, they can choose to continue following their accounting treatment.

An equal spread of either the impairment and revaluation adjustment or the make-good and direct costs adjustment may not exactly replicate the accounting spread of these adjustments but is intended to be easier for taxpayers to calculate and will total to the same amount over the term of the lease.

Proposed section EJ 10B(4) allows a deduction for make-good costs and direct costs when they are incurred. To ensure all direct costs incurred are deductible only once, this will apply only when the taxpayers has chosen to include direct costs in the formula in proposed section EJ 10B(2).

 

Cumulative adjustments

An impairment and revaluation adjustment and a make-good and direct costs adjustment must be carried forward into the remaining income years of the lease term when applying the formula in proposed section EJ 10B(2). This means there may be more than one impairment and revaluation adjustment or make-good and direct costs adjustment in a year.

Lease term

The impairment and revaluation adjustment and make-good and direct costs adjustment in proposed section EJ 10B(3) are both required to be spread in equal proportions over the remaining income years of the lease term. NZ IFRS 16 requires a specific lease term for each lease but this can change over time, for example when an entity decides they will take up an option to extend a lease that they previously had not planned to do. The lease term referred to in these proposed adjustments is the lease term recognised by NZ IFRS 16 at the time of the initial adjustment, but this is not updated if the lease term recognised by NZ IFRS 16 subsequently changes. By not having to change the tax adjustments to reflect the change in lease term, compliance costs are expected to be minimised.

The consequence of this approach is if the lease term shortens the full amount of adjustments will not be made before the maturity of the lease so these will be covered by the wash-up calculation described below. Likewise, if the lease term extends, the full amount of adjustments will be made before the maturity of the lease so there may not be adjustments in the final years. In either case, on an individual year basis the tax adjustments will not match the accounting consequences arising from the change in lease term. However, over the full term of the lease these differences will net to zero.

Transitional adjustment

Appendix C of NZ IFRS 16 sets out the accounting transition for entities applying NZ IFRS 16 for the first time. The two possible transition approaches in paragraph C5 allow taxpayers to choose between applying NZ IFRS 16:

• retrospectively to each prior period’s profit and loss account, which will result in a movement (positive or, more commonly, negative) to the entity’s opening retained earnings in the year of transition; and
• to the remaining lease term at the date of initial application of NZ IFRS 16, which will not affect the opening retained earnings in the year of transition.

The Bill includes proposed section EJ 10B(7) and (8) to ensure the correct tax deductions are available for any leases outstanding when the entity transitions to applying NZ IFRS 16 for tax. A tax transitional adjustment could be necessary in one of three scenarios.

• A taxpayer has applied NZ IFRS 16 retrospectively to ensure any movements to retained earnings upon to the year of tax transition[6] are correctly deductible.
• A taxpayer chooses to apply NZ IFRS 16 for tax one or more years after they started following NZ IFRS 16 for accounting, to ensure any difference between NZ IFRS 16 deductions and tax deductions under the existing rules are correctly deductible.
• A taxpayer is already applying NZ IFRS 16 for tax and has one or more leases that previously did not meet the requirements to be an IFRS lease but subsequently does qualify. The transitional adjustment will ensure any difference between NZ IFRS 16 deductions and tax deductions before applying NZ IFRS 16 for tax is correctly deductible.

The tax transitional adjustment is calculated for each lease at the date of tax transition using the formula in proposed section EJ 10B(7):

retrospective accounting expenditure − retrospective tax adjustments − previous tax deductions

Each of these terms is defined in proposed section EJ 10B(8):

• Retrospective accounting expenditure is the total expenditure or loss recognised under NZ IFRS 16 for the income years that a person has applied NZ IFRS retrospectively.
• Retrospective tax adjustments is the total tax adjustments that would have been required in relation to the total expenditure or loss recognised under NZ IFRS 16 for the income years that a person has applied NZ IFRS 16 retrospectively, if the entity had applied proposed section EJ 10B.
• Previous tax deductions is the total tax deductions incurred from entering into the lease until the tax transition date.

The proposed transitional adjustment may be deductible expenditure or assessable income. In either case this should be spread equally over the tax transition year and the four subsequent years. When a transitional adjustment arises due to an election to apply NZ IFRS 16 for tax it will arise at the start of an income year and apply evenly across these five years. When a transitional adjustment arises because an existing lease newly meets the IFRS lease definition, the transitional adjustment could first arise in the middle of an income year; however, it should still be spread evenly across the five income years even if the remaining period of the first income year is shorter than a full year. This is in contrast to the impairment and make-good costs adjustments referred to above which would take into account part-years on a pro rata basis.

