Covid-19 legislation guidance
IR has now published guidance on the legislative changes introduced via the passing of two recent tax Bills – the Covid-19 Response (Taxation and Other Regulatory Urgent Measures) Act 2020 (No. 10 of 2020) enacted on 30 April 2020 and the Covid-19 Response (Further Management Measures) Legislation Act 2020 (No. 13 of 2020) enacted on 15 May 2020.
The guidance document covers:
- The new temporary loss carry-back regime
- IR’s new administrative flexibility powers
- The small business cashflow scheme; and,
- The rules to ensure those New Zealanders stranded overseas who are receiving social benefits and pension equivalent payments are taxed as if they were back in NZ.
Some take-outs from the guidance:
- A temporary measure applying to losses incurred in either the 2019–20 or 2020–21 income years (although Government intention to develop permanent rules to apply from the 2021–22 tax year).
- You generally access the rules by changing your estimated provisional tax (assuming the profit year tax return not filed yet), and deadline for re-estimating provisional tax now extended to the date the tax return is due or filed, whichever is the earlier. If tax return for profit year already filed, then you request a reassessment and refund due to the loss carry-back.
- Almost all taxpayer types eligible to carry back losses.
- Be conservative with your loss estimates (you can estimate multiple times) as standard late payment use-of-money interest applies if the loss carry-back is overestimated, and use of the UOMI new relief provisions are not available in loss carry-back scenarios.
- Ownership continuity (maintaining 49% / 66% throughout continuity period), grouping (must offset all current year profits first), and imputation rules (must have sufficient credits available for refunds) also apply.
- Loss carry-back enables provisional tax already paid to be refunded, and rules extend to shareholder-employees who may have paid provisional tax on the basis that they would receive a shareholder salary from the company which is not in fact paid because the company’s pre-salary income is offset by a loss carry-back – both parties need to opt-in to the regime in this scenario.
- Carry-back loss restricted where you’ve made charitable donations in the taxable income year, to the amount of taxable income reduced by the amount of charitable donations. This restriction will not apply to a company however, as it does not receive a tax credit but a deduction for a charitable donation.
- If you owe a debt on other tax types, IR will not apply any of the refund arising from the loss carry-back to satisfy these tax debts.
A temporary discretionary power IR may use to provide flexibility for due dates, deadlines, time periods, timeframes or procedural and administrative requirements for taxpayers who are affected by Covid-19, making compliance with current tax obligations impossible, impractical, or unreasonable.
To date (as far as I am aware at least), the following COV determinations have been issued:
- COV 20/01: variation to s HB 13(3)(b) of the Income Tax Act 2007 – LTC elections.
- COV 20/02: variation to s EI 1 of the Income Tax Act 2007 – Spreading of timber income.
- COV 20/03: variation of the application of s 15D(2) Goods and Services Tax Act 1985 to extend time to make an application to change GST taxable period.
- COV 20/04: variation in relation to s DB 31 Income Tax Act 2007 to extend time for writing off bad debts.
- COV 20/05: variation in relation to s RP 17B(4) of the Income Tax Act 2007 to extend time for tax pooling transfers.
- COV 20/06: variation in relation to s EI 1 of the Income Tax Act 2007 (supplement to COV 20/02).
Small business cashflow scheme
- Section DF1(1)(cb) added to ensure that business expenditure funded by loan not subject to the restrictions on deductibility that apply to expenditure financed by certain government grants and loans – so normal deductibility rules apply.
- Amendment to section EW 45 to ensure that if conversion to a grant occurs this does not trigger debt forgiveness income under the financial arrangement rules.
- Section MB 13 amended to ensure that loan amounts are not counted as family scheme income for Working for Families purposes.
The definition of exempt interest in section YA 1 amended to ensure that interest payments made under the SBCS will not be subject to resident withholding tax
FBT prescribed interest rate changed
The FBT prescribed interest rate has been reduced from 5.26% to 4.50% for the quarter commencing 1st July 2020.
QWBA on LTD debt remission
This ‘questions we’ve been asked’ looks to answer the question as to whether a look-through company will derive debt remission income when a close friend / family member of the shareholders forgives a loan made to the LTC.
QB 20/02 responds with a ‘no’ as section EW 46C will prevent the LTC from deriving debt remission income where all of the shareholders and the close friend / family members have natural love and affection for each other. In this regard, IR will generally accept that the shareholders and the close friend / family members have natural love and affection for each other.
Note that a similar exception applies to partnerships (s EW 46C(1)(d)), and while QB 20/02 only applies to LTC’s, the conclusions reached in the QWBA are also relevant to partnerships where the creditor of the partnership and all of the partners have natural love and affection for each other.
In essence, the LTC shareholder and the close friend/family members will be treated as a single creditor group. Once this is achieved, then on the basis that the proportional debt ratio (the percentage the debt bears to the total amounts of debt owed by the LTC that are forgiven at the same time) equals the proportional ownership ratio (the creditor’s percentage of the total effective look-through interests in the LTC), no debt remission income will arise.
In this respect, be mindful therefore that a particular LTC shareholder may still have deemed remission income, if they are outside of the single creditor group (as economically they are now better off as a result of the creditor forgiving the loan).
US LLC binding rulings on FTC's
IR has finalised its five binding rulings, which each provide commentary on when a foreign tax credit may be claimable by a New Zealand investor who has invested in a US LLC.
A US LLC is treated as a partnership for US federal tax purposes, meaning it is the individual members of the US LLC who are responsible for filing their own US federal income tax returns and paying the US income taxes assessed on their respective shares of the LLC income (in practice however, I have found that where non-resident investors are involved, US advisors will often recommend that the LLC elects to pay taxes as a US corporation – so the binding rulings might not be so relevant to your client therefore).
The binding rulings cover the scenarios where an individual investor holds FIF’s of $50k or less (usually therefore just subject to paying tax on dividends); a FIF investment where FDR and the like used to compute annual income; an attributed FIF investment; a CFC investment; and dividends derived from the LLC which is either a non-attributing active foreign investment fund or a controlled foreign corporation.