Taxation (Annual Rates, GST and Miscellaneous Provisions) Bill

Taxation (Annual Rates, GST and Miscellaneous Provisions) Bill

Officials’ Report to the Finance and Expenditure Committee on Submissions on the Bill

21 August 2000

Prepared by the Policy Advice Division of the Inland Revenue Department

and the Treasury

CONTENTS

GST

Overview of submissions

Tax-free shopping

Deductions for GST in calculating tax due on gross income

The specific anti-avoidance provisions

Definition of “associated persons”

Issue: Implications of the definition

Issue: Iterative universal tripartite test

Issue: Defacto relationships

Issue: Scope of the universal tripartite test

Financial services

Issue: Debt collection services

Issue: Financial options

Issue: Deliverable and non-deliverable futures contracts

Issue: Deliverable futures contracts for money

Definition of “input tax”

Issue: Reform does not go far enough

Issue: Clarifying the application of the reform

The second-hand goods input tax credit

Issue: Matching input tax credit claims and output tax paid on deregistration

Issue: Whether the proposal should proceed

Issue: Alternative options for reform

Issue: Consistency with the taxation of value added

Issue: Effect of the proposed changes to the definition of “associated persons”

Tokens, stamps and vouchers

Issue: The need for proposed section 5(11H)(b)

Issue: Scope of the terms “token”, “stamp” and “voucher”

Issue: Options to recognise GST to be mutually exclusive

Issue: Issuer election of redemption option

Issue: Certainty of GST treatment

Issue: Clarification of clause 70(4)

Issue: Clarification of the redemption option

General insurance

Issue: The proposal to clarify the scope of input tax and output tax in relation to payments under general insurance contracts

Issue: Treatment of payments under general insurance policies

Subrogation payments

Issue: The relationship between section 5(13) and 5(13B)

Issue: Excluding as subject to output tax the interest component of a payment
under a contract of insurance

Issue: The inability to obtain input tax credits in relation to subrogation payments

Issue: Remedial amendment to section 5(13B)

Issue: Application date of the amendment

Issue: The exclusion from output tax under proposed section 10(15C) of the
interest component of a subrogation payment

Time of supply for rates

Uplift to market value rules

“Cash price”

Deregistration

Exported goods and services

Issue: Extending the zero-rating of exported information services

Issue: The definition of “foreign-going ship”

Issue: Goods supplied “free alongside ship” or “ex-factory”

Zero-rating of going concerns

Issue: Time at which the status of a taxable activity as a going concern should be ascertained

Residential accommodation

Penalty interest

Last day of taxable period

Issue: Greater flexibility in allowing taxpayers to choose the last day of their
taxable period

Issue: Impact on previously agreed positions with Inland Revenue – “sound
commercial reason” and “tax timing advantage”

The six-monthly return filing period

Issue: Increase the threshold

The payments basis of accounting for GST

Issue: Access to accounting for GST on a payments basis

Deferred settlements

Issue: Whether the proposal is necessary

Issue: The 93-day exclusion period should be extended

Issue: Alternative solutions

Issue: Whether, if the proposed section 19D is to be enacted, there should be
some amendment to the timing of deduction of input tax credits associated with
the transaction

Issue: The proposal to allow the Commissioner to aggregate transactions with a
low value

Issue: Clarification as to whether the “$200,000” threshold is exclusive of GST

Input tax credits for goods imported and subject to a “change in use”

Issue: The retrospective application of the proposal from 1 October 1986 other than where the Commissioner has agreed in writing to a claim before 16 May 2000

Issue: Application of shortfall penalties

Issue: General provision to preserve taxpayers’ rights whenever there is
retrospective tax legislation

Issue: Whether the proposal in any event produces the right policy outcome

Issue: The ambit of the proposal

Issue: The meaning of “in writing”

Adjustments for changes in use

Background

General issues

Issue: Defer any changes until the general review

Issue: Communication on the proposed changes

Issue: Value of adjustments

Output tax adjustments

Issue: Scope of adjustments

Issue: Extent of adjustments

Issue: Timing of adjustments

Issue: The threshold below which taxpayers are not required to make adjustments

Issue: Calculating the extent of taxable and non-taxable use

Issue: Application date

Input tax adjustments

Issue: Scope of adjustments

Issue: Timing of adjustments

Issue: Tax advantages arising from the valuation of changes in use

Issue: Exception from requirement to make output tax adjustments for changes
in legislation

Tax invoices

Issue: Threshold for when an abbreviated tax invoice may be issued

Issue: Offence not to issue a tax invoice

Debt factoring

Issue: The amendment should not proceed

Issue: Clarification of amending legislation

Specified agents

Issue: Commissioner’s right to withhold payments

Registration threshold

Issue: Registration threshold should be increased to $50,000

Issue: The registration threshold should be indexed to inflation

Unincorporated bodies

Issue: Liability of trustees

Issue: Liability of members’ estates

Issue: Definitions in section 57

General anti-avoidance provision

Issue: Publication of a standard practice statement

Issue: The need for section 76(5) – (7)

Issue: The form of section 76(6)

Issue: The scope of section 76(5) – (7)