In many instances an existing lease will mature before the end of this five-year spreading period. The Bill proposes that any undeducted expenditure or unreturned income would be incorporated into the wash-up calculation discussed below.

 

 

 

Wash-up

When a taxpayer is no longer a lessee in an IFRS lease, either because it no longer meets the IFRS lease requirements in proposed section EJ 10B(1) or because the lease itself ends, proposed section EJ 10B(5) and (6) require a wash-up calculation to ensure total deductions match what would have been available under the existing tax treatment. This adjustment is conceptually similar to a base price adjustment under the financial arrangements rules.

The lease will no longer be an IFRS lease when:

• the lease matures;
• the lessee and lessor have become associated;
• the asset has been subleased to another person; or
• the lessee stops following NZ IFRS 16 for accounting.

This wash-up is typically expected to be zero when a lease runs its full term and NZ IFRS 16 has been applied for tax for at least five years so that the transitional adjustment spreading period in proposed section EJ 10B(7) is exhausted. If a lease existed before NZ IFRS 16 was adopted for tax, and it runs for its full term, which is less than 5 years after NZ IFRS 16 is adopted, the wash up will typically be equal to any undeducted expenditure or unreturned income under the transitional adjustment.

The wash-up adjustment is calculated for each lease using the formula in proposed section EJ 10B(5):

IFRS deductions − IFRS income − expenditure

Each of these terms is defined in proposed section EJ 10B(6):

• IFRS deductions is the total amount deducted for tax for the lease for all income years, including the year in which the lease stops being an IFRS lease but excluding the wash-up adjustment. This may include deductions in years when section EJ 10B was not applied.
• IFRS income is the total amount of income returned for tax for the lease for all income years, including the year in which the lease stops being an IFRS lease but excluding the wash-up adjustment. This may include income in years when section EJ 10B was not applied.
• Expenditure is the total expenditure incurred since entering into the lease until the wash-up date, ignoring proposed section EJ 10B.

The wash-up adjustment may be deductible expenditure or assessable income.

 

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SCHEDULE 32 OVERSEAS DONEE STATUS

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(Clause 62)

Summary of proposed amendment

The Bill proposes to amend the Income Tax Act 2007 by adding three charities to the list of donee organisations in schedule 32.

Application date

The proposed amendments would apply from 1 April 2020.

Key features

It is proposed to add three charitable organisations to schedule 32 of the Income Tax Act 2007. Donors to these charities would be eligible for tax benefits on their donations in money.

Background

Donations in money made by individuals to organisations listed in schedule 32 can receive a tax credit of 33⅓% of the donation, 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.

Detailed analysis

The three charitable organisations being added to schedule 32 are engaged in the following activities:

Active Hearts Foundation

Active Hearts Foundation formalised in 2017 the charitable activities of a group of New Zealand trekking guides, which were directed at improving living conditions and education outcomes in Nepalese villages in the Himalayas. Key projects to date have involved disaster relief following the 2015, 2018 and 2019 earthquakes, refitting and resourcing school libraries, resourcing community health clinics, and ensuring the resilience of local infrastructure, including an irrigation pipeline for food production.

Kiwilink

Kiwilink was formally established as a charitable trust in August 2018 to separate humanitarian projects formerly undertaken within the Associated Churches of Christ New Zealand, and continue to undertake missions with a particular focus on Zimbabwe and Vanuatu. Recent work undertaken by the Trust in Zimbabwe includes collaborating with local charities to provide orphan care, student bursaries, and water borehole drilling in the Zvishavane region in South Western Zimbabwe. In Vanuatu, the Trust has worked on relocating people in the Ambae region displaced by volcanic activity, and providing first-aid supplies and a water storage tank at the Noui Noui Hospital.

Shimshal Trust

Shimshal Trust was set up in 2003 to support education outcomes and the relief of poverty for communities and villages in the northern region of Pakistan (Shimshal). The principal focus of the Trust is to fund scholarships to help local students with promising ability but no financial support, to attend high school or university. The Trust also provides financial support to community aid and development projects in the region.

