A Week in Review

Published 20 January 2020 by Gilligan Sheppard

Debt forgiveness qualifies for Donation Tax Credit?

Well it did at least in the eyes of both the High Court and the Court of Appeal, where a taxpayer had established a charitable trust, advanced a sum of money to the trust by way of loan, proceeded to forgive a portion of the debt annually and then submitted a donation tax rebate refund claim in relation to the amounts forgiven.

The Commissioner attempted to reassess the taxpayer to recover the refunds made, on the basis that forgiveness of a right to be repaid a loan was not a charitable gift within the meaning of s LD 1 of the Income Tax Act 2007 (ITA 2007) because it was not a cash gift that is paid. In the Commissioners view, the use of the term “monetary” in the legislative provisions, meant cash.

Both courts, however, disagreed, with the Court of Appeal ruling:

  • Consideration of the legislative history provided no support for the interpretation of “monetary” or “money” contended for by the Commissioner. Comments in reports by officials about “cash” did not assist the Commissioner when that was not the wording of the statute. The task of the Court was to interpret the words used in the statute, not paraphrases and, in particular, imprecise paraphrases, used in discussion papers and officials’ reports.
  • Interestingly in my view, was the statement, “Comments by officials, unless they formed part of the parliamentary record, were not an especially reliable, or orthodox, form of legislative history.”; and,
  • From an analysis of the various dictionary definitions of “monetary” and “money”, it appeared that the words “monetary” and “money” in s LD 3(1)(a) meant more than just cash. Such a conclusion was consistent with the Commissioner’s longstanding practise of accepting that gifts made by way of electronic bank transfers, credit card payments or cheques qualified as monetary gifts under s LD 3(1)(a).

However before you get too excited and race off to review your client’s files for any potential missed refund opportunities, the Government is not happy with the Court’s decision and consequently has filed a SOP for inclusion in the present taxation Bill before Parliament (Taxation (KiwiSaver, Student Loans, and Remedial Matters) Bill), to amend the legislation retrospectively from 1st April 2008 to confirm that donation tax credits and gift deductions will not be available for gifts to donee organisations where they are made by way of debt forgiveness.

The issuance of donation tax credits and gift deductions will be restricted to cash donations (including payments made by bank transfers, credit card or cheques).

Settlement date for GST not necessarily the "Stated Settlement Date"

These people clearly have too much money and time on their hands, or simply just don’t like each other, to the extent that emotions have clearly overtaken more rational economic decision making.

For those of you that have been reading AWIR for some time now, back in 2016 there was a case brought before the Court’s, which surrounded the timing of the purchaser giving notice to the vendor of their intended GST registration status at settlement date, for the purpose of the vendor then being able to determine the GST treatment of the supply – standard or zero-rated. In this case, the purchase had advised only the day before settlement, that they would be GST registered (which the vendors lawyer had acknowledged and actually issued an amended settlement statement in this regard!), however, the vendor refused to settle on any basis other than “standard-rated”, because clause 14.5 of the sale and purchase agreement required that notice be given at any time up to two working days prior to the agreed settlement date, which the purchaser had not complied with.

The case went as far as it could go, the Supreme Court, however, dismissing the vendors application for leave to appeal the Court of Appeal decision, and then the parties were back in court when the vendor still refused to settle, the purchaser now requesting the High Court to order specific performance of the agreements, an application which was ruled in their favour.

Again not happy with the outcome, the vendor appealed the decision to the Court of Appeal, however with the additional claim that since the judicial process had begun, it had been discovered that the purchaser was not in fact actually registered for GST at the agreed settlement date in the agreement, but instead had retrospectively registered to this date afterwards.

While I’m happy for the vendor to continue wasting their money trying to get the upper hand, the latest decision by the Court of Appeal does have some interesting commentary for us all to take home:

  • The vendor was not entitled to insist that any settlement must take place on a standard-rated basis. The purchasers expected to be registered at settlement and intended to use the properties for making taxable supplies, not as a principal place of residence. The purchasers were GST-registered with retrospective effect and settlement must proceed on a zero-rated basis.
  • Whether the supply must be zero-rated was determined at the time of settlement. The “time of settlement” in terms of s 11(8B) of the Goods and Services Tax Act 1985 (GST Act) was the time the transaction actually settles, irrespective of whether that occurs on the agreed settlement date. The time of settlement and the contractually agreed settlement date did not always coincide.
  • The time within which notice can be given under s 78F of the GST Act had still not passed. Section 78F(2) provided that notification can be given at or before the settlement of the transaction. There was also still time for the requisite notice to be given in terms of cl 14.5 of the agreements. This clause provided for notice to be given at any time up to two working days before settlement. The notice period in the agreements was not calculated by reference to the settlement date.
  • The GST position was determined by the GST Act, not by the agreements. If the requirements of s 11(1)(mb) are met at the time of settlement, the supply must be zero-rated. The vendor was accordingly not entitled to insist that the GST position be determined and fixed based on the written information supplied to it up to two working days prior to the agreed settlement date and require that any settlement thereafter must proceed on a standard-rated basis.
  • In the event s 11(1)(mb) did apply, the purchasers were obliged to give written notice in terms of s 78F of the GST Act. The vendor could not refuse to accept such notice and demand payment of GST at the standard rate. The most the vendor was entitled to do was to insist on receiving two working days’ notice prior to settlement proceeding.

China/NZ new Double Tax Treaty comes into force

Signed in April 2019, the new DTA came into force on 27th December 2019.

The new DTA intends to provide cross-border investors with more certainty about tax treatment, particularly for dividends, interest and royalties. It will do this by reducing withholding rates on certain dividends and eliminating double taxation.

The new agreement also reflects recent work by the Organisation for Economic Co-operation and Development (OECD) on base erosion and profit shifting (BEPS). The new agreement includes a number of anti-BEPS measures to improve the ability of both countries to detect and prevent tax evasion.

The new DTA with China does not apply to Hong Kong, which is managed by a separate DTA.

QWBA's on Trust Property rented for short-term accommodation finalised

Canvased in a previous AWIR when the drafts were initially released for public feedback, IR has now released the finalised versions.

QB 19/15 deals with a scenario where a beneficiary of the trust rents out the trust property for short-stay accommodation and considers the question of who should declare the income for tax purposes and what deductions can be claimed.

In summary:

  • The beneficiary will derive the short-stay accommodation income because it is their interest in land that is affected by the property being rented out.
  • The beneficiary may be eligible to use the “standard-cost method” for meeting their tax-obligation.
  • Some expenses will be fully deductible; others may be only partly deductible because they also relate to the private use of the property.

On the other hand, QB 19/16 looks at the same questions but from the perspective of the trustees of the trust being the party who rents the trust property out for short-stay accommodation. In this regard, it is the Commissioners view that:

  • Where the trustees rent out the property — any income from renting the property out for short-stay accommodation will belong to the trustees and will need to be returned by them.
  • The deductibility of the (non-capital) property-related expenses depends on whether the expense is incurred by the person deriving the income — in this case, the trustees. Sometimes in a family trust situation, this will not be the case.

Some expenses will be fully deductible; others may be only partly deductible because they also relate to private use or non-income-earning use of the property