ABA Tax Section, Foreign Lawyers Forum Report 2008
NEW ZEALAND DEVELOPMENTS OF INTEREST TO INTERNATIONAL TAX LAWYERS – TO DECEMBER 31, 2008
This report is made for the purposes of the Tax Section of the American Bar Association’s Foreign Lawyer’s Forum. It summarizes a number of developments in New Zealand tax law and practice that may be of interest to lawyers assisting clients doing business with entities or individuals in New Zealand, or lawyers wishing to be informed generally of tax developments in New Zealand.
The report is divided into the following sections:
(a) Legislative changes
(c) Determinations, Rulings and Statements
(d) International Agreements
2. Legislative changes
This section of the report summarizes the major legislative tax changes which were enacted in 2008. In addition to the annual income tax rate setting legislation the following Acts were passed:
(a) Taxation (Limited Partnerships) Act 2008 – This legislation was assented to on 12 March 2008 and introduced new regulatory and tax rules to introduce a limited partnership structure into New Zealand law. As a complementary measure the legislation also updated the tax rules for general partnerships.
(b) Taxation (Personal Tax Cuts, Annual Rates, and Remedial Matters) Act 2008 – This legislation was passed under urgency on 23 May and gives effect to tax measures announced in the 2008 New Zealand budget. It includes personal tax reductions to be phased in over three and a half years and changes to tax credits given to families with children to take account of inflation.
(c) Taxation (Urgent Measures and Annual Rates) Act 2008 – This legislation was assented to on 15 December 2008 and most notably repealed the research and development tax credit from the 2009-10 income year
2.1 Introduction of Limited Partnerships
The new legislation provides for separate legal entity status for limited partnerships in New Zealand, a structure not previously been recognized in New Zealand. Limited partnerships are an entity widely used internationally as a vehicle for investing into another country, particularly in relation to private equity and venture capital investment.
Key tax implications include the following:
• All partnerships will be subject to flow-through treatment for tax purposes with partners deriving income, expenses, tax credits, rebates and losses (subject to some loss limitation rules applicable to limited partners in limited partnerships) in proportion to their share in partnership income.
• Each partner’s share of partnership income will be as is determined in the partnership agreement or, in the absence of such an agreement, by operation of the Partnership Act.
• Subject to specific carve outs, partners will be required to account for tax on their exit from a partnership in some circumstances, if the amount of disposal proceeds from the partnership interest exceeds the total net tax book value of the partner’s share of partnership property by more than $50,000.
• Tax losses will only be able to be claimed by individual limited partners to the extent of the tax book value of the limited partner’s investment. A “basis” concept will calculate the extent of the investment and the extent to which tax losses can be accessed by a limited partner in a particular income year.
2.2 Petroleum mining legislation
The New Zealand government announced on 4 March 2008 that it will amend the Income Tax Act to prevent New Zealand missing out on significant tax revenue from the petroleum mining industry. Under current law, New Zealand petroleum miners can offset their expenditure in other countries against the revenue from their New Zealand operations.
The amendments will mean that expenditure on petroleum mining operations undertaken through a foreign branch cannot be offset against petroleum mining income from New Zealand. Specifically, expenditure incurred on petroleum mining operations through a branch in another country will be allowed to be deducted only from income from those foreign petroleum mining operations. The changes will be included in the next taxation bill and, once enacted, will be effective from 4 March 2008.
2.3 Stapled Stock draft legislation
The New Zealand government announced on 25 February 2008 that the law on stapled stock instruments with debt components will be amended to prevent a loss to the revenue base from their use. Under current law, by using stapled stock instruments with debt components, companies can pay tax-deductible interest to shareholders as a substitute for dividends. Forthcoming amendments to the Income Tax Act will ensure that when a debt instrument that would normally give rise to tax deductions is stapled to a share it will be treated as equity for tax purposes. Once enacted, the change will be effective from 25 February 2008.
2.4 Research and Development
The Taxation (Urgent Measures and Annual Rates) Bill was introduced on 9 December 2008 and passed on 15 December 2008. The Bill abolishes the research and development tax credit from the 2009/2010 tax year.
New tax rules were introduced in 2007 which provided a tax credit for New Zealand businesses that perform research and development on their own behalf or that commission others to perform it for them, provided the research and development is performed predominantly in New Zealand. The new tax credit comes into effect from the beginning of a taxpayer’s 2008/09 income year. However, that will now be the last year that such a credit is available.
2.5 Kiwi Saver
“Kiwisaver” is a broad-based public savings and investment initiative which is administered in part through the tax system by the deduction of contributions from wage and salary earners and other participants.
