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KiwiSaver and R&D tax bill reported back

KiwiSaver and R&D tax bill reported back

The Taxation (KiwiSaver, Student Loans, and Remedial Matters) Bill (the “Bill”) has been reported back from the Finance and Expenditure Select Committee with a number of changes.

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Read the Taxation (KiwiSaver, Student Loans, and Remedial Matters) Bill as reported from the Finance and Expenditure Committee here.

Changes at a glance

The Bill as introduced

Reported back version

Comment

KiwiSaver contribution rates can be changed via the employee’s scheme provider or IRD as well as their employer

Application date deferred until 1 April 2022 (or earlier by regulation)

The deferral is to allow time for consultation with employers on the compliance cost impact

 

Early KiwiSaver withdrawals allow for those with life-shortening congenital conditions

Introduced by Supplementary Order Paper

KiwiSaver administrative amendments

Additional clarifying changes

 

Allow R&D tax credit refunds to more taxpayers

No change

The Bill extends refundability from the 2020-21 tax year

Prevents entities that derive any exempt income from claiming the R&D tax credit

Prevents entities that derive specific types of exempt income from claiming the R&D tax credit

This is to better target the entities which are not intended to be in the scope of the R&D tax credit regime

New legislation

The Bill contain a number of new provisions:

  • Changes to the Portfolio Investment Entity (“PIE”) tax rules:

o The current policy setting of ‘no refunds’ if the PIE tax rate applied is too high (but with tax payable if the PIE tax rate is too low) will be changed. Inland Revenue will do an end-of-year square-up for PIE investors from the 2020-21 tax year. This will mean automatic refunds for those on too high PIE tax rates and tax bills for those on too low rates.    

o Inland Revenue will also be able to directly instruct a PIE to change a PIE tax rate that the Commissioner considers is incorrect (based on information she has about the investor’s income).

  • New standalone investment income reporting and tax withholding rules for qualifying “custodial institutions”. These rules reflect their unique position as conduits between New Zealand investment income payers and the beneficial owners of that income (the “end investors”). In summary:

o The rules will allow “custodial institutions” (new definition for investment income purposes) to undertake investment reporting and tax withholding or to pass on those obligations to another custodial institution in the investment chain, or a third-party service provider, depending on the commercial arrangements entered into.

o Reporting/withholding of tax would need to be undertaken by the custodial institution that has the relationship with the end investor (if this is not undertaken earlier in the investment chain). 

o Non-resident custodial institutions will be treated as the end investor for investment income reporting and withholding tax purposes by a New Zealand custodian. (Note: the New Zealand custodian may use information provided by the non-resident custodian about its investors, such as their DTA status, to apply the new withholding tax and reporting rules. They will not have to “look through” to determine the investors’ status).

o Certain investment income reporting requirements will be relaxed for qualifying custodial institutions, to reduce compliance costs.

o These new rules will apply from 1 April 2020, to align with the application date of the new reporting rules for investment income payers generally. 

Some initial views

As with any Tax Bill, a detailed review of the reported-back version is required. This has not been possible in the time available. However, we share some initial thoughts on key changes recommend at Select Committee. 

R&D tax credit – additional clarity on what’s excluded

The Select Committee’s recommendation that simply having any tax exempt income is too broad a test for excluding entities from the R&D tax credit regime is welcome. In our submission on the Bill we noted that, as drafted, a business receiving an electricity consumer trust distribution for example would have been excluded (as these typically comprise both taxable and exempt income amounts). The approach in the reported-back Bill is to list specific types of exempt income which would make an entity ineligible. This is consistent with our submission to make the rules more workable.

It is disappointing that the policy for the R&D tax credit regime is still linked to the tax status of the entity undertaking the R&D. It still excludes charitable entities, for example. If the R&D tax credit is an incentive to boost New Zealand businesses’ R&D expenditure, that should be agnostic as to the tax status of the business undertaking that spend. 

PIE tax square-ups – understanding the context

The PIE income square up is a direct consequence of Inland Revenue’s most recent Business Transformation changes. Inland Revenue can electronically match investors PIE and other taxable income. This has confirmed many PIE tax rate elections are wrong. Inland Revenue wrote to around 1.5 million PIE investors, including those in KiwiSaver. Around 550,000 investors were asked to pay tax because their elected rate was too low. However, for the almost 1 million other investors on too high PIE tax rates, it was to simply tell them the rate was too high and too correct it for the future. The legislation did not allow refunds to be made.

To understand the reason for this asymmetry, the historical context is important. The PIE tax rules were designed when most individuals were “non-filers” (that is, were not required to complete a manual tax return). And with KiwiSaver expected to boost investor numbers, there was a desire to keep individuals from having to file a tax return to square up tax on their PIE income, when they would otherwise be non-filers.

The policy decision was made to treat PIE tax as a “final” liability, and therefore not included in tax returns, if the PIE tax rate elected was no lower than the investor’s “correct rate” (with the latter being based on their income in a prior tax year). However, to stop investors electing too low a PIE tax rate and that being their final tax, the need to square-up in tax returns (and at marginal rates) was retained. Until recently Inland Revenue did not match taxpayers’ PIE and other income data, to identify potential non-compliance. They had the information but did not commit any resource to matching. That changed with Business Transformation.

Business Transformation allows Inland Revenue greater and more regular access to individuals’ income and tax information from third parties and for these sources to be matched. Further, Inland Revenue’s pre-population of income and tax data in MyIR means the earlier “non-filing” constraints no longer apply. Put simply, the tax administration system has moved on since the introduction of the PIE rules.

The Select Committee’s recommendation to allow excess PIE tax to be refunded reflects this state of the world. The proposed PIE tax square-up process by the Commissioner will be performed outside the normal income tax assessment process. This means that any additional amount to pay will be capped at the difference between the top PIE tax rate (currently 28%, and not the top marginal tax rate of 33%, if that applies to an investor) and the PIE tax rate that was applied.  

Standalone investment income withholding and reporting rules for custodians

We welcome the inclusion of standalone investment income and withholding tax rules for custodial institutions.

By way of background, new investment income reporting requirements apply from 1 April 2020 for all “investment income payers” (these include: banks and other financial institutions, managed funds, and any New Zealand companies paying dividends, interest and royalties). The requirements ask for more (investor-level) information more frequently.

The rules work appropriately when an investment income payer makes a payment directly to the beneficial owner (the “end investor”). They work less well, and in some cases not at all, if there is an intermediary such as a custodial institution (or multiple custodial institutions) between the payer and end investor, or the end investor is a non-resident custodian.

The changes in the Reported-back Bill reflect the important role that that custodial institutions play in commercial investment arrangements (and the complexity of some arrangements). 

© 2020 KPMG, a New Zealand Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

KPMG International Cooperative (“KPMG International”) is a Swiss entity.  Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

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