Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Bill

Taxation (Annual Rates for 2019–20, GST Offshore Supplier Registration, and Remedial Matters) Bill

Government Bill

114—1

Explanatory note

General policy statement

This taxation omnibus Bill introduces amendments to the following legislation:

  • Goods and Services Tax Act 1985;

  • Income Tax Act 2007;

  • Tax Administration Act 1994;

  • Student Loan Scheme Act 2011; and

  • Child Support Act 1991.

Broadly, the policy proposals in this Bill fall into 4 categories. The first category sets the annual rates of income tax for the 2019–20 tax year.

The second of these categories comprises proposals aimed at improving current tax settings within a broad-base, low-rate framework. This framework, helps ensure that taxes are fair and efficient, and that they impede economic growth as little as possible. It also helps keep compliance costs low and minimises opportunities for avoidance and evasion. The framework underpins the Government’s revenue strategy and helps maintain confidence that the tax system is broadly fair, which is crucial to encouraging voluntary compliance.

Although New Zealand has relatively strong tax settings, it is important to maintain the tax system and ensure that it continues to be fit for purpose. Changes in the economic environment, business practice, or interpretation of the law can mean that the tax system becomes unfair, inefficient, complex, or uncertain. The tax system needs to be responsive to accommodate these concerns.

The third category relates to proposals aimed at modernising and improving the settings for the administration of social policy by Inland Revenue. This includes simplification measures relating to student loans and Working for Families.

The fourth category consists of proposal aimed at providing consistency with the broad objectives of government for international co-operation. This covers amendments to ensure that the New Zealand is able to meet its international obligations concerning automatic exchange of information.

The main policy measures within this Bill have been developed in accordance with the Generic Tax Policy Process (GTPP). It is a very open and interactive engagement process between the public and private sectors, which helps ensure that tax and social policy changes are well thought through. This process is designed to ensure better, more effective policy development through early consideration of all aspects, and likely impacts, of proposals, and increased opportunities for public consultation.

The GTPP means that major tax initiatives are subject to public scrutiny at all stages of their development. As a result, Inland Revenue and Treasury officials have the opportunity to develop more practical options for reform by drawing on information provided by the private sector and the people who will be affected.

The final stage of the GTPP is a post-implementation review of new legislation and identification of remedial issues that need correcting for the new legislation to have its intended effect. Further information on the GTPP can be found at http://taxpolicy.ird.govt.nz/how-we-develop-tax-policy.

The following is a brief summary of the specific policy measures contained in this Bill. A comprehensive explanation of all the policy items is provided in a commentary on the Bill that is available at http://taxpolicy.ird.govt.nz/publications/2018-commentary-argosrrm-bill/overview.

Confirmation of annual rates of income tax for the 2019–20 tax year

The Income Tax Act 2007 requires the rates of income tax to be set each tax year by an annual taxing Act. The Bill proposes to set the annual rates of income tax for the 2019–20 tax year at the same rates currently specified in schedule 1, part A of the Income Tax Act 2007 (that is, confirm that the rates remain unchanged).

GST on low-value imported goods

Goods and services tax (GST) as a broad-based consumption tax is intended to apply to all consumption that occurs in New Zealand, ensuring the system is fair, efficient, and simple. However, GST is not usually collected on imported goods valued below $400 for administrative cost reasons.

When GST was introduced in 1986, few New Zealand consumers imported low-value goods directly from offshore suppliers. Therefore, the compliance and administrative costs involved in collecting GST on imported goods below the Customs de minimis were considered to outweigh the benefits of collection at that time.

The growth of e-commerce has meant that the volume of goods on which no GST is collected has become increasingly significant. This raises concerns about the impact that this uneven GST treatment may have on the competitiveness of domestic retailers and on future tax revenues.

The amendments proposed in this Bill address the non-collection of GST on low-value imported goods in order to maintain the broad base of New Zealand’s GST system and provide a level playing field for domestic and offshore suppliers.

The non-taxation of low-value imported goods is an international issue faced by countries that have a GST or Value Added Tax (VAT) system. Since 1 July 2018, offshore suppliers selling goods valued at or below A$1,000 to consumers in Australia are required to collect and return Australian GST on these sales if their total taxable supplies to Australia exceed the A$75,000 GST registration threshold. The European Union (EU) has also introduced legislation that will require non-EU suppliers to collect VAT on low-value goods imported from outside the EU from 1 January 2021. The proposed amendments, which would apply to supplies made on and after 1 October 2019, are consistent with these international developments.

Supplies to consumers

The Bill proposes amendments to the Goods and Services Tax Act 1985 which would apply GST to supplies of “low-value goods” by non-resident suppliers to consumers in New Zealand. Low-value goods are those that are valued at or below $1,000.

Supplies to GST-registered businesses

GST would not apply to supplies of low-value goods made to New Zealand GST-registered businesses. As GST-registered businesses are not able to claim deductions for GST charged on these supplies, non-resident suppliers will not be required to provide tax invoices for their supplies of low-value goods.

However, if an offshore supplier inadvertently charges GST to a GST-registered business and the consideration for the supply does not exceed $1,000, the supplier would have the option of providing a tax invoice to allow the registered business to deduct the GST charged.

Registration threshold

Offshore suppliers will be required to register and return GST if their taxable supplies to New Zealand exceed $60,000 in a 12-month period, which is the existing domestic registration threshold.

Electronic marketplaces

An operator of an electronic marketplace would be required to register and return GST on supplies of low-value goods made through the marketplace. This is intended to maximise compliance with the rules while also minimising total administration and compliance costs by reducing the number of collection entities that would be required to register. The proposed rules for electronic marketplaces are broadly consistent with those recently introduced in Australia.

