The COVID-19 crisis has put significant financial stress on many New Zealand businesses. For many, tax is only one of the liabilities fighting for attention among others in these uncertain times. It has also been a difficult time for internal tax functions with the Alert Level 4 lockdown coinciding with tax year end and considerable uncertainty for future tax periods.
The government’s 15 April 2020 announcements are welcome in this context and will provide a measure of relief for many taxpayers. We will monitor those proposals as details emerge.
In this update, we analyse the other key tax relief measures announced by the government so far. We also take this opportunity to provide a reminder about existing relief mechanisms in the Tax Administration Act 1994 (TAA) that may become significant for taxpayers in the coming months.
New COVID-19 tax relief measures
On 25 March 2020, Parliament enacted under urgency the COVID-19 Response (Taxation and Social Assistance Urgent Measures) Act 2020 (the Relief Act). The Relief Act was enacted to provide taxation assistance alongside the government’s overarching COVID-19 pandemic response in order to soften the economic impacts.
Use of money interest remission
A new provision, s 183ABAB of the TAA, has been enacted which allows the IRD to remit interest on a late payment by a taxpayer if the late payment was due to the taxpayer being “significantly adversely affected by the COVID-19 outbreak”.
This amendment has effect from 25 March 2020 and applies to tax payments due on or after 14 February 2020. This new ability will exist for 24 months following 25 March 2020, unless an Order in Council is declared extending it.
The IRD provided the following indicative guidance which suggested that the discretion will be exercised where:
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A taxpayer’s income or revenue has reduced by at least 30% compared to the same month 12 months earlier (if your February 2020 income is 30% lower than your income from February 2019, for example).
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A taxpayer has explored other options to support them financially, such as talking with their bank about additional finance or re-negotiated loans or overdrafts.
The IRD’s updated guidance on the new provision stated that the Commissioner will consider a taxpayer to have been “significantly affected by COVID-19 financially” where their income has been negatively impacted by COVID-19 and, as a result, the taxpayer is unable to pay their taxes on time.
While untested, one view is that the “significantly adversely affected” standard and, in particular, the earlier indication that a taxpayer had explored other funding options, sets a high standard for relief and requires that there are no other reasonable means available to source funds for the tax payment.
The current uncertainty around the application of the new standard could well drive increased demand for tax pooling services around upcoming provisional tax payments.
Depreciation on non-residential buildings
Tax depreciation on commercial and industrial buildings has been reinstated with effect from 1 April 2020. Depreciation on buildings with an estimated useful life of greater than 50 years was reduced to 0% with effect from the 2011-2012 income year. Prior to 1 April 2011, depreciation on such buildings had allowed at 2% per annum. The new depreciation rate will be 2% declining value or 1.5% straight line.
This is in line with the Tax Working Group’s recommendation to reinstate depreciation on non-residential buildings as part of their Final Report released in February 2019, but without the trade-off of a comprehensive capital gains tax.
It is possible that the reinstatement was in train before the COVID-19 crisis. The reduction to 0% in 2011-2012 was unpopular. It was justified at the time on the basis that New Zealand building price data suggested that such buildings had been increasing in value. That analysis was questionable and the change put us out of step with the approach adopted by some key competitor jurisdictions. It is a welcome move.
The change will benefit accommodation providers affected by the pandemic, but its implications will be far broader than that. The cost of the reintroduction is estimated at NZ$2.1 billion.
The distinction between commercial and residential buildings will give rise to some fine distinctions and is likely to be an area of contention in the future.
Other relief measures and 15 April 2020 announcements
The government’s announcements on 15 April 2020 will provide a measure of relief for many taxpayers. The proposed changes will include:
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A tax loss carry-back scheme permitting anticipated losses in the year ended 31 March 2021 to be carried back to the 2020 income year (affecting 7 May 2020 tax obligations and potentially giving rise to refunds of 2020 tax paid). The scope of the scheme is stated in broad terms and is likely to extend beyond the immediately affected years. Temporary measures will be included in a bill to be released in the week beginning 27 April 2020.
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A relaxation of the loss continuity rules by introducing a “same or similar business” test to facilitate new capital raising without impacting on existing loss balances (to be included in a bill in the second half of 2020, but with retroactive application to the 2020-2021 and later income years).
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Greater IRD discretion around the extension of statutory deadlines and timeframes for an 18 month period.
