While most of us have been hunkered down in lockdown for over three weeks now, IR have themselves remained busy, even during their own close down period recently while the latest business transformation updates were effected, releasing the following three documents last week:
CS 20/01 “GST liability for insurance and settlement payments to third party claimants — s 5(13) of the Goods and Services Tax Act 1985” – a Commissioner’s statement to confirm her position on the GST liability of a GST-registered third-party claimant, when they receive a payment for damages or loss incurred (including by way of settlement agreement) under a contract of insurance.
It had come to the Commissioner’s attention, that there was some confusion as to whether GST was payable on the receipt by the third party claimant, with some taxpayers taking a position that where the insurer made the payment directly to the claimant and not to the insured who would then pay the claimant, the claimant did not have to account for GST output tax on the receipt due to the wording of s.5(13).
The Commissioner has now confirmed her position, and states that it is one that she has always held, that when an insurer pays an amount to a GST-registered third-party claimant, that person must return GST on the receipt (provided the other requirements of s 5(13) of the Act are met).
It is suggested that taxpayers who have not taken this position in the past, may wish to consider filing a voluntary disclosure.
IS 20/01 “Income tax — treatment of the receipt of lump sum settlement payments” – an interpretation statement which considers the income tax treatment of lump sum payments received to settle claims that are both capital and revenue in nature. In particular, the statement considers when apportionment will be required. Note that IS 20/01 is essentially a re-release of IS 16/04.
The interpretation statement concludes that whether a settlement payment is taxable depends on what it is paid for – in this case, what was given up in return for the payment – and its nature in the hands of the recipient. It is essential to first determine what a payment is for before determining whether apportionment is necessary.
It is IR’s view that New Zealand courts would seek a reasonable basis for apportioning a lump sum, and consequently, where a single undissected sum is received, it should be apportioned between its capital and revenue elements where possible. Any apportionment must be made on an objective basis. The starting point for determining an appropriate apportionment will be the settlement agreement and any related documents (for example, the statement of claim (if there is one)). Other relevant circumstances and evidence may also be taken into account, however the onus of proof will always be on the taxpayer to show the apportionment is appropriate.
In the rare circumstance where the payment cannot be appropriately apportioned, the whole amount should be treated the same. Where the lump sum includes an amount that is taxable under a provision in Part C of the Income Tax Act 2007, the taxpayer has the burden of proving what part of the amount is not taxable. If a taxpayer is unable to show what part of a lump sum payment is capital, the Commissioner’s view is that generally the whole amount should be treated as income.
RA 18/01 – Dividend Stripping – Some Share Sales Where Proceeds Are At A High Risk Of Being Treated As A Dividend For Income Tax Purposes – a Revenue Alert to put you all on notice that IR are increasingly seeing sales of shares to related entities in situations where they consider the sale proceeds are a dividend under the general tax avoidance rule in section BG 1 and also sometimes the dividend stripping rule in section GB 1.
As most of you will be aware, unless acquired on revenue account, the sales of shares in a company is usually a capital transaction for the seller. IR’s concern is where taxpayers are structuring transactions in such a way to take advantage of this capital characterisation, where arguably the true flavour of the restructure is enabling the taxpayer to access amounts which in the usual course of events would have constituted a taxable dividend, had it not been for the sale of the shares.
Keep in the back of your mind therefore when advising clients of potential restructuring solutions, particularly where a group of existing shareholders will remain in the structure post perhaps exiting others as one example, that IR will be on the look-out for potential dividend substitution transactions and may challenge what you may have otherwise considered was a genuine commercial transaction (remembering that IR will simply need to assert that the tax effects of the arrangement were more than merely incidental, in order to invoke the anti-avoidance provisions).
Accompanying RA 18/01 is a useful scenario based Q&A, RA 18/01a, which certainly assists in illustrating IR’s position.
Covid-19 – further tax relief measures announced
On 15th April 2020, the Government published a further round of proposed tax changes to assist those taxpayers negatively affected by the impacts of Covid-19. The latest proposals follow-on from those which were part of the Government’s initial response to the virus outbreak, which have already been legislated for via the enactment of the Covid-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 on the 25th March 2020 (note that a special report has now been issued by IR on these earlier changes which can be found here – https://taxpolicy.ird.govt.nz/sites/default/files/2020-sr-covid-19.pdf).
The latest proposals are:
A temporary loss carry-back scheme (although with a proposal to make it permanent with application from the 2021/22 and later income years) – the ability to carry back a tax loss incurred in the 2020 income year to offset a taxable profit in the 2019 income year, thereby potentially creating a tax refund in respect of 2019 taxes already paid. Equally the same facility for expected 2021 income year losses to offset 2020 income year profits, and in this regard, with the final instalment of 2020 provisional tax not due until 7th May 2020 (for standard March balance date taxpayers), the proposed rules will enable taxpayers to now re-estimate the 7th May instalment, which for some could dictate that they have already paid sufficient provisional tax for the 2020 income year, and consequently no final payment is now required. Additionally, to the extent that the 7th May re-estimate reflects an overpayment of your 2020 income tax liability, you will be able to obtain a refund of the excess amount. There will also be no rush to make 7th May re-estimates prior to that date, as the proposed law change will include a provision to allow the filing of re-estimates post the 7th May. The loss-carry back temporary mechanisms will be included in a Bill to be introduced to Parliament in the week of 27th April and it is proposed to make the rule permanent, by way of legislation likely to be contained in a tax Bill to be introduced in the second half of 2020.
Amendments to the tax loss continuity rules – addressing the Government’s concerns that the negative impacts of Covid-19, will have a consequence of companies looking to source additional capital from potential investors in order to survive and the present risk for these companies of course, is any change to their existing shareholder structures of more than 51% due to the new investment of capital, will result in loss forfeiture. To mitigate this potential outcome, as well as arguably making a company more attractive to new investors due to the preservation of the tax losses if they were to come on board, the Government proposes to amend the tax loss continuity rules, with application to the 2020/21 and later income years. While there are no definitive statements at this time as to how the new rules may be designed (public consultation to be undertaken first, with a tax Bill introduced in the second half of 2020), IR’s update page suggests that we may see a similar rule introduced to that presently used in Australia – a ‘same or similar business’ test. In simple terms, the tax losses are unaffected by shareholding changes provided the business of the company continues in the same or similar way it did prior to the ownership change.
Giving IR flexibility to change due dates – to date, the Government’s response packages have made no amendments to IR’s discretion to modify timeframes or procedural requirements for taxpayers who are impacted by Covid-19. The newly released proposal therefore, is to introduce a discretionary power into the Tax Administration Act 1994 to allow IR to provide an extension to due dates and timeframes, or to modify procedural requirements set out in the Revenue Acts. This could include, for example, extending deadlines for filing tax returns and paying provisional and terminal tax. At this stage, the power will be time-limited for a period of 18 months and will apply to businesses affected by COVID-19