New Zealand tax update on Foreign Investment Funds & Residency, IRD audit trends

Tax Update
South Auckland Practice Group
February 2014

Terry Baucher, Baucher Consulting Ltd

© Baucher Consulting Limited

February 2014 All rights reserved.

Today’s Topics
1. FIF update and foreign tax credits
2. Overseas companies trading in NZ
3. Residency – new developments

4. IRD’s current audit focus


FIF update
Foreign tax credits



FIF Update
 Taxation (Annual Rates, Foreign Superannuation,
and Remedial Matters) Bill received the Royal
assent on 27th February
 Late change allows any person who has “applied”
to an overseas scheme by 31st March 2014 for a
transfer to still use the 15% even if the transfer is not
finalised until after 31st March 2014



FIF Update – Options for FSS holders
Pre 1 April 2014 transfers:
1. Return 15% of amount transferred in 2014 or 2015
tax return;

2. Apply “ordinary rules” at time of transfer
3. Apply FIF rules
But:

Options 2 and 3 may mean UOMI payable;
FIF rules may not be available



FIF Update – Comparative Value (1)
When is it compulsory to use the CV method when
calculating FIF income?
Typically applies to “stapled securities” where there is
an equity element and a financial arrangement
Anti-avoidance rule intended to prevent use of FDR in
respect of high-yield assets
Referred to as “non-ordinary shares”


FIF Update – Comparative Value (2)
“non-ordinary share” defined in section EX 46 (10) as:
 a fixed-rate share;
 a non-participating redeemable share
 investments in which 80% of assets are hedged or
fixed rate investments
 share determined by Commissioner as not eligible
for FDR

Losses calculated when use of CV method is
compulsory ARE deductible against other income
(sections EX 51(7),(8))


FIF Update – Disclosure (1)
Did you at any time during the income year hold
rights in a foreign company, unit trust, superannuation
scheme or life insurance policy for which disclosure is
required?
Applies where FIF is in country with which NZ does
NOT have a double tax agreement
If “yes” complete form IR 447 (FDR), or IR 448 (CV)



Investments in OM-IP are being targeted by IRD
OM-IP thought to be Australian but actually based in
Cook Islands and therefore disclosure required
NZ and Cook Islands have signed a Tax Information
Exchange Agreement
IRD knows there are 37,000 investors in the fund but
has received only 3,000 disclosures

IRD are also of view that held on revenue account
and therefore taxable


Foreign Tax Credits (1)
Covered by subpart LJ of Income Tax Act 2007
Subpart LJ requires dividing of foreign sourced
assessable income into segments and allows a tax
credit in relation to each segment

Although dividends are excluded income under the FIF
regime, any foreign tax credits attached can be
claimed (but not Australian franking credits and tax
credits on dividends received from UK)
Amount claimable limited to the New Zealand tax
payable.


Foreign Tax Credits (2)
IRD reviewing foreign tax credit claims in conjunction
with double tax agreements (“DTA”)
UK pension included in NZ tax return and UK PAYE
claimed as foreign tax credit. Under Article 19 of UK/NZ
DTA pensions taxed in country of residence. Therefore
no tax credit available re UK PAYE
Client required to pay tax in respect of foreign tax
credit incorrectly claimed and apply to the UK for
refund of overpaid tax



Overseas companies trading
in New Zealand



Overseas companies trading in New Zealand (1)
Income derived from a business has a source in New
Zealand to the extent it is wholly or partly carried on in
New Zealand. (Section YD 4(2))
Income derived from a contract has a source in New
Zealand if the contract is made in New Zealand or to
the extent it is performed in New Zealand. (Section YD
4(3))
Section YD 5 apportions income where either business
wholly or partly carried on in New Zealand or contract
wholly or partly performed in New Zealand


Section YD 2: a company is resident in New Zealand if:
a) It is incorporated in New Zealand:
b) Its head office is in New Zealand:

c) Its centre of management is in New Zealand:
d) Its directors, in their capacity as directors, exercise
control of the company in New Zealand, even if
the directors’ decision-making also occurs outside
New Zealand


If non-resident has a “permanent establishment”
(“PE”) in New Zealand then under DTA business profit
attributable to the PE is taxable in New Zealand
PE generally means a fixed place of business through
which the business in wholly or partly carried on
PE includes a place of management, a branch, an
office, a factory, a workshop, a mine, a quarry, an oil
or gas well, and an agricultural, pastoral or forestry
property



DTA with Australia has more expansive PE definition so
even if no fixed place of business, a PE includes:
a) services performed by an individual present in a
contracting state for more than 183 days in a 12month period;
b) mineral exploration activities carried on for more
than 90 days in a 12-month period;
c) the operation of substantial equipment for more
than 183 days in a 12-month period.