Re-deliverers

“Re-deliverers” are used by consumers when the supplier or electronic marketplace does not offer delivery to New Zealand. The goods are instead shipped to an address overseas and are brought to New Zealand by the re-deliverer. Since the supplier or marketplace in this situation would not know that the final destination of the goods is in New Zealand, it would be unreasonable to require them to charge GST.

The re-deliverer will however know that the goods are to be delivered to New Zealand. Therefore, as an integrity measure, a re-deliverer would be required to register and return GST on low-value goods that it re-delivers to New Zealand if its total supplies for GST purposes (including the low-value goods it re-delivers to New Zealand consumers) exceed $60,000 in a 12-month period.

Determining the tax treatment of a supply

A non-resident supplier of low-value goods must treat a customer as not being registered for GST unless the customer notifies the supplier that they are registered, or provides their GST registration number or New Zealand business number. A provision would allow the Commissioner of Inland Revenue and a supplier to agree on an alternative method of determining whether a customer is a GST-registered business.

If a consumer knowingly provides false or misleading information to avoid the payment of GST, the existing knowledge offences would apply. Additionally, where the amount of GST involved is substantial or where the behaviour is repeated, the Commissioner of Inland Revenue would have discretion to register the consumer and require them to pay the GST that should have been charged.

Other GST matters

The Bill proposes a number of technical and remedial amendments to the Goods and Services Tax Act 1985.

Capital raising costs

The first set of GST remedial amendments in the Bill clarify the scope of the rules allowing GST-registered persons to deduct GST incurred on costs of raising capital.

The existing law is unclear on whether a registered person can claim input tax deductions for capital raising costs in situations where the funds raised are used in refinancing the taxable activity. An amendment is proposed to clarify that input tax is deductible in such situations.

Where a capital raising transaction is carried out by a treasury company or holding company, it may be another group company that ultimately uses the funds raised in a taxable activity. The amendments clarify that input tax deductions for capital raising costs are available to the company that ultimately uses the funds in these situations.

GST treatment of vouchers

The Goods and Services Tax Act 1985 contains special rules for vouchers, tokens, and stamps. The default rule is that GST applies on the issue of a voucher (the issue basis). However, a significant exception allows the option for GST to apply on the redemption of a voucher (the redemption basis) if the issuer of the voucher and the supplier of the goods and services that it is redeemed for are separate persons and agree to use the redemption basis.

There are issues with the current criteria for when the redemption basis for vouchers can be used, in particular—

  • The issue basis is the only option if the issuer and redeemer of the voucher are the same person. This is problematic in relation to cross-border transactions, as applying GST on the issue basis can give rise to either double taxation or double non-taxation of cross-border goods and services. The Bill proposes an amendment to clarify that GST applies on the redemption of a voucher and not at the time it is issued in situations where the voucher is or could be redeemed for cross-border goods and services, regardless of whether there is more than one party involved in the issue and redemption of the voucher or not.

  • Where there are more than 2 parties involved (that is, where the issuer, seller, and redeemer of the voucher are different persons) the GST legislation gives rise to a technical issue about which party is liable to pay the GST. The Bill proposes an amendment to clarify that it is the entity redeeming the voucher that has the GST liability.

Treatment of arranging services relating to goods located offshore

The Bill proposes an amendment to correct an unintended change to the GST treatment of certain arranging services, resulting from an amendment that was made in 2016 to allow the rules applying GST to inbound cross-border supplies of services and intangibles to work properly.

The proposed amendment concerns services that consist of the arranging of services supplied directly in connection with goods situated outside New Zealand. The issue is that the arranging services may not be zero-rated, even though the underlying services that they arrange (such as overseas storage, handling, and logistics) will be clearly zero-rated. This is an anomalous result as the GST treatment of arranging services generally follows that of the underlying services being arranged.

The proposed amendment ensures that services that consist of the arranging of underlying services supplied directly in connection with moveable personal property located outside New Zealand at the time the underlying services are performed are zero-rated, in line with the policy intent and the previous treatment that applied prior to 1 October 2016.

Ring-fencing rental losses

Under current New Zealand tax settings, tax is applied on a person’s net income. Deductions that relate to particular activities or investments are not generally ring-fenced. This means there is generally no restriction on deductions in respect of a loss-making activity or investment reducing tax on income from other sources (although there are some exceptions to this general treatment).

While rental housing is not formally tax favoured, there is an argument that it may be under-taxed given that tax-free capital gains are often realised when rental properties are sold. The fact that rental property investments are often make persistently loss-making indicates that expected capital gains are an important motivation for many investors purchasing rental property.

While interest and other expenses are fully deductible, not all of the economic income generated from rental housing is subject to tax. There is therefore an argument that, to the extent deductible expenses in the long-term exceed income from rents, those expenses in fact relate to the untaxed gain on sale, so should not be deductible unless the gain is also taxed.

Currently, investors (particularly highly-geared investors) have part of the cost of servicing their mortgages subsidised by the reduced tax on their other income sources, helping them to outbid owner-occupiers for properties.

The Bill proposes to ring-fence deductions in respect of residential rental properties to the extent the deductions exceed income from the properties. This means the excess deductions cannot be used to reduce tax on other income. The proposed rules would apply from the start of the 2019–20 income year.

Portfolio or property-by-property basis

The amendments would apply on a portfolio basis by default – meaning that investors would calculate their overall profit or loss across their residential portfolio. However, taxpayers would be able to elect to apply the rules on a property-by-property basis.

Property subject to the rules

The amendments would apply to “residential land”, using the definition of “residential land” that already exists for the bright-line test. The definition includes bare land, but does not include farmland or land used predominantly as business premises.

