Taxation (Depreciation, Payment Dates Alignment, FBT, and Miscellaneous Provisions)

366 Pages·2006·0.91 MB·English

Taxation (Depreciation, Payment Dates
Alignment, FBT, and Miscellaneous
Provisions) Bill

Officials’ Report to the Finance and Expenditure
Committee on Submissions on the Bill

14 February 2006

Prepared by the Policy Advice Division of the Inland Revenue Department
and the Treasury

CONTENTS
Changes to the tax depreciation rules 1
Overview 3
Change to the method of calculating depreciation rates for plant and equipment 5
Lower depreciation rates for buildings 8
Changes to the low-value asset thresholds 15
Other concerns 19
Drafting issues 21
Issues raised by officials 23
Other issues 25
Aligning the payment of provisional tax with GST and basing
provisional tax payments on a percentage of GST taxable
supplies 27
Overview 29
Aligning the payment of provisional tax with GST payment dates 31
Basing provisional tax payments on a percentage of GST taxable supplies 37
Other 40
Drafting 45
Subsidy for payroll agents 49
Overview 51
Scope of the subsidy 52
Minor drafting changes 59
Fringe benefit tax 61
Overview 63
Motor vehicles 66
Application of GST to FBT 83
Start of FBT day 84
Income protection insurance 86
Otherwise deductible rule 89
Charities providing short-term credit facilities 90
Application of general anti-avoidance rule to FBT 91
Fringe benefit filing 92
Car parks 95
Transport benefits 97
Employment-related loans 101
Business tools exemption 105
Benefits related to health and safety 109
Low-value unclassified benefits 111
Taxation of share-lending transactions 113
Overview 115
Application date 119
Types of securities 121
Relationship with subpart CB 125
Deductions for excepted financial arrangements 130
Replacement payments 133
Tax credits 136
Treatment of non-fully imputed dividends 139
Non-resident share users 141
Non-resident share suppliers 143
Foreign dividends 144
Replacement shares 145
12-month restriction 146
Collateral 147
Anti-avoidance rules 148
Drafting 150
Officials’ recommendations 151
Allocation of research and development tax deductions 153
Overview 155
Deductions under the general provisions 156
Depreciation issues 157
Market development expenditure requirements 159
Timing issues 161
Extending proposals 165
Corporate migration 169
Overview 171
Withdraw proposed legislation 172
Application date 173
Taxation of capital gains to non-residents 176
Technology companies and valuation of assets 178
Extent of application of rules 179
Timing of distribution 181
Proposed exemptions 182
Interaction with double tax agreements 185
Technical issues 186
Temporary exemption from tax on foreign income for new
migrants and certain returning New Zealanders 191
Overview 193
Residence definition 194
Length of the exemption 195
Non-residence period 197
Scope of the exemption 198
Eligibility criteria 200
Certification process 206
Share options 207
Trusts 209
Accrual rules 210
Non-resident withholding tax 211
Family assistance implications 212
Immigrants’ four-year exemption from certain FIF interests 213
Disclosure 214
Other 215
Drafting issues 216
Information-reporting and record-keeping requirements for
foreign trusts 221
Overview 223
Application date for new requirements 226
Validity of the new requirements 227
Sanctions for non-compliance 233
Scope of the new requirements 238
Approved organisation 240
Qualifying New Zealand-resident trustee 243
Information-disclosure requirements 244
Record-keeping requirements 247
Drafting 250
Trans-Tasman imputation credit streaming 251
Overview 253
Justification for changes 254
Trans-Tasman imputation credits 255
Companies resident in New Zealand 256
Deductibility of interest 257
Proceeds used to generate income which is subject to New Zealand tax 258
Streaming concerns 259
Further “grandfathering” provisions 260
Binding ruling applications 261
Resident withholding tax deductions 262
Imputation credits and resident withholding tax deductions 263
Foreign hybrids and foreign tax credits 265
Overview 267
Dividend reduction 268
Grey list exemption for foreign hybrids 271
Grey list company underlying foreign tax credits 272
Definition of “costs” 273
Dividend withholding payments and other submissions 274
Application dates and savings provision 276
Other changes to the Income Tax Act 279
Deductible distributions from co-operatives 281
Tax consequences of natural disasters 289
ACC attendant care 294
Venture capital investment alongside the Venture Investment Fund 297
Exemption for interests in employment-related foreign superannuation schemes 299
Increase in child tax rebate 304
Reverse takeovers and continuity rules 305
Income tax rates 310
Farm conversions 312
Rollover of exemption for investments in listed CFCs 317
Other changes to the GST Act 319
GST on goods and services supplied to security holders 321
GST and international postage stamps 325
GST and distributions for no consideration 331
Other changes to the Tax Administration Act 333
Commissioner may issue an assessment without first issuing a NOPA 335
Response period to start a dispute for disputable decisions 336
Deemed acceptance of a valid NOPA if Commissioner does not respond
within the specified period 337
Shortfall penalty for taking an unacceptable tax position 338
Rewrite of the Income Tax Act 339
Rewrite Advisory Panel – recommended changes 341
Changes recommended by others 344
Other changes recommended by officials 345
Application of section EE 41 to buildings 347
PAYE deductions 348
Prohibitions on having imputation credit accounts 349
Definition of “beneficiary income” 350
Cross-references between the GST Act and new credit contracts legislation 351
Minor remedial amendments 354
Other changes pertaining to the bill 357
Wine equalisation tax rebate 359
General matters 360
Changes to the tax
depreciation rules
1
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OVERVIEW

Clauses 53, 54, 55, 56, 57, 58, 80, 151, 168, 169 and 194

The bill and Supplementary Order Paper No. 382 introduce a number of changes to
the tax depreciation rules. The key changes have been the subject of earlier public
consultation, in an officials’ issues paper released in July 2004.