The Taxation (Urgent Measures and Annual Rates) Bill introduces changes to Kiwisaver which will take effect from 1 April 2009. The proposed changes include a reduced employee contribution rate of 2% and the capping of compulsory employer contributions at 2%. The Bill also proposed to discontinue the employer tax credit which was to be paid by the government to employers to offset some of the costs associated with the scheme.
2.6 Personal tax cuts
The Taxation (Personal Tax Cuts, Annual Rates, and Remedial Matters) Act 2008 introduced personal tax cuts which took effect from 1 October 2008. The bottom personal tax rate was reduced from 15% to 12.5%. In addition, the personal tax rate thresholds were to be raised over a period of three and a half years. However, the New Zealand government has since changed from a Labour government to a National government.
The Taxation (Urgent Measures and Annual Rates) Bill was introduced on 11 December 2008 by the National government and includes additional personal income tax cuts and threshold changes, as well as a new independent earner tax credit for low and middle income earners.
3.1 Taxpayer Secrecy
Westpac Banking Corporation Limited, BNZ Investments Limited, ANZ National Bank Limited and Ors v The Commissioner of Inland Revenue was decided on 14 April 2008. The case held that the exceptions in the taxpayer secrecy legislation permit the discovery of documents held by the Commissioner in relation to a taxpayer in defence of his assessment against another taxpayer.
The Court analysed the exceptions allowing disclosure of taxpayer secret information and the legislative history behind the provision. The Supreme Court then analysed the Commissioner's secrecy obligations and in particular the need to balance the Commissioner’s obligation to ensure a taxpayer’s affairs are kept confidential against the Commissioner’s overriding obligation to maintain the integrity of the tax system. The ultimate issue for the Court was to decide how these competing values could be reconciled.
The Court held that disclosure of taxpayer secret information was not permitted unless, and to the extent that, it was reasonably necessary for the performance of the Commissioner's statutory functions. The Court recognised the value of taxpayer secrecy but said this value needed to be balanced against the need to maintain the integrity of the tax system.
Westpac Banking Corporation Limited, BNZ Investments Limited, ANZ National Bank Limited and Ors v The Commissioner of Inland Revenue SC 66 and 67/2007
3.2 Tax Advisor’s statutory non-disclosure right
In Iain Wilson Blakeley v The Commissioner of Inland Revenue it was held that the protection afforded to tax advice is much more confined than legal professional privilege. A list of clients' names was found not to be protected.
In this case the plaintiff relied on the principle, accepted in cases involving legal professional privilege, that a client's identity is protected if disclosure risks revealing confidential communications. The Commissioner argued that the statutory non-disclosure right contained in section 20B of the Tax Administration Act is not the same as legal professional privilege and that the information sought is not protected on a plain reading of the words of the section.
The court held that the protection afforded by section 20B was much more confined than legal professional privilege. It was held it is a limited statutory right and there is no reason why it should be construed as if it is an extension to legal professional privilege.
Therefore, statutory protection was not available to a list of names and IRD numbers because they were held not to be tax advice documents for the purposes of section 20B.
Iain Wilson Blakeley v The Commissioner of Inland Revenue
4. Determinations, Ruling and Statements
The following interpretation statements are of interest:
4.1 Deductibility of feasibility expenditure
This interpretation statement contains guidelines that the Commissioner of the New Zealand Inland Revenue considers relevant in determining whether feasibility study expenditure is deductible under the general deductibility provisions in section DA 1 of the Income Tax Act 2007.
Often feasibility expenditure will be non-deductible on the basis that it is either incurred before the commencement of a business or income-earning activity or it is capital in nature. To be deductible there must be a sufficient relationship or nexus between the feasibility expenditure and the taxpayer’s business or income-earning activity, and the expenditure must be of a revenue nature.
S 08/02: Deductibility of Feasibility Expenditure
4.2 Resource Consent
In New Zealand resource consent may be required for the use of land or other natural resources, and may be granted subject to certain conditions.
For example, such conditions might include requiring the consent holder to provide services, works or information relating to the exercise of a resource consent (such as information relating to measurements and tests required).
The purpose of this Interpretation Statement is to consider the GST treatment of:
• fees payable in respect of applications for resource consent;
• the provision of services or works required as a condition of resource consent;
• the provision of information as a condition of resource consent; and
• the transfer of land as a condition of subdivision consent.
IS 08/03 - Resource consent application fees and provision of works, provision of information and transfer of land as conditions of resource consent - GST treatment
The following public rulings are of interest:
4.3 Projects to Reduce Emissions programme – income tax treatment
This ruling addresses the income tax treatment of agreements entered into between the Crown and participants under the Projects to Reduce Emissions programme. Under such an agreement the participant agrees to implement and operate a project in order to reduce greenhouse gas emissions in return for the transfer of emission units. Emission units received may be sold by participants. The ruling includes clarification of the following issues concerning the tax treatment of emissions.
