EY Tax News Update – Q2 2023

EY Tax News Update – Q2 2023

Welcome to the second edition of EY’s tax news for 2023, covering Q2 2023. Here you can stay on top of key tax developments for the quarter. You can also find details of upcoming events, along with links to EY insights.

Q2 2023 in brief

Inland Revenue updates

• Current draft consultation item: tax depreciation rate for gaming machines
• New finalised guidance, including:
  • Income tax – Application of the s CZ 39 5 year bright-line test to certain family and close relationship transactions
  • GST – Section 58: Specified agents of incapacitated persons, and mortgagees in possession
  • The interest limitation rules and short-stay accommodation
  • Provisional tax – impact on salary or wage earners who receive a one-off amount of income without tax deducted
  • GST – goods purchased on deferred payment terms
  • When employee allowances for additional transport costs for home to work travel are exempt for income tax
  • Kilometre rates for the business use of vehicles for the 2023 income year
  • A number of public Binding Rulings relating to the income tax treatment of payments made to employees in cryptoassets
  • National Average Market Values of Specified Livestock Determination 2023
  • GST – Payments made by parents to state and state integrated schools
  • Various Consumers Price Index adjustments for 2023
  • A number of Technical Decisions Summaries
• Other items recently consulted on, including:
  • Income tax – Main home exclusion to the bright-line test
  • Deductibility of software as a service (SaaS) configuration and customisation costs
  • GST: Directors and board members providing their services through a personal services company
• Release of high-wealth individuals research project report
• Special reports on Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023

Government and political updates

• Budget 2023 – (almost) no tax surprises
• New Tax Bill
• Taxation Principles Reporting Bill
• Economic update

International updates

• Updates from Australia include:
  • Federal Budget 2023/24
  • Central management and control test of corporate tax residency

EY Webcasts

• EY Global Webcast – How to understand the new class of tax authority governance programs in Asia-Pacific
• EY Global Webcast – BEPS 2.0: Pillar Two implementation and practical considerations

EY Insights

• Tax Guides – various matters covering 150 jurisdictions
• EY Global Tax News Alert: UK/Australia and New Zealand Free Trade Agreements enter into force
• Global Tax Policy and Controversy Watch, June 2023 edition
• The latest on BEPS and Beyond, June 2023 edition
• PE Watch: Latest developments and trends, June 2023 edition
• BEPS 2.0 Pillar Two Developments Tracker

Other items which may be of interest include:

• Kilometre rates for the business use of vehicles for the 2023 income year (OS 19/04 (KM 2023)
  
  
• A number of public Binding Rulings relating to the income tax treatment of payments made to employees in crypto assets. These are largely re-issues of previous statements with no substantive changes:
  • BR Pub 23/04 – salary and wages paid in cryptoassets
  • BR Pub 23/05 – bonuses paid in cryptoassets
  • BR Pub 23/06 – employer issued cryptoassets provided to an employee
  • BR Pub 23/07 – application of the employee share scheme rules to employer issued cryptoassets provided to an employee
     
• National Average Market Values of Specified Livestock Determination 2023 (NAMV 2023)
  
  
• GST – Payments made by parents to state and state integrated schools (BR Pub 23/08)
  
  
• Various Consumers Price Index adjustments for the 2023 income year, relating to:
  • Square metre rate for the dual use of premises: OS 19/03 (CPI 2023)
  • Household boarding service providers: DET 19/01 (CPI 2023) 
  • Short-stay accommodation: DET 19/02 (CPI 2023)
  • Standard-cost household service for childcare providers: DET 09/02 (CPI 2023)

A number of Technical Decision Summaries have also been released by Inland Revenue, including:

• Income tax: Timing of income and expenditure: (TDS 23/03) – relates to the timing of the derivation of the maintenance component of lease income and the timing of the deduction for maintenance expenditure
  
  
• Losses carried forward and debt remission income: TDS 23/04
  
  
• In-specie distribution of assets upon winding-up of a unit trust: TDS 23/05
  
  
• Deductibility of payment to settle legal proceedings: TDS 23/06
  
  
• Whether expenditure to resolve weathertightness issues is deductible: TDS 23/07
  
