Inside this edition
Provisional tax improvements 1
The perils of a PPOA 2
Targeted marketing activities 3
Taxation of insurance receipts 3
Nordic tax records 4
Beware of paying excessive salaries 4
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Provisional tax improvements
New legislation enacted in February substantially simplifies obligations under the provisional tax regime.
Most taxpayers pay their provisional tax at three times through the course of their financial year, being the 28th day of the 5th, 9th and 13th months after their balance date.
The ‘standard uplift’ method determines a person’s liability based on a prior year’s tax payable (105% for last year, or 110% for previous). The problem is that if a person’s final liability is more than the estimate, Inland Revenue will charge use-of-money interest (UOMI) on the difference (currently 8.27%).
This is a source of frustration as taxpayers are either rewarded for having a great year by being charged interest by IRD, or they have to scrutinise their own tax position as they trade through the year and make increased payments to IRD when they could be focusing on their business.
In a positive change, the UOMI rules are being amended from the 2017/2018 income year. UOMI will no longer be charged from the first two provisional tax dates on the difference between a person’s ‘standard uplift’ liability and their actual liability based on their completed tax return.
In order to defer the start of the interest charge the taxpayer must meet the minimum payment obligations under the standard uplift method on the first two instalment dates. Where the taxpayer does not make the required payments, UOMI will apply on the first two instalment dates based on the lower of the difference between: the amount due under standard uplift and the actual payment; or one-third of the residual income tax liability for the year and the actual payment.
To be eligible for the concession, companies within
a group will all be required to use either the standard uplift or GST ratio method for calculating provisional tax. This rule is designed to prevent related entities gaming the differences between the standard uplift and estimation methods to reduce exposure to UOMI.
In a similarly positive change, the existing concession, which defers UOMI for individuals with a tax liability of less than $50,000 to their terminal tax date (typically the following 7 February or 7 April), is being increased and widened. From the 2017/2018 income year, the concession is being increased to $60,000 and extended to all types of taxpayers, such as companies.
As with the first change above, there are requirements that need to be met in order for the concession to apply, such as meeting obligations
under the standard uplift method. IRD expects that the change to the safe harbour threshold will eliminate UOMI charges for approximately 67,000 taxpayers, at least 63,000 of these being non-individuals who did not previously qualify for the concession.
Finally, the late penalty regime is also changing. Currently, a 1% late payment penalty is charged the day after tax is due, a further 4% penalty is charged at the end of the first week and a 1% incremental late payment penalty is charged each month thereafter. For most taxpayers the incremental 1% monthly penalty will no longer be charged on GST periods starting from 1 April 2017 or income tax and working for families debts relating to the 2017/2018 or later years.
The perils of a PPOA
It is important for individuals to correctly determine their residency status for tax purposes, as a New Zealand tax resident is taxed on their ‘worldwide income’.
A person is considered to be a New Zealand resident for tax purposes if they have been physically present in New Zealand for more than 183 days in any 12-month period or if they have a ‘permanent place of abode’ (PPOA) in New Zealand. A person ceases to be a tax resident if they are physically absent from New Zealand for 325 days in any 12-month period. However, if a person maintains a PPOA throughout the period they are absent from New Zealand, they are still considered a New Zealand tax resident.
A recent Taxation Review Authority decision has highlighted the importance of these residency rules, and in particular, the breadth of a PPOA.
The taxpayer, a sea captain, had an interest in his employer’s superannuation fund, and in foreign investment unit trusts owned by him, which were all sold by August 2008.
The taxpayer was accused by Inland Revenue (IRD) of maintaining a PPOA in the income tax years ended 31 March 2005 to 31 March 2009 (inclusive), and was therefore liable to pay New Zealand income tax on his interest in the unit trusts and any deemed income under the Foreign Investment Fund (FIF) rules.
The taxpayer had been a mariner all his adult life, and under the terms of his employment, spent approximately eight months a year at sea. The taxpayer’s wife typically accompanied him at sea. In
1998 he became a trustee and beneficiary of a trust which owned a property in New Zealand. The taxpayer returned to this house at least twice a year in the years from 1998 until October 2014, when the property was sold. The TRA found this property to be a PPOA for the taxpayer, supported by the following facts:
The property was not rented when the taxpayer was absent from New Zealand - friends and family were able to stay on occasion but otherwise the property was available for use by the taxpayer and his wife.
During the tax years in dispute, the taxpayer, on average, spent three and a half months in New Zealand, with credit card statements for these periods showing daily use in the suburb where the property is situated.
The taxpayer’s salary was used to meet the trust’s loan obligations, pay insurances, utilities and other expenses.
Vehicles belonging to the taxpayer, his wife, and the trust were registered to the property during the years in dispute.
A SKY subscription was maintained for the taxpayer’s use when at the property.
The address was used for mail, including mail related to the trust’s rental properties.
When not at sea, the taxpayer’s payslips were sent to the property.
The taxpayer was registered on the Electoral Roll in 2008 at this address.
As a result, the TRA upheld the Commissioner’s reassessments for each of the 2005-2009 income tax years, to tax the taxpayer’s interest in the unit trusts and any deemed FIF income from the superannuation fund. Adding to the cost, a shortfall penalty for taking an unacceptable tax position was charged, calculated at 10% of the tax shortfall.
Targeted marketing activities
A shared universal goal of all businesses is to maximise sales of products or services. To achieve this, business owners need to implement effective marketing strategies that focus on how to reach potential customers and make their products stand out from the competition.