While the Bill contains a wide range of tax changes, unfortunately it does not include anticipated rules to clarify what a new build is for the purposes of the interest deductibility restriction and expanded bright line test announced and partly enacted in March.

Bright-line test

Three amendments have been proposed to the bright line test in relation to the main home exemption.

The first amendment would allow a main home that is being constructed to be excluded from the bright-line test if the construction of the main home takes longer than 12 months.

The second amendment denies the ability to reduce bright-line income where a property is used as a main home and the taxpayer has either used the main home exclusion twice in a two-year period or has engaged in a regular pattern of acquiring or disposing of residential land.

The final amendment clarifies the new 12-month buffer, which limits the main home exemption in circumstances where a property is not used as a main home for a period of more than 12 months. The rule change in the Bill will allow taxpayers to qualify for the full main home exclusion even if they have multiple periods of less than 12 months each where the property is not used as a main home.

Tax treatment of cryptoassets

New Zealand’s current tax rules do not contemplate the existence of cryptoassets such as Bitcoin and so the tax and GST treatment of these assets are not clear. With the increased popularity of cryptoassets, the government wishes to rectify this.

It is being proposed that, for GST purposes, cryptoassets will be excluded from the definition of goods or services for GST purposes. This means the supply of cryptoassets would not be subject to GST. ;However, GST will still apply to supplies of goods and services bought using cryptoassets (e.g., buying a pizza with Bitcoin is subject to GST but not acquiring the Bitcoin itself).

Non-fungible tokens (tokens which represent ownership of a digital asset such as a photo or video) will still be subject to GST as they will be excluded from the definition of cryptoasset.

In addition, the current income tax definition of financial arrangement is sufficiently broad to include some cryptoassets and not others, making compliance difficult. A proposed amendment would include cryptoassets in the definition of excepted financial arrangement, meaning complex spreading calculations for income tax purposes would not be necessary. This would provide clarity to taxpayers and minimise compliance costs.

In most cases income derived from the sale, trading, or exchanging of cryptoassets remains taxable, as it is now.

Ability to agree a GST apportionment method with Inland Revenue

When a GST registered taxpayer uses goods and services for both taxable and non-taxable purposes, apportionment and adjustment rules apply. These rules are complex and often confuse taxpayers.

Currently the GST Act allows taxpayers who expect to make supplies of more than $24 million in a 12-month period to agree to an apportionment method with Inland Revenue. The government considers this unfair to smaller taxpayers and so plans to amend the GST Act to allow all taxpayers to access this.

Disposal of assets with taxable and non-taxable use

In Tax Talk on 15 July 2020 (link) we discussed certain unexpected consequences of a recent IRD GST ruling and expressed the hope that the issue would be resolved by a legislative fix. That fix is contained in this Bill. In summary, the ruling we discussed in July 2020 said that where a farmer claims an income tax deduction for the farmer’s house as the home office, then the sale of the farmhouse is subject to GST. This means a 15% tax on the increase in value of the farmhouse. Our view was that this results in over-taxation as most of the farmhouse would have been used for private purposes, which should not be taxed.

The Bill proposes to resolve this issue by only taxing the bit of the increase in the farmhouse used for the home office. The mechanism is complex, and we can see how purchasers could end up with an unexpected tax bill because of the way the mechanism works. Care should be taken when buying or selling a farm for this particular issue. Note the issues also apply to sole traders who use their houses as their home office.

The GST rules in these situations are already complex and we recommend you contact your Baker Tilly Staples Rodway advisor for advice in these situations.

Tax pooling to satisfy backdated tax liabilities

At present, tax pooling can only be used:

• For income tax, but only until 75 days after the terminal tax due date
• For all tax types, but generally limited to reassessments

This means tax pooling generally cannot be used where there is no existing assessment. Proposed amendments would allow taxpayers to use tax pooling for voluntary disclosures involving no existing assessment, enabling them to access the benefits of tax pooling for such voluntary disclosures including mitigation of late payment penalties and use of money interest.

Second-hand goods input tax credit - associated person supplies

An amendment is proposed to allow a GST registered person to claim input tax credits for purchases from an associated person if the associated person purchased the second-hand goods from a non-associated person.

Presently the GST that can be claimed is limited to the GST paid by the associate. The proposal is to allow GST to be claimed on the cost from the non-associated person. This is a significant and positive change that should, at the margins, make the owners of small parcels of land more able to do the development themselves.

Modernising GST tax invoices

The rules governing GST tax invoices have largely remained unaltered since GST was introduced in 1986 despite significant technological and business operations changes in the 35 years since. The Bill includes updating the rules around tax invoices, which would be renamed to taxable supply information. Under the proposed amendments, the following information would need to be supplied as part of taxable supply information:

• The GST trade name and GST number of the supplier
• Recipient details for the recipient
• The address of a physical location for the recipient, if available to the supplier
• The date on which the taxable supply information is issued
• A description of the goods or services supplied
• The consideration for the supply
• The tax charged for the supply

A new $200 threshold would apply for the provision of taxable supply information.

In addition, pre-approval by the Commissioner for issuing buyer-created tax invoices would no longer be required. Instead, an agreement between the supplier and the recipient on the proviso both parties are GST registered would be all that is needed. This is a very sensible amendment.

Conclusion

It is unfortunate the government did not include the definition of new build in this Bill. There has been significant uncertainty among taxpayers as to whether the investment properties they are purchasing would have interest deductions available. We suspect that the amendments for ‘new builds’ will be added to the Bill by way of a Supplementary Order Paper. Hopefully this is done early enough to allow for consultation. Otherwise, this Bill represents annual maintenance on the country’s tax system and some welcome GST policy changes, that have caused significant problems in the past.

We expect submissions on the Bill will be open during October. If you have any queries in relation to the Bill, or require any assistance in making a submission, please contact your Baker Tilly Staples Rodway advisor.