EY Tax Monthly News Update – August 2022

EY Tax Monthly News Update – August 2022

Welcome to EY’s monthly tax news for August 2022. Here you can stay on top of key tax developments for the month. You can also find details of upcoming events, along with links to EY insights.

August in brief

Inland Revenue updates

• New draft consultation item released regarding: 
  • the rules applicable to tax losses for companies, and 
  • the donations tax credit and GST rules that apply to payments made by parents to private schools.
• Use of money interest rates increase from 30 August.
• Adverse weather event declared covering Northland, Canterbury and Otago regions, and Gisborne and Wairoa districts.
• Report on regulatory review of FBT released – recommends widescale reform is needed.
• Inland Revenue releases final long-term insights briefing – discussing various possible business tax reforms.

Government and political updates

• Government introduces, and then withdraws new Tax Omnibus Bill – covering various GST and income tax rules.

International updates

• Australian Treasury releases a discussion document on multinational tax integrity and tax transparency.
• Australian Board of Taxation releases consultation guide on taxation of crypto assets. 
• US Inflation Reduction Act passes introducing new corporate minimum tax and climate-related incentives, as well as new funding for the IRS.

EY Webcasts

• EY Global Webcast – BEPS 2.0 developments: What to watch out for in country implementation
• EY Australia Webcast – Start your e-invoicing journey now with EY
• EY Global Webcast – Think ESG: Navigating the next phase of ESG reporting

EY Insights

• Tax Guides – various matters covering 150 jurisdictions.
• Global Tax Policy and Controversy Watch, August edition.
• PE Watch: Latest developments and trends, August edition.
• EY Global Controversy Flash newsletter – It is time to think and act globally on employment tax risks.

New draft consultation items

This month Inland Revenue has released the following new draft items for public consultation:

UOMI rates increase from 30 August

The Taxation (Use of Money Interest Rates) Amendment Regulations came into on 30 august 2022 increasing both rates as follows:

• Increase the taxpayer’s paying rate of interest on unpaid tax from 7.28% to 7.96% per annum
• Increase the Commissioner’s paying rate of interest on overpaid tax from 0.0% to 1.22% per annum.

The regulation is available on the legislation website here.

Adverse weather event declared covering Northland, Canterbury and Otago regions, and Gisborne and Wairoa districts

Tax Administration (July Adverse Weather Event) Order 2022, which came into force 18 August 2022, declares the July adverse weather event to be an emergency event. The July adverse weather event refers to all or any of the flooding, landslides and other damage that occurred as a result of the severe weather systems that crossed New Zealand between 11 July 2022 and 31 July 2022 in all or any of Canterbury, Gisborne District, Northland, Otago, and Wairoa District.

The order applies to taxpayers who were significantly affected by the July adverse weather event in respect of making a payment required by tax law by the due date. The effect is that taxpayers may ask the Commissioner to remit interest charged under Pt7 of the Tax Administration Act 1994 for failing to make payments by due date, given the Commissioner is satisfied that it is equitable that the interest is remitted, the taxpayer asked for relief as soon as practicable, and the taxpayer made the payment as soon as practicable. The order expires and is revoked on 30 September 2022.

More information is available on the Inland Revenue website here.

Report on regulatory review of FBT released – recommends widescale reform is needed

Inland Revenue released its final report on the regulatory review of the fringe benefit tax (FBT) system. The review, undertaken as part of Inland Revenue’s regulatory stewardship role, focussed on both the experience of Inland Revenue in administering FBT and employers in complying with it. Broadly the review has recommended that widescale reform is needed to simplify the FBT regime, to reduce compliance costs, and improve compliance and enforcement.

The reviewers noted the high degree of agreement between Inland Revenue and submitters about the general weaknesses and strengths of the current FBT system.

