The Finance and Expenditure Committee (“FEC”) has recommended a number of changes to the Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill (the “Bill”). The reported back Bill and Officials’ Report on submissions are available here.
Our Taxmail at the time of the Bill’s introduction summarises the key policy changes in the Bill. We highlight below some of the FEC’s recommendations and changes.
The Bill now awaits its remaining Parliamentary stages, which are expected to be completed before the end of March. A Supplementary Order Paper containing the new company Business Continuity Test (you can read more on that here) will be added to the Bill prior to its enactment.
The Bill allows feasibility expenditure (defined as expenditure incurred in creating, acquiring or completing an asset that would be depreciable or taxable, if progress on the asset is abandoned) to be deductible over five years, from the year of abandonment. The deduction is clawed back if the project is subsequently reinstated.
The FEC’s changes further tighten the criteria for feasibility expenditure deductions by:
- Clawing back all the expenditure allowed as a deduction under the feasibility provisions, rather than just those costs which are directly attributable to the reinstated project (to create the original asset or a similar asset).
- Denying deductions for any residual feasibility expenditure under the five-year spreading mechanism once the claw back provisions apply.
- Excluding specifically listed expenditure (e.g. relating to land and non-depreciable intangible assets, such as goodwill) from the rules.
On a positive note, the claw back provision for reinstated projects will be time limited to seven years.
Our quick take
The FEC has rejected submissions by KPMG and others to expand the scope to include pre-commencement expenditure and to ensure there are no gaps between the feasibility expenditure rules and the depreciation and revenue account property rules which apply when a project is successful. This is disappointing and appears to be primarily due to Officials’ fiscal cost and integrity concerns.
We hope that these issues will be more fully considered as part of the Government’s new tax policy work programme, rather than simply being ignored.
Purchase price allocation
The Bill sets out rules where parties to a sale and purchase of assets have not agreed the allocation across different assets. At a high level, the vendor must determine the allocation in the first instance. However, if this is not done, the onus shifts to the purchaser.
A key change is to the application date, which has been shifted from 1 April to 1 July 2021 to allow extra time for changes to be made to standard sale and purchase forms and for Inland Revenue to educate taxpayers. The FEC has also recommended a review of the rules be undertaken in six to 12 months’ time to ensure they are working as intended.
The FEC’s other changes improve and clarify the operation of the rules, including:
- Extending the time period available to the vendor to notify the purchaser and Inland Revenue of an allocation from two to three months and confirming that, if this does not happen, the purchaser will have three months to notify their allocation. If after this six-month period no allocation is made, Inland Revenue can intervene as it sees fit (e.g. to accept a late allocation).
- Reversing the requirements in the Bill that a purchaser is deemed to acquire the assets for nil consideration if they are required to make an allocation and do not do so. Instead, they will have a cost base for the assets (for tax depreciation purposes) in the next tax return after they notify an allocation.
- Excluding residential land transactions (including chattels) with a total purchase price of $7.5m or less from the scope of the purchase price allocation rules.
Our quick take
We welcome the application date of the purchase price allocation rules being deferred as multiple aspects of the rules in the Bill as introduced simply did not work. While these have largely been fixed in the reported-back version, the original 1 April 2021 application date did not leave sufficient time to implement with confidence. We also endorse the need for greater education and a post implementation review of these rules.
IFRS 16 alignment for tax
The Bill allows the accounting treatment to be followed for tax for leased plant and equipment when the new NZ IFRS 16 leasing standard applies.
The FEC’s changes are largely operational and include:
- The ability to apply the NZ IFRS 16 treatment, for tax, on a lease by lease basis. This will be an irrevocable election.
- A new de minimis for having to reverse NZ IFRS 16 adjustments, for tax, for “low value short term leases”. This is defined as a lease with a term of four years or less and a value less than $100,000. This will apply to leases of land which would otherwise need to be adjusted for tax.
Our quick take
Our concern with the original proposal – the compliance costs from having to track what is happening in the accounts to make adjustments, if necessary – remains. In fact, the option to follow the accounting treatment for specific leases only may add to compliance costs. And while we support the de minimis, the qualification criteria means it is likely to be more applicable to SMEs, who are unlikely to be applying IFRS.
The FEC has also made several changes to other items in the Bill, some of which are covered briefly below:
Definition of “dwelling” – the FEC has recommended clarifying that this includes both occupied and unoccupied residential property, such that the bright-line test, residential land withholding tax, and rental loss ring-fencing rules cannot be avoided in the case of the latter. The change will have retrospective effect to 1 October 2015 (the original-bright line test application date).
GST treatment of mobile roaming services – while the FEC majority supported applying GST to NZ residents using roaming services offshore, there was a dissenting view by the National Party on the basis this would be inconsistent with Australia’s GST treatment, require costly upgrades for NZ telecommunication providers and raise minimal revenue for the costs imposed.
R&D tax credit regime – the FEC has agreed that firms using contracted labour on core R&D activities should be eligible for the R&D tax credit. This is welcome and consistent with KPMG’s submissions on this issue.
A note of caution. Given its omnibus nature, there are several policy matters and various remedial amendments in the Bill which we have not been able to cover. Some of the FEC’s recommendations and changes apply to these. In addition, there are a range of Officials’ submissions, some on new matters, which have been accepted. A closer inspection of FEC’s report alongside the reported back Bill and the Officials’ report is strongly encouraged.