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Canterbury tax relief, GST loophole closed

· August 15, 2018

Revenue Minister Stuart Nash has confirmed Parliament will extend tax relief for Canterbury businesses affected by issues relating to depreciation following the earthquakes.

Mr Nash today introduced a Supplementary Order Paper (SOP) to the Taxation (Annual Rates, Modernising Tax Administration, and Remedial Matters) Bill currently making its way through Parliament.

“The SOP extends tax relief for Canterbury businesses affected by earthquakes. It extends depreciation roll-over relief for a further five years to the end of the 2023-24 income year. I have been advised that at least 40 Canterbury businesses will be adversely affected if current depreciation provisions are not extended.

“The tax issue arises because an insurance payout on a depreciable asset can attract a tax liability which may cause consequent cash flow problems. We do not want to hinder the city’s recovery or unfairly burden these taxpayers.

“Many Canterbury businesses are experiencing problems outside their control, such as delays with insurance pay-outs or finding tenants for properties or making progress on building projects. This measure will provide relief to affected businesses and further assist with the Canterbury rebuild.”

Mr Nash says the SOP will also close a loophole which allows non-profit entities to potentially avoid GST on income from asset sales. The change was signalled in an issues paper released on 15 May and will apply from that date.

“The GST treatment of non-profit organisations differs from other entities,” says Mr Nash. “Non-profits can register for GST and claim GST refunds on most of their expenses, even if their turnover is below the $60,000 threshold for GST registration. In many cases non-profit bodies do not pay much GST on their activities.

“In turn, when a GST-registered body sells an asset for which it has claimed GST expenses, it must pay GST on the income from the sale. Inland Revenue has applied this rule since GST was first introduced in 1986.

“Revenue officials have recently been advised of a new legal interpretation of this rule which exposes the tax system to potential losses. For the avoidance of doubt, the SOP introduced today will clarify the GST rules.

“The new interpretation is not consistent with the way the GST rules have been applied and understood in the past. If GST expenses have been claimed by a non-profit body in relation to an asset, GST should apply to the asset when it is sold or there is an equivalent event, such as an insurance pay-out.

“The tax system is based on fairness, and being simple and efficient to operate. The new interpretation threatens those principles and the law change restores certainty.

Hong Kong double tax agreement updated

· August 13, 2018

Revenue Minister Stuart Nash says New Zealand’s ability to detect and prevent tax evasion is enhanced by an update to our double tax agreement with Hong Kong which is now in force.

The update to the 2010 double tax agreement (DTA) removes an impediment to the automatic exchange of information (AEOI) between the two tax jurisdictions.

“The double tax agreement with Hong Kong is one of 40 such tax treaties with our main trading and investment partners,” says Mr Nash. “They encourage growth in economic ties by reducing tax impediments to cross-border trade and investment.”

“Double tax agreements provide greater certainty of tax treatment, eliminate double taxation, reduce withholding taxes on cross-border investment returns, and exempt certain short-term activities from income tax.

“But they also enable New Zealand and Hong Kong tax officials to help each other to detect and prevent tax avoidance and evasion. DTAs do this by establishing a mechanism for exchanging information.

“New Zealand residents are taxed on their worldwide income and so the exchange of information is critical to effective tax enforcement. It makes it possible to obtain off-shore information to verify that residents are correctly reporting their foreign income. Before these updates took effect, information was only exchanged on request between Hong Kong and New Zealand. The update allows for automatic information exchanges under a global standard supported by the OECD and G20.

“Under this AEOI initiative, New Zealand financial institutions must review their accounts and compile information which is then reported to Inland Revenue. The updated double tax agreement will allow New Zealand’s first automatic exchange of information with Hong Kong to occur by 30 September 2018.

“The AEOI initiative is an international response to mounting concerns with the problem of off-shore tax evasion, that is, the ability of individuals and entities to evade tax by hiding their wealth in off-shore accounts.

“Hong Kong is an important international financial centre and if it was not included as an AEOI exchange partner it would leave a significant gap in our tax compliance network. We are progressively expanding and updating our network of double tax agreements to clamp down on tax evasion,” Mr Nash says.

More information is available here: http://taxpolicy.ird.govt.nz/tax-treaties/hong-kong

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