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Tax Talk | A host of new tax measures – both COVID-19 and ‘normal’

New tax payment deferrals, extra time to write-off bad debts, feasibility cost deductions, further tax and accounting alignment measures and more.

More time to pay 2019 tax pooling arrangements

Inland Revenue have announced taxpayers adversely affected by the COVID-19 pandemic who make use of tax pooling intermediaries to pay their 2019 terminal tax will have more time to make arrangements and pay tax.

All taxpayers will be given until 21 July 2020 to arrange their pooling transactions, extended from 18 June 2020.

The deadline for making payment for pooling transactions will depend on the usual terminal tax date of the taxpayer. Ordinarily for taxpayers with a balance date of March 2019 through September 2019, their terminal tax would have been due on 7 April 2020. By using tax pooling, they would usually have until 18 June 2020 to make payment. This measure gives them until 7 April 2021 to complete the transaction. Earlier dates apply for balance dates from October 2018 through February 2019.

The usual benefits of using a tax pooling intermediary apply; this includes access to a lower rate of use of money interest (around 4% instead of Inland Revenue’s 7%), and certainty that further interest and penalties will not apply provided the transaction is completed on time.

Unfortunately, Inland Revenue have not provided much detail on the taxpayers who can benefit from this extension apart from saying the taxpayer must have suffered a significant decline in revenue. This is unfortunate as many relief measures to date have utilised the criteria of the first wage subsidy.

Please contact your Baker Tilly Staples Rodway advisor if you have an outstanding 2019 terminal tax liability and this could be of use.

 

More time to write off bad debts

Ordinarily, in order to claim a deduction for bad debts, those debts need to be written off as bad by the financial year end. This requires both an assessment of whether the debt is actually unrecoverable and then physically writing off the debt.

Taxpayers may not have been in a position to write off bad debts this year for a variety of reasons. This might include inability to access systems and records due to the lockdown. Accordingly, Inland Revenue have extended the deadline for writing off bad debts to 30 June 2020. This is provided they were unable to write off the debt due to the effects of the pandemic.

Only information that was available as at the end of the taxpayer’s 2020 income year can be considered. As such, if debtors were in a stable financial position at year end but subsequently got in trouble, the debts could not to be written off as bad until the 2021 year.

Please contact your Baker Tilly Staples Rodway advisor if you have any queries in relation to the above concession.

 

A new tax bill brings in 'normal' measures

In another move back to normality, the government has tabled a new tax bill. This bill proposes a number of amendments to legislation, including in relation to:

  • Aligning the tax treatment of leases with NZ IFRS 16
  • Feasibility expenditure
  • Purchase price allocation
  • GST credit notes
  • Cash dividend derivation
  • Mycoplasma bovis

Inland Revenue have previously sought comment on most of these items, and this legislation will enact them. This is likely to be the last tax bill prior to the election on 19 September.

 

Alignment of tax treatment of leases with NZ IFRS 16

With the introduction of NZ IFRS 16 for years commencing 1 January 2019, the treatment of leases for tax and accounting purposes was going to significantly vary. Government, wanting to keep compliance costs to a reasonable level, is proposing to enable taxpayers subject to IFRS to align their treatment of leases for tax and accounting purposes, but only for certain leases.

 

Read more here

 

Feasibility expenditure

Many businesses invest time and money investigating potential new business activities, assets or ways of operating. Under current rules, a deduction is usually not available for this expenditure (‘black hole expenditure’). A legislative amendment is proposed to allow a deduction for this expenditure, either in the year the expenditure is incurred, or over five years, depending on the amount involved.

 

Read more here

 

Purchase price allocation

Inland Revenue have been concerned for some time around the ability for vendors and purchasers to allocate different amounts to the same asses, often resulting in a tax benefit. A legislative amendment is proposed to ensure symmetry between the two positions.

 

Read more here

 

GST credit notes

Under current commercial practice, where a business incorrectly charges 15% GST on a zero-rated or exempt supply, the business would issue a credit note for the incorrect invoice and then issue a new correct invoice. Government is concerned the legislation does not clearly reflect current commercial practice and so is proposing to amend the legislation to enable businesses to continue with this approach. A time limit of four years would be put on issuing the credit note, with an extension to eight years where the overpayment resulted from a clear mistake or simple oversight. As a result, this amendment would apply from 1 April 2012.

 

Cash dividend derivation

For many years, there has not been absolute clarity around when a cash dividend is derived and should therefore be returned for income tax purposes. Inland Revenue attempted to clarify the question in a “Questions We’ve Been Asked” item, but ultimately the law has needed to be amended to provide certainty.

The bill proposes to treat cash dividends as derived on a cash basis (i.e. when the cash is received by a shareholder) and not on an accrual basis (i.e. when the debt is established in favour of the shareholder). The amendment if enacted would apply from the 2021 income year onward.

 

Mycoplasma bovis

The outbreak of mycoplasma bovis has been hard on the farming sector, with herds of cattle needing to be culled as a result. Unfortunately this gives rise to a cashflow issue for farmers as the compensation is taxable income – but the compensation is also needed to replenish those herds.

Following lobbying efforts by Federated Farmers, the government proposes under the Bill to enable income derived by farmers being compensated for a herd cull (required by Biosecurity New Zealand) to be spread over a six-year period. In order to utilise the spreading method, farmers would need to:

  • Be carrying on a dairy or beef breeding operation, with the culled breeding stock being valued under NSC or self-assessed cost; and
  • Substantially replace the stock by purchasing equivalent breeding stock by the end of the income year following the cull year; and
  • Continue valuing replacement stock using, as relevant, NSC or the cost price method

The amendment would apply from the 2018 income year onwards, and taxpayers who have already filed 2018 and 2019 income tax returns would be able to apply for an amendment to these returns once the legislation has been enacted.

 

Comment

Parliament has not yet set a deadline for when submissions are due on the Bill but we anticipate it will be at some point prior to the election on 19 September.

The amendments proposed continue a trend over the last couple of decades to encourage a reduction in compliance costs to businesses, while also trying to ensure the integrity of the tax base. Most would agree these amendments are fair and reasonable, although it is a pity the feasibility cost rules are not more generous to encourage wider investment in new ideas that do not quality as research and development.

If you have any queries in relation to the Bill, or wish to make a submission on it, please contact your Baker Tilly Staples Rodway advisor.