IRD are tightening procedures around companies with
no director with an IRD number



Companies Office has also tightened its procedures
for
incorporating
companies
with
overseas
shareholders and directors

Now require certified copies of director and
shareholder consent forms together with certified
copies of passports and of proof of residential address
(dated within three months of application)
If shareholder overseas entity must supply a copy of
the Certificate of Incorporation and a certified copy
of the resolution to become a shareholder


Residency update



Residency update (1)
Section YD 1(2) Income Tax Act 2007
“Despite anything else in this section, a person
is a New Zealand resident if they have a
permanent place of abode in New Zealand,
even if they also have a permanent place of
abode elsewhere”.



What is a “Permanent Place of Abode”?
IRD draft interpretation statement INS 0117 – Income
Tax Residence to replace PIB 180 from 1989
Draft interpretation statement now regards availability
of dwelling as a prerequisite
An available dwelling includes a property which is let
but not on a fixed term basis

Contrary to OECD model convention which refers to
“at all times continuously”


Previously thought per PIB 180 and a QWBA item from
1999 that three year absence sufficient
The interpretation statement changes these previous
examples “so conclusion is consistent with case law”
Redrafted examples give no guidance as to how long
an absence before PPOA lost

A fixed term contract to work overseas may therefore
not result in a loss of PPOA
Interpretation statement to be finalised shortly


Residency – TRA Case 43/11 (1)
[2013] NZTRA 10 (judgement 5 December 2013)
 Related to 2004 to 2007 income years
 Former soldier who on leaving NZ Army in July 2003,
went first to PNG, before going to Iraq in October
2004 to work as a security consultant. Finally left Iraq
in April 2012 and moved to Australia

 Spent an average of 42 days per tax year in NZ



 Soldier and wife separated in 1994 but didn’t
actually divorce until March 2009 and had good
relationship.
 In 2000 soldier and wife formed a partnership to own
rental properties (transferred in 2006 to LAQC)
 Soldier’s relationship with four children deteriorated
over time because of absence abroad

 Accepted that had been out of NZ for more than
325 days as required under OE 1(3) [YD 1(5)]


Held that soldier had a permanent place of abode for
following reasons:
 Investment property purchased in 1998 (in which he
never lived) was an available dwelling;

 No contemporaneous documentation that intention
in 2003 was to leave NZ permanently;
 Continuing relationship with wife and children
including financial support “significant factor”



Residency – Conclusions
 TRA Case 43/11 likely to reinforce harder line of
Inland Revenue
 Doubtful if Interpretation Statement will change
substantially when it is finalised shortly

 Result will be very difficult to break residency
 Most at risk are those moving to countries without a
double tax agreement with New Zealand



IRD audits - current trends



IRD audits - current trends (1)
Property Compliance Programme (“PCP”)
Credit cards issued by foreign banks
ICA and loss reviews
Foreign tax credits review
Foreign Account Tax Compliance Act (“FATCA”)

Base erosion and profit shifting (“BEPS”)



PCP very targeted especially in Auckland, Christchurch
and Queenstown
Credit card review typically involves preparation of IR 110
statement of assets and liabilities
No time bar for ICA review resulting in $300,000 adjustment
for shareholding change in March 2000
Foreign tax credits: co-operating with HMRC
IRD already exchanging information with IRS and FATCA
may accelerate this trend


“My client received a letter from his bank advising that they had
been requested to provide bank statements for his account
using S17 of the Act (the Tax Administration Act 1994). The letter
came from the Community Compliance team.”
The IRD supervisor reiterates what her staff member is saying
which is that this is a compliance check of the engineering
industry – it is just a study!!!!!!!!!!
IR are quite frequently using the compliance teams to prepare
low level investigations of taxpayers using S17(1) and
circumnavigating tax agents.



“Just as a heads up, IRD are accessing all my emails with regard to
XXXX to about May 2013, they will be going through them all. They
have determined that as I am not a CA I cannot claim any form of
privilege over them, unless there is advice relating to me personally
they are claiming they can do what they want. “



For further information please contact Terry Baucher
09 486 6200

terry@baucherconsulting.co.nz
www.baucherconsulting.co.nz



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