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GST CREDIT NOTES

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(Clause 90)

Two amendments are proposed to ensure that a supplier that issues a GST credit note to correct a previous mistake in a GST return receives similar outcomes to a supplier that applies to the Commissioner to amend the original GST return. All section references are to the Goods and Services Tax Act 1985 unless otherwise stated.

Using a credit note to correct an invoice when 15% GST was incorrectly charged on a zero-rated supply or an exempt supply

Summary of proposed amendment

A supplier may have issued an incorrect invoice charging 15% GST on a supply of goods or services which was actually zero-rated supply (such as an export) or an exempt supply (such as a financial service). The proposed amendment to insert new subparagraph 25(1)(aaa) would allow the supplier to issue a credit note to correct the mistake.

The supplier can then include an adjustment for the correct amount of GST in the GST return for the taxable period in which the credit note was issued.

Application date

In order to align with existing commercial practices, the proposed amendments would apply retrospectively from 1 April 2012.

Background

A GST-registered supplier that supplied goods or services and incorrectly charged GST (because the supply was either zero-rated or exempt) needs to correct the error. For example, if the invoice was for $100 supply plus $15 of GST that was incorrectly charged, it would be common commercial practice to issue a credit note for the full value of the original invoice ($115), and then issue a new invoice for the correct amount ($100). This method is used for many reasons, including that it is more practical and provides a better audit trail.

It also involves fewer compliance and administrative costs than alternatives for correcting the GST, such as the supplier asking Inland Revenue under section 113 of the Tax Administration Act 1994 to amend the GST return in which the supply occurred.

Suppliers issuing a credit note in situations whereby 15% GST was incorrectly charged on a supply which actually zero-rated or exempt are currently relying on paragraph 25(1)(b) to allow them to do so. However, it is not clear that this provision was intended to be used for issuing a credit note in these situations.

Section 25(1)(b) was mainly designed to apply when the supplier subsequently offered a discount. For example, if a price is discounted from $230 to $200 the deduction allowed by section 25(2)(b) in a subsequent GST return will be 3/23 of the $30 discount: $3.91.

If the relevant supply was for consideration of $200 plus $30 of GST that was incorrectly charged, an adjustment of $30 (rather than $3.91) would be required to correctly account for the overpayment of GST.

The proposed amendment would insert a new section 25(1)(aaa) which will explicitly allow the supplier to issue a credit note when 15% GST was incorrectly charged on an exempt or zero-rated supply.

After issuing the credit note, the supplier could then include an adjustment for the correct amount of overpaid GST ($30 in the preceding example) in the GST return for the taxable period in which the credit note was issued.

Time limit for issuing a credit note for a supply made in an earlier period

Summary of proposed amendment

Proposed new section 25(3)(f) sets time limits for issuing a credit note for a supply made in an earlier period.

The proposed time limit for issuing a credit note is intended to align with the “time bar” that applies to GST refunds made through amendments to GST returns, which is generally four years from the end of the taxable period. The time limits for refunds are referred to in sections 45(1), (2) and (3) of the GST Act.

Proposed section 25(3)(f)(iii) provides the same four-year time limit for issuing a credit note that relates to a supply which was included in a previous GST return. The time limit is measured from the end of the taxable period for the earlier return.

Under section 45(4) an extra four years may be available to adjust a GST return to correct an overpayment of tax that resulted from a clear mistake or simple oversight. This effectively provides an eight-year time bar in these circumstances.

Proposed section 25(3)(f)(ii) provides the same additional time limit for issuing a credit note. This means the total of eight years is only available when the overpayment of tax, which the credit note is being issued to correct, was due to the result of a clear mistake or simple oversight.

Existing section 25(3)(f) provides a seven-year time limit for credit notes issued under section 25(1)(ab) for supplies of land which were incorrectly standard-rated rather than zero-rated. Proposed section 25(3)(f)(i) of the Bill duplicates and retains that existing section. This is because it involves a different time limit (seven years) and applies from the date of settlement, which is different to the end of the taxable period that the supply was included in a GST return.

The shorter of the new proposed limits, or the existing seven year limit for credit notes issued under section 25(1)(ab), would be used to limit the time for issuing a credit note.

Application date

The proposed amendment to impose a time limit on issuing a credit note would apply from the date that the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Bill was introduced.

This is necessary as there is a potential fiscal risk from publicising the fact that the current time bar may be ineffective for credit notes.

