General policy statement
This taxation omnibus Bill introduces amendments to the following legislation:
Student Loan Scheme Act 2011
Tax Administration Act 1994
Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019
Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018
Taxation (Research and Development Tax Credits) Act 2019
Accident Compensation Act 2001
Income Tax (Adverse Event Income Equalisation Scheme Rate of Interest) Regulations 1995.
Broadly, the policy proposals in this Bill have 3 main objectives:
to continue the Government’s simplifying and modernising of social policy administration
to further improve the application of our broad-base, low-rate framework, and
to further encourage research and development expenditure.
The first category relates to proposals aimed at modernising and improving the settings for the administration of social policy by Inland Revenue as part of the Government’s programme of transforming the revenue system through business process and technology change. This category includes measures to simplify and modernise the administration of the KiwiSaver and student loan schemes.
The second of these categories comprises proposals aimed at improving current tax settings within a broad-base, low-rate framework. Under this framework, the treatment of alternative forms of income and expenditure is intended to be as even as possible. This treatment ensures that overall tax rates can be kept low, while also minimising the biases that taxation introduces into economic decisions. This 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 with tax obligations.
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 objective of this Bill is aimed at extending the refundability of research and development tax credits, to support Government objectives relating to increasing business expenditure on research and development.
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.
KiwiSaver changes
The Bill proposes a number of changes to improve the administration of the KiwiSaver scheme. These changes facilitate faster transfers of funds, improve the administrative efficiency and enhance members’ experience with the scheme.
Payment of employer contributions
The Bill proposes to allow Inland Revenue to pass KiwiSaver employer contribution amounts (both compulsory and voluntary) to scheme providers, before the contribution amount has been received by Inland Revenue. Employer contributions would be forwarded to providers as soon as practicable after employment income information has been provided to Inland Revenue. This would improve the administrative efficiency of the KiwiSaver scheme and members would receive the benefit of their contributions being invested with scheme providers sooner. The change would align with the existing treatment of employee contributions.
Calculating interest on contributions from the employee’s payday
The Bill contains changes to ensure that interest on employer and employee contributions begins to accrue from the employee’s payday, until the contributions are forwarded to the KiwiSaver scheme provider. When KiwiSaver was introduced Inland Revenue’s systems could not calculate interest from the employee’s payday without imposing compliance costs on employers. The introduction of payday filing overcomes this obstacle.
Reducing the KiwiSaver provisional period and holding period
When automatically enrolled in KiwiSaver, members are provisionally allocated to a default provider. Inland Revenue is not able to transfer contributions to scheme providers until the end of the provisional period. The Bill reduces the provisional period and the initial holding period from 3 months to 2 months.
Reducing the timeframe for the transfer of member’s information and funds between providers
When a KiwiSaver member decides to transfer schemes, the old provider must transfer funds and information within 10 working days for default providers and 35 days for non-default providers. The Bill proposes that this period be reduced to 10 working days for all providers.
Giving employees more ways to change their contribution rates
Currently, members can only change their employee contribution rate by giving notice to their employer. The Bill proposes that members would also be able to change their contribution rate by notifying either their scheme provider or Inland Revenue.
Removing the 3-month grace period for people who were invalidly enrolled in KiwiSaver to gain residence
There is currently a 3-month grace period for those who are invalidly enrolled in KiwiSaver to meet the scheme’s residence requirement. In practice, members who do not have residence are typically individuals not intending to become residents in the short term (such as individuals on temporary work visas). The Bill proposes the removal of this grace period. This would mean that a person who does not meet the residence requirement would have their account closed immediately. They would be able to open a new KiwiSaver account if they later meet the residence requirement.
Requiring employers to provide information to Inland Revenue on the employee’s income and ESCT rate
The Bill proposes that employers would be required to provide Inland Revenue with information on any difference between an employee’s income for PAYE and KiwiSaver purposes and information on the employee’s employer superannuation contribution tax (ESCT) rate. This would enable Inland Revenue to more easily verify that the correct KiwiSaver contributions have been made and that the correct tax is paid. It would also reduce the likelihood that employers are subject to penalties in the case of any miscalculation.
Student loan changes
The Bill proposes 5 student loan policy changes. These changes seek to improve the administration of the student loan scheme.
Limiting changes to a borrower’s repayment obligations prior to 1 April 2013
The Bill proposes that changes to a borrower’s repayment obligations will only occur due to changes in residency status, where fraud is involved, or where a tax return has not been filed and it is cost effective to make changes. The Bill also contains a clause to allow the Commissioner to correct the position of any borrower who is made worse off as a result of this change. The purpose of this section is to limit the reassessment of historical changes beyond this point.
