A Week in Review

Published 02 December 2019 by Gilligan Sheppard

Child Support Collection Web Widens

IR presently has circa $7.7m in child support debt owing by liable parents who live outside of New Zealand. While we have had strong reciprocal enforcement and collection arrangements in place with Australia for nearly 20 years, the same cannot be said with respect to most other jurisdictions, where historically IR has had to obtain a court order from the relevant country to pursue the liable parent.

Liable parents beware however, due to the recent addition of NZ’s signature to the Hague Convention on the International Recovery of Child Support and Other Forms of Family Maintenance. Presently signed by 42 foreign jurisdictions, the initiative will make it easier for IR to firstly track a liable parent that may be living in a signatories’ community, and then once located, to have the assistance of that State’s Government to collect outstanding debt and ongoing future payment obligations on IR’s behalf.

Naturally, IR will also have reciprocal obligations to the other signatory countries, helping collect the payment obligations of those liable parents presently residing in NZ.

It is expected that the new regime will come into effect in April 2021, once the measures have been considered by a Parliamentary Select Committee, who will then report to Parliament, with the Convention ultimately being ratified by an Order in Council.

“No Place to Hide” says IR

Continuing the global ‘hunting’ theme of this week’s edition of AWIR (A Week in Review), IR also issued a news item during the week, regarding the implementation of the OCED’s automatic exchange of information (AEOI) initiative, of which New Zealand is a party to.

Most of you by now have probably heard the phrase ‘common reporting standards (CRS)’ during those Monday morning standing around the water cooler conversations (actually waiting for the coffee machine to warm up but trying to give the impression you’re being healthy!). If you haven’t, in essence it’s an international data gathering regime whereby all reporting financial institutions are required to identify and collect information on accounts held by their account holders who are foreign tax residents (usually including those entities that are controlled by foreign tax residents), and to provide that information to their local Revenue authority.

The local Revenue Authority then either automatically provides the information to the local Revenue Authority of those countries who have also ratified the AEOI initiative, or will so provide such information upon request by a foreign Revenue Authority, usually via the exchange of information Articles of a relevant Double tax Treaty Agreement (DTA) between the two jurisdictions.

NZ commenced AEOI via the CRS mechanism in September 2018, and to give you some appreciation of the scale of the initiative, the IR news item alluded to 1.5m records in respect of NZ tax residents having been received from 72 separate reporting jurisdictions to date. Post receipt of the foreign financial account information, IR embarks upon its usual matching processes, reviewing the tax returns of identified NZ tax residents, and issuing ‘please explain’ letters to those who have filed their income tax positions with no mention of any foreign sourced income.

We have already received two such IR letters, and a couple of my advisory clients have also reached out with questions regarding similar letters received for their clients, so IR is certainly now active in this space.

While I am sure that there will be some taxpayers out there starting to sweat, in our latest case it was in fact quite innocent. Our particular client had bank accounts in China, and while a NZ tax resident, they were also presently a tax resident of China, therefore a tax dual resident. In this respect we had already provided a recent tax residency opinion to them, whereby application of the residency tiebreaker test contained in the NZ/China DTA, had determined their tax residency in favour of China. Consequently NZ only had taxing rights to their NZ sourced income, and we have provided a response to IR in this regard.

The ‘nuts & bolts’ of CRS however, is that the world certainly is a much smaller place to hide these days, and if you are in receipt of such a letter (or expect you are very likely to receive one) and may have historically ‘OVERLOOKED’ telling IR about your foreign nest eggs, a voluntary disclosure could be the right tool for you to come clean. Certainly happy to help clear the closet of those skeletons if you need assistance.

IR Rate Updates

During the week IR used the NZ Gazette to update you all regarding forthcoming changes to the Minimum Family Tax Credit prescribed amount and the FBT prescribed rate for low interest loans.

Effective for the 2020/21 and later tax years, the prescribed amount for the minimum family tax credit will increase from $26,572 to $27,768. The prescribed amount is that from which your “net family scheme income” is deducted, equating to a figure which is then multiplied by the number of weeks during the tax year you were a full-time earner, then divided by 52, to calculate your credit entitlement.

With respect to the FBT prescribed interest rate, the FBT quarter which commenced 1st October 2019, will see the rate reduce from 5.77% to 5.26%. The use of the rate is commonly twofold, firstly to potentially reduce the FBT taxable value on employment related loans to nil, to the extent the interest rate charged by the employer at least equates to the prescribed rate, and secondly, to extinguish the potential deemed dividend issues that can arise for shareholders of a company who have overdrawn shareholder current accounts/loans.

In the latter scenario, a deemed dividend can arise (assessable to the recipient of the benefit (which could be an associate of the shareholder) and non-deductible to the company), where there is a ‘transfer of value’ to the shareholder from the company, which will include situations where the shareholder does not pay a market-rate interest to the company for the use of its funds. In this respect, IR accepts the use of the FBT prescribed rate as a deemed ‘market-rate’, so use of the rate will negate the potential deemed dividend issue.