• Emission units derived by a participant under a project agreement are income of the participant.
• Amounts derived by a participant from the sale of emission units are income of the participant under section CB 1 of the Income Tax Act.
• If the participant continues to carry on the business involving the generation of energy for sale or for use in the supply of goods or services for sale (in connection with which the project agreement was entered into), a deduction is allowable under section DA 1 of the Income Tax Act in the year in which emission units are sold by the participant for an amount equal to the value of emission units at the time of their transfer to the participant.
• A project agreement is a financial arrangement.
This Ruling was signed on 7 November 2008 and will apply from 1 April 2008 to 31 December 2013.
4.4 Projects to Reduce Emissions programme - GST treatment
This ruling addresses the GST treatment of agreements entered into between the Crown and participants under the Projects to Reduce Emissions programme. The ruling includes clarification of the following issues concerning the tax treatment of emissions.
• The participant makes a supply of emission reduction services (the implementation and operation of a project so as to reduce emissions of greenhouse gases) to the Crown for the purposes of the GST Act 1985.
• The consideration for the supply of emission reduction services will be in the form of emission units transferred by the Crown to the participant for the purposes of the GST Act 1985.
• The ruling clarifies how the value of the supply of emission reduction services is to be determined under the GST Act 1985.
• The time of supply of each annual supply under the project agreement will be the earlier of the relevant transfer date (as defined in the project agreement) and the date on which emission units are actually transferred to the participant.
This Ruling was signed on 7 November 2008 and will apply from 1 January 2008 to 31 December 2013.
The following standard practice statements are of interest:
4.5 Disputes resolution process commenced by the Commissioner of Inland Revenue
This Standard Practice Statement sets out the Commissioner's rights and responsibilities with a taxpayer in respect of an adjustment to an assessment when the Commissioner commences the disputes resolution process. The tax dispute resolution procedures were introduced and designed to reduce the number of disputes by:
(a) promoting full disclosure
(b) encouraging the prompt and efficient resolution of tax disputes
(c) promoting the early identification of issues; and
(d) improving the accuracy of decisions.
This SPS has been updated due to changes made to the law under:
the Taxation (Savings Investment and Miscellaneous Provisions) Act 2006, and
(a) the Taxation (Depreciation, Payment Dates Alignment, FBT, and Miscellaneous Provisions) Act 2006;
(b) the Taxation (Business Taxation and Remedial Matters) Act 2007;
(c) the Income Tax Act 2007; and
(d) the relevant case law decided since SPS 05/03: Disputes resolution process commenced by the Commissioner of Inland Revenue was published.
SPS 08/01 – Disputes resolution process commenced by the Commissioner of Inland Revenue (June 08)
4.6 Disputes resolution process commenced by a taxpayer
This Standard Practice Statement ("SPS") discusses a taxpayer's rights and responsibilities in respect of an assessment or other disputable decision when the taxpayer commences the disputes resolution process. The dispute resolution procedures and reasons for the changes are similar to those detailed above for SPS 05/03: Disputes resolution process commenced by the Commissioner of Inland Revenue.
4.7 SPS 08/02 - Disputes resolution process commenced by a taxpayer (June 08)
5. International Agreements
New Zealand has a comprehensive regime of double tax agreement’s (“DTA’s”). During 2008 the following developments occurred:
• An Order in Council was signed on 28 July 2008 which incorporated a new DTA with the Czech Republic into New Zealand law. The agreement is yet to enter into force.
• An amending protocol to the double tax agreement with the United Kingdom entered into force on 28 August 2008 and was effective from that date. The changes mean the treaty now more closely follows the OECD standard regarding the exchange of information between tax authorities. In particular, the amended treaty will allow authorities to exchange information on other taxes besides income tax. Provision is also made for tax authorities in each country to request assistance from each other in the recovery of tax debt.
• New protocols affecting the DTA between New Zealand and Australia became effective. The protocol with Australia significantly widens the exchange of information article in the DTA so that it applies to all taxes and an “Assistance in the Collection of Taxes” Article has been added to the Australian DTA. The Article came into effect on 8 September 2008 and was added to the Treaty by the 2005 amending protocol.
• A new tax information exchange agreement between New Zealand and the Netherlands on behalf of the Netherlands Antilles has entered into force on 2 October 2008, and has effect from 1 January 2009. The agreement establishing information exchange with the Netherlands Antilles is the first of a number of arrangements that New Zealand is seeking to establish outside of its DTA network.
• The protocol updating the double tax agreement between New Zealand and the United States was signed on 02 December 2008. The changes include lower withholding taxes on dividends, interest and royalty payments between the United States and New Zealand. The updated DTA will come into force once both parties have given legal effect to it, which in New Zealand's case is yet to occur through an Order in Council.