Expert Commentary:

TAX ALERT: Bumper Tax Bill Introduced

05 May 2016

Bumper Tax Bill Introduced

The Taxation (Annual Rates for 2016-17, Closely Held Companies, and Remedial Matters) Bill was introduced on 2nd May 2016.  The Bill is vast (approaching 150 pages with over 200 pages for associated commentary) and in our view offers many pragmatic, sensible improvements to a number of policy positions we have been campaigning for change with Inland Revenue over a number of years. 

It is important to remember it is a Bill and is not active legislation until enacted and in receipt of Royal Assent.  We provide you with some high-level information below while we work through the finer details.

Closely Held Companies

Important changes to the tax treatment of closely held companies include:

  • Relaxation of the “tainted capital gain” barrier to commercially driven business re-organisations and succession planning transactions.The legislation currently seeks to tax certain gains made by companies from transactions with associated persons.This rule is often a surprise to taxpayers and, in our view, can add unnecessary complexity and is a barrier to commercially driven transactions

  • An ability to opt out of the requirement to account for resident withholding tax on dividends to corporate shareholders

  • Greater flexibility on the treatment of shareholder-employee salaries.

A closely held company is broadly one with five or fewer persons holding more than 50% of the voting rights (i.e. the changes target companies that form the backbone of the New Zealand economy).

Look Through Company Changes

Modifications to the Look Through Company (“LTC”) regime include:

  • Removal of the “benefit” to shareholders for some existing companies to enter into the regime without having to pay what is commonly referred to as “entry tax”. The “entry tax” will be imposed at the shareholder’s personal tax rate.Ordinarily, a fully imputed dividend made by a company to its New Zealand resident shareholders will attract an additional 5% “top-up” tax (being resident withholding tax).However, a company electing into the LTC regime with sufficient imputation credits may “distribute” pre-LTC retained earnings without incurring the 5% “top-up” tax.This leakage was acknowledged by the Policy Makers from the outset, however sentiment has changed and the Bill seeks to modify the LTC “entry tax” formula to remove this advantage

  • Modifying the application of the loss limitation rule to very limited circumstances.The current loss limitation calculation is cumbersome and can give rise to unintended consequences

  • Ensuring there is no debt remission income arising to an owner who remits a shareholder debt owed by their LTC.This is to apply retrospectively to remove a technical exposure under the existing legislation, which created taxable income to a shareholder for a debt which by virtue of the LTC rules was effectively owed to themselves. 

NRWT/ AIL Changes

There are significant changes to the application of the rules to non-resident withholding tax (NRWT) and the approved issuer levy (AIL) which are aimed at tightening the New Zealand withholding tax rules on intercompany debt.  These include:

  • The alignment of the payment for NRWT and AIL with the interest deduction being claimed under an accrual method.This will bring forward the deduction for the NRWT or AIL to be paid in circumstances where the interest has been accrued but not paid

  • Introducing specific rules to look through "back to back" lending arrangements designed to allow a borrower the benefits of the AIL regime in circumstances where it would not otherwise have been able to apply

  • Removal of certain long-standing exemptions for branch structures.

These changes will have an impact on existing cross-border intercompany debts which will need to be assessed.

Other Changes

There are also plethora of other technical changes included in the Bill with regard to specific GST amendments, tax losses and imputation credits and clarification on related party debt remission. 

Timing

It is proposed that majority of changes will take effect from the beginning of 2017/18 income year (1 April 2017).

Comment

At first glance, BDO backs a number of the proposed changes, but it is now important to work through the finer detail before drawing steadfast conclusions.  We shall continue to work with Inland Revenue closely and provide our input as necessary.  If you have any comments/submissions, please contact your local BDO adviser.

If you have any comments, please contact your local BDO adviser.