Opinion & Analysis
OPINION: Keeping up to date with tax laws is a mammoth task.
There are always new tax cases interpreting the law and Inland Revenue officials doing the same thing. And the law itself is constantly evolving, as the Government uses tax as one of its tools for managing the economy, not to mention plugging the various gaps that seem to emerge from time to time.
The 2013 year was like most others - full of mutation. Here are some of the tax topics that were discussed, proposed or implemented during the year.
1. Accommodation allowances. Right at the end of 2012, the commissioner issued a statement explaining her approach to the treatment of accommodation allowances paid to employees, dealing mainly with the issue of temporary relocations.
Then, near the end of last year, the Government introduced a bill that will provide greater certainty as to the tax treatment of such payments. Generally, they will be tax free for a relocation of up to two years, with longer periods allowed for specific projects and in respect of the Canterbury earthquakes.
2. Avoidance. In June, the commissioner released her Interpretation Statement on how Inland Revenue views the law on tax avoidance. It's the first statement released since 1990, and the first since some landmark cases, such as Penny & Hooper, fundamentally changed the law in this area - generally in the commissioner's favour. Most people express amusement at the prospect of trying to work out Parliament's purpose in respect of particular tax provisions, which is now part of the test for avoidance. Around a third of the statement's 559 paragraphs try to provide some guidance on the issue.
3. Bach tax. Following on from Budget announcements, a limitation on the deduction of expenses for holiday homes was introduced, with effect from the current (2013/14) tax year. Previously, expenses were claimed based on the proportion of time a bach is used or available for use as a rental.
The new rules mean that the deductible percentage will generally be less. As a sign that tax reform is not about simplification, officials released a 24 page report on how the new rules will work, full of formulas and exemptions. This will no doubt be a scintillating read for bach owners as they enjoy the summer private use of their investment.
4. Income sharing. Introduced in 2010 by then Minister of Revenue Peter Dunne as part of his coalition deal with National, this bill has made no real progress. That's probably because the estimated cost to revenue is between $240 million and $460m per annum, depending on which option is adopted. Don't expect to see this become law any time soon.
5. Leases. Law changes applying from 1 April 2013 make lease inducement receipts taxable. Case law previously held that these were generally tax-free. To keep things in balance, the same changes provide for deductibility of a lease inducement payment.
6. Multinationals. The spotlight came on international companies like Google and Amazon, with accusations that, based on the quantum of their sales, they do not pay a fair share of tax in the countries that they sell in. New Zealand participated in the development of the OECD's "Action Plan on Base Erosion and Profit Shifting". It tries to deal with the modern world of commerce, much of which is conducted over the internet and requires little, if any, physical presence.
Foreign companies will generally only be taxed in New Zealand on business profits that are made through a "permanent establishment" here. The reality is that Apple doesn't need to set up a shop to sell me iTunes.
While New Zealand can make some changes at home, such as tightening up on thin capitalisation and transfer pricing rules, significant change can only come from redefining what constitutes a permanent establishment - and that is something that will require a concerted international approach.
7. Research and development. New Zealand fancies itself as a knowledge economy. After repealing the short-lived R&D tax credit at the start of its term, the Government is now considering making changes that will allow small companies that are R&D intense (20 per cent of salary costs) to cash out their tax losses. In a separate initiative, there are also proposals that would allow a write-off of so-called "black hole" expenditure, being R&D costs that would otherwise never qualify for a deduction.
8. Superannuation. The taxation of foreign superannuation has been a quagmire for decades. The current law is so complicated I think that even the tax department aren't sure how the rules work. A tax bill proposing significant changes to the rules is working its way through the process and was reported back in November.
Pensions will generally continue to be taxed, while lump sums will be taxed based on a graduated, percentage based scale; the longer a person has been resident in New Zealand, the bigger the percentage that gets taxed. A transitional measure has been proposed whereby people can use a "15 per cent option" if they haven't complied with past requirements to include lump sums as taxable income.
With two large tax bills working their way through the process, this year promises even more change.
It will be interesting to see what other tax surprises emerge in election year 2014.