September 2009

Contents:

The Taxation (International Taxation, Life Insurance and Remedial Matters) Bill ("Bill") passed its third reading in Parliament under urgency on Thursday 17 September.  The Bill will become law when it receives the Royal Assent, which is expected by early October.

The Bill contains a number of major tax reforms, including:

1. Major changes to the international tax rules (including most notably, the introduction of an active income exemption from attribution of income under the CFC rules). These reforms generally apply for income years beginning on or after 1 July 2009.
2. Changes to the associated persons definitions, in most respects broadening the circumstances in which two or more persons will be "associated".  These changes could have wide-ranging ramifications, given that the concept of "associated persons" is used in numerous provisions throughout the Income Tax Act.  The new definitions will generally apply from the commencement of the 2010-11 income year.  However, for the purposes of determining the assessability of gains from the sale of land, the new definitions apply in respect of land acquired by the taxpayer and (where relevant) land on which improvements are begun, on or after the date the Bill receives the Royal Assent.
3. Life insurance tax rules, which apply from 1 July 2010, or from an earlier income year which includes 1 July 2010 if the life insurer chooses.

The Bill also contains numerous miscellaneous technical amendments, including remedial amendments to the portfolio investment entity rules and offshore portfolio share investment (ie foreign investment fund) rules.

An officials' issues paper released last week recognises the importance of a well functioning corporate bond market in New Zealand, and the possibility that the current approved issuer levy ("AIL") and non-resident withholding tax ("NRWT") regimes are hindering the development of New Zealand's corporate bond market.  Officials appear to have accepted, in principle, a long-held concern that AIL/NRWT increases the cost to New Zealand businesses of borrowing on the international capital markets, because non-resident lenders generally require a return calculated on an after AIL/NRWT basis even where tax credits for withholding taxes are available to the bond holder in its home jurisdiction. 

The issues paper proposes that AIL could apply at a rate of 0% for interest paid on certain "qualifying bonds" (as AIL is not available on interest paid to associates the proposal does not extend to lending between associated persons).  A "qualifying bond" would be a debt security that belongs to a group of identical debt securities that satisfy either a "widely held test" or a "stock exchange test".  These tests would be broadly as follows:

1. The widely held test would require that: (i) the debt securities be held by at least 100 non-associated investors (or investors that could not reasonably be expected by the issuer to be associated); and (ii) no person (or group of persons that the issuer could reasonably expect to be associated with each other) holds more than 10% of the debt securities (disregarding securities initially held by an underwriter for up to a year).
2. The stock exchange test would require that the debt securities be listed on a recognised stock exchange.

These proposed tests are derived from Australia's corresponding "Public Offer Test Exemption" (in section 128F of the Australian Income Tax Assessment Act 1936).  However, there are some significant differences, in particular:

1. The proposal includes only two of the four tests from the Australian exemption. 
2. The widely held test in the issues paper focuses on who the debt securities are "held by" and it is proposed that this would be retested annually.  The difficulty with this aspect of the proposal is that an issuer has no control over who holds its debt securities at a given time; indeed the whole point of raising debt by way of tradable securities is to enable the securities to be dealt with in the secondary market.  This issue does not arise under the Australian exemption which focuses on the position as at the point debt securities are "offered for issue".  The same issue arises in relation to the requirement that no person (including associates) hold more than 10% of the debt securities (there is no corresponding requirement in the Australian widely held test).
3. The proposal also suggests specific exclusions for private debt placements, debt that is not widely offered and asset-backed securities. 

Submissions on the issues paper may be made to the Policy Advice Division of Inland Revenue until 30 October 2009. 

To view a copy of the issues paper please click here.

New Zealand

In certain circumstances, it may be advantageous for taxpayers contemplating a termination or reduction in scale of a taxable activity to deregister for GST prior to the asset sales giving effect to that termination or scaling back, as the value of the deemed supply of those assets on deregistration may be less than the value to be realised on disposal.  The High Court recently considered the Commissioner's ability to reinstate a GST registration, so as to in effect claw-back that advantage (Thompson v CIR (2004-442-571, Nelson Registry, 21 August 2009, Dobson J)).  The case is a sequel to the Court of Appeal's decision in Lopas v CIR (2006) 22 NZTC 19,726 (CA), which addressed this situation.

