Winter 2014 Tax Update

Categories: General
      Date: Jun  2, 2014
     Title: Winter 2014 Tax Update

In this issue:

Budget 2014: The Tax Take

Tax residency: IRD Changes Rules

Tax Avoidance: Four IRD Scenarios

Budget 2014: The Tax Take

The Government's 2014 Budget had little to excite on the tax front. The main tax changes proposed to apply from the 2015/2016 tax year are:

Start-up companies with tax losses can cash out some or all of their tax losses from R & D expenses, subject to meeting certain criteria
All businesses will be allowed a tax deduction for R & D expenses that are currently non-deductible i.e. black hole expenses
Registered designs will become tax depreciable
Cheque duty will be repealed from 1 July 2014
Possible decreases in some ACC levies

Also, further funding ($132m) is being provided to the Inland Revenue to increase its activities in tax compliance and chasing unfiled tax returns.

Tax Residency

The IRD recently finalised its Interpretation Statement on tax residency. The statement reflects a fundamental change in the IRD's views on tax residency where a person based overseas owns, rents or has available a dwelling in NZ in which they could live and increases the NZ tax residency risks for those persons. The key points include:

If a person is not tax resident in NZ under the 183 days test, they can only be tax resident in NZ under the permanent place of abode test if they have a dwelling available to them in NZ and have sufficient other ties with NZ i.e. no dwelling, no tax residency
The person does not have to own or rent the dwelling, it must merely be available to them to live in
Persons based overseas with investment properties in NZ are at increased risk under the IRD's revised interpretation
Persons living outside of NZ in a country with which NZ has a Double Tax Agreement will generally be better off than those living in non-DTA countries, as DTAs may mitigate the tax impact of any IRD view that a person is tax resident in NZ.

Tax Avoidance: Four IRD Scenarios

The IRD have issued for public comment four scenarios which consider whether tax avoidance arises. Three of interest are:

Interest deductions where shareholder loans are refinanced and funds used by a shareholder for private purposes
Look-through company elections
Capitalising debt in insolvent companies

In the first scenario, the IRD interestingly considers that no tax avoidance arises, even if the purpose of the refinancing is to make interest deductible in the company that would not have been had teh shareholder borrowed.

In the second scenario (LTC elections), the IRD considers that tax avoidance does not arise where the company continues to operate and obtains the 5% benefit on entering the LTC regime. However, the IRD considers that tax avoidance may arise where the company is wound up after the election, as the IRD considers that Parliament only contemplated that the LTC election would be used for companies which continue to trade post the election.

In the third scenario, the IRD considers that tax avoidance can arise as the effect of the arrangement is that the company would have had debt remission income but for the issue of shares.

The key point to be taken from these examples is that any transaction that has a tax benefit is potentially open to attack under the tax avoidance provisions if the IRD considers that Parliament did not contemplate that the taxing provision should be used in the way it has.