The amendments would also not apply to a person’s main home or a property that is subject to the mixed-use asset rules. Land that is identified to Inland Revenue as being on revenue account is also excluded from the proposed amendments, provided either the taxpayer is notifying the Commissioner of their rental income on a property-by-property basis, or they are notifying the Commissioner of their rental income on a portfolio basis and all properties within the portfolio are on revenue account.

The Bill proposes further exclusions for residential land owned by widely-held companies and accommodation provided to employees or other workers where it is necessary to provide that accommodation owing to the nature or remoteness of the business.

Using ring-fenced deductions

Taxpayers would be able to offset ring-fenced residential property deductions from 1 year against residential rental income in future years (from any property) or against income on the sale of any residential land. Ring-fenced deductions would be released if a taxpayer has applied the rules on a property-by-property basis and the property ends up being taxed on sale, or if a taxpayer has applied the rules on a portfolio basis and all of the properties within the portfolio are sold and were subject to tax on sale.

The Bill proposes to allow the transfer of ring-fenced deductions between companies in the same wholly-owned group, but these deductions would remain ring-fenced.

Structuring around the rules

The Bill proposes specific rules to ensure that interposed entities cannot be used to structure around the ring-fencing rules. The interposed entity rules are proposed to apply where property is held by an entity that is residential land-rich – being where over 50% of the entity’s assets are residential properties.

Where this threshold is met, it is proposed that interest on borrowings relating to the entity would be treated as rental property expenditure. The interest would be ring-fenced to the extent it exceeds the appropriate proportion of the entity’s profit from residential properties for the year, taking account of the total interests the person has in the entity.

If capital of a residential land-rich entity is applied to multiple purposes, the interest incurred on borrowings to fund the capital would be apportioned between the uses to which the capital is applied on a pro-rata basis. This would ensure the appropriate treatment of the interest that relates to the other (non-rental) activity.

Social policy changes

The Bill proposes 4 amendments to improve the administration of student loans, Working for Families and child support, along with a technical amendment to the day count tests for student loans to align the law with the policy intent.

Deductions from withholding income

Domestic student loan borrowers that earn income other than salary and wages have their student loan assessment calculated at the end of the year based on the amount of income earned in that year.

Some of these borrowers receive schedular, election-day, and casual agricultural income which has a similar treatment to other employment income. Employers are required to withhold tax at source from that income in the same way as PAYE is deducted from salary and wages.

The Bill proposes that student loan borrowers who receive schedular, election-day, and casual agricultural income should have student loan repayments deducted from their income by their employer in the same way a salary and wage earner does.

Interest-free student loans

Moving to Inland Revenue’s new computer system, START, allows policy options that were previously discounted owing to systems constraints to be progressed – such as changes to improve the administration of interest-free loans for New Zealand-based borrowers.

Currently, student loan borrowers are charged loan interest. This interest is then written off for borrowers who are New Zealand-based.

The Bill proposes that loan interest should only be charged to overseas-based borrowers, removing the requirement to complete a subsequent write-off for those who are New Zealand-based. This would remove confusion for borrowers whose statements set out the interest charges and subsequent write-offs.

Alignment of the definitions of “income”

Both the Working for Families tax credit and student loan definitions of “income” refer to “net income” as the base income with adjustments made to include or exclude specific types of income. However, there are a number of differences between the Working for Families and student loan definitions of “income”, which can lead to confusion.

The Bill proposes to align the respective definitions as appropriate by—

  • Providing a separate legislative provision to specifically state that non-beneficiary income from a trust when a person is not the settlor should be included as income for Working for Families purposes (rather than captured as an “other payment”). This would align with the current student loan income definition.

  • Aligning the voting interest percentage for student loans with the percentage used for Working for Families to calculate the close company net income not distributed adjustment.

  • Aligning the adjustment for specific retirement savings contributions for student loans with other social policy products.

  • Aligning the adjustment for depreciation loss allowed on the sale of buildings for student loans with that for Working for Families.

Student loan day count tests

The Bill proposes amendments to the day count tests used to determine whether a student loan borrower is New Zealand-based or overseas-based. The proposed amendments would ensure the rules are consistent with their policy intent and Inland Revenue’s administrative practice.

Different repayment rules apply to student loan borrowers depending on whether they are New Zealand-based or overseas-based. A borrower is intended to become overseas-based if they spend at least 184 consecutive days overseas, beginning on the first day they were overseas, excluding periods in New Zealand totalling less than 31 days. Conversely, a borrower is intended to be a New Zealand-based borrower if they spend at least 183 consecutive days in New Zealand, excluding periods overseas of less than 31 days.

An unintended legislative change occurred in the rewrite of the Student Loan Scheme Act 1992 into the Student Loan Scheme Act 2011. This unintended change means that borrowers could become overseas-based after less than 6 months, although Inland Revenue’s administrative practice has been to continue to apply the previous law which allowed borrowers to travel overseas for short periods of up to 6 months before becoming overseas-based.

Discretion to grant permanent child support exemption

A person can have a child as a result of being the victim of a sex offence and may be made liable to pay child support for that child. A permanent exemption from paying child support exists for the parent of a child born as a result of a sex offence. To qualify for the exemption, the offender must have been convicted.

However, there are situations when there has not been a conviction for an offence but the reality that a sex offence occurred is in little doubt.

The Bill proposes to give the Commissioner of Inland Revenue discretion to consider other information in order to grant the exemption even though there is no convicted offender. Additionally, the Commissioner would have the discretion to back date the exemption in situations where she is satisfied this would not negatively impact on a parent or carer. An exemption could not be back dated to periods before 26 September 2006 when the permanent exemption was first introduced.

