September 2008
The Commissioner has released a new exposure draft on the "Care and Management of the Taxes Covered by the Inland Revenue Acts" ("Exposure Draft"). The Exposure Draft considers the framework within which the Commissioner exercises his care and management responsibilities provided for under sections 6 and 6A of the Tax Administration Act 1994. This Exposure Draft represents a reconsideration of an earlier draft issued in December 2005 and the resulting submissions, and therefore supersedes the earlier draft. There are a number of differences. Significantly, section 6 is no longer considered paramount to section 6A, rather the Commissioner needs to exercise his care and management functions within the framework of both sections. Also important is that there is less concern regarding the Commissioner "dispensing with the law". This is because if the Commissioner is acting in accordance with sections 6 and 6A, he is acting within the law.
The Exposure Draft states that the Commissioner's responsibility for "care and management" is a question of how the Commissioner collects the taxes imposed by law, as opposed to actually determining the extent of the tax to be imposed. In other words, sections 6 and 6A do not provide a basis for the Commissioner to interpret the tax legislation otherwise than in accordance with conventional principles of interpretation. This is the case even if the statutory provisions in question give rise to anomalous outcomes if interpreted in the conventional way.
The Exposure Draft observes that in collecting taxes the Commissioner must balance the short and long term objectives in allocating resources and administering the tax system. In practice this may mean that the Commissioner can justifiably forgo collecting the highest net revenue in the short term or from particular taxpayers, if he considers that this would result in the collection of more net revenue in the long term or from all taxpayers, having regard to sections 6 and 6A.
Finally, and perhaps of greatest practical significance, the Exposure Draft notes that the Commissioner's duty to collect the highest net revenue over time does not impose any impediment on the Commissioner's ability to settle tax disputes during litigation or pre-litigation. The Exposure Draft states that the Commissioner's ability to settle disputes pre-litigation is, in principle, no different from the Commissioner's ability to settle once litigation has commenced, as long as sufficient information is available for an informed decision to be made. This view seems to differ somewhat from the current practice, whereby the Commissioner seems reluctant to settle matters pre-litigation on a commercial basis (taking into account litigation risk) or with a view to encouraging voluntary compliance generally, but is prepared to do so once Court proceedings have been initiated.
The Exposure Draft also contains a number of examples demonstrating the considerations the Commissioner may take into account under sections 6 and 6A, ranging from a misinterpretation of an Interpretation Statement to the reassessment of a taxpayer's income tax when the problem is industry wide. The weightings of each consideration are to be determined by the Commissioner.
To view a copy of the Exposure Draft click here.
The Government has released a discussion document, "Streaming and refundability of imputation credits" ("Discussion Document"), which invites submissions on whether existing anti-streaming rules inhibit normal commercial transactions. Broadly, the anti-streaming rules prevent imputation credits being directed to those shareholders in a company that can most effectively use them.
The Discussion Document also requests submissions on the possibility of imputation credits being refundable for certain shareholders. It acknowledges that, because at present imputation credits are not refundable, the imputation regime effectively taxes returns on shares held by tax exempt entities (such as charities) at the company tax rate. This is inconsistent with the underlying policy of maintaining as close to a fully integrated system as possible, whereby corporate profits are subject to tax at the tax rates of the shareholders who own the company.
The Discussion Document also acknowledges that it has been issued during the current talks between the New Zealand and Australian Governments about the possibility of mutual recognition of franking and imputation credits. It states that its purpose against this background is to make sure private sector concerns about the imputation system are clearly understood by the Government, and that this will be useful whether or not mutual recognition proceeds.
Submissions on issues raised in the Discussion Document are due by 10 October 2008.
In February 2008 the Government indicated that it would amend the law relating to the tax treatment of certain stapled securities. This was in response to a concern that deductible interest could be paid as a substitute for dividends, eroding the New Zealand tax base where the investor was a non-resident.
Draft legislation was released by Inland Revenue in April 2008. Legislation that reflects the April draft was introduced to Parliament on 27 August 2008 by way of Supplementary Order Paper to the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill, which is currently before Parliament. The new rules will apply to stapled securities issued on or after 25 February 2008 (which is when the proposal was announced).
The rules will apply to a debt security issued by a company if:
- that debt security provides funds to the issuer, and would give rise to an interest deduction for the issuer; and
- the debt security is stapled to a share (not being a fixed rate share) in the issuer or in any other company.