The following themes were highlighted in the report:

• FBT is unnecessarily complex: FBT is generally seen as complex and costly to comply with, specifically submitters noted the perceived overreach due to the very broad base, for example taxing minor unclassified benefits which had a weaker link to remuneration such as flowers sent due to bereavement.
• Complexity prohibiting automation: The report suggests that the complexity in the FBT rules precludes effective automation and digitisation of FBT compliance. Inland Revenue acknowledge that greater support for end-to-end software solutions is needed to ease the compliance burdens, including facilitating improved electronic filing, data collection and record retention.
• Low revenue collected though FBT not necessarily problematic: The role of FBT as a buttress to the PAYE system remained important, with the authors noting that the mere fact that the FBT regime does not collect much tax revenue does not suggest that the system is ineffective. FBT is likely one of the reasons that non-cash benefits are not used more widely in New Zealand which helps support a strong PAYE base.
• Non-compliance risking integrity: Broad concern with degree of non-compliance or partial compliance with FBT, as well as general low engagement with FBT in the wider community. In particular submitters raised the concern that the “work-related vehicle” exemption was misused, posing integrity risks.
• Enforcement historically lacking: While the low level of revenue collected by FBT has in the past meant that it has not received as much enforcement focus from Inland Revenue, with submitters suggesting FBT rarely came up in audits, the enhanced capability of Inland Revenue’s new IT platform START is expected to help change this in the future.
• FBT regime is out of date: The FBT regime does not fit well within the context of modern work practices, such as increased working from home and increased focus on staff wellbeing. Review was needed to ensure the rules remained fit for purpose.

Having received the report Ministers will now need to decide when and to what extent further policy resources should be dedicated to completing the in-depth analysis that the report suggests is needed. Any legislative changes which would follow are therefore unlikely to apply before 2024/5 or possibly even later.

The report is available on the Inland Revenue Policy website here.

Inland Revenue releases final long-term insights briefing – discussing various possible business tax reforms

Inland Revenue has prepared and now released its first ever long-term insights briefing, as required by the Public Service Act 2020. The aim of the briefing is to provide information on medium- and long-term trends, risks and opportunities and provide impartial analysis on possible policy options.

The briefing considers the impact that New Zealand tax settings, those applicable to business in particular, have on inbound investment and the cost of capital in New Zealand. It broadly concludes that New Zealand has relatively high taxes on inbound investment, which in turn reduces economic efficiency. The briefing aims to facilitate further discussion on potential future reforms which could ease the burden of taxation.

Specifically, the analysis considered the following potential reforms that would be expected to lower the cost of capital, and in some cases promote tax neutrality:

• A cut to the corporate tax rate
• Accelerated depreciation
• Inflation indexation of the tax base
• A higher safe harbour threshold for the thin capitalisation rule 
• An allowance for corporate equity 
• Special industry or firm-specific incentives and
• A dual income tax system.

The report acknowledges the trade-offs inherent in making any of these discussed changes to the New Zealand tax settings and does not strongly conclude on the desirability of any. That decision is left to future governments to consider. The report nevertheless highlights some of the challenges faced in attracting investment to New Zealand whilst supporting a progressive and efficient tax system, built off of a relatively small taxpayer base in a country that is geographically remote.

The report is available on the Inland Revenue policy website here.

Government introduces, and then withdraws, new Tax Omnibus Bill – covering various GST and income tax rules

The Government released the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Bill. This Bill contains a number of anticipated policy and remedial changes which will have wide ranging impacts across a multitude of sectors.

As an Omnibus bill, the Bill is large and contains many proposed and varied amendments including:

• Applying GST to certain listed services provided through digital platforms, including short-stay accommodation and transport, and adopting the OECD information reporting requirements applicable to digital platforms from 2024;
• Compliance simplifications for cross border employees and non-resident contractors, including a new safe harbour providing relief for certain non-resident employers who have incorrectly determined that they do not have New Zealand PAYE, FBT and ESCT obligations;
• Further tweaks to the rules denying interest deductions relating to residential land, including the recently announced exemption for build-to-rent developers, and further brightline rollover relief;
• Changes to provide relief for companies considered dual tax resident, including those caught under the Australian “centre of management and control” tax residence tests, by allowing the continued access to loss grouping, imputation and the consolidated group regime;
• The Bill also makes several important GST amendments including changes to simplify the GST apportionment rules;
• Finally, the Bill also includes an amendment to narrow the application of FBT to certain employer subsidised public transport for employees’ travel between home and their place of work.

The initial version of the Bill included changes proposed to apply GST on management services supplied to managed funds, including retirement funds and KiwiSaver. In response to public concerns with the impact the proposals could have on New Zealanders’ KiwiSavers, Minister of Revenue David Parker later announced that the Government will not proceed with its proposal to apply GST to fund manager and investment manager fees at this time. Refer to the Beehive press release available here. As a consequence of this decision the Bill has been withdrawn and later re-introduced with updated clause numbering.