Other tax relief matters already introduced through the Relief Act include:
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Increasing the low-value asset write-off threshold from NZ$500 to NZ$5,000,
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Increasing the provisional tax threshold from NZ$2,500 to NZ$5,000, and
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Bringing forward the application date for the broader refundability rules for Research & Development tax credits.
We have not commented on the government wage subsidy in this update, you can find our comment on the initiative here.
Existing tax relief measures
In addition to the new relief offered to taxpayers under the Relief Act, there are already other mechanisms for tax relief in the TAA. The TAA provides for various forms of tax relief such as the write off or remission of amounts owing, relief for serious hardship, and provision for instalment arrangements. These forms of relief are generally subject to the Commissioner’s discretion.
The IRD, in Standard Practice Statement 18/04 (SPS 18/04), noted that the different forms of relief may be granted in combination, even if a taxpayer has only sought one form in particular.
Instalment arrangements
The TAA makes provision for tax instalment arrangements whereby a taxpayer can request financial relief by requesting to enter into an instalment arrangement with the Commissioner. The Commissioner must consider the taxpayer’s financial position in determining whether to accept, decline, counter-offer or seek further information in respect of the instalment arrangement request.
There are various factors which allow the Commissioner to decline an instalment arrangement request. These factors include where it would not maximise the recovery of outstanding tax; the Commissioner considers that the taxpayer has the ability to pay the outstanding tax; the taxpayer is frivolous or vexatious; or the taxpayer has not fulfilled their obligations under a prior instalment arrangement. Where the taxpayer is a natural person, the Commissioner is prohibited from entering into an instalment arrangement if it would place the taxpayer in “serious hardship” (addressed further below).
Instalment arrangements are discretionary and are usually reserved for situations where taxpayers are unable to pay tax when due, with the IRD adopting a reasonably hard line about the circumstances that qualify, including the requirement that certain assets be realised where possible to fund the timely payment of tax. Our expectation is that in the current environment the IRD may take a more benign approach to instalment arrangements and the level of financial distress that a taxpayer must be experiencing.
Relief for serious hardship
The TAA includes provisions permitting a taxpayer to request relief where they would face serious hardship if the outstanding tax was sought by the Commissioner. The relief provided for includes instalment arrangements or the write-off of the amount owing (or a combination).
There is a two-step approach that the Commissioner will take when considering whether to grant relief to a taxpayer on the basis of serious hardship:
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First, whether they meet the definition of “serious hardship”. “Serious hardship” for the provisions is defined in the TAA (s 177A) as whether the taxpayer would have significant financial difficulties after repayment of the outstanding amount due to (one or more of) the following factors:
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they or their dependant has a serious illness,
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they would be unable to meet minimum living expenses,
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they would be unable to meet the cost of medical treatment for an illness or injury for themselves or a dependant,
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they would be unable to meet the cost of education for their dependant, or
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any other factor that the Commissioner thinks relevant.
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Non-compliance with tax obligations is not to be considered by the Commissioner when making a decision on whether a taxpayer faces serious hardship.
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The second step, if the Commissioner has found that the taxpayer meets the criteria for “serious hardship”, is to determine what relief should be granted to the taxpayer. The Commissioner may have regard to the taxpayer’s prior compliance and to how the outstanding amount arose in informing whether the discretion to grant relief is exercised.
Remission
The TAA provides the Commissioner with discretion for the remission of both interest and/or late payment penalties in certain circumstances. These circumstances include where there is: an event or circumstance beyond the taxpayer’s control; a declared emergency event; or remission would be consistent with the Commissioner’s duty to collect of the highest net revenue over time.
An event or circumstance beyond the taxpayer’s control may include an accident, disaster, illness or emotional or mental distress. The event must also provide reasonable justification for why there was a breach of the relevant tax laws. In these circumstances, the Commissioner may remit (among others) a late filing penalty, a non-electronic filing penalty, and initial and incremental late payment penalties. A significant limitation is that this provision does not allow for the remission of interest or most shortfall penalties.
In addition, the Commissioner may, remit interest and/or penalties if to do so would be consistent with her duty to collect the highest net revenue over time. Again, most shortfall penalties are not included within this relief power. The Commissioner may not consider the taxpayer’s financial situation in deciding whether to grant relief using this specific power.
If you would like to discuss your eligibility for any of the relief measures addressed above, or any other tax issues you might be encountering during these uncertain times please get in touch with the contacts listed, or your usual Bell Gully advisor.