The purpose of the changes is to:

• reduce the impact that tax depreciation rates may have on investment decisions,
by changing the methods of calculating tax depreciation rates so they more
closely match estimates of economic depreciation; and
• reduce compliance costs associated with the current tax depreciation rules.

Economic theory suggests that tax depreciation rates should mirror how an asset
actually declines in value. Having tax depreciation rates that mirror economic
depreciation avoids the situation whereby tax depreciation rates artificially encourage
or discourage investment in particular types of assets.

Below is a summary of the key changes in the bill as introduced:

Clause 53 maintains the old depreciation rates for plant and equipment acquired
before 1 April 2005 and for buildings acquired before 19 May 2005.

Clause 54 sets out the proposed amendment for how the tax depreciation rate for an
item of plant and equipment is calculated. The amendment introduces the formula for
double declining balance (2 / estimated useful life of an asset). This formula creates a
tax depreciation rate that is generally likely to provide better estimates of how plant
and equipment decline in value. Applying the new formula will increase depreciation
rates for shorter-life plant and equipment and will not change depreciation rates for
longer-life plant and equipment. The Supplementary Order Paper sets depreciation
rates for certain motor vehicles and aircraft. These changes affect assets acquired
from 1 April 2005 and the new rates will apply from the 2005–06 and subsequent
income years.

Clause 54 also sets out the proposed amendment for how tax depreciation rates for
buildings are calculated. The amendment introduces the straight-line depreciation
formula. This formula and its diminishing value equivalent are likely to produce a
present value of depreciation deductions that more closely mirror how buildings
decline in value over their useful life. Applying the new formula decreases
depreciation rates for buildings. These changes will affect buildings acquired on or
after 19 May 2005, and will apply from the 2005–06 and subsequent income years.

Clause 55 is a compliance cost-saving measure. It is aimed at allowing taxpayers the
option of continuing to depreciate plant and equipment acquired after 1 April 2005 at
the current depreciation rates for the 2005–06 income year and beyond. Without this
clause, taxpayers would be required to depreciate these assets at the proposed new
rates from the beginning of their 2005–06 income year.

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Clause 56 proposes changes to the low-value asset thresholds. The first threshold
allows an immediate deduction for capital expenditure that is less than $500. The
second threshold, known as the single supplier rule, allows an immediate deduction
for capital expenditure of up to $500 on items that have the same depreciation rates
and that are purchased at the same time from a single supplier.

Clause 57 proposes that the cost of selling or disposing of an asset is fully deductible.
This change ensures that when the cost of selling an asset exceeds the amount
received, any resulting loss is fully deductible. This change applies to asset disposals
from the 2005–06 income year.

There are some consequential proposed changes because of the new methods for
calculating tax depreciation rates. Together the bill and Supplementary Order Paper
No. 382 provide the following amendments to definitions:

• Clause 58, as amended, includes references to the new sections EE 25 to EE
25D in the definition of economic rate.
• Clause 143 amends the definition of “finance lease” in section OB 1 to also
include reference to the new sections EE 25B, to EE 25D.

Clause 80 extends section GC 6 to allow a deduction to be denied when the
Commissioner of Inland Revenue is of the opinion that certain arrangements are
intended to allow the taxpayer to apply the new higher depreciation rates to existing
assets. The concern is that the introduction of the new higher depreciation rates will
provide taxpayers with an incentive to sell and re-acquire assets for the benefit of the
higher depreciation rates.

Clause 151 inserts new Schedule 11B. The Schedule specifies the new depreciation
rate bands (both straight line and diminishing value) for plant and equipment, and
buildings. For administrative reasons, the legislation groups a band of depreciation
rates into a single depreciation rate. Having depreciation bands reduces the number of
depreciation rates that taxpayers and the department have to consider.

Clauses 168 and 169 propose amendments to sections 91AAF and 91AAG of the Tax
Administration Act 1994. These amendments result from the new methods for
calculating the tax depreciation rates. The proposed amendments require the
Commissioner to have regard to the proposed new methods when determining an
asset’s depreciation rate. These changes apply to plant and equipment acquired after
1 April 2005 and for buildings acquired on or after 19 May 2005.

Eight submissions have been received on the changes to the tax depreciation rules
introduced in the bill. The overall tenor of submissions is:

• general support for changes that increase tax depreciation rates;
• general criticism of the changes that seek to reduce building depreciation rates;
and
• that the changes to the low-value asset thresholds do not go far enough.

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