In Lopas the Court of Appeal held that, in determining whether the taxpayer's taxable supplies would exceed the threshold referred to in section 52(1) of the Goods and Services Tax Act 1985 ("Act"), the Commissioner could properly have regard to sales of property (including as part of the termination or reduction in scale of a taxable activity) that were "planned" as at the taxpayer's initial deregistration date.  Further, the Court held that the Commissioner could "re-exercise" his discretion to accept a taxpayer's deregistration if that decision had been based on erroneous or incomplete information.  As a result of the new deregistration date set by the Commissioner in that case, GST was charged on the actual sale and sale proceeds, rather than on a deemed supply of the property at cost immediately prior to deregistration under section 5(3) of the Act (GST on the actual sale being significantly greater than GST on a deemed supply at cost).

Similarly in Thompson, the High Court, applying Lopas, considered whether each of three sales was "planned" at the time of deregistration, and whether the Commissioner could impose a new deregistration date on the basis that he was not fully informed in respect of the subsequent sales at the time of granting the taxpayer's request for deregistration.  The Court's conclusions on those two points would determine whether GST would apply to each of the three sales.

The Court began by considering whether the taxpayer's first sale was "planned" as at the taxpayer's initial GST deregistration date, 30 November 1999.  The Court found that the first sale was sufficiently "choate" as at 30 November 1999 to be "planned", and held that the Commissioner could defer cancellation of the taxpayer's GST registration from 30 November 1999 to 31 July 2000 so that GST was imposed on that sale.  

As a consequence of the new deferred deregistration date, GST was also imposed on a second sale which occurred in March 2000.  It should be noted that GST was imposed on the second sale even though it was found not to be planned as at the taxpayer's initial deregistration on 30 November 2000. 

Finally, the Court held that the Commissioner could not defer cancellation of the taxpayer's GST registration beyond 31 July 2000 which the Commissioner sought to do in order to impose GST on a third sale in September 2000.  This was on the basis that the third sale was not sufficiently "choate" to be "planned" as at the taxpayer's deferred deregistration date (31 July 2000).  Instead, GST was imposed on a deemed supply immediately prior to the taxpayer's deferred deregistration date (based on the cost of the property).

It will be important to consider Thompson (and Lopas) if it is foreseeable that property retained after deregistration from GST may be sold within 12 months of the de-registration date.  In practice the Commissioner now has an incentive to assert that post-deregistration sales were "planned" as at the deregistration date, particularly in relation to property acquired before 1 October 1986 (deemed to be supplied at the lesser of cost and open market value immediately prior to deregistration, under section 10(8) of the Act) and property which increases significantly in value between deregistration and sale.  (As it applied prior to 10 October 2000, section 10(8) of the Act was not limited to property acquired before 1 October 1986.)

To view a copy of the case please click here.

Australia

In Australia, as in New Zealand, the Commissioner of Taxation has statutory powers to require in certain circumstances that a third party who owes money to a taxpayer, deduct and pay to the Commissioner all or part of the amount owing to the taxpayer, in satisfaction of taxes or other amounts owing by that taxpayer to the Commissioner.  In New Zealand, such powers are found in a number of Inland Revenue statutes.  The most commonly applicable provisions are section 157 of the Tax Administration Act 1994 (applicable where the taxpayer is in default in relation to income tax) and section 43 of the Goods and Services Tax Act 1985 (applicable where the taxpayer is in default in relation to GST).

A recent decision of Australia's highest Court considered the relationship between such provisions (in the particular case, section 260-5 of Australia's Taxation Administration Act 1953) and section 500 of the Corporations Act 2001 which relevantly provided that "any attachment … put in force against the property of the company after the passing of the resolution for voluntary winding up is void".  That provision has some similarities with section 248(1)(c)(ii) of New Zealand's Companies Act which, with effect from the commencement of liquidation, prevents any person from exercising or enforcing or continuing to exercise or enforce, "a right or remedy over or against property of the company".

The taxpayer, Bruton Holdings Limited ("BHL"), was the trustee of a charitable trust.  BHL had deposited around $470,000 into the trust account of a law firm, Piper Alderman, in connection with costs and disbursements relating to litigation that the trust was engaged in.  Administrators were appointed to BHL, and a few months later BHL's creditors passed a creditors' resolution to place BHL into liquidation. 

The Commissioner of Taxation ("Commissioner") had assessed BHL for tax, and had issued a notice under the Taxation Administration Act 1953 to Piper Alderman requiring the amount in the trust account to be paid to the Commissioner in satisfaction of BHL's tax liability as a trustee.  The Commissioner argued that the notice was valid, despite the fact that it was issued after the commencement of the liquidation.