The discretion would be supported by guidelines that would assist with deciding whether or not the exemption should be granted. The type of evidence that could support an offence had occurred could include a police report, medical report, or report from another agency that has already assessed the person was the victim of the offence.

The Commissioner would be obliged to revoke the exemption in situations when she subsequently becomes aware that the exemption should not have been granted – for example, when a person is found to have made a false accusation.

Sale and compulsory buy back of pre-1990 forest land emissions units

The Bill proposes an amendment to address an issue with the tax treatment of pre-1990 forest land emissions units. The issue arises when the units are securitised through a sale and compulsory buy back transaction.

The proceeds from the sale of pre-1990 forest land emissions units are generally non-taxable. However, any subsequent sales of the emissions units are taxable.

It is not appropriate to treat a transaction involving the sale and compulsory buy back of pre-1990 forest land units as a standalone sale, as that transaction amounts to a securitisation of an asset in exchange for a loan.

The proposed amendment will treat the transaction as a loan, including elements that are an excluded financial arrangement, thereby better reflecting the economic substance of the transaction.

Tax records in te reo Māori

The Bill proposes amendments to the Tax Administration Act 1994 and the Goods and Services Tax Act 1985 to allow tax records to be held in te reo Māori. The amendments codify existing Inland Revenue administrative practices regarding taxpayers holding tax records in te reo Māori.

The proposed amendments do not override the disclosure requirements in the GST Act concerning tax invoices or other similar documents provided by GST registered persons.

PAYE and employee share schemes

The Bill proposes to remove a non-tax obstacle relating to financial reporting requirements for employers electing to account for PAYE on benefits provided to employees under an employee share scheme. This potential obstacle relates to the costs an employer would need to incur to comply with financial reporting requirements relating to the provision of benefits under an employee share scheme.

Under an International Financial Reporting Standard (IFRS 2 Share Based Payment), an employer electing to withhold PAYE from income earned by an employee under the terms of an employee share scheme must, for financial reporting purposes, treat the costs of the scheme as either—

  • a fixed cost which is amortised on a straight line basis (the fixed cost method); or

  • an annually revalued amount, with the relevant amount then being an expense for financial reporting purposes.

The annual expense of obtaining an annual revaluation of costs of the scheme could mean that employers may elect not to withhold PAYE from benefits provided to employees under employee share schemes. The cost of establishing an employee share scheme in a way that permits the employer to treat the costs of the scheme as a fixed cost for financial reporting purposes could also impose significant non-tax compliance costs.

IFRS 2 does however permit an employer to apply the fixed cost method for financial reporting purposes if there is a statutory obligation to withhold PAYE in relation to benefits arising under an employee share scheme. The proposed amendment would allow an employer to make an irrevocable election to withhold PAYE from income earned by employees under an employee share scheme, thus satisfying the statutory obligation threshold.

Trust beneficiaries as settlors

Current legislation makes beneficiaries of a trust settlors if they transfer value to the trust. The policy intent is that the settlor definition is wide, to ensure most transfers of value to a trust are captured. However, it was not intended that beneficiaries with modest current account balances (where the trust has allocated money to them but it has not been paid out) become settlors as a result.

The Bill proposes an amendment to the definition of “settlor” in the Income Tax Act 2007 to ensure that beneficiaries of a trust do not become settlors when either—

  • the trust pays a market interest rate, measured by the prescribed fringe benefit tax rate of interest, to the beneficiary to compensate them for the fact they have been allocated money which they have not received yet; or

  • the amount retained in the current account with the trust at the end of the income year is no greater than $25,000.

Cash distributions from co-operative companies

In general, co-operative company law permits a co-operative company to make distributions of profits from mutual transactions between the company and its shareholders to a specific group of shareholders, provided the company’s constitution permits such a distribution. However, a rule in the Income Tax Act 2007 allowing co-operative companies to attach imputation credits to a non-deductible cash distribution of profits from mutual transactions during a year requires the relevant distribution to be made to all persons who were shareholders at any time during that year.

The Bill proposes a remedial amendment to the non-deductible cash distribution rule to clarify that a cash distribution of mutual profits in a co-operative company need not be made to all shareholders in order for imputation credits to be attached to the distribution, provided such a distribution is permitted by the company’s constitution.

An “anti-imputation streaming” rule in the Income Tax Act 2007 requires imputation credits to be attached to a dividend at the same ratio as those attached to the first dividend in a year. This rule prevents imputation credits from being attached at different ratios for multiple dividends over a year, as this could result in imputation credits being “streamed” to shareholders that are best able to use them.

Imputation credit streaming is a concern because it is counter to the objectives of ensuring that income derived through companies is taxed at the tax rates of the shareholders in the company.

To avoid such concerns, the Bill proposes that the non-deductible cash distribution rule be subject to the anti-imputation streaming rule.

Common Reporting Standard – Investment entities and corporate trustees

The Bill proposes an amendment to the implementation legislation for the Common Reporting Standard (CRS) to ensure the law works as intended.

The CRS imposes due diligence and reporting obligations on financial institutions. Information provided to Inland Revenue under the CRS implementation legislation is an integral part of the G20/OECD Automatic Exchange of Information initiative which seeks to provide a global framework for the collection, reporting, and exchange of certain financial account information relating to persons who invest outside their country of tax residence. The focus of this is to enable international cooperation in the detection and deterrence of offshore tax evasion.

The CRS definition of “financial institution” includes an investment entity that meets certain criteria. It is ambiguous as to whether or not an investment entity managed by a corporate trustee would be required to comply with the CRS. However, the policy intent, and international consensus, is that such investment entities are obliged to comply with the CRS. If not addressed, this ambiguity could therefore result in Inland Revenue not being able to meet its automatic exchange of information obligations in some instances.

