A Week in Review; Further COV determinations issued | Anti-avoidance IS for temporary loss carry-back regime

Further COV determinations issued

IR has certainly become trigger-happy with its new administrative flexibility powers, last week issuing three further COV Determinations:

Determination 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’ – this variation provides additional time for a person who may wish to elect to change from a six monthly filing period to one monthly filing (primarily due to Covid-19 and the need to obtain GST refunds earlier than otherwise) from 1^st April 2020. Usually the legislation provides that an election to change filing periods takes effect from the end of the taxable period during which the change election is made to IR – so a person wishing to change to monthly filing from 1^st April 2020, would need to have filed their election no later than 31^st March 2020. COV 20/03 however extends the election filing date to 30^th June 2020. Note that the determination only applies to those changing to a monthly filing period from 1^st April 2020, and requires them to remain a monthly filer until at least 30^th September 2020.

Determination COV 20/04: ‘Variation in relation to s DB 31 Income Tax Act 2007 to extend time for writing off bad debts’ – this variation extends the time period for cementing 2020 bad debt deductions. Usually a person has to both determine that a debt is ‘bad’, and then physically write-off the amount in their books, prior to the end of the relevant income year, in order to claim a tax deduction for the bad debt in that relevant income year. So for the 2020 income year, this action should have been undertaken pre 31^st March 2020. COV 20/04 extends this date to 30^th June 2020, provided that the person can show that they did not write off their debt as bad by the end of the 2020 income year as a result of the impacts of Covid-19, and that they have taken into account only information that was relevant at the end of their 2020 income year.

Determination COV 20/05: ‘Variation in relation to s RP 17B(4) of the Income Tax Act 2007 to extend time for tax pooling transfers’ – this variation extends the present 75 day transfer request period to 365 days with respect to the 2019 income year. A person wishing to use a tax pooling intermediary in respect of their 2019 income year (to satisfy provisional/terminal tax obligations or UOMI on either) would usually have had to have made their transfer request no later than 75 days post their terminal tax due date (21^st June 2020 for those with tax agents EOT). COV 20/05 extends that date until 7^th April 2021, provided that the transfer relates to a contract the person has with the tax pooling intermediary that is in place on or before 21 July 2020 to purchase tax pooling funds, and in the period between January 2020 and July 2020 the taxpayer’s business must have experienced (or for June and July 2020 be expected to experience) a significant decline in actual (or predicted) revenue which means that in respect of the 2019 tax year the taxpayer was either:

(a) unable to satisfy their existing commercial contract with a tax pooling intermediary; or,

(b) was, prior to this variation, not able to enter into a commercial contract with a tax pooling intermediary; and that decline in actual or predicted revenue is related to Covid-19.

You should note that COV 20/05 contains no set definition of the term ‘a significant decline in actual (or predicted) revenue’ – so there is no 30% or 40% revenue decline threshold for example as there was to ensure eligibility to claim the wage subsidy.

Anti-avoidance IS for temporary loss carry-back regime

IR has issued Interpretation Statement IS 20/03 ‘Income tax — sections GB 3B and GB 4 of the Income Tax Act 2007 — temporary loss carry-back regime’, to counter you gamers out there who already had your thinking caps on as to how the new temporary loss carry-back regime rules could be utilised to obtain unintended advantages to those contemplated by Parliament when the rules were drafted.

Commonly referred to now as the ‘parliamentary contemplation test’ under the general anti-avoidance provision in section BG 1 as set out by the Supreme Court in Ben Nevis Forestry Ventures Ltd v CIR [2008] NZSC 115, the test targets arrangements that in legal substance satisfy the requirements of a particular provision or regime, but when viewed in a commercial and realistic way, make use of (or circumvent) the provision or regime in a manner that is inconsistent with the provision or regime’s purpose.

When new section IZ 8 was introduced into the Income Tax Act 2007 to establish the temporary loss carry-back regime, introduced in tandem were specific anti-avoidance rules contained in sections GB 3B and GB 4. IS 20/03 provides commentary as to how IR will apply those specific provisions, where:

a company share is ‘subject to an arrangement’ (which includes ‘an arrangement directly or indirectly altering rights attached to the shares’);
the arrangement ‘allows’ the relevant company ‘to meet the requirements’ of the temporary loss carry-back regime; and,
a ‘purpose’ of the arrangement is ‘to defeat the intent and application’ of the regime.

In simple terms IR are concerned with the 49% and 66% shareholding continuity requirements, where taxpayers may enter into arrangements to ensure continuity is not breached ‘on paper’, thereby still enabling them to take advantage of a loss carry-back, whereas ‘off paper’ there has been a breach – for example new investor required to inject cash due to Covid-19, will take a 60% shareholding in respect of that injection, puts the cash into the company now, but share transfer deferred until post end of relevant loss year.

I would suggest that ultimately IS 20/03 may only have a one year application period if the proposed changes to the loss continuity rules do proceed to come into effect from 1^st April 2020 – move to a ‘same or similar business’ test as opposed to the existing 49% ownership continuity requirements.

QWBA on Healthy Homes standard costs

IR has issued QB 20/01, a question we’ve been asked on whether owners of existing residential rental properties can claim deductions for costs incurred in complying with the new Healthy Homes (‘HH’) standards.

IR’s view is that there are four potential scenarios where the costs are likely to be on revenue account and therefore fully deductible in the year incurred:

repairing items that would otherwise meet the standards if operational or in a reasonable condition – so the building already has a heat pump for example that would satisfy HH standards if it actually worked, then the cost to get it working should be on revenue account;
minor additions or alterations not involving repairs that do not change the character of the building;
replacing items on a like-for-like basis in the future where they have previously been treated as part of the building – so while the initial spend may have been on capital account (installing the smoke alarms that are deemed to be on capital account due to changing the character of the building), the subsequent replacement of the item likely to be r&m; and,
record-keeping and providing information in tenancy agreements – so paying a property manager to provide a HH compliance report or services for example.

Otherwise the costs are likely to be capital in nature, particularly where the work involved:

results in the reconstruction, replacement or renewal of the whole asset or substantially the whole asset; or,
goes over and above making good wear and tear, i.e. is not a repair, and changes the character of the asset.

Naturally, the use of the term ‘asset’ in the aforementioned paragraphs, requires identifying the relevant asset, and IR’s 3 step test can be used as guidance in this regard:

Step 1: Determine whether the item is in some way attached or connected to the building. If so, go to step two. If not, the item will be a separate asset.

Step 2: Determine whether the item is an integral part of the residential rental property such that a residential rental property would be considered incomplete or unable to function without the item. If so, the item will be part of the residential rental building. If not, go to step 3.

Step 3: Determine whether the item is built-in or attached or connected to the building in such a way that it is part of the ‘fabric’ of the building. If so, the item will be part of the residential rental building. If not, the item will be a separate asset.

In respect of the present topic, HH expenditure, IR’s view is that step one is almost always met, step two will be met in most cases, and step three is sometimes applicable.

A few other comments of note:

replacements using modern materials are not necessarily capital in nature;
expenditure that is part of an overall project may be capital in nature – IR’s view you cannot break one project down into its revenue and capital items – if capital expenditure exists, then all costs are on capital account for that project; and,
do not overlook the low-value asset rule, particularly when until 17^th March 2021, the threshold is $5,000. So immediate write-off still for costs that would otherwise have been on capital account.

QB 20/01 ends with a commentary on the various types of likely HH expenditure, and IR’s views on the treatment of each.