  
• GST input tax deductions and output tax liability: TDS 23/08
  
  
• Deductibility of expenditure: TDS 23/09 – concerns the deductibility of costs incurred by a company on certain regulatory registrations with an overseas regulator in respect of products it manufactures for a customer

Other items recently consulted on

Draft items that have been recently consulted on by Inland Revenue but not yet finalised as at the end of June 2023 include:

• Income tax – Main home exclusion to the bright-line test – a draft Question We’ve Been Asked was consulted on regarding how to determine a person’s main home for the purpose of the main home exclusion to the bright-line test, where the person uses two or more homes as a residence. Broadly, the conclusion reached in the draft item is that the main home will be the one with which they have the greatest connection. A draft Interpretation Statement was also consulted on, which considers how absences from the home during the bright-line period affect the application of the main home exclusion. Both draft items can be found on Inland Revenue’s website here.
  
  
• Deductibility of software as a service (SaaS) configuration and customisation costs (PUB00464) – a draft Interpretation Guideline was consulted on with respect to deductibility of costs a taxpayer incurs in configuring or customising a supplier’s application software in a SaaS arrangement. Depending on the circumstances, the costs may be deductible under the general permission, as development expenditure, or as relating to depreciable intangible property.
  
  
• GST: Directors and board members providing their services through a personal services company (PUB00424) – a draft Question We’ve Been Asked which addresses the GST treatment of a director or board member who provides their services through a personal services company. The draft item concludes that generally such personal services companies are able to be registered for GST.

Release of high-wealth individuals research project report

In April 2023, Inland Revenue released its high wealth individuals research project report. The project was commissioned to research the effective tax rates of high-wealth New Zealand families, using a “comprehensive” definition of income. Over 300 high-wealth New Zealand families were surveyed after legislation was passed to enable Inland Revenue to compel their participation.

The headline finding of the report is that the wealthiest New Zealanders have a mean effective tax rate (“ETR”) of 9.8%, compared to the 15.9% to 20.2% estimated for “middle” New Zealanders through the Treasury’s concurrent research. This is due in large part to the broad definition of economic income used in the report which included unrealised capital gains.

The report does not make an express recommendation for the implementation of a capital gains tax. However, the report suggests that investment in assets with non-taxable returns is incentivised. Prime Minister Chris Hipkins has recently ruled out a capital gains tax or wealth tax under his leadership.

Shortly before Inland Revenue’s report was published, Sapere released a report commissioned by tax consultancy OliverShaw. This report concluded New Zealand’s high wealth households have ETRs of 23% to 31% and that average ETRs increase as the net real economic incomes of households increase.

The different conclusions reached by the two reports may reflect the different objectives, assumptions and definitions used. Inland Revenue’s report and related fact sheet can be found here and the Beehive release is here.

Special reports on Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023

Inland Revenue has produced several Special Reports on some of the new rules contained in the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Act 2023. These reports cover:

• Build-to-rent exclusion from the interest limitation rules.
• Tax relief for certain payments and benefits provided by employers to employees due to the North Island flooding events.
• Changes to the GST apportionment and adjustment rules.
• Amendments to rollover relief for the bright-line test and interest limitation rules.
• Information on the new marketplace rules for listed services that generally require operators of electronic marketplaces to collect GST on supplies of “listed services” from 1 April 2024. “Listed services” may include the supply of ride-sharing and ride-hailing, delivery services for food and beverages, and taxable accommodation services.

The Special Reports can be accessed via Inland Revenue’s Tax Policy website here.

Budget 2023 – (almost) no tax surprises

On 18 May 2023, the Government released its “Wellbeing Budget 2023: Support for today, Building for tomorrow”. A key tax measure included raising the trustee tax rate from 33% to 39% in order to align the trustee tax rate with the top personal tax rate, with effect from 1 April 2024. There were no other major tax surprises or reforms.

Further information on Budget 2023 can be found in the article New Zealand Budget: How can today’s pressures unleash tomorrow’s opportunity? by Aaron Quintal and Adam Naiman, which was sent out on 18 May. If you have not received a copy of this article and would like to read it, please get in touch with us.

New Tax Bill

The Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Bill was introduced to Parliament on the same day as Budget 2023.

Among other things, the Bill includes:

• The proposed new trustee tax rate of 39% announced in Budget 2023 along with related provisions, including accompanying new rules for beneficiary income derived by certain close companies.