Renaming the student loan repayment holiday to temporary repayment suspension
The Bill proposes that the current repayment holiday be renamed “temporary repayment suspension”. This wording change will better signal to borrowers who receive a repayment suspension that their repayment obligations have been suspended, and that they will have repayment obligations after the end of their repayment suspension.
Giving Inland Revenue the ability to write-off student loans taken out before 2000 in cases of fraud
This will allow Inland Revenue to write-off loans that have been taken out fraudulently, in cases where the correct borrower cannot be identified. Inland Revenue does not currently have the ability to write-off these loans.
Allowing employers to be notified of an employee’s loan balance when their student loan is close to being fully repaid
The Bill proposes that employers would be notified of an employee’s loan balance when their loan balance is close to zero, so that the amount of any final deduction can be reduced, to avoid an over-deduction. This will prevent employers deducting more than the loan balance from an employee’s salary and wages, and then contact between Inland Revenue and the borrower to arrange a refund of the excess.
Treating overseas-based borrowers with serious illnesses or disabilities as physically in New Zealand
The Bill proposes that borrowers who are unable to meet their overseas-based repayment obligation as a result of serious illnesses or disabilities can be treated as physically in New Zealand for the purpose of determining whether they are New Zealand-based or overseas-based. This will mean that their repayment obligations are based on their income, and the borrowers will not be subject to loan interest.
Other changes
Granting overseas donee status to additional charities
The Bill gives overseas donee status to the following charities from the 2019–20 income year:
Little Brothers and Sisters International
Partners Relief & Development - New Zealand
UN Women National Committee Aotearoa New Zealand Incorporated.
Extending the refundability of research and development tax credits
The Bill proposes changes to extend the refundability of research and development tax credits (R&D tax credits). These changes are intended to apply from the 2020–21 income year. It is proposed that R&D tax credits be more broadly refundable, with a cap based on the payroll taxes paid by a firm in each year. The proposed cap would not apply to tax credits resulting from eligible expenditure on activities performed by approved research providers and would not apply to R&D tax credits refunded to levy bodies.
Excluding tax exempt entities from the research and development tax credit regime
Refundability would not be available to entities who receive exempt income (other than income that is exempt under section CW 9 or CW 10 of the Income Tax Act 2007). Any surplus credits claimed in the 2019–20 income year by these entities would not be carried forward by these entities and would be extinguished from the 2020–21 income year.
Remedial research and development tax credit amendments
There are a small number of cases where the legislation supporting the new R&D tax credit does not align with the policy intent. The Bill proposes remedial changes for issues related to allocating tax credits to members of joint ventures, the timeframe for businesses to dispute R&D tax credit claims, the R&D certifier regime, the definition of internal software development, and taxpayers’ ability to challenge decisions of the Commissioner. The Bill proposes that most of these amendments apply from the beginning of the regime (the 2019–20 income year).
Allowing the Commissioner to correct the tax rate of PIE investors on the default rate
Currently, investors in PIE funds are expected to elect a tax rate. If they do not notify the PIE fund of a tax rate to apply, the top 28% PIE tax rate will apply by default. Inland Revenue is currently able to provide a multi-rate PIE with an alternative tax rate for an investor where the investor had provided a tax rate to the PIE that is different from what it should be. However, Inland Revenue cannot use this power where an investor has been defaulted onto the top rate. The Bill proposes an amendment to allow Inland Revenue to correct an investor’s tax rate if they have been defaulted onto the top rate.
Allowing the Commissioner to withdraw short-process rulings
An oversight in the drafting of the short-process rulings legislation prevents the Commissioner from being able to withdraw short-process rulings. The Bill proposes an amendment to the Tax Administration Act 1994 to enable the Commissioner to withdraw short-process rulings, which mirrors the existing rule that allows her to withdraw private rulings.
Clarifying the date that withdrawal takes effect for binding rulings withdrawn on matters not involving arrangements
Since 18 March 2019 the Commissioner has been able to issue binding rulings on a broader range of matters without the need for an arrangement (for example, on a person’s New Zealand tax residence). The Bill proposes an amendment to ensure that where a binding ruling has been issued for a matter not involving an arrangement and that ruling is subsequently withdrawn, taxpayers can continue to rely on the ruling for the period specified in the ruling.
