Monday 4th April 2022
It’s done and dusted
Well one could not say that it was unexpected, but they certainly left it until the last minute in terms of getting it through before the end of the income year, however the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill received its third reading on the 30th and then the Royal Assent the same day.
You could say that this Bill contained the good, the bad and the ugly – some positive GST changes for the taxpayer, which I suspect will be quickly overlooked as having been a component of the Bill, dramatically overshadowed by the passing into law of the Government’s new interest deduction limitations in relation to debt used to fund residential rental properties.
With a view to not turning this week’s edition into a ‘Gone with the wind’ classic, I will dedicate its focus solely to the new legislation and then catch-up on some of the other releases that occurred during the week in next week’s edition.
Crypto Assets: Confirmation that the assets themselves (which have been ruled not to be money) are neither subject to GST nor the financial arrangement rules. However naturally where crypto assets themselves are used to acquire good or services, those latter transactions will still have GST consequences.
Disposal of MUA: Now here the reference is not to the mixed-use asset regime itself (asset used for income/private purposes, unused for >62 days blah blah), but to GST assets that are used for both taxable and non-taxable purposes. When such assets are disposed of, there was an issue for appreciating assets (particularly land due to the $$ involved) due to the formula which existed to ensure that the registered person obtained the correct input tax claim in relation to the output tax now payable on the asset being disposed of. The problem – the input tax quantum was capped at that included in the original purchase cost. So, if you had land that had only been used 75% for making taxable supplies and consequently only 75% of the disposal proceeds should have been subject to GST output tax, the limitations with the formula resulted in you paying something more than 75%. The amendment has modified the formula to the extent that now you will only pay 75%, and even better the change is effective from 24th February 2020.
Associated Person Acquisitions: This little gem is sitting squarely in the goody bag! Acquire second-hand goods from an unregistered associated party, and the ‘lesser of’ rule dictated a $0 input tax claim if your associated vendor had paid no GST when they had acquired the goods. However, all has now changed, and post the date of enactment (30th March 2022), you’ll at least be able to claim an input tax credit equal to the tax fraction of the purchase price of the goods paid to the non-associated vendor.
Non-resident’s New Zealand Customs Claims: Presently your non-resident client who is deemed to not make any supplies in New Zealand due to all their New Zealand customers being GST registered, could not utilise the special non-resident’s claimant regime to recover New Zealand Customs GST charged on goods they imported into New Zealand, and had to instead register under the general regime, facilitated by having the New Zealand customer agree that the supply would be treated as being made in New Zealand (s.8(4)) and therefore a taxable supply. Naturally this required your New Zealand customer to play ball (because they would then have the timing issue of paying the GST and then claiming through their return), and while I did not encounter too many scenarios where the New Zealand customer would not accommodate the non-resident suppliers request for the requisite agreement, the scenario did create additional compliance costs for your client. Effective from the date of enactment again, your client will be able to use the special regime to recover the New Zealand Customs GST, provided all the imported goods are going to a New Zealand GST registered customer.
CZR Errors: At the moment if the purchaser discovers post settlement that the supply was incorrectly zero-rated, they are required to account for the GST that should have been charged in the GST return period covering settlement date, which naturally can trigger UOMI and penalty exposures. Discover the same error on transactions occurring post the date of the Bill’s enactment however, and now the obligation to account for the GST is moved to the GST period during which the purchaser (objectively naturally) became aware of the zero-rating error.
Invoicing: A number of changes were intended to modernise invoicing rules which have effectively been in place since GST was first introduced in October 1986. The proposed changes were supposed to take effect from the date of enactment, however the FEC felt that this timing was too soon to allow taxpayers to become accustomed with the new rules and consequently the changes are deferred until taxable periods commencing on or after 1st April 2023.
