The Finance and Expenditure Select Committee of Parliament (“FEC”) has recommended a number of changes in its report back of the Taxation (Annual Rates for 2021-22, GST, and Remedial Matters) Bill (the “Bill”). You can find the amended Bill and the FEC’s report here.
Given the range of issues covered in the Bill, we have focused on the key proposals and key recommendations in respect of these. Our original Taxmail contains more detail on the proposals in the Bill as introduced. The new interest deductibility restrictions for residential investment property, which have retrospective application from 1 October 2021, as well as the accompanying “new build” exception were added later. You can read our Taxmail on this here.
Interest deductibility restrictions
The FEC has recommended minor technical changes only. While disappointing, this is not surprising given the Government’s majority on the FEC. That has ensured the interest restrictions will proceed and largely unchanged. The FEC’s technical recommendations include:
- treating as new builds earthquake prone buildings that are remediated and removed from the earthquake prone building register on or after 27 March 2020 and leaky homes that have been significantly (that is, 75% or more) re-clad with code of compliance issued or or after the same date
- clarifying that boarding establishments that operate on a commercial scale are excluded from the interest deductibility restrictions.
Pleasingly, the FEC's independent adviser supported (and Inland Revenue noted there was merit in) KPMG's submission that the application date of the interest deductibility restrictions should be deferred to 1 April 2022. However, as the 1 October date was Government policy, this unfortunately was not accepted by the FEC.
Bright-line test “consequentials”
The Bill contains several consequential changes arising from the extension to 10 years for the bright-line taxing period. The FEC’s recommendations here include:
- a new “reasonable time” test when applying the main home exclusion from the bright-line test. This is designed to apply where a person acquires land to construct their main home and the construction is delayed, including for longer than 12 months. If the test is met, all of the time (including the period prior to construction) can be counted as “main home” (exempt) days.
- extending rollover relief from bright-line taxation to:
- transactions within wholly-owned corporate groups. This was in response to a KPMG submission, although it should be noted that this change was inadvertently omitted from the reported-back Bill.
- certain transactions involving look through companies or partnerships.
- property that is transferred from a trust back to the settlor (to mirror relief on the transfer of property into a trust).
It should be noted that rollover relief is designed to apply only where this is no economic change of ownership (e.g. in the case of transfers by a trust to a beneficiary, rollover relief would not apply).
- confirming that the bright-line period does not reset when there is a change in co-ownership of residential property. Importantly, this does not remove co-owners (such as parents assisting their children to purchase residential property) from the bright-line tax rules, when they transfer their share of the property. Such transfers will still be taxed if within the bright-line period. The technical fix is to ensure that where there is only a partial transfer of co-ownership, the bright-line period does not reset for any remaining interest they hold.
Modernising GST information requirements
The Bill contains proposals to modernise GST information requirements, including changes to terminology (e.g. tax invoice will be replaced with taxable supply information), scope, content, and processes (replacing the need to issue credit/debit notes with supply correction information) as well as removing the need to get Inland Revenue pre-approval for buyer created invoices.
FEC’s key recommendation was to shift the application date of several of the GST information changes to 1 April 2023, to provide more time for those impacted to understand and implement the changes. Other recommendations, include:
- a $1,000 de minimis for providing detailed taxable supply information, such as the buyer’s name and physical address
- making it mandatory to issue taxable supply information for transactions of $200 or more. For supplies less than $200, taxable supply information will still be needed for input claims.
The Bill contains several changes to improve the workability of the Fair Dividend Rate rules for foreign exchange hedges. We are pleased to see that the FEC has accepted several KPMG’s submissions to further simplify these rules. For more detail on these, see page 336 of the Officials’ Report on the Bill for a summary of the recommendations.
The Bill contains a FBT rate change so employers can elect to pay FBT at 49.25% for employees with “all-inclusive pay” under $129,681 (i.e. those earning below the 39% marginal rate equivalent). The FEC has recommended, as an alternative to “all-inclusive pay” which can be difficult to determine, that the 49.25% rate can also apply if an employee’s pre-tax cash pay is $160,000 or less and their attributed benefits are $13,400 or less.
The Bill excludes crypto assets from the GST and financial arrangements rules. The FEC has recommended a number of clarifications, including aligning the tax treatment of derivatives over crypto assets with derivatives over other assets, such as shares or commodities.
The reported back Bill is a mixed bag. There is little meaningful change to the interest deductibility restrictions as originally proposed. Those rules will proceed, notwithstanding KPMG and numerous other submitters recommending against it. Our concern is that it is not clear these rules will have any material impact on housing affordability but will undoubtedly result in additional complexity in the tax system and for a target audience that, by and large, will not have access to expert tax advice. The FEC’s report also includes commentary on the impact of inflation on interest deductibility. We are puzzled by the comment that at December 2021 quarter inflation rates… landlords who claim interest as an expense deduction at the nominal rate would be claiming a tax deduction for something which was, in real terms, not an expense at all. It is unclear what this is getting at. Firstly, notwithstanding any economic arguments, the interest will be “real” in the sense that landlords still need to pay it. Secondly, the tax system is not inflation indexed. Applying the above logic, for consistency, landlords (and, for that matter, lenders) should not be taxed on the inflation component of rents (and interest received), which they are and will continue to be following these changes.
On the other measures, there are a number of helpful clarifications and amendments. The challenge now is to work through the significant detail in the Bill and Officials Report. Both are weighty documents. Helpfully, the latter contains a summary of key recommendations at page 333.