A debt security will be considered to be “stapled” to a share if the debt security “can, or ordinarily can, be disposed of only together with the share” and the issuer of the debt security or the share "is a party" to the arrangement that requires the instruments to be disposed of together. We understand that the second requirement is intended to narrow the rules. In particular, we understand the intention is that shareholders of private companies should be able to agree that debt and shares must be disposed of together, without those instruments being treated as stapled securities.
Where the rules apply, the issuer of the debt security is not entitled to a deduction for any interest payable under it and the debt security will be treated as a share for tax purposes.
The Court of Appeal's recent decision in Beckham v CIR [2008] NZCA 301 illustrates the practical implications of the Court's earlier decision in Commissioner of Inland Revenue v Zentrum Holdings [2007] 1 NZLR 145. In Zentrum the Court had held that Inland Revenue is not restricted to its originally stated grounds of assessment when defending an assessment in challenge proceedings. The taxpayer in Beckham had been assessed on the proceeds of disposing of land, under section CD 1(2)(f) of the Income Tax Act 1994 (a subdivision/development undertaking or scheme commenced within 10 years of acquiring the land). The Taxation Review Authority found against the Commissioner on that ground, concluding that section CD 1(2)(f) did not apply. The Authority went on to conclude, however, that section CD 1(2)(e) (at least 20% of gain due to granting of resource consent) was applicable.
The High Court on appeal, and the Court of Appeal on further appeal, upheld the Commissioner's ability to rely at trial on alternative grounds to support his assessment, which differed from the original grounds. The Court of Appeal observed that under the Tax Administration Act 1994 the High Court or the Taxation Review Authority has the same powers that the Commissioner has, and so can make any assessment the Commissioner could have made.
The only restrictions would appear to be that if statements of position have been exchanged, the evidence exclusion rule will generally restrict both parties to matters relied on in the statements of position, and, further, that rules of civil procedure will apply so as to prevent either party from being ambushed at trial by an argument of which the party did not have reasonable notice. Neither of those applied in Beckham. The alternative argument under section CD 1(2)(e) had been foreshadowed in the parties' statements of position. Further, the taxpayer had the opportunity to call evidence in respect of the section CD 1(2)(e) issue, but declined to do so.
To view a copy of the case click here.
In Boanas v CIR (Unreported, CIV 2007 485 360, 12 August 2008), the taxpayers had been assessed on the basis that they had derived income from the sale of land acquired with a purpose or intention of selling it, in terms of section CD 1(2)(a) of the Income Tax Act 1994. The land had been bought and sold by a partnership. The judgment addressed three main issues. The first was how purpose or intention should be assessed in the context of a transaction undertaken by a partnership. The second was what was required to amount to a "purpose or intention" of selling or disposing of land. The third concerned an argument that the time bar applied.
Inland Revenue argued that in determining whether there was the requisite purpose or intention of resale, it was the partnership's intention - and not the individual taxpayers' intentions - that was relevant. The High Court agreed with Inland Revenue on this point. Therefore, inferences that could be drawn from particular documents or from the conduct of a particular partner could be attributed to the partnership as a whole. That said, on the facts, the point turned out to be immaterial; on either basis, it could be concluded that the taxpayers did not have the requisite purpose or intention.
The judgment also discusses what will amount to the acquisition of land with a "purpose or intention" of selling or disposing of it. Taxpayers, when acquiring land, may not intend to hold the land forever, and may have in mind that they could sell the land in certain circumstances (for example if family circumstances change, or if a business venture does not succeed as planned). In the Boanas case, Inland Revenue made much of a statement by one of the taxpayers that the land in question was acquired as a "stepping stone" to a larger farm property. The Court was not persuaded that this, and other statements reflecting a desire by the taxpayer to "ultimately" sell the land, were determinative against the taxpayers on the purpose or intention point. Rather, the Court characterised those statements as reflecting no more than a prospect or aspiration of future sale, which does not amount to a purpose or intention as required by the legislation.
Dobson J also dismissed a cross-appeal by the taxpayer on the grounds that the assessments had been made out of time. As a result of an internal system glitch, the assessment notices were mistakenly "held" in the Inland Revenue system after the Commissioner (by way of delegated authority to an investigating supervisor) had authorised the making of the assessments. Dobson J held that because the Commissioner's delegate had regarded the signing off of the assessments as definitive, the assessments had been made at that point (not at the point when the notices were issued), and were consequently made in time.
