A Week in Review

Richard AshbyPartner, Gilligan Sheppard

I can feel it in the wind

A few weeks back I shared my views on Labour’s election win, the likely introduction of a 39% top marginal tax rate, and the potential to see a greater focus by IR on the application of the personal services application rules. 


Well lo and behold, IR have suddenly released draft interpretation statement PUB00321 ‘Income tax – Calculating income from personal services to be attributed to the working person’. At first glance, my immediate reaction would be “here we go, IR’s starting to lay the foundations”, however sucking in a few big ones and returning to my more usual calm, logical state, I suspect a look back through IR’s work programme agenda earlier in the year, would reveal that the item has been planned for a release for some time.

Now the first thing to note about PUB00321, is that it is not a comprehensive discussion by IR on the attribution rules as a whole – that detail can be sourced from the 2019 release of IR 19/02 ‘Income Tax – Attribution rule for income from personal services’. Instead, this item focusses on how one should calculate the income that needs to be attributed to the working person (as provided for in section GB 29). 

The document is 45 pages in length, and contains commentary on:

  • The general attribution rule calculation ‘the lowest of three amounts’
  • Key issues to consider when computing ‘the lowest of three amounts’
  • Certain things specifically taken into account and not taken into account in the calculations
  • The extent to which the look-through status of LTC’s and partnerships is ignored
  • The treatment of dividends, both in-year and post-year
  • The implications for foreign tax credits attached to foreign personal services income derived

Like any good interpretation statement issued by IR, there are a myriad of examples throughout the commentary to explain the narrative.

If you would like to have your say on draft PUB00321, the deadline for commentary is Christmas Eve – and isn’t that approaching way too quickly!

Another warning on GST warranties

I read an interesting case decision of the High Court during the week, which is certainly a timely reminder again about ensuring our clients take due care when completing their sale and purchase agreements (or more likely, a real estate agent is completing on their behalf!).

What struck me about this recent decision, was that on all accounts the purchaser has suffered no actual economic loss, yet the Court still found against the vendor and awarded damages.

So what happened in a nutshell – well for whatever logical reason the vendor had in her head, the agreement for sale and purchase reflected that she was not registered for GST for the purpose of this transaction, when in fact she was – the property contained a house, shop, workshop and on-site parking. Now admittedly I have not reverted back to the District Court decision to try to understand why the vendor thought the property was not in the GST net (she was still GST registered after all when entering into the agreement, but perhaps her view was that this property was no longer used in whatever taxable activities she was carrying on at the time).

The purchasers entered into the agreement thinking they would use the existing structures upon the land to operate a lamp manufacturing and sale business and a toy museum, and were therefore planning to claim a GST second-hand goods input tax claim to fund working capital for the business.

Now no problem with the decision of the Court at this point, however the purchaser, based on professional advice received, decided not to proceed with the business as intended, and instead subdivided the land and sold the shop with its road frontage (and not as part of a GST taxable activity carried on as the purchaser did not in fact proceed to register for GST).

So at this point you would be thinking, well that’s ok, everybody’s happy, however somebody clearly whispered in the purchasers ear that because the vendor had breached her warranty with respect to her stated GST registration status (apparently not discovered until post the decision being made not to proceed with the intended business activities), the purchasers had lost their contracted anticipation of being able to obtain a GST refund and consequently they should sue – which they did – and they won!

Here’s the reason for the decision, however you may wish to read the cases in full to get your head around it (Marr v Mills (2020) NZHC 3004):

  • The District Court did not err. As a prospective benefit was denied the Mills by Ms Marr’s breach of warranty, the GST refund was sufficiently foreseeable to warrant its award in damages.
  • The value to the Mills of the loss of Ms Marr’s promised performance was the GST refund to provide start-up working capital for the businesses. The allocation of risk by the GST warranty meant such was within the contemplation of the parties at the time of the property’s acquisition. That was the financial position the Mills were denied by Ms Marr’s breach of the warranty.

The Mills’ post-auction instruction of the property’s apportioned valuation for GST purposes was given in advance of notice of Ms Marr’s breached warranty. The instruction was not opportunistic on the Mills knowing of the breach.