The bill would make several remedial amendments designed to ensure that tax legislation works as intended, such as updating terminology and correcting cross-referencing errors. We have recommended further changes of a similar nature. We do not discuss these minor and technical amendments in this commentary.²

The GloBE rules are set out in documents published by the OECD.³ The bill proposes to refer to these documents rather than replicating their entire content in legislation.

We acknowledge that some submitters oppose incorporating the GloBE rules by reference. They were concerned about the potential for undermining New Zealand’s autonomy, not being able to easily access the rules, and not being aware of changes to the rules.

On balance, we accept that incorporating GloBE rules by reference is preferable to replicating them in legislation. The documents that set out the GloBE rules and their application are lengthy. Reproducing this content in legislation would require substantial resources, might give rise to inadvertent errors, and risks New Zealand diverging from the rules. We note that New Zealand contributes to setting GloBE rules, and affected businesses generally have input into the agreed administrative guidance.

We agree with submitters that it is vital that entities affected by GloBE rules have the information they need to comply with the law. We urge Inland Revenue to ensure that this occurs.

We recommend amending proposed section HP 3(3) to clarify that the GloBE rules apply for a fiscal year.

In the unlikely event that the GloBE model rules were inconsistent with the commentary and agreed administrative guidance, the desired policy outcome would be for the latter documents to prevail. Proposed section HP 3(3) says that the GloBE rules would be treated as applying “consistently with” the most recent commentary and agreed administrative guidance. However, this wording might not mean that the commentary and guidance prevailed as desired.

We recommend inserting section HP 3(4), which states “if there is a conflict between the [GloBE] rules and commentary or guidance … the commentary or guidance prevails.” We also recommend replacing the phrase “consistently with” in proposed section HP 3(3) with “subject to the modifications made by subsection (2), in accordance with”. We recommend deleting the phrase “treated as” to reduce ambiguity.

In the bill as introduced, the GloBE rules would apply from a date set by Order in Council. However, we understand that many countries have adopted the income inclusion rule from 1 January 2024, and an under-taxed profits regime from 1 January 2025. Therefore, we recommend that the application dates for the GloBE rules be set out in the bill, rather than left to Order in Council.

We recommend amending the bill so that the income inclusion rule and under-taxed profits rule apply from 1 January 2025, and that the domestic income inclusion rule applies from 1 January 2026. Having these dates set in legislation would give certainty to affected entities and allow them time to establish systems that ensure they comply with the rules.

Proposed section HP 1(3) states that constituent entities located in New Zealand are jointly and severally liable for any tax payable under the GloBE rules. We recommend inserting section HP 1(4) to allow for the release of an entity from joint and several liability when it leaves a particular multinational enterprise group.

Submitters suggested that the bill did not make clear whether money paid under a qualified domestic minimum top-up tax (QDMTT) would be included within the meaning of “foreign income tax”. This would make it eligible for a foreign tax credit. We recommend amending clause 48 to make it clear that such a payment would be considered “foreign income tax” which would be eligible for a foreign tax credit.

The Commissioner of Inland Revenue can issue binding rulings in respect of the application of tax law.⁴ The rulings give taxpayers certainty about how the Commissioner will apply the law.

We believe the Commissioner should be able to issue binding rulings in relation to GloBE rules, including the commentary and agreed administrative guidance. We therefore recommend inserting clause 71D into the bill, to amend section 91C of the Tax Administration Act.

Two discretionary penalties proposed by the bill and two existing penalties do not have provisions empowering Inland Revenue to assess the penalties. We recommend inserting clauses 72C and 72D (to insert new sections 94BB to 94BD into the Tax Administration Act) so there is no doubt that Inland Revenue can assess the penalties if the relevant statutory requirements are met.

To mitigate over-taxation, the bill proposes to tax trusts set up for the care of disabled people at the personal tax rate of the disabled beneficiary, rather than at the trustee tax rate.

Instead, we recommend that a 33% flat rate apply to all disabled beneficiary trusts. We recommend this change because:

• in some cases, trustees may not be aware of a beneficiary’s personal tax rate

• a 33% rate is the status quo, and would be consistent with other amendments to the bill that we are recommending

• it would be simpler to tax at a flat rate if a disabled beneficiary trust has multiple disabled beneficiaries. (We recommend below allowing disabled beneficiary trusts to have multiple beneficiaries.)

This change would be made to clauses 39 and 62(2) of the bill, proposed section HC 39(1) and schedule 1, part A, clause 6B(a) of the Income Tax Act.

In the bill as introduced, clause 33 would insert new section HC 8B into the Income Tax Act. This section would enable trustees to elect to have trustee income derived within 12 months after someone has died taxed at the deceased’s personal tax rate (instead of the trust tax rate).

Instead of the deceased’s personal tax rate applying, we recommend a flat tax rate of 33%. This would be simpler for taxpayers and Inland Revenue. Given that 84% of estates have trustee income of $10,000 or less, reducing compliance costs is particularly desirable. We also recommend amending the bill so that this flat rate is the default for all estates, instead of being opt-in.

We agree with the numerous submissions that 12 months is insufficient for this provision. We understand that the average estate requires at least 18 months to be wound up, and that 85% of estates are likely to be wound up within 3 years after the income year of a person’s death. We therefore recommend that this provision apply for the income year of the person’s death and the 3 subsequent income years.

We acknowledge concerns raised by submitters about the possible over-taxation of trusts that are superannuation schemes.

The Income Tax Act defines a “widely-held superannuation fund” as a retirement scheme that has 20 or more members. These schemes are taxed at a flat rate of 28%. This tax rate is intended to ensure that such schemes are taxed in a similar manner to PIEs.