Other Remedials: A couple of other remedials of note – where a business sale has been zero-rated as a going concern but the purchaser then uses some of the goods included in the supply for non-taxable purposes, an amendment now requires the purchaser to determine the amount of GST that would have been payable if the transaction was not zero-rated and to apportion the amount accordingly. Also, where a registered person has performed a ‘wash up’ calculation under section 21FB (change to 100% taxable or 100% non-taxable use of an asset for two adjustment periods), the requirement to perform any further annual adjustments will be switched off.
Income Tax changes: Interest deduction limitation rules
I’m guessing you will all be aware by now of this new term – disallowed residential property or DRP – property that is commonly and foreseeably used to provide residential accommodation on a long-term basis and is (or could be) used as an owner-occupied residence. If the property you’re advising your client on falls into the DRP basket, then effective 1st October 2021, unless one of three exceptions apply, the deductibility of any interest costs incurred in relation to that DRP are going to be affected – either no deduction going forward or deductions subject to a phasing out regime.
Note that you still must satisfy the general permission in the first instance, as well as then consider the application of any of the general limitations.
What is DRP exactly? Land in New Zealand (so non-New Zealand land unaffected) to the extent to which it has a place configured as a residence or abode; the owner has an arrangement to erect a residence or abode; or it is bare land that could be used to erect a place configured as a residence or abode. Note that certain types of land which may have fallen within the legislative definition has been carved out – social, emergency, transitional, and council housing for example as well as what is referred to as excepted residential land. Refer to schedule 15 of the ITA07 for the full list of the latter.
When do the new rules apply from? Interest costs incurred post 1st October 2021. If the interest costs relate to borrowings in place pre 27th March 2021 (unless foreign currency loans), then a phase out period will apply, until 1st April 2025, when the deduction entitlement will have reduced to zero (referred to as grandparented residential interest (GRI)). If however the borrowings were drawn down post 27th March 2021 (with exception of pre-27th March 2021 debt refinancing of exactly the same level of borrowing), then no interest deductions will be available post 1st October 2021. Note that unless a pre-27th March 2021 foreign currency loan is refinanced in New Zealand dollars, its interest is also non-deductible from October 1st. Should refinancing occur post October 1st, then GRI status will be reinstated from the date of drawdown.
Do the rules apply to companies? Yes, the rules apply to those companies whose main business involves DRP, and to most close companies that hold DRP. If the interest limitation rules apply to a company, it must trace its borrowings to identify interest it has incurred for DRP. It is denied a deduction for that interest unless an exemption applies. Importantly note that the new rules override s.DB 7 which has historically automatically allowed an interest deduction without requiring a nexus to income derivation.
Are there exceptions to the new rules? Yes, there are three specific exemptions from the new rules, the land business exemption, the development exemption and the new build exemption.
- Land business exemption – if your client operates a business activity of the type subject to taxation under s.CB 7 (dealing in land; land development and/or division into lots; erecting buildings), then interest costs relating to land acquired for the purpose of that business remains fully deductible.
- Development exemption – if a person does not qualify for the land business exemption but is developing land with an aim to creating new housing, then the development exemption should apply to the person. Think of s.CB 12 (minor subdivisions)/CB 13 (major development scheme) type scenarios. Again, interest costs will retain full deductibility but only from the point in time that the scheme is deemed to have commenced.
- New build exemption – now this definition is important to understand, as what is considered a ‘new build’ also dictates whether the bright-line period for the land will be reduced from 10 years to 5 years. Generally applies once a new build has been added to the land, and in most cases applies for 20 years from the date the new build is completed (usually defined by CCC issue date). Interest will remain 100% deductible for both the initial owner and any subsequent purchasers over the 20-year exemption period.