Background

The existing time limits on GST refunds in section 45 may be ineffective when a credit note is issued to provide the adjustment. This is because a credit note amends the current GST return, even though the original supply to which the credit note relates was included in an earlier GST return.

This poses a potentially large fiscal risk as it means a GST registered person may be able to use credit notes to claim GST refunds if they discovered they had been applying an incorrect GST treatment for a long time.

This would undermine the policy intent and effectiveness of the time limits for GST refunds.

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PORTABILITY OF AUSTRALIAN UNCLAIMED SUPERANNUATION MONEY

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(Clauses 58(3) and 93)

Summary of proposed amendment

The proposed amendments would support an enhancement to Trans-Tasman retirement savings portability, to enable the direct transfer of New Zealanders’ Australian unclaimed superannuation money (USM) from the Australian Tax Office (ATO) to a KiwiSaver scheme.

In addition to the amendments proposed in this Bill, this enhancement requires amendments to Australian legislation and to the Trans-Tasman Retirement Savings Portability Arrangement between New Zealand and Australia (the Arrangement).

Application date

The proposed amendments would come into force on the same date as amendments to the Arrangement. The Arrangement will be amended through an exchange of diplomatic notes between the Governments of Australia and New Zealand, with these notes stipulating when the amendments to the Arrangement, and therefore the amendments in this Bill, will come into force.

Before amendments are made to the Arrangement, amendments to legislation in New Zealand (in this Bill) and legislation in Australia first need to have been passed into law. It is unlikely that both New Zealand and Australian amendments will be passed until late 2021, at the earliest.

Inland Revenue officials will provide further guidance on the date the amendments in the Bill would come into force when these prerequisites are closer to being met.

Key features

The proposed amendments would extend the definition of “Australian complying superannuation scheme” in the KiwiSaver Act 2006 and Income Tax Act 2007 to include the Australian Commissioner of Tax in their capacity as the holder of USM. This would mean the rules that currently apply to retirement savings transferred from Australian superannuation schemes to KiwiSaver schemes, would apply to USM transferred from the ATO to KiwiSaver schemes.

Background

The Arrangement came into effect from 1 July 2013 and allows for the transfer of retirement savings between certain Australian superannuation schemes and New Zealand KiwiSaver schemes. It reflects the special relationship between New Zealand and Australia and removes an impediment to labour movement.

A number of provisions in the KiwiSaver and Income Tax Acts give effect to the Arrangement in New Zealand.

An unresolved portability issue relates to “lost” Australian retirement savings. Under Australian law a superannuation account is generally considered to be lost when the account is inactive and the member uncontactable. Eventually, under the Australian Superannuation (Unclaimed Money and Lost Members) Act 1999, Australian superannuation schemes are required to transfer savings from lost superannuation accounts to the ATO. These savings are then commonly referred to as USM.

The Arrangement does not currently enable the direct transfer of USM from the ATO to New Zealand KiwiSaver schemes. Domestic legislation in Australia and New Zealand also does not permit this. Instead, New Zealanders currently wanting to recoup USM held by the ATO must first transfer these savings to an Australian superannuation scheme before they can be transferred to a KiwiSaver scheme. As many affected New Zealanders will no longer have an Australian superannuation account, this acts as a significant hurdle to the repatriation of USM to New Zealand.

Detailed analysis

The amendments in this Bill would regulate how USM would be treated in New Zealand after being transferred from the ATO to KiwiSaver schemes.

Under the proposal it would be voluntary for KiwiSaver members, or KiwiSaver scheme providers on their behalf, to request the transfer of USM from the ATO. The ATO would then be required to transfer the USM to the member’s KiwiSaver scheme provider.

More detailed guidance on operational matters relating to the transfer of USM from the ATO to KiwiSaver schemes would be provided closer to the start date for transfers.

Rules applying to transferred savings

The proposed amendments would extend the definition of “Australian complying superannuation scheme” in section 4 of the KiwiSaver Act and section YA 1 of the Income Tax Act to include the Australian Commissioner of Tax in their capacity under the Australian Superannuation (Unclaimed Money and Lost Members) Act 1999. Therefore, transferred USM would be covered by the existing rules applying to retirement savings transferred from an Australian superannuation scheme to a KiwiSaver scheme.

Generally, this would mean USM transferred from the ATO to a KiwiSaver scheme would be subject to the same KiwiSaver rules as New Zealand-sourced retirement savings. However, a number of special rules apply to transferred savings, which are set out below. These special rules are intended to ensure individuals transferring their retirement savings across the Tasman are neither advantaged nor disadvantaged by differences between Australian and New Zealand superannuation settings.

