Categories: Previous Articles
      Date: Mar 16, 2013
     Title: March Tax Update

In this issue:

• FBT and carparks
• NZ Tax residency
  
• Tax avoidance: Alesco
  
• Lease Inducement and Surrender Payments
• Drought Relief
• Taxing Multinationals

FBT and Carparks

The Government is proposing to overhaul the FBT rules applying to carparks provided by employers to staff.

At the moment, carparks are not liable for FBT where they form part of the employer's premises.  The IRD have interpreted "employer's premises" as meaning carparks that are either owned by the employer or leased by the employer.  If an employer merely licenses carparks from a carpark operator, the IRD considers those carparks are liable for FBT.

Under the proposed changes, a carpark provided by an employer to a staff member will be liable for FBT if it meets one of the following three criteria:

• The carpark is in the Auckland or Wellington Central Business Districts
• The carpark is provided by a commercial carpark operator for $210 or more per month
• The employee can choose to cash in the carpark for a higher salary

There are certain exclusions but the above are proposed to be the general rules applying.  The proposals are part of a Tax Bill at the moment with a proposed introduction date of 1 April 2014.  It will be interesting to see if the proposals see the light of day given the current backlash from the business community.

Tax Residency in New Zealand

The IRD have issued a draft Interpretation Statement which restates and also amends their policy on when a person or company will be an income tax resident of New Zealand.

Unfortunately, the IRD seems to have done a complete u-turn on some of its policy, which a cynic may wonder is linked to revenue gathering intentions rather than any change in the tax laws since their previous policy.

For example, if a person was seconded overseas for 3 years, their family went with them and  and their home was rented out, under previous IRD policy the IRD considered the person was a non-resident.  However, under the latest draft Statement and using a very similar fact scenario, the IRD now considers the person would remain a New Zealand tax resident.

A key change in the IRD's draft policy relates to whether there is a dwelling in New Zealand available to the person at short notice (even if rented).  If there is, the person is more likely to be considered a New Zealand tax resident.

If the draft policy is finalised on this basis, more people will be considered tax residents and the IRD are likely to revisit residency status for all persons filing non-resident tax returns.

We should know the content of the final policy shortly, as the Interpretation Statement should be released soon.

Tax Avoidance: Alesco Case

The IRD have won another tax avoidance case, Alesco.  Rather than bore you with the detail, there is one issue from this case which is worthy of discussion.

The Court held that the Commissioner did not have to compare what the taxpayer actually did, with what they would most likely have done (the counterfactual position), when determining whether income tax had been avoided.

The taxpayer argued that, had they not used a certain financing instrument to fund the purchase of certain assets, they would simply have used interest-bearing debt and no tax would have been avoided.

While the Commissioner has the discretion to counteract a tax advantage as she sees fit, the tax legislation states:

"Commissioner's identification of hypothetical situation

(4) ...the Commissioner may have regard to [an amount of deduction] which, in the Commissioner's opinion, had the arrangement not occurred, the person-

(a) would have had; or

(b) would in all likelihood have had; or

(c) might be expected to have had"

It is clear from the above legislation that the Commissioner should, in any reconstruction, take into account what would have happened.  This is the essence of the word "avoidance" i.e. avoiding something that would otherwise have occurred.

The Court acknowledged that if there was clear evidence that Alesco would have used interest-bearing debt, then the outcome may have been different.  Unfortunately for Alesco, the evidence was conflicting.  However, we believe it is incorrect for the IRD, and the Court, to completely ignore the most likely counterfactual position that Alesco would have used interest-bearing debt: this seems to be another kind of avoidance...avoidance of reality.

We believe the discussion in the case of the counterfactual position means that taxpayers should take care to evidence actions that would have occurred, when taking tax positions which may later be challenged by the IRD.

If the other corporates being pursued by the IRD for the same financing arrangements do have sufficient evidence that they would have used interest-bearing debt, then it may be that the IRD has won a battle but will lose the war.

Lease Inducements and Surrender Payments

Historically, the tax treatment of lease inducements and surrender payments has been unclear and asymmetrical.  For example, a lease inducement was generally tax deductible to a landlord (though not always) and generally not assessable to the tenant.

The law is changing in this area.  From 1 April 2013, all of these payments will be assessable/deductible.  There will be certain spreading provisions which will spread the income and deductions over the term of a lease.

Drought Relief

The IRD has extended its income equalisation discretions to the entire North Island, as a result of the drought.

These discretions allow farmers to smooth their income by generally allowing income to be put aside and not taxed until it is withdrawn in a later income year.

Taxing Multinationals

The issue of whether or not large Multinationals such as Starbucks and Google have been paying their fair share of taxes around the world has been in the news and is now being considered by the OECD.

The IRD has committed to working with the OECD and Australian Treasury to address the issue.