Loss of earnings insurance

The Bill proposes an amendment to ensure that claims paid out under a loss of earnings insurance policy are taxable to the recipient in all circumstances, consistent with the policy intent.

The income component of claims received under a loss of earnings insurance policy has always been taxable under the common law. That principle was codified in an amendment in 2011, which addressed a question over the timing of when the income should be returned. However, the wording of the amendment has inadvertently resulted in the insurance proceeds not being taxable if the policy holder assigns the right to receive the proceeds to another person whose business was not interrupted by the event.

The proposed amendment ensures that if a policy holder assigns a loss of earnings insurance policy to another person, the income component of a claim received by the assignee will be taxable. A savings provision is also proposed to protect the historic tax positions of taxpayers that have relied on the existing law.

“Level premium” life insurance policies

The Bill proposes a technical amendment to the transitional rules that accompanied the substantive reform of the life insurance business taxation rules, to ensure the law better reflects the policy intent of those rules.

The reform of the life insurance business taxation rules provided comprehensive transitional relief for life insurance policies sold on or before 1 July 2010. The proposed amendment would preserve pricing expectations and assumptions made prior to 1 July 2010 for “level premium” life insurance policies which were sold before the taxation rules for life insurance businesses changed.

Remedial amendments

A number of minor remedial matters are also addressed in the Bill, consisting mainly of correcting minor faults of expression, reader’s aids, and incorrect cross-references.

Departmental disclosure statement

The Inland Revenue Department is required to prepare a disclosure statement to assist with the scrutiny of this Bill. The disclosure statement provides access to information about the policy development of the Bill and identifies any significant or unusual legislative features of the Bill.

Regulatory impact assessment

The Inland Revenue Department produced regulatory impact assessments on 20 July 2017, 7 May 2018, 1 August 2018, and 5 September 2018 to help inform the main policy decisions taken by the Government relating to the contents of this Bill.

Clause by clause analysis

Clause 1 gives the title of the Act.

Clause 2 gives the dates on which the provisions of the Act come into force.

Part 1Annual rates of income tax

Clause 3 sets the basic rates of income tax for the 2019–20 tax year.

Part 2Amendments to Goods and Services Tax Act 1985

Clause 4 provides that Part 2 amends the Goods and Services Tax Act 1985.

Clause 5 amends section 2(1), which contains the definitions of terms defined for the Act. Subclause (1) amends the definition of electronic marketplace, as a consequence of the new regime for supplies of distantly taxable goods. Subclause (2) inserts new definitions of entry value and entry value threshold, which are required by the new rules relating to supplies of distantly taxable goods. Subclause (3) amends the definition of marketplace, paragraph (b), as a consequence of the new regime for supplies of distantly taxable goods. Subclause (4) inserts a new definition of quarter by reference to the Income Tax Act 2007. Subclause (5) inserts a new definition of redeliverer, which is required by the new rules relating to distantly taxable services. Subclause (6) inserts a new definition of underlying supplier, which is required by the new rules relating to distantly taxable services.

Clause 6 inserts new section 4B, which defines distantly taxable goods and provides for a supply that includes items not meeting the requirements of the definition as well as items that do meet the requirements.

Clause 7 amends section 5, which gives the situations in which a supply occurs. Subclauses (1) and (2) amend subsection (11G), which provides for the treatment of the redemption of tokens, stamps, and vouchers, as a consequence of the new regime for supplies of distantly taxable goods. Subclauses (3) to (8) amend subsection (27), which imposes reverse charges on the consumers of some supplies in some circumstances, as a consequence of the new regime for supplies of distantly taxable goods. Subclause (9) inserts new subsection (28), which gives the Commissioner the power to treat distantly taxable goods, that would otherwise be treated as supplied to a recipient by the operator of a marketplace, as being supplied to the recipient by the person who provides the distantly taxable goods if the person has provided false or misleading information to the operator of the marketplace.

Clause 8 amends section 5B, which applies when the recipient of a supply by a non-resident is treated as being the supplier, by extending the scope of the section to include supplies of distantly taxable goods.

Clause 9 amends section 8, which imposes tax on supplies, by extending the scope of the section to include supplies of distantly taxable goods.

Clause 10 amends section 8B, which relates to supplies of remote services. The subsections giving the requirements that a supplier must meet before treating a recipient of a supply as being a registered person are removed, since the requirements are reflected in new section 8BB.

Clause 11 inserts new section 8BB, which gives the requirements that a supplier must meet before treating a recipient of a supply of distant services or of distantly taxable goods as being a registered person.

Clause 12 amends section 10, which gives the rules for the value of a supply in different situations, to provide for some supplies of distantly taxable goods by an operator of a marketplace or a redeliverer.

Clause 13 inserts new sections 10B and 10C. Section 10B provides a method for determining the value of a supply of goods for the purposes of determining whether the supply is of distantly taxable goods. Section 10C provides that a supplier who is a non-resident or the operator of a marketplace or a redeliverer may elect that supplies of goods having a value greater than the entry value threshold may be supplies of distantly taxable goods if the supplier meets the requirements in the section.

Clause 14 amends section 11, which provides for certain supplies of goods to be taxed at a rate of 0%, by extending the scope of the section to include supplies of distantly taxable goods.

Clause 15 amends section 11A, which provides for certain supplies of services to be taxed at a rate of 0%, by extending the scope of the section to include supplies of services relating to distantly taxable goods.

Clause 16 amends section 12, which provides for the imposition of tax on goods at the time of importation, by extending the scope of the section to allow for the importation of distantly taxable goods.