Withdrawal of savings for retirement: under clause 4B of schedule 1 of the KiwiSaver Act, transferred USM could be withdrawn from KiwiSaver when the member is 60 years or older and satisfies the Australian definition of retirement.

First home withdrawal: clause 8(4) of schedule 1 of the KiwiSaver Act would prevent transferred USM from being withdrawn from KiwiSaver for the purchase of a first home in New Zealand.

Permanent emigration: after being transferred to KiwiSaver, clauses 14(1)(b) and 14(2)(b) of schedule 1 of the KiwiSaver Act would prevent USM from subsequently being transferred to a third country if the member permanently emigrates.

Invalid enrolment: if a person’s membership in KiwiSaver is discovered to be invalid, transferred USM would be returned to an Australian superannuation scheme selected by the person under section 59D(2)(c)(ii) of the KiwiSaver Act or by the Commissioner of Inland Revenue under section 59D(2)(c)(iii). (The option under section 59D(c)(i) of the KiwiSaver Act to have savings refunded to the scheme they were transferred from would not apply in relation to USM, as it would not be appropriate for USM to be refunded back to the ATO.)

Government contribution: USM would not count towards a member’s entitlement to the annual $521.43 Government contribution in the year it was transferred to New Zealand. (Amounts transferred from an Australian complying superannuation scheme are specifically excluded from the definition of “member credit contribution” in section YA 1 of the Income Tax Act; this definition is used to determine what payments count towards the Government contribution entitlement.)

Tax treatment: under section CW 29B of the Income Tax Act, USM would be treated as exempt income on entry into New Zealand (after being transferred to New Zealand, any subsequent earnings on transferred savings would be taxed under the portfolio investment entity rules).

Clause 14B of schedule 1 of the KiwiSaver Act currently sets out the portability rules applying to the transfer of savings from a KiwiSaver scheme to an Australian complying superannuation scheme. Although the proposed amendments would bring USM within the definition of Australian complying superannuation scheme for the purpose of transferring USM to KiwiSaver, this would not make it possible for a transfer in reverse (that is, a transfer from a KiwiSaver scheme to the ATO). A transfer from KiwiSaver to the ATO would not involve USM.

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MYCOPLASMA BOVIS TAX ISSUE

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(Clause 33)

Summary of proposed amendment

The proposed amendments would enable the taxable income arising from the culling of certain qualifying Mycoplasma bovis affected livestock to be spread over six income years.

Application date

The proposed amendments would apply for the 2017 - 18 and later income years.

Key features

The income would only be able to be spread if:

• The business has been subject to Biosecurity Security New Zealand requiring a cull of Mycoplasma bovis affected stock.
• The business is a dairy or a beef breeding operation, with the breeding stock that is culled being valued under NSC or self-assessed cost. The expectation is that the breeding stock that is culled would comprise mainly mixed-aged cows, in combination with any other class of breeding stock.
• The stock is substantially replaced through purchasing equivalent breeding stock by the end of the income year following the cull year.
• The replacement stock continues to be valued using, as relevant, NSC or the cost price method. This is to ensure that farmers cannot enter the herd scheme on more advantageous terms than those not affected by Mycoplasma bovis.

Given that a livestock owner might use a couple of valuation methods in combination,[7] not all of the breeding stock might be valued at cost. However, only the income derived from the culling of the breeding stock valued under NSC or the self-assessed cost scheme would be able to be spread. For this purpose, breeding stock would include immature female stock intended for future breeding in the business.

Owners of the affected livestock, including sharemilkers, would be covered, that is, the ability to spread income from the cull is not be limited to just the owners of farmland with livestock.

The qualifying proceeds from the cull would comprise payments from the slaughterhouse, top-up compensation from the government for the difference between the normal market value for the stock and the payments from the slaughterhouse, and in some cases, further compensation to cover the additional cost of purchasing equivalent replacement stock.

The income arising from the culling of stock valued under another valuation method, or stock culled from a fattening stock business valued under NSC, would not qualify for this spreading provision. The Income Equalisation Scheme is available in those circumstances to mitigate the income implications of the cull.

Background

Some farmers have significant unexpected taxable income through their herds being culled following a primary sector and government decision to eradicate Mycoplasma bovis in New Zealand.

