New Zealand tax and COVID-19 — new tax relief measures
The New Zealand government’s new tax measures provide some relief for taxpayers dealing with the effects of COVID-19. However, the global pandemic is causing a number of tax issues that have not yet been addressed. Simon Akozu and Phillip Chrisp of MinterEllisonRuddWatts explain the new tax measures, and flag some potential issues for multinationals that operate in New Zealand to consider.
New Tax Measures
On March 25, 2020, New Zealand’s Parliament passed the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020, which includes amendments that:
- Reinstate depreciation deductions for commercial and industrial buildings. Depreciation on most commercial and industrial buildings was controversially removed in 2011. The reinstatement of depreciation deductions for these buildings from the 2020–21 income year is a welcome development for owners of these properties. This measure is estimated to cost the government NZ$2.1 billion ($1.2 billion) over the costs forecast period (which runs to 2023–24).
- Increase the threshold for first year low-value asset write offs. The threshold for first year low-value asset write offs will increase from NZ$500 to NZ$5,000 for assets purchased in the 12 months from March 17, 2020, reducing to NZ$1,000 from March 17, 2021. This measure is estimated to cost NZ$667 million over the costs forecast period.
- Increase the threshold for paying provisional tax. The residual income tax threshold for paying provisional tax will increase from NZ$2,500 to NZ$5,000 to allow more small taxpayers to delay tax payments. This is estimated to cost NZ$4 million over the forecast period.
- Bring forward broader R&D refundability rules. Broader refundability rules that were originally intended to apply from the 2020–21 income year will now apply from the 2019–20 income year.
- Increase Inland Revenue’s powers to remit interest on late paid tax. Inland Revenue will be given greater powers to waive interest charges on tax payments due on or after February 14, where a taxpayer’s ability to pay tax on time is significantly affected by an outbreak of COVID-19. For this relief to apply the Commissioner of Inland Revenue must be satisfied that the taxpayer asked for relief as soon as practicable, and made the payment of tax as soon as practicable.
In addition, Inland Revenue has issued guidance that it will treat certain late 2018–19 income tax returns as having been filed on time for time bar purposes, if filed before May 31, 2020, and will waive any late filing penalties. This effectively extends the filing deadline for qualifying 2018–19 income tax returns. It is important to note that this would only be available for certain taxpayers, for example, those not subject to existing exclusions from the standard four-year time bar, or for certain disputes involving alleged tax avoidance or tax in dispute of greater than NZ$200 million.
As a general comment, these amendments are very welcome, but fall short of measures taken in other jurisdictions. We would like to see:
- Further measures to provide cash flow relief for taxpayers. The provisional tax and interest remission amendments in particular are a good start, but ideally the government would go further and extend the deadline for all tax payments to give businesses extra breathing room. The government could also allow businesses to opt into monthly goods and services tax (GST) filing to get quicker access to GST refunds.
- Further measures to provide administrative relief for taxpayers. Given New Zealand is now under “level 4” lockdown, extended filing deadlines for all forms of tax returns would be a welcome relief for many taxpayers who may struggle to file tax returns from home. We note that tax return filing deadlines have been extended in many jurisdictions (including in Australia, North America and within the EU).
- Steps taken to address technical tax issues arising from the disruption caused by COVID-19. We discuss some of the tax issues arising for multinationals below.
Potential Issues for Multinationals
The travel restrictions and economic disruption caused by COVID-19 create a range of potential tax issues for multinationals operating in New Zealand, including:
- Potential dual-residence. A New Zealand tax resident subsidiary of a multinational could potentially become tax resident in another jurisdiction if directors who would normally travel to New Zealand for board meetings exercise their powers outside New Zealand. Dual tax residence can impact a New Zealand’s subsidiary’s ability to maintain an imputation credit account, share losses, and group with other entities.
- Potential New Zealand permanent establishment. The unplanned presence of staff in New Zealand, who may work from home in New Zealand, could potentially create a permanent establishment for the multinational under New Zealand’s expansive permanent establishment tests.
- New Zealand PAYE exposure. A multinational may become subject to New Zealand’s payroll tax regime, if it has staff stranded working in New Zealand because they cannot leave.
- Potential “thin cap” issues. With the New Zealand dollar falling, and the value of assets in decline, there is an increased risk that a foreign-owned New Zealand subsidiary could breach thin capitalization thresholds, resulting in adverse tax consequences.
At the time of writing Inland Revenue has not issued any guidance on these points. In comparison, the Australian Tax Office (ATO) has already indicated that it will take a concessionary approach to the first three issues. We think the ATO’s view on these issues is sensible, and hope that Inland Revenue takes a similar approach.
Simon Akozu is a Senior Associate and Phillip Chrisp a Senior Solicitor at MinterEllisonRuddWatts.
This article first appeared in Bloomberg.