A Week in Review

Richard AshbyPartner, Gilligan Sheppard

Extension to R&D approval date

The new R&D tax credit regime now requires taxpayers to obtain approval from IR with respect to the R&D activities they are undertaking. With effect from 1st April 2020, for the 2020/21 and later income years, the due date for filing the approval application, is the 7th day of the second month post the end of the relevant income year – so 7th May 2021 with respect to the 2021 income year of a standard balance date taxpayer.

This week saw the release of COV 20/10, which acknowledges that due to Covid-19, certain taxpayer’s ability to plan/conduct R&D, obtain information, seek advice, and formulate an application may be delayed. Consequently, COV 20/10 will extend the due date for filing the general approval application by three months.

COV 20/10 is a variation that applies for the period 1st September 2020 to 30th September 2021.

A general approval application can specify a period of up to three income years, the taxpayer then simply having to provide a statement to IR for each subsequent income year, confirming that there has been no material change for their business. This statement itself must be provided no later than the 7th day of the second month post the end of the relevant income year.

Labour announces tax rate increase

Post Labour’s win in this year’s election (I just cannot see National getting over the line, even with Crusher Collins now at the helm), they are going to increase the top personal marginal tax rate to 39%, for those with personal incomes in excess of $180k per annum.

This was Grant Robertson’s announcement during the week, unsurprisingly with reference to the recent Covid-19 relief measures (most notably the wage subsidy) which required greater Government borrowing to fund, and now requires new funding sources to repay, and assist the whole country to recover and rebuild.

So, he’s asking only the top 2% of earners to help. At this time, I have not seen an effective commencement date, my best guess being 1st April 2021, by the time Parliament reconvenes, relevant legislation is drafted and passed etc.

The 6% increase in the top rate, is expected to generate $500m additional revenue for the Government coffers per annum (so where is the rest going to come from one may ask?).

There has been no suggestion of any change to either the 28% corporate tax rate, or the 33% trustee tax rate, so we should all expect to see a greater focus by IR on earnings retained by companies in their 2021 and subsequent income tax returns, particularly where a family trust owns the majority of the shares in the company, and additionally where shareholder salary allocations have suddenly reduced when compared to what was paid in 2020 and earlier income years.

What is the first step?

Most of you should be aware, that distributing capital gains during the life of a company does not provide the greatest of tax outcomes, such distributions falling within the ‘dividend’ definition and consequently fully taxable in the shareholder’s hands (with the requisite obligation for the paying company to deduct a 33% dividend withholding tax to the extent that the dividend is not imputed).

To avoid this unfortunate taxing consequence therefore, most capital gains are trapped within the company, until the company is put into liquidation – available subscribed capital per share and most capital gains able to then be distributed to shareholders tax free.

Naturally to understand when it is considered ‘safe’ to distribute the capital gain (or in fact for any transaction where a liquidation status is relevant), one needs to appreciate what IR considers is the first step in the liquidation process.

In 2014, we saw the release of BR Pub 14/09, which covered off IR’s view with respect to short-form liquidations (usually the passing of a directors / shareholder’s resolution confirming the company had ceased to trade etc).

Now IR has released a draft QWBA that explores the same question with respect to long-form liquidations. In contrast to BR Pub 14/09 however, IR’s draft view is that it is not a resolution passing that commences a long-form liquidation, but instead the appointment of a liquidator as required by the Companies Act 1993.

The draft QWBA has a comment deadline date of 21st October 2020 and has a reference PUB00366.

GST agency or not?

And in case you are not interested in long-form liquidation timings, but would still like something to read (because you do not have anything better to do with your time), then you may be more satisfied by PUB00327, IR’s QWBA on the question of GST and agency.

This draft statement discusses whether a person is acting as an agent or as a principal for the purposes of the Goods and Services Tax Act 1985.

PUB00327 is broken into four parts, plus an appendix:

  1. Part one identifies a series of features that indicate the existence of an agency relationship for GST purposes.
     
  2. Part two explains how, in certain circumstances, the Act can operate to modify an agency relationship.
     
  3. Part three outlines the specific compliance obligations on agents and principals in the Act.
     
  4. Part four contains worked examples that illustrate how to determine whether a relationship is an agency relationship for GST purposes.
     
  5. The Appendix contains summaries of relevant agency cases from New Zealand and overseas.

The deadline for comment is 20 October 2020.

If you have any questions or would like a second opinion on any national or international tax issues, please contact me richard@gilshep.co.nz