Government targets 39% avoidance
Perhaps thinking that they’ve now done enough damage to the residential property investment market via interest deduction restrictions, loss ring-fencing and increased bright-line periods… the Government has now moved its focus to all you tax avoiders out there who have nothing better to do with your businesses in the challenging environment of the new Covid world, than to spend your days thinking up ways of how you can avoid the new 39% personal marginal tax rate.
Introduced for your bedtime reading pleasure (although this one may keep you awake at night rather than help you sleep) is the Government’s consultation document, ‘Dividend integrity and personal services income attribution’. It’s a 54-page masterpiece that seeks your feedback (which is likely to fall on deaf ears) on measures that would limit the ability of individuals to avoid the 39% or the 33% personal income tax rates by using a company structure.
First up it’s a new capital gains tax (oops, did I just hint that?) on the sale of your shares in a company you and/or your associates have controlled (more than 50% interest), where you’ve clearly retained earnings within the company to avoid paying 33% or now 39% personal tax. Basically, without getting into the detail for now (since it is purely a consultation document at this stage), if your company has retained earnings when you sell your shares to another party, then a portion of your historically tax-free capital gain will be treated as a taxable dividend.
Second up, and a few of you may think it’s just basic best practice in any event (because the onus always rests with you to prove the tax position taken) so why waste time legislating for it?… is a proposal to require companies to maintain a record of their ASC and ACDA balances, so that the Revenue can easily verify the non-taxable amount when either shares are repurchased by a company, or the company that is liquidated. I expect most of you will be aware, that an amount paid to a shareholder for a repurchase of their shares is tax-free in their hands to the extent of the available subscribed capital (ASC) per share component. Or, when a company liquidates, a distribution to shareholders will not be a dividend to the extent of the ASC and available capital distribution amount (ACDA) – the latter in essence net non-related party capital gains. The consultation document suggests two options for the new rules – reporting to IR annually akin to present ICA account balance reporting (to me suggests “Big Brother is watching you”), or you simply produce when requested should one of the triggering events occur.
More Covid variations
A couple more Covid-related variations came out over the last week:
- COV 22/15, ‘Variation in relation to s RP 17B(4) of the Income Tax Act 2007 to extend time for tax pooling transfers’. The variation applies to a person who wishes to use funds in a tax pooling account to satisfy an obligation for provisional tax or terminal tax for the 2021 tax year. The variation recognises that the impact of Covid-19 means that some taxpayers who would otherwise have made use of tax pooling have been unable to do so due to cashflow difficulties and disruption to normal business operation. In order to use funds in a tax pooling account to satisfy a tax obligation for the 2021 income year, s.RP 17B(4) of the ITA07 requires a transfer request to be made on or before either 75 or 76 days of terminal tax date. For the 2021 income year, the time within which a request must be made has been extended to 183 days after terminal tax date. The variation applies from 18 March 2022 to 30 September 2022.
- Remission of interest for taxpayers affected by Covid-19 – the Taxation (Extension of COVID-19 Interest Remission) Order 2022 (SL 2022/70) comes into force on 25 March 2022 and amends s 183ABAB(3)(b) of the Tax Administration Act 1994. The time limit for IR to remit interest under s.183ABAB(3) for taxpayers affected by Covid, and who asked for relief and made payment as soon as practicable has been extended from 25 March 2022 to 8 April 2024. This Order is revoked at the close of 30 June 2024.
Keeping with the ASC flavour
While the Government has issued its consultative document to review present ASC and ACDA record keeping requirements, IR has ramped up the gossip surrounding ASC balances by releasing its own operational statement OS 22/01, titled ‘Available Subscribed Capital recordkeeping requirements’. A quick four-page read compared to its 54-page Big Brother, setting out IR’s approach to applying the statutory recordkeeping requirements that are necessary to substantiate distributions of Available Subscribed Capital (ASC).
The document in essence discusses your onus of proof obligations, and is a reminder that if you do not have sufficient records to verify that either the s.CD 22 (Returns of capital: off-market share cancellations) or s.CD 26 (Capital distributions on liquidation or emigration) exclusion from what is a dividend should apply to a distribution made to a shareholder, then IR will simply assert that s.CD 4 applies to tax the amount received.
Therefore, you have been warned!
Bright-line roll-over relief update
Unfortunately, I got a little over-excited last week when I noticed the proposed roll-over relief which acts to prevent the bright-line rules from applying (including a restart of the bright-line clock), when the trustees of a trust transfer residential land to a settlor of the trust.
The relief is actually a lot narrower in scope than I first thought, only having application where the particular settlor had originally transferred the land to the trust. And if there was more than one original settlor who settled that residential land upon the trust, then all the other original settlors must also get back their original interest as well.
Sorry Angus (who posted feedback on my LinkedIn last week)!