The Bill will be open to public submissions and select committee hearings, with a report back expected in early 2023. Following any further amendments, this Bill is then expected to progress through to enactment before 31 March 2023.

For further information on the reforms contained in this Bill refer to EY Global Tax Alerts on EY.com here and here, and the Inland Revenue policy website here.

Australian Treasury releases a discussion document on multinational tax integrity and tax transparency

The Australian Treasury has released a discussion document on multinational tax integrity and tax transparency. The release of this discussion document reflects the Labor Government’s election proposals under its tax integrity package to address tax avoidance and improve transparency of multinational enterprises.

The paper focusses on new rules for thin capitalisation, royalty deductions and public tax disclosures and details background to the proposals, policy issues and implementation considerations, with a series of consultation questions for each measure. Submissions to the paper were due 2nd September.

For more information see the EY Global Tax News alert here and the paper is available on the Australian Treasury website here.

Australian Board of Taxation releases consultation guide on taxation of crypto assets

The Board of Taxation has published a Consultation Guide which provides an overview of crypto assets and the current taxation treatment within Australia. The guide outlines recent relevant government reports and announcements and poses a series of questions for interested parties to consider when formulating input to the planned review into the appropriate policy framework for the taxation of digital transactions. Written submissions are due by 30 September.

For more information see the Board of Taxation website here.

US Inflation Reduction Act passes introducing new corporate minimum tax and climate-related incentives, as well as new funding for the IRS

On August 16, US President Biden signed into law the Inflation Reduction Act. This Act makes several important reforms including:

• Introducing a 15% corporate alternative minimum tax based on book income for companies that report over $1 billion in profits to shareholders.
  
  
• Several climate-related provisions focussing on incentivising and accelerating renewable energy, advancing the adoption of electric vehicle technologies and improving the energy efficiency of buildings and communities. Many of these provisions are expected to spur significant development and investment into these sectors.
  
  
• Significant increase in Internal Revenue Service (IRS) enforcement funding by US$80b over the next 10 years. The additional funds are expected to generate $204b in additional revenue, with a net of US$142b, that will partially finance US$430 billion in climate, energy and healthcare provisions. This increase in funding is, amongst other things, also expected to increase IRS scrutiny over high-wealth and high-income individuals, as well as complex partnerships and large corporations and transfer pricing cases.

Refer to a series of EY Global Tax Alerts available on EY.com here which detail the new 15% corporate minimum tax here, the climate-related changes here and for comments on the increased IRS funding see here and here.

EY Global Webcast – BEPS 2.0 developments: What to watch out for in country implementation register here on EY.com to watch on-demand.

EY Australia Webcast – Start your e-invoicing journey now with EY register here on EY.com register, webcast scheduled for 21 September at 12noon.

EY Global Webcast – Think ESG: Navigating the next phase of ESG reporting register here on EY.com to watch on-demand.

Refer to the below thought leadership articles and regular newsletters available on EY.com:

• Tax Guides – browse our in-depth guides covering corporate tax, indirect tax, personal taxes, transfer pricing and other tax matters in more than 150 jurisdictions.
  
  
• Global Tax Policy and Controversy Watch | August 2022 edition
  
  
• PE Watch | Latest developments and trends, August 2022
  
  
• EY Global Tax Controversy Flash Newsletter (Issue 49) | It's time to think and act globally on employment tax risks

Dean Madsen | New Zealand Tax Leader
Ernst & Young Limited, New Zealand
Dean.Madsen@nz.ey.com

Sarah-Jane Leslie | Tax Watch Editor, Tax Policy
Ernst & Young Limited
New Zealand
Sarah-Jane.Leslie@nz.ey.com

Paul Dunne | Tax Policy Leader
Ernst & Young Limited
New Zealand
Paul.Dunne@nz.ey.com

Sladja Freakley | Senior Manager, Tax Policy
Ernst & Young Limited
New Zealand
Sladjana.Freakley@nz.ey.com

Aaron Quintal | Partner, Private Client Services
Ernst & Young Limited
New Zealand
Aaron.Quintal@nz.ey.com