So exactly what is new build land? It’s defined to mean land that has a self-contained residence or abode on it, provided the residence/abode received a CCC on or after 27th March 2020 (no it’s not a typo) confirming it has been added to the land. So, the acquisition date of the land is not relevant, but instead the date the new build is added to the land (usually the CCC date). Once such a residence or abode (a new build) has been added to residential land, that land becomes ‘new build land’. Land for which there is an agreement to add a new build may qualify as new build land (although note that this element is excluded for bright-line purposes). In addition, buildings that are converted into self-contained residences (such as office blocks converted into apartments, or large houses converted into multiple units), and existing buildings that are remediated for weather-tightness or seismic issues, may also qualify as new build land if certain criteria are met. Also ‘added to the land’ can include a scenario where an older home is relocated onto the land.
Watch out for apportionment issues. This warning applies equally for the bright-line rules where both a 5-year and 10-year period may apply to the same land. Any legislative use of the term ‘to the extent’ should put you on notice that you may have apportionment requirements. In the present case, if your parcel of land contains both a new build and an older dwelling, only interest costs relating to the former are going to retain a full deduction.
Income Tax changes: Bright-line rule changes
Equally I suspect most of you will be aware by now that for land acquired post 27th March 2021, a 10-year bright-line period now applies unless the land qualifies as being ‘new build land’.
When does the 5-year bright-line period apply? A 5-year bright-line period still applies to residential land acquired post 27th March 2021, ‘to the extent’ the land satisfies the new build land definition – is new build land (as defined above under my comments on interest deduction limitations) which is acquired before, or no later than 12 months after, it became new build land, and there is a self-contained residence (new build), as described in the definition of new build land, on the land when it is disposed of or when settlement occurs, unless the new build was destroyed by a natural disaster or fire. So, your client could acquire land which already contains a new build, or they could add a new build to land already owned.
The main home exclusion rules have changed. For land acquired post 27th March 2021, the previous all or nothing rules which required you to satisfy the two >50% tests or the exclusion was not available, have gone. Introduced instead is arguably a more fairer rule, which in essence should only result in you being exposed to paying bright-line tax in relation to the portion of residential land not used for main home purposes where the main home occupies less than 50% of the land, or where main home land has been used for non-main home purposes for periods in excess of 365 consecutive days (extended to more than 365 days in respect of a dwellings construction provided the construction period is still considered to be ‘reasonable’).
Roll-over relief provisions expanded. I’ve been complaining (I know, unnatural for me) for a long-time about how the bright-line rules did not contain an associated vendor ownership concession which most of the other land taxing provisions contain. Well finally the Government has listened, and arguably if you can look at your associated person transaction and take the view that the economic ownership of the land has not changed, then the transferor should not be exposed to paying bright-line tax and the transferee should not have the bright-line clock restarted. Roll-over relief can be full or partial, the latter if the transferor transfers their land to the associated purchaser for more than their original cost. Under full relief, the transferee obtains both the transferor’s original acquisition date and cost (so called ‘stepping into the shoes of the vendor’), while under partial relief the transferee only obtains the vendors acquisition date, while their cost is the actual transfer amount (note the deemed market value amount in s.GC 1 is still overridden).
Who does roll-over relief apply to? Settlor to family trust (check specific requirements but basically primary settlor must be beneficiary, plus all beneficiaries within 4th degree) and back to settlor (but a caution that same interest must be returned to original settlor); owner to/from LTC/partnership (provided ownership interests remain constant); joint tenants to/from tenant in common (same proportionate ownership interests); and companies within a consolidated group. Also note the ability for land to go from personal ownership into a family trust and then back out again to an LTC/partnership (due to the look-through nature of these ownership vehicles) or vice versa. Also trust resettlements where principal settlor of new trust identical to principal settlor of first trust, and all beneficiary requirements satisfied by both trusts, was supposed to receive roll-over relief as well, however, will require an amendment with the next available taxation Bill to ensure that this intention is legislated for.
Does roll-over relief apply for transfers of land from trustees to beneficiaries? No, exposure for bright-line tax will need to be considered by the trustees, and the bright-line clock will restart for the beneficiary.
Dazed and confused by all the changes? Please don’t hesitate to reach out to me with any questions.