We note that, over time, membership of a retirement scheme that is not accepting new members will naturally decline below 20 members, so it will no longer meet the definition of a “widely-held superannuation fund”. These schemes should not then become subject to a higher tax rate. We recommend applying a 28% tax rate to trusts that formerly qualified as a “widely-held superannuation fund” and cannot have new members. This change would be made by inserting clauses 59(11B) and 62(1B) into the bill.

We received submissions that trusts with beneficiaries representing a wide range of the public, such as trusts that own electricity distribution companies, should be excluded from the 39% trustee tax rate due to the risk of over-taxation. We agree that all energy consumer trusts should continue to be taxed at the current 33% tax rate and recommend amending the bill to this effect. These trusts are a well-defined group, so providing them an exclusion does not raise integrity concerns. This change would be made by amending clause 62(2) of the bill.

A company can be a beneficiary of a trust. The bill proposes to treat income that is derived by certain corporate beneficiaries as trustee income. This treatment would apply if a settlor of a trust has natural love and affection for a shareholder of the close company beneficiary. This would ensure that the proposal is targeted towards family trusts and companies.

This treatment may not apply if the settlor is the sole shareholder of the company because a settlor cannot have natural love and affection for themselves. We recommend amending clause 39 of the bill (proposed section HC 38(1) of the Income Tax Act) so that it also applies if a direct or indirect shareholder of the close company is a trustee of a trust or a settlor of the trust making the beneficiary income allocation.

To ensure that this rule does not affect the use of trusts in the securitisation industry, we recommend amending clause 39 to exclude securitisation trust beneficiaries.

Section 78(1) of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023 amended section HC 26 of the Income Tax Act. The amendment replaced “New Zealand resident trustee” with “resident trustee of a foreign trust”. This appears to narrow the scope of section HC 26, which concerns exempt income, so that it only applies to foreign trusts. This was not intended. We recommend inserting clause 36B into the bill to reverse this change.

Since the bill was introduced to the House in May 2023, the Government has announced funding to assist local councils to purchase certain flood- and cyclone-affected residential properties. For consistency, the taxation rollover provisions should also apply to gains or depreciation recovery income arising from the buy-out of a property. To this effect, we recommend amending clause 18.

Some taxpayers may receive an insurance pay-out for land improvements covered by sections DO 4 and DO 5 of the Income Tax Act, potentially giving rise to taxable gains. (Section DO 4 covers a range of land improvements, such as support frames for crops, access roads and tracks, dams, stop-banks, and vineyard vines. Section DO 5 covers horticultural plants such as apple trees.) Again, for consistency, we recommend extending taxation rollover relief to cover these land improvements by inserting clause 18B.

Clause 59(13) of the bill would replace the definition of “North Island flooding events” in the Income Tax Act. The new definition would include “circumstances where damage caused by [Cyclones Hale and Gabrielle and heavy rainfall from 26 January to 3 February 2023] is exacerbated by a subsequent weather event”.

One submission asked that the bill be amended to make it clear that the June 2023 East Coast floods are covered by the new definition of North Island flooding events to the extent the June 2023 East Coast floods exacerbate the damage resulting from the earlier events, and are therefore eligible for taxation rollover relief. We do not consider an amendment to the bill necessary as current clause 59(13) includes within the definition circumstances where damage caused by any of the listed January-February 2023 events is exacerbated by a subsequent weather event, such as the June 2023 East Coast flood event.

Tax rules generally distinguish between assets that are repairable and those that are irreparably damaged or rendered useless. Assets may be technically repairable, but it could be uneconomic to do so. Proposed section EZ 83 of the Income Tax Act, as inserted by clause 27, provides for the disposal and reacquisition of assets that are damaged by a January/February North Island flooding event and are uneconomic to repair. This would ensure that the assets would be eligible for taxation rollover relief.

As introduced, the proposed section would only apply if the asset is “assessed by the payer of the insurance or compensation, or another qualified assessor, as uneconomic to repair”. We consider that businesses can be relied on to make this assessment themselves. Requiring a third-party assessment would be a barrier to rollover relief.

We recommend amending proposed section EZ 83(1)(c) to apply to property that a person reasonably assesses as uneconomic to repair.

Proposed section FZ 7B of the Income Tax Act would allow for an optional adjustment to how group assets are measured for the purposes of thin-capitalisation rules.

A person who chooses to take advantage of this option would be required to notify the Commissioner of Inland Revenue and provide certain information. We recommend amending proposed section FZ 7B, as inserted by clause 30, to only require people to provide a “reasonable assessment” of the relevant amount of income. This should address concerns that a precise measurement of the relevant income would be onerous.

The bill would require taxpayers who want to take advantage of taxation rollover relief in the 2022–23 income year to notify the Commissioner of Inland Revenue by 31 January 2024, or 31 March 2024 if they have a tax agent.

Given the timeline for consideration and probable enactment of this bill, the deadline for notifying IRD needs to be extended. We recommend amending proposed sections CZ 25C(6) and EZ 23BE(10) of the Income Tax Act so that the new deadline is 30 April 2024 (clauses 18 and 26).

Although not directly related to the bill, we recommend that Inland Revenue undertake policy work to streamline the legislative process for tax responses to emergency weather events. Currently if there is an emergency event, Inland Revenue must wait for the next tax bill to be introduced or quickly propose amendments in the fortunate event that a tax bill is already before the House. This can create uncertainty and delays for taxpayers at a time of high stress.

One possibility could be to pass legislation that establishes a framework of “off the shelf” tax measures. Then, following an emergency event, the appropriate tax response could be chosen and activated by way of an Order in Council.

We recommend that the Government put this policy matter on the tax and social policy work programme.