Clause 17 inserts new section 12B, which provides that the supplier of goods that are imported must reimburse the recipient for tax charged under section 8 on the supply of the goods if the recipient is required to pay tax levied under section 12 on the goods when they are imported.

Clause 18 amends section 15, which provides for the taxable periods for which registered persons must make returns. Subclause (2) inserts new subsection (7), which provides for the length of the first taxable period of a non-resident supplier whose supplies are of distantly taxable goods.

Clause 19 amends section 20, which provides for the calculation of the tax payable by a registered person for a taxable period. Subclause (2) inserts a new subsection (3)(dd), which provides a supplier with a credit for consumption tax paid in another country or territory when the goods are supplied to a person who is not a registered person.

Clause 20 amends section 20G, which provides for the apportionment of input tax when an asset is used partly for a taxable use and partly for a non-taxable use. Under the amendment, the apportionment depends on concepts used in the Goods and Services Tax Act 1985, instead of depending on concepts used in the Income Tax Act 2007.

Clause 21 amends section 20H, which provides for a deduction of input tax by a registered person who makes supplies of financial services in the course of trying, but failing, to raise funds for taxable uses. The amended provision contains an added requirement for a deduction of input tax, which is that the supplies used in making the supplies of financial services would give rise to a deduction if used in the taxable activity for which the funds are raised. New subsection (1B) provides for apportionment when funds are raised for more than 1 activity.

Clause 22 amends section 21HB, which gives transitional rules for a previous law change that extended the availability of deductions of input tax for supplies relating to dwellings. New subsection (4)(aa) requires that the person acquire premises before 1 April 2011 as a prerequisite for an election by the person under subsection (4) that a supply of accommodation in the premises not be a taxable supply.

Clause 23 amends section 24, which gives the requirements for suppliers to issue tax invoices, by extending the scope of the section to include non-resident suppliers of distantly taxable goods.

Clause 24 inserts new sections 24BAB and 24BAC. Section 24BAB requires a supplier of distantly taxable goods charged with an amount of tax to provide a recipient on request with a receipt giving the specified details. Section 24BAC requires a supplier of distantly taxable goods that are imported into New Zealand to ensure that the New Zealand Customs Service has, by the time of the importation, the specified information relating to the supply.

Clause 25 amends section 24B, which gives the records that must be kept by a recipient of imported services, by extending the scope of the section to include recipients of supplies of distantly taxable goods.

Clause 26 amends section 25, which gives the situations when suppliers are required to issue credit and debit notes, by extending the scope of the section to include suppliers of distantly taxable goods, including distantly taxable goods that are taxed under section 12 at the time of importation.

Clause 27 amends section 25AA, which gives the consequences of a change in a contract for imported services, by extending the scope of the section to include changes in a contract for a supply of distantly taxable goods.

Clause 28 amends section 25A, which gives the Commissioner a power to approve notations used in electronic documents, by extending the scope of the section to include notations used in electronic receipts issued under new section 24BAB.

Clause 29 amends section 26, which gives the treatment of bad debts, by excluding from the section a bad debt, of a marketplace operator, to which new section 26B applies.

Clause 30 inserts new section 26B, which gives the treatment of certain bad debts of a marketplace operator arising from a taxable supply by the operator of goods and services provided by an underlying supplier.

Clause 31 amends section 51, which provides for the liability to registration of persons making supplies, by extending the scope of the section to include persons making supplies of distantly taxable goods.

Clause 32 amends section 51B, which provides for the automatic treatment of certain persons making supplies as being registered, by extending the scope of the section to include persons making supplies of distantly taxable goods.

Clause 33 amends section 56B, which provides for the treatment of a supplier of services that carries on activities both inside and outside New Zealand through branches or divisions, by extending the scope of the section to include persons making supplies of distantly taxable goods.

Clause 34 amends section 60, which gives the supplier for a supply involving an agent or auctioneer, by extending the scope of subsections referring to supplies of remote services to include supplies of distantly taxable goods.

Clause 35 amends section 60C, which gives the supplier for supplies of remote services through an electronic marketplace, by extending the scope of the section to include supplies of distantly taxable goods.

Clause 36 amends section 60D, which gives the supplier for supplies of remote services through an approved marketplace, by extending the scope of the section to include supplies of distantly taxable goods.

Clause 37 inserts new sections 60E, 60F, and 60G. Section 60E gives the situations in which a redeliverer of goods is the supplier of the goods. Section 60F provides for a deficiency in the amount of output tax returned by an operator of an electronic marketplace, or by a redeliverer, if the deficiency arises from information provided by another person involved in the supply. Section 60G gives the requirements relating to the treatment of information that must be met before an operator of a marketplace or a redeliverer may rely on section 60F.

Clause 38 amends section 75, which gives the requirements for the keeping of records that must be met by a registered person. Subclauses (1) and (3) to (5) extend the scope of the section so that the Commissioner’s consent is not required for the keeping of records in te reo Māori. Subclause (2) extends the scope of a subsection relating to supplies of remote services so that the subsection applies for supplies of distantly taxable goods.

Clause 39 amends section 77, which provides for the currency in which amounts of money must be expressed, by extending the scope of a subsection applying to a non-resident supplier of remote services to include a non-resident supplier of distantly taxable goods.

Part 3Amendments to other enactments

Amendments to Income Tax Act 2007

Clause 40 provides that sections 41 to 66 amend the Income Tax Act 2007.

Clause 41 amends section CB 16A to add a cross-reference, as a consequence of the introduction of ring-fencing of deductions for owners of residential rental property.