Federated Farmers requested an amendment to ensure there would be no income tax implications from culling and replacing dairy and beef cattle impacted by Mycoplasma bovis. They cited the special treatment given to depreciation recovery income on buildings damaged by the Christchurch and the Hurunui-Kaikōura earthquakes as a precedent.

The issue arises for farmers who have used a cost-based method (that is, the national standard cost scheme (NSC) and self-assessed cost scheme)[8] to value their breeding stock on hand for tax purposes. This is because the difference between the total proceeds received from the cull and the cost of the stock is income. This creates a cash-flow issue for those farmers who purchase replacement livestock after the cull. Those replacement stock are valued at their purchase price and cannot, for tax purposes, be immediately written down to the homebred cost to offset the income.

To avoid this outcome, the proposed legislative changes would enable the proceeds from the cull to be transferred from the year of the cull and spread evenly over the following six income years. This ability to spread will be optional.

Detailed analysis

Relevant current legislation

The livestock valuation rules are contained in subpart EC of the Income Tax Act 2007, including the requirements that apply when using multiple valuation options and the restrictions on switching between valuation options. These rules ensure that the cost of stock on hand is valued appropriately and that the cost of purchases is not deducted ahead of their being sold.

Precondition for the spread

Proposed section EZ 4B(1) sets out the following preconditions:

• A person would have to have, as part of their business, mixed-age cows on hand at the start of the cull year and those cows would need to be valued under either NSC or the cost price method at the end of the income year before the cull year. The cull year would need to be before the 2028 - 29 income year. (The focus on mixed-age cows is to ensure that the spread is provided to those who have sizeable additional income as a result of the cull given that female breeding stock make up a high proportion of a standard herd. The 2028 - 29 income year cut-off is in the expectation that Mycoplasma bovis should be less significant by that stage).
• In the cull year, some or all of the person’s cattle would need to be destroyed, because of Mycoplasma bovis, using the powers in either sections 121 or 122 of the Biosecurity Act 1993 that enable Biosecurity New Zealand to examine organisms and give directions. (Normally the whole herd is destroyed but in some isolated cases only a portion needs to be destroyed).
• A significant portion of the culled stock would need to be replaced by the end of the income year following the cull year. The expectation is that the culled livestock are replaced with purchased stock. Specifically, the requirement is that the number of mixed-age cows valued under the national standard cost scheme or the cost price method that the person has on hand (or expects to have on hand) at the end of the income year following the cull year is at least seventy five percent of the number of mixed-age cows valued under the national standard cost scheme or the cost price method that the person had on hand at the start of the cull year.

The spread

There are two parts to the spread. Proposed section EZ 4B(2) would enable the income calculated under proposed section EZ 4B(5) to be spread evenly over the six income years following the cull year. Proposed section EZ 4B(3) would spread the deduction that the livestock owner would otherwise be able to claim under section EC 2 for the equivalent number of stock.[9] Their combined effect is that the net income arising from the culling of the relevant livestock would be spread.

For the income spread component, the formula in proposed section EZ 4B(5) is:

Σ(number × (sale proceeds + compensation) ÷ culled stock)

This formula works on a livestock class basis, where:

• Σ is the summation of the amounts calculated using the formula for each of the following classes of each of the beef cattle and dairy cattle types of livestock:

(a) rising 1 year heifers;

(b) rising 2 year heifers;

(c) mixed-age cows; and

(d) breeding bulls.

• Number, for a class of livestock, is the number that is the lesser of:

(a) the number calculated using the formula in proposed EZ4B(12):

valuation method breeding stock + culled stock − opening stock

(b) the number of livestock of that class that are part of the destroyed cattle (culled stock).

• Sale proceeds, for a class of livestock, is the amount of income the person derives from the disposal of the livestock of that class that are part of the destroyed cattle.
• Compensation, for a class of livestock, is the amount of compensation which the person is entitled to under section 162A of the Biosecurity Act 1993 and that the person receives by the end of the income year following the cull year for:

(a) the difference between the stock’s market value and the sale proceeds; and

(b) the cost of the replacement cattle of the same class being greater than the total amount received in relation to the stock it replaces.

• Culled stock, for a class of livestock, is the number of livestock of that class that are part of the destroyed cattle.
• Valuation method breeding stock is the number of livestock of that class that:

(i) were breeding stock or stock that the person expected to be capable of, and intended be used for, breeding upon reaching maturity; and

(ii) the person valued under NSC or the cost price method in the income year before the cull year.