• Provisions to implement “Pillar Two” of the OECD’s Global Anti-Base Erosion rules in New Zealand. Pillar Two essentially introduces a minimum 15% global effective tax rate on the mobile income of multinational entities with annual revenues over €750 million. In New Zealand, it is proposed that an “Income Inclusion Rule” and “Under Taxed Profits Rule” will be introduced, together with a “Domestic Income Inclusion Rule”. The application date is dependent on the take-up of the rules in other countries however the Income Inclusion Rule will not apply before 1 January 2024, with the introduction of the Under Taxed Profits Rule not occurring before 1 January 2025.

Information on the Bill, including the Commentary on the Bill and a fact sheet on the proposed increase in the trustee tax rate, can be found on Inland Revenue’s Tax Policy website here. Further details on the proposed implementation of Pillar Two can be found in an EY Global Tax News Alert here. If you would like more information on any of the changes proposed in the Bill, please get in touch with your usual EY tax advisor.

Taxation Principles Reporting Bill

The Taxation Principles Reporting Bill was also introduced to Parliament on 18 May 2023. This Bill proposes a set of “generally accepted tax principles” and requires the Commissioner of Inland Revenue to prepare an annual report on how the tax system is tracking against those principles. The reporting required by the Bill is intended to help the public better understand how the tax system is performing, inform public consultation on tax policy, and ensure that tax policy is developed in line with values society considers desirable in a tax system.

The Commentary to the Bill states that the proposed tax principles “are intended to be universally accepted principles that have been used in numerous tax reviews in New Zealand and abroad.” The principles are:

• Horizontal and vertical equity
• Efficiency
• Revenue integrity
• Compliance and administrative costs
• Certainty and predictability
• Flexibility and adaptability

While each principle is described in the Bill, we are concerned that the descriptions are not intended to be definitions and that many of the descriptions use undefined concepts which may not be well understood, such as the concept of “economic income”.

If passed by Parliament, the proposed legislation will be effective 1 July 2023, with the first annual report under the Bill due by 31 December 2023. Further information on the Bill can be found on Inland Revenue’s Tax Policy website here.

Economic update

The Treasury released the Interim Financial Statements of the Government of New Zealand for the eleven months ended 31 May 2023 – see the Treasury release here and the Beehive release here. Key figures include:

• Tax revenue of $103.3 billion, which was $2.2 billion below forecast. This was largely due to lower corporate profits and other individual tax revenue.
• Operating balance before gains and losses (OBEGAL) deficit of $6.5 billion, which was $2.1 billion greater than forecast.
• Gross debt at $133.9 billion (34.6% of GDP), being $1.3 billion higher than forecast.

Key updates from Australia include:

• Federal Budget 2023/24 was delivered on 9 May 2023, including an announcement that Australia will adopt legislation to implement the OECD’s Pillar Two Global Anti-Base Erosion rules, effective for income years commencing on or after 1 January 2024. Further information regarding the Federal Budget is available in the EY Global Tax News Alert here, with more detailed information on adoption of the Pillar Two rules in the separate Alert here.

• There have been developments in relation to the central management and control test of corporate tax residency, including the release of a Draft Practical Compliance Guideline by the Australian Taxation Office. The Draft Guideline confirms that the transitional compliance approach in this area ended on 30 June 2023. It also proposes a new Risk Assessment Framework to assist foreign-incorporated companies in managing their compliance risks for the central management and control test. Companies with a presence in Australia may need to act - get in touch with your usual EY tax advisor to discuss any potential implications for your business.

EY Global Webcast – How to understand the new class of tax authority governance programs in Asia-Pacific register here on ey.com to watch on-demand

EY Global Webcast – BEPS 2.0: Pillar Two implementation and practical considerations register here on ey.com to watch on-demand

Refer to the below guides, 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
  
  
• EY Global Tax News Alert: UK/Australia and New Zealand Free Trade Agreements enter into force
  
  
• Global Tax Policy and Controversy Watch, June 2023 edition
  
  
• The Latest on BEPS and Beyond, June 2023 edition
  
  
• PE Watch: Latest developments and trends, June 2023 edition
  
  
• BEPS 2.0 Pillar Two Developments Tracker – provides a summary of administrative and legislative developments around the world relating to the implementation of Pillar Two