Clause 42 amends section CG 5B to ensure that loss of earnings insurance receipts under a business interruption policy are income of the recipient when the insured person has assigned the right to receive the proceeds to another person.

Clause 43 repeals section CV 9, as a minor drafting remedial matter to remove redundant provisions.

Clause 44 expands a heading to include the subject matter of new section CX 54B.

Clause 45 inserts new section CX 54B, which provides for the treatment of a transfer of an emissions unit made under a type of excepted financial arrangement that is subject to new section EW 52B.

Clause 46 amends section CX 60, as a drafting remedial matter to clarify a cross-reference and an exception.

Clause 47 expands a heading to include the subject matter of new section DB 17B.

Clause 48 inserts new section DB 17B, which provides for the treatment of a transfer of an emissions unit made under a type of excepted financial arrangement that is subject to new section EW 52B.

Clause 49 inserts new sections DB 18AC to DB 18AK to provide for ring-fencing of deductions for owners of residential rental property. New section DB 18AC provides for the amount of a person’s deductions that relate to their residential rental property portfolio that is allocated to an income year. New section DB 18AD allows a person who has ring-fenced deductions after divesting themselves of their entire residential rental property portfolio to choose to allocate those deductions to another residential rental property they own in a future income year. New section DB 18AE provides an exclusion from the definition of residential rental property for a person’s main home. New section DB 18AF excludes certain land held on revenue account from the definition of residential rental property. New section DB 18AG allows a person to choose to apply ring-fencing of residential rental property-related deductions on a property-by-property basis, and provides for the amount of a person’s deductions that relate to an individual residential rental property that is allocated to an income year if they have made such an election for the property. New section DB 18AH allows a person who has ring-fenced deductions after disposing of a residential rental property for which they have made an election under new section DB 18AG to choose to allocate those deductions to another residential rental property they own in a future income year. New section DB 18AI provides that a company may transfer ring-fenced residential rental property deductions to another company that is part of the same wholly-owned group. New section DB 18AJ determines the portion of interest expenditure on borrowings used to acquire an interest in a residential land-rich company or trust that is treated as if it were residential rental property expenditure for the purposes of the ring-fencing rules. New section DB 18AK determines the portion of interest expenditure on borrowings used to acquire an interest in a residential land-rich partnership or look-through company that is treated as if it were residential rental property expenditure for the purposes of the ring-fencing rules.

Clause 50 amends section DE 4, as a minor drafting remedial matter to correct a fault of expression.

Clause 51 amends section DV 18, to insert a cross-reference to new section OB 78B.

Clause 52 amends section EW 5 to provide that an arrangement to assign a type of emissions unit, as part of a financial arrangement that is a loan, is an excepted financial arrangement that is subject to new section EW 52B.

Clause 53 inserts new section EW 52B, which provides for the treatment of an excepted financial arrangement under which a pre-1990 forest land emissions unit is assigned to a lender, who is not associated with the holder of the emissions unit, and the same or a replacement emissions unit is returned at the end of the excepted financial arrangement. If the return is made under the agreement, the holder is treated as having continued to hold the original emissions unit during the period of the agreement.

Clause 54 amends section EY 30, which provides as a transition measure that a new life insurance policy replacing a life insurance policy, that is still subject to rules that otherwise no longer apply, is treated as being subject to the former rules if the policies meet certain requirements. The clause changes the requirements relating to increases in premiums payable under the policies so that some increases are permitted.

Clause 55 amends section FE 4, as a minor drafting remedial matter to correct a cross-reference.

Clause 56 amends section HC 27 to provide for a situation in which a beneficiary of a trust who makes a loan to the trust does not become a settlor of the trust.

Clause 57 inserts new section MB 12B to better align the definition of income for Working for Families purposes with the definition of income for student loan scheme purposes. The change is the insertion of a specific provision, for Working for Families purposes, for payments from trusts that are not beneficiary income of the recipient, and where the recipient is not the settlor (to align with schedule 3, clause 15 of the Student Loan Scheme Act 2011).

Clause 58 inserts new section OB 78B, which provides for an election by a co-operative company to attach an imputation to a cash distribution paid to a group of the company’s shareholders.

Clause 59 amends section OB 82 by inserting a cross-reference to new section OB 78B.

Clause 60 amends section OZ 15 by inserting a cross-reference to new section OB 78B.

Clause 61 replaces section RD 7B, to provide an irrevocable election in relation to withholding and employee share scheme benefits.

Clause 62 amends section RE 21, as a minor drafting remedial matter to correct a fault of expression.

Clause 63 amends section RF 2B, as a minor drafting remedial matter.

Clause 64 amends section RF 2C, as a minor drafting remedial matter.

Clause 65 amends section YA 1. Subclause (2) amends the definition of dispose to add some cross-references, as a consequence of the introduction of ring-fencing of deductions for owners of residential rental property. Subclause (3) amends the definition of dwelling to add a cross-reference, as a consequence of the introduction of ring-fencing of deductions for owners of residential rental property. Subclause (4) amends the definition of principal settlor to add a cross-reference, as a consequence of the introduction of ring-fencing of deductions for owners of residential rental property. Subclause (5) inserts a new definition of residential land-rich entity, which is used in the interposed entity rules that are part of the new rules providing for ring-fencing of deductions for owners of residential rental property. Subclause (6) inserts a new definition of residential rental property, which is used in the new rules providing for ring-fencing of deductions for owners of residential rental property.

Clause 66 amends the Income Tax Act 2007 in accordance with schedule 1 to update nomenclature.

Amendments to Tax Administration Act 1994

Clause 67 provides that clauses 68 to 74 amend the Tax Administration Act 1994.

Clause 68 amends section 22, to remove the need for the Commissioner to consent to the keeping of records in te reo Māori.