• Opening stock is the number of livestock of that class that the person had on hand at the start of the cull year.

The formula takes into account the possibility that a livestock owner might be using more than one valuation method to value the stock, and might reduce the number on NSC or the cost price method between the start of the cull year and the cull date. When all the stock are on NSC or the cost price method, stock numbers are constant and all stock is culled, then the formula simplifies to just the sales proceeds plus compensation.

Ceasing business

Should the business cease, or the owner of the business die, proposed section EZ 4B(4) would require any unallocated amount of spread income and deduction to be allocated to the “cessation” year.

Already filed income tax returns

For those taxpayers that have already filed their 2018 - 19 income tax returns, once the legislation has been enacted they can apply for a reassessment under section 113 of the Tax Administration Act. In the meantime, Inland Revenue is allowing instalment arrangements to be entered into, in relation to the tax due to match the proposed spread. No legislative amendment is necessary for this to occur.

Since the proposed spread would apply from the 2017 - 18 income year, some taxpayers would also be eligible to apply for reassessment of their 2017 - 18 income tax returns once the legislation has been enacted.

Notification

Those taking up the spreading option need to notify Inland Revenue in writing. This can be done electronically.

Proposed section EZ 4B(14) requires an election to be made by the date of filing of the taxpayer’s return of income for the 2020 - 21 income year, if the cull year is the 2020 - 21 income year or earlier, and by the date of filing their return for the cull year in any other case.

The additional compliance costs from this notification requirement would be small given the anticipated small number of farmers affected by Mycoplasma bovis and the fact that many will need to contact Inland Revenue anyway in the interim period before the legislation is enacted to arrange instalment arrangements. The amount of income and tax involved is significant for each affected taxpayer so knowing who has taken up this option will also be helpful from a compliance perspective.

The election would be irrevocable, but would not be treated as being made if, at the end of the income year following the cull year, the number of mixed-age cows on hand that were valued under one of the cost schemes was less than seventy five percent of the equivalent pre-cull levels.

Table 3: Income spread

Opening numbers for cull year						Cull numbers		Income spread
	Total for class	Valued in cost	Held in herd scheme A − B	Held for breeding	Breeding in NSC D − C	Number culled	Valued in NSC E + F − A	Spread based on smaller of F or G	Cull proceeds per class	Compo per class	Gross cull income I + J	Cull income per head K ÷ F	Income to spread H × I
	A	B	C	D	E	F	G	H	I	J	K	L
R1 heifers	0
R2 heifers (AVO in use)	20	5	15	20	5	19	4	4	$15,200	$7,600	$22,800	$1,200	$4,800
MA cows	100	100	0	100	100	80	80	80	$95,000	$55,000	$150,000	$1,875	$150,000
Breeding bulls	0
Total income spread													$154,800

Presumed that when the alternative valuation option (AVO) is in use, the herd scheme animals are the breeding or replacement animals.

Table 4: Deduction spread

	Spread based on smaller of F or G	Last year NSC per class	Spread H × M
	H	M	N
R1 heifers	0
R2 heifers	4	$845	$3,380
MA cows	80	$925	$74,000
Breeding bulls	0
Total deduction spread		$77,380

[4] See section 51(1)(e).

[5] This interest rate has been chosen as a representative rate as it was the NZ dollar five-year BBB+ rate on a particular day when officials were considering this project. This rate is used in all NZ IFRS 16 examples in this commentary. The actual interest rate is determined for each individual lease, based on its specific terms and features, following the requirements set by IFRS 16.

[6] The year of accounting transition and tax transition will usually be the same, but if tax transition happens in a subsequent year the tax transitional adjustment will also need to include the retained earnings impact of the years when the entity follows NZ IFRS 16 for accounting and not for tax.

[7] For example, an owner might use the herd scheme in conjunction with NSC (the alternative valuation option).

[8] The NSC scheme values the animals at, if the animal is homebred, a standard cost (determined by the Commissioner of Inland Revenue) for the respective age and type of animal that reflects that animal’s average costs of production, or at its purchase cost if the stock is purchased. The self-assessed cost scheme (a cost price method) involves farmers using their own farm costs rather than standard costs.

[9] Section EC 2 provides a deduction at the beginning of the cull year for the value of stock on hand at the end of the preceding income year).