The Australian Board of Taxation ("Board") is currently undertaking a review of Australia's foreign source income anti-deferral regimes (the controlled foreign company rules, the foreign investment fund rules, the transferor trust rules and the deemed present entitlement rules). As part of the review, the Board has released a discussion paper, a position paper and an issues paper.
The Board's focus is on identifying ways to reduce the complexity and compliance costs associated with Australia's foreign source income anti-deferral regimes, including whether they can be collapsed into a single regime. The Board is also examining whether the regimes strike an appropriate balance between effectively countering tax deferral and unnecessarily inhibiting Australians from competing in the global economy.
The timing of the review coincides with New Zealand's current reform of its international tax rules, which is only just catching up with Australia's current active/passive CFC regime. Given the significance to New Zealand businesses of the Australian economy, and the importance of the tax system to facilitating competition in the global economy, the Australian developments will be of interest to New Zealand businesses looking to expand internationally.
To view a copy of the discussion paper, position paper or issues paper click here.
In January the Australian Government released the Inspector-General of Taxation's report examining the Australian Taxation Office's ("ATO") administration of GST audits for large taxpayers.
Of interest from a New Zealand perspective, the report recommends that the ATO fully remit general interest charges in GST audit cases which result in adjustments involving no net loss to the revenue base, such as wash transactions, cases involving documentation issues and cases where GST has been paid by the wrong entity. The report also proposes replacing the general interest charges with an appropriate penalty in these cases. The ATO did not agree with these recommendations. The Inspector-General subsequently recommends that the Government consult with the community on the need for legislative changes which have the effect of requiring or allowing the ATO to follow these recommendations.
More recently in July the Australian Government released an issues paper for a general review of the Australian GST administration framework: Review of the Legal Framework for the Administration of the Goods and Services Tax. The issues paper indicates that the Australian Commissioner has adopted suggestions in the Inspector-General of Taxation's report in his administrative practices (Tax Office, Practice Statement Law Administration (PS LA 2008/9)), and invites submissions on the effectiveness of the current practices.
To view a copy of the report click here, to view a copy of the issues paper click here, or to view a copy of the Tax Office practice statement click here.
Recently, the United Kingdom has enacted changes to the treatment of United Kingdom tax resident individuals who are not domiciled in the United Kingdom. These changes could potentially apply to New Zealand expatriates based in the United Kingdom, who remain domiciled in New Zealand. The changes apply from 6 April 2008, which is the beginning of the current tax year for United Kingdom purposes.
The so-called "remittance" basis of taxation applies to United Kingdom resident non-domiciled individuals and only subjects their offshore investment income and capital gains to United Kingdom tax when the income/gains are remitted to the United Kingdom. Changes have been made to extend the concept of remittance to remove what the United Kingdom Inland Revenue regarded as loopholes. The definition of remittance is drafted widely and includes any money or other property brought to, or received or used in, the United Kingdom by or for the benefit of a relevant person, or any service which is provided in the United Kingdom for the benefit of a relevant person (which includes a person connected with the resident non-domicile).
In addition, from 6 April 2008, non-domiciles who have been resident in the United Kingdom for 7 out of the past 9 tax years and who want to claim the remittance basis will have to pay an annual levy of £30,000.
To view a copy of the legislation click here.
The OECD has redrafted Article 7 of the OECD Model Tax Convention (to be included in the next update of the Model Tax Convention, which is scheduled for 2010). This Article is important as it gives the primary taxing rights over business profits of an enterprise to the state of residence of that enterprise. The exception to this is when the enterprise carries on business in another state through a permanent establishment situated there. In such a case, the profits attributable to the permanent establishment are taxable in that other state.
Interpretations of how such profits are to be attributed have been varied, and the OECD has redrafted the Article for the stated purpose of, broadly, improving certainty. The proposed Article 7 contains the following significant changes:
- Previous wording is clarified to reflect the arm's length principle when describing how to determine profits attributable to the permanent establishment.
- Paragraphs 3 to 6 of the current Article 7, which provide specific rules relating to the determination of profits attributable to the permanent establishment, are to be removed. Briefly, the reasoning behind this is either that the paragraphs were redundant due to the clarification of the arm's length principle, or because the paragraphs were inconsistent or potentially inconsistent with that principle.
- If double taxation should occur, a new paragraph 3 provides for the determinative calculation of how profits are to be attributed.
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