Clause 69 amends section 22A, consistently with the removal of the need for the Commissioner to consent to the keeping of records in te reo Māori.

Clause 70 amends section 22B, consistently with the removal of the need for the Commissioner to consent to the keeping of records in te reo Māori.

Clause 71 amends section 26, consistently with the removal of the need for the Commissioner to consent to the keeping of records in te reo Māori.

Clause 72 amends section 143A to provide for a knowledge offence involving the knowing failure to issue a receipt that is required to be issued by new section 24BAB of the Goods and Services Tax Act 1985.

Clause 73 amends section 185O by inserting cross-references required by the changes to schedule 2.

Clause 74 amends schedule 2 by splitting the schedule into 2 parts and inserting an item relating to the interpretation of the Commentary on the CRS Standard into the second part.

Amendments to Child Support Act 1991

Clauses 76 to 81 make amendments relating to Part 5A, subpart 4 of the Child Support Act 1991. This subpart provides for exemptions from the payment of financial support for victims of sex offences.

Clause 76 extends the situations in which a liable parent may apply for an exemption under section 89Y. Section 89Y currently requires another person to have been convicted of a sex offence or to have been proved before the Youth Court to have committed a sex offence. The amendments now allow a liable parent to apply if they believe that another person has committed a sex offence (without a conviction or finding of guilt by a court).

Clause 77 allows the Commissioner to grant the exemption under section 89Z if the Commissioner considers that it is likely that another person has committed a sex offence and that the liable parent is a victim of that sex offence.

Section 89Z has also been amended to give the Commissioner a broad discretion to backdate the exemption if the Commissioner considers that it is just and equitable to the child, the liable parent, the carer who receives the financial support, and all other persons concerned. The exemption may be backdated until a date on or after 26 September 2006 (which is the date on which this exemption first came into force under the Child Support Amendment Act 2006).

Clause 78 provides for the exemption to be void under section 89ZA if the Commissioner is no longer satisfied that the other person has committed a sex offence. The amendments also allow a new application to be made, which may be backdated under section 89Z.

Clause 79 consequentially amends section 89ZB to provide for the Commissioner to act as soon as practicable after deciding that an exemption does not apply for the whole or a part of a period for which it was granted.

Clause 80 amends section 152A, which allows the Commissioner to grant relief to a person who has received financial support and who may otherwise be required to repay the financial support because an exemption has been backdated. The amendment extends the power to cover exemptions under Part 5A, subpart 4.

Clause 81 inserts transitional provisions relating to the changes to these exemption provisions. The transitional provisions allow an application to be made in respect of sex offences committed before or after the new provisions come into force and in relation to periods before or after that time. However, an exemption may be back-dated only to a date on or after 26 September 2006.

Amendments to Student Loan Scheme Act 2011

Clauses 83 to 93 amend the Student Loan Scheme Act 2011.

Clause 83 amends section 4, with 2 main effects as follows:

  • salary or wages from employment as a casual agricultural employee or as an election day worker (as both are defined in section YA 1 of the Income Tax Act 2007) will become subject to student loan scheme salary deductions as if they were secondary employment earnings:

  • schedular payments will become subject to student loan scheme salary deductions as if they were primary employment earnings and, to the extent that deductions are not made, will be subject to an end-of-year repayment obligation but will not be included for the purpose of calculating interim payments. See also clauses 86 (which amends section 73) and 91 (which inserts new section 202A).

Clauses 84 and 85 amend sections 22 and 23, which are the tests for when a borrower is New Zealand-based and when a borrower is overseas-based. The changes clarify the application of the day-count test to ensure that, if there are periods that could serve as qualifying periods for both tests, borrowers are treated as New Zealand-based. The changes are intended to be in favour of borrowers. See new section 23(1A), which was a tie-breaker provision that was previously in section 38AC(3) in the Student Loan Scheme Act 1992 but that was omitted from the Student Loan Scheme Act 2011. The changes are backdated to 1 April 2012, the date on which the Student Loan Scheme Act 2011 came into force.

Example

Bob is New Zealand-based, then goes overseas for 155 days, then returns to New Zealand permanently (for more than 183 days).

A tie-breaker is needed because, in a 184-day period that starts when Bob went overseas and ends 24 days after Bob’s return, Bob has been in New Zealand for less than 31 days, so Bob could be treated as overseas-based throughout that 184-day period.

The amendments, with the tie-breaker, clarify that Bob is not to be treated as absent for the 24 days at the end of the 184-day period while he is in New Zealand. Therefore, Bob is New Zealand-based for the entire period.

Clauses 87 to 90 amend sections 134, 135, and 137 to provide that loan interest will be charged only to overseas-based borrowers. This is already the practical effect under the Student Loan Scheme Act 2011. The clauses remove the current requirement for the Commissioner to complete a subsequent write-off for those borrowers who are New Zealand-based.

Clause 92 amends Schedule 2 to apply certain PAYE rules that relate to schedular payments to student loan scheme deductions from schedular payments.

Clause 93 amends Schedule 3 to make 3 minor changes to align the borrower’s income for student loan scheme purposes with the adjustments that are made to income for Working for Families purposes. The changes are as follows:

  • an adjustment so that certain contributions to retirement savings schemes are excluded income (to align with section MB 1(5B) of the Income Tax Act 2007):

  • an adjustment so that an amount of depreciation loss on disposal of buildings that was allowed in 2002–03 or earlier years is excluded income (to align with section MB 1(5C) of the Income Tax Act 2007):

  • an adjustment so that the interests of dependent children are attributed to a person who is a major shareholder in a close company (to align with section MB 4 of the Income Tax Act 2007).