Issue: The breadth of the definition of “tax avoidance”

Minor drafting changes

Alienation of income - the attribution rule

Overview of submissions

Purpose of the attribution rule

Issue: Attribution rule’s impact on structures

Issue: The need for an attribution rule

Issue: Attribution rule wider than just “anti-avoidance”

Application date

Issue: Retrospective application of the proposal

Issue: Application to entities established before 1 April 2000

Scope of the attribution rule

Issue: Proposed threshold

Issue: Exemption for legitimate business

Issue: Application only when a certain percentage of income is not appropriately distributed

Issue: Application to partnerships

Issue: Implications for non-residents

Deriving 80 percent of income from one source

Issue: Amendment to the income measurement period

Issue: Exemption where income is derived independently from associated
companies

Issue: Scope of the 80 percent rule

Double taxation issues

Issue: Implications for companies

Issue: Double tax of trusts

Assets

Issue: Substantial assets

Issue: Necessary part of the business structure

Issue: Premises

Issue: Finance leases and hire purchase

Issue: Proportion of private use

Issue: Quantum of depreciable assets

Issue: The 25 percent rule

Issue: Choice of methods of calculating private proportion of vehicle usage

Associated persons, relation tests

Issue: Associated persons

Issue: Related persons test

Issue: Clarification that government departments are not deemed to be associated
sources of income

Mechanical calculations

Issue: Calculation of interposed income

Issue: Apportionment of expenses

Issue: Concessionary expense allocation rules

Issue: Quantifying the value of services

Issue: More than one related personal service provider

Other issues

Issue: Transfer and utilisation of losses

Issue: Attribution of provisional tax

Issue: Source deduction

Issue: Alignment with new fringe benefit tax rules

Issue: Clarification of the relevant income year

Issue: Clarification of dates for association, etc.

Issue: Alignment of return filing dates

Issue: Multiple intermediaries

Miscellaneous issues

Issue: Numbering of sections

Issue: Use of the term “personal services”

Issue: Nil amounts to be attributed

Issue: Terminology

Issue: Location of definitions

Other policy changes

Group investment fund management fees

Deductions for 1998-1999 accident insurance base premiums

Issue: Year in which ACC base premiums are payable

Gifts of financial arrangements

Foreign tax credits

Issue: Prevention of abuse of foreign tax credit rules

Issue: Drafting issues in rules to prevent abuse of foreign tax credit

Tax simplification for wage and salary earners

Issue: Amendments to the income statement process

Issue: Increasing the flexibility of the rebate claim process

Issue: Income statements and student loan borrowers

Issue: Income statements for casual agricultural employees

RWT on interest paid by Inland Revenue

Issue: Application of the RWT rules

Income tax rates

Incremental penalty for late payment of tax

Issue: Application date

Issue: Cancellation of incremental penalties where instalment arrangements
are being met

Grace period from use-of-money interest

Serious hardship and financial difficulty

Issue: Date of effect

Issue: Applications in writing

Issue: Applications in writing – date of effect

Alignment of payment dates

Remedial amendments

Financial arrangement terminology

Foreign investor tax credit rules

Definition of “tax”

Provisional tax for those changing balance dates

Issue: Provisional tax due dates and taxpayers commencing business

Issue: Provisional tax due dates and new provisional taxpayers

Issue: Provisional tax instalment dates and transitional income years

Issue: Instalments of provisional tax for use-of-money interest purposes

Issue: Late payment penalties for provisional tax

Issue: Provisional tax instalments using the uplift method

Issue: Definition of “provisional taxpayer”

Issue: Use of the term “provisional tax payable”

Minor remedial amendments

Issue: Amendment to section 90 of the Tax Administration Act 1994

Issue: Amendment to section 124A(3) of the Tax Administration Act 1994

Issue: Amendment to Income Tax Act 1994

GST

1

Overview of submissions

The bill contains proposals for reform of the Goods and Services Tax Act 1985 contained in the discussion document on the GST review. It also contains other issues raised in submissions on the discussion document or identified by officials.

In 1997 the then Government agreed that officials should undertake a post-implementation review of GST in accordance with the Generic Tax Policy Process. The Government discussion document GST: A Review was released in March 1999.

The objectives of the GST review were to:

• reduce compliance and administrative difficulties in the practical application of GST;
• limit the scope for obtaining unintended GST advantages.

The GST proposals are wide-ranging and include extensive base maintenance, compliance cost and remedial measures. This bill does not, however, address every single GST issue that may need to be addressed. The review of GST continues, and the Government’s tax policy work programme already contains further specific areas for review, particularly in the financial and imported services areas.

Submissions on the GST proposals in the bill covered a wide range of issues. The main recommendations following submissions are as follows:

• Input tax credits for changes in use of imported goods

A significant number of submissions opposed the retrospective application of the proposed legislation to remove the ability of a taxpayer to claim a one-off input tax credit in relation to assets introduced into the GST base from overseas. Officials are not recommending any changes to the proposal because of the revenue risk involved and the aggressive nature of the arrangements.