The particular question the Court had to consider was whether the Commissioner's notice to Piper Alderman under section 260-5 was an "attachment" against the property of the company.  In considering that question, the Court discussed in broader terms the relationship between the Commissioner's tax recovery powers and the provisions governing company liquidations.  The Court observed that permitting the Commissioner to exercise his section 260-5 power concurrently with the company's liquidation would arguably give the Commissioner a preference in respect of amounts owing to the company.  This, the Court recognised, was at odds with the policy reflected in both the Taxation Administration Act 1953 and the Corporations Act 2001, to the effect that, aside from specified preferred creditor claims, the Commissioner should rank pari passu with a company's other creditors.

Consistently with those policy considerations, the Court concluded that the section 260-5 notice was an "attachment" in terms of section 500 of the Corporations Act 2001.  Having been issued after the commencement of the company's liquidation, the notice was therefore void.

The language of the relevant Australian provisions does differ from the language used in the equivalent New Zealand provisions.  Nonetheless, the High Court's comments on the more general issue of the relationship between the Commissioner's tax recovery powers and the general liquidation provisions are likely to be relevant should a similar issue arise in New Zealand.  The case is also a useful reminder of the fact that provisions in the tax legislation do not exist in a vacuum, but rather must be considered alongside other statutory provisions and legal principles.

To view a copy of the case please click here.

New Zealand and Singapore last month signed a new double tax agreement ("DTA") that will replace the present 1973 agreement.  The new agreement will come into force after both countries have given legal effect to it.  In New Zealand this will occur by way of an Order in Council.  The new agreement will then apply in respect of withholding taxes from the first day of the second month following the date on which the agreement enters into force, and in respect of all other taxes for income years beginning on or after the 1 April following the date on which the agreement comes into force.

The revised DTA contains numerous changes, mostly directed at bringing the DTA more closely into line with the OECD model, and hence with most of New Zealand's most recently concluded DTAs.  The revised DTA also reflects New Zealand's recent move to negotiate reductions in source country tax limits in respect of dividends, interest and royalties.  It is interesting in this regard to compare the approach taken in the Singapore DTA with that taken in the two other revised DTAs (being the Protocol with the United States signed last December, and the new DTA with Australia signed in June) which New Zealand has signed, containing reduced source country tax limits.

The revised limits for source country tax on dividends, interest and royalties are as follows:

1. For dividends (formerly 15%):
   1. 5% where the recipient is a company that owns, directly, shares representing at least 10% of the voting power in the payer;
   2. 15% in all other cases.
   In contrast to the revised DTAs with Australia and the United States, there is no provision eliminating source country tax where the recipient holds 80% or more of the voting power in the company.  It appears that the difference reflects Singapore's approach of retaining the ability to tax on the basis of source, non-portfolio dividends, to the extent of 5%.
2. For interest (formerly 15% in the case of non-associated persons, with no limit under the DTA in the case of interest payable between associated persons):
   1. 0% where the interest is derived by a government body;
   2. 10% in all other cases.
   In contrast to the revised DTAs with Australia and the United States, there is no provision eliminating source country tax on interest paid to an unrelated financial institution.  Given New Zealand's insistence, in the revised DTAs with Australia and the United States, on retaining its ability to impose the 2% approved issuer levy on such interest, it can be assumed that the non-inclusion of the exemption for such interest is in accord with New Zealand's preferred approach. 
3. For royalties, 5% (formerly 15%).  This is in line with the position in the revised DTAs with Australia and the United States. 

The new DTA also contains other developments, including:

1. Numerous amendments to the "permanent establishment" definition, as well as the replacement of the previous Business Profits Article (based on the "force of attraction" principle) with the more familiar model, which confers taxing rights on the source country only over business profits attributable to the activities of the permanent establishment, not to all business profits sourced in the country where the permanent establishment is located.   
2. Specific provision in respect of income from immovable property and gains from the alienation of movable and immovable property.
3. Specific provision in respect of income from general insurance in the business profits article (essentially New Zealand has reserved the right to tax insurance premiums sourced in and relating to risks situated in New Zealand, to the extent of taxing 10% of the gross premiums).
4. Expansion of the exchange of information provisions.
5. The eventual removal of "tax sparing" provisions from the DTA, following a 10 year sunset period following the revised DTA taking effect. 

To view a copy of the new Singapore and New Zealand double tax agreement please click here .

This publication is included in Russell McVeagh's website on the Internet: www.russellmcveagh.com

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