Income attribution rules
The Bill proposes 2 changes to the income attribution rules. The income attribution rules apply when an individual earns income from providing their own services through an entity that has 1 main source of such income: the entity is disregarded and the income is taxed directly to the person performing the services, to prevent higher income earners from avoiding the top personal rate by paying tax on their income from personal services at the company rate instead.
The Bill proposes to clarify that if the entity provides services to a foreign buyer and pays tax overseas, foreign tax credits are available to the individual.
The Bill also proposes an amendment to ensure that dividends paid by the entity to the person can only be tax exempt if they are paid out of income that has already been attributed to the person.
Trusts
Following an administrative review of the income tax treatment of trusts, a number of technical matters for remedial amendment have been identified. These changes seek to improve the clarity of the law and better reflect the policy intent. The amendments:
ensure there is consistency within the trust rules on the treatment of distributions when a trustee pays New Zealand tax on worldwide trustee income
clarify the relationship of the residence rules to trustees and their obligations under the Income Tax Act 2007
clarify rules relating to the value of a settlement
ensure there is internal consistency between the treatment of distributions, beneficiary income, taxable distributions, and the ordering rules, and
address minor matters such as terminology and notice requirements.
Disclosure of information about representatives
The Bill contains an amendment to extend the coverage of the existing rules which allow Inland Revenue to disclose information about tax agents to their professional bodies. The change will extend this to include representatives (including bookkeepers). This follows changes made by the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Act 2019 which added “representatives” as a new class of intermediary to the Tax Administration Act 1994.
Tax treatment of non-resident international aircraft operators
Tax legislation allows a reciprocal income tax exemption to be granted to non-resident international aircraft operators, but the wording of the current legislation limits the exemption to outbound aircraft only. The Bill proposes an amendment to ensure that exemptions can extend to inbound aircraft. This aligns with Inland Revenue practice.
Māori authority tax credits
An unintended legislative change arising from the rewrite of the rules relating to Māori authority tax credits means that the current law allows these credits to be attached retrospectively to any distribution from a Māori authority. The policy intent is that these credits can only be attached retrospectively to non-cash distributions occurring under the transfer pricing rules. The Bill proposes an amendment to maintain this treatment. Inland Revenue is not aware of any taxpayer who has retrospectively attached these credits.
Main home exclusion for the bright-line test
The main home exclusion for the bright-line test requires that a person use the land as their main home for most of the time they own the land. However, the period that a person owns land under this general definition can differ from the period that the bright-line test applies to. The Bill proposes an amendment to align the period of ownership for the main home exclusion for the bright-line test with the bright-line period.
Consideration for grant of an easement
The Bill contains a remedial amendment to clarify that a one-off payment for the grant of a permanent easement is not taxable.
Inbound thin capitalisation de minimis
Under the current law a New Zealand taxpayer does not have to make adjustments for being over the thin capitalisation threshold provided they have less than $1 million of group finance costs. This de minimis was not intended to be available if the New Zealand taxpayer borrowed from a non-resident related party; however, the legislation currently only removes access to the de minimis if the taxpayer has borrowed from an owner who is not a member of the same group. The Bill proposes to align the legislation with the policy intent.
Employee share schemes
The Bill contains 3 amendments to the employee share scheme rules.
The Bill contains a proposal to allow the use of a wider range of methods for determining the “market value” of shares for the purpose of the employee share scheme rules.
Under the exempt employee share scheme rules, shares are required to be held for a “restricted period”, generally 3 years, before they can be released to employees. In the event of a takeover or other corporate reorganisation the restricted period may be breached, making the shares taxable. However, since takeovers and other comparable reorganisations are generally outside the employee’s control, it is proposed that there be an exception to the restricted period for these events.
There is an additional exception to the restricted period to allow for employees leaving employment. Currently, the rules allow employees who leave within the restricted period to retain their shares if they meet 1 of the specified exemptions. Employees who leave for other reasons, such as to work for a competitor, are not allowed to keep their shares. This rule creates difficulties for trans-Tasman companies, as the equivalent Australian rules allow for exempt shares to be retained by all employees leaving a firm. The Bill proposes that companies be able to choose to either continue to follow the current rules or allow all departing employees the option of keeping their shares.
Availability of GST credits
The Bill contains a proposal to move the day that a GST tax credit becomes available from the day after it arises to the day that it arises. This change will align the legislation with current practice.
Provisional tax
The Bill includes a range of remedial amendments to align tax legislation with Inland Revenue’s systems. The changes either have no or a positive impact on taxpayers or are necessary to maintain the integrity of the tax system.
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.