The proposed legislation contains a savings provision from the retrospective nature of the proposal. The savings provision requires that the taxpayer must have agreed with the Commissioner, in writing, to the claim. Some concerns have been expressed about the uncertainty of this requirement, and officials are therefore recommending clarification and are discussing the wording with submissioners.

• Associated persons

Some submissions expressed concern at the breadth of the proposed definition of “associated persons”. Officials consider that the general scope of the proposed definition is appropriate but are recommending some minor amendments to clarify the application of the definition.

• Second-hand goods

The bill proposes to limit the input tax credit for second-hand goods to the GST cost initially paid by the vendor in relation to sales of appreciating assets (such as land) by a non-registered person to a registered associate.

The proposal addresses a base maintenance issue involving associates entering into transactions primarily to claim an input tax credit where there is no output tax liability on the other side. The issue could be addressed in several ways but we consider the solution proposed is the simplest and best-targeted option.

• Deferred settlements

The proposed legislation addresses a revenue risk caused by the difference between the time at which GST is returned (if the vendor accounts for GST on a payments basis) and an input tax credit claimed. (If the purchaser is on the invoice basis this will be immediately.) The bill is drafted to exclude transactions when settlement is required within 93 days. Submissioners commented on whether there was a need for amendments to target deferred settlements and also noted that the 93-day grace period would not be sufficient for some business transactions. While officials are convinced that reform is required to prevent the growing number of deferral arrangements, it is acknowledged that the proposal could be narrowed in its focus and thereby ensure that genuine transactions are not caught. Officials therefore recommend that the time period in which a deferred settlement will not be subject to the proposed amendments be extended from 93 days to 365 days.

• Last day of taxable period

The proposed legislation limits the extent to which taxpayers are able to use an alternative day as the last day of their taxable period. The proposal was recommended as some taxpayers have been able to use the existing right to choose an alternative last day of taxable period to obtain sizeable tax timing advantages.

Officials have met with representatives from the Corporate Taxpayer Group to discuss their submission on this proposal. From these discussions, and the written submissions, new issues have been raised concerning the ability of exporters to mitigate the cash flow disadvantages of GST. In officials’ view, these issues require further analysis, and we recommend that the relevant clauses be removed from the bill. Officials will report to the Government after further consideration of the cash flow impacts of GST on exporters.

• One-off adjustments for changes from exempt to taxable use

There is currently some doubt as to whether it is possible to make one-off, rather than periodic, adjustments for assets with a value in excess of $10,000. For revenue protection reasons, for assets shifting from non-taxable to taxable use the bill did not extend the ability to make on-off claims beyond a proposed threshold of $18,000.

A submission has been made on behalf of Community Housing Limited that significant compliance costs would arise from this limitation where assets regularly undergo a 100 percent change in use. To address this concern, and at the same time reduce the revenue risk in providing one-off adjustments, officials recommend that taxpayers be required to apply to the Commissioner when claiming a one-off input tax credit in relation to 100 percent change in use from making exempt supplies to taxable supplies. The taxpayer will have to satisfy a number of criteria, including that one-off adjustments are also made for taxable to non-taxable changes in use, before the Commissioner will approve such an adjustment.

• General insurance

Officials recommend that amendments affecting the treatment of interest included in subrogation payments be removed and the issue deferred for further consideration as part of the planned review of the GST treatment of financial services. This change has been agreed with the Insurance Council.

To address other concerns expressed by the Insurance Council, officials recommend the following changes to the proposed legislation affecting the treatment of general insurance:

-The clause that would impose a GST liability on an insured person in relation to an insurance payment to a third party (if registered for GST) should be amended to place the liability instead on the third party where the third party receives the payment. This change is recommended after the Insurance Council indicated that the existing proposal would impose significant compliance costs on the industry.

-The inclusion of further amendments to clarify the treatment of subrogation payments and the availability of an input tax credit for such payments.

• Definition of “input tax”

Submissions were received that suggested that the proposed reform did not go far enough to resolve inconsistencies that existed between the application of the Goods and Services Tax Act 1985 and the Customs and Excise Act 1996. Officials recommend further legislative amendment should be made to make the reforms more effective. These reforms will make it easier for agents of non-resident principals (who are selling the non-resident’s goods in New Zealand) to claim an input tax credit for GST levied at the border.

• Remedial and drafting matters

Officials have made a number of other recommendations to clarify the proposals contained in the bill and make minor drafting changes.

• Tax-free shopping

Although not related to any of the matters contained in the bill, an extensive submission was received from Global Refund, with support from the Retail Merchants Association, concerning the introduction in New Zealand of GST refund scheme for tourists. Submissions note that such a scheme in New Zealand would compare favourably with the refund scheme recently introduced in Australia. Officials recommend that at this stage the submission be declined. Officials will report to the Government at a later date on the likely benefits and costs associated with tax-free shopping.

Tax-free shopping

Clause: N/A

Submissions

(4 – Retail Merchants Association of New Zealand Inc, 18 – Global Refund)

A GST refund scheme on purchases by tourists should be introduced in New Zealand by January 2001 to promote retailing, tourism and exports, thus providing significant economic benefits. The introduction of an effective refund system in New Zealand would compare favourably with the refund scheme recently introduced in Australia.