Terry Baucher on what the IRD could do about Coronavirus, watch out for Aussie beneficiaries in NZ trusts, and some tax year end planning tips

They say a week is a long time in politics, but the pace of change over the past week as the global response to the Covid-19 pandemic ramps up has been astonishing in its rapidity. On Tuesday, as Italy went into self isolation, the Italian government announced an initial €12 billion stimulus package. This includes loans to small and medium sized companies, compensation for firms whose turnover has plunged more than 25% and apparently some form of moratorium for business and personal mortgage repayments.

On Wednesday night, the British Budget, which was actually scheduled at that time, included a further £12 billion of Coronavirus measures, including a new temporary Coronavirus business interruption loan scheme and support for taxpayers with their payments through H.M. Revenue and Customs time to pay service. In fact, HMRC has now set up a dedicated Covid-19 helpline for advice and support.

Finally, Australia announced an A$17.6 billion dollar package which will mean 6.5 million lower income Australians will receive a one off payment of A$750. This is apparently a repeat of something that happened in the wake of the Global Financial Crisis. But of great interest to a lot of business owners is the fact that small and medium sized businesses will receive up to  $25,000 to cover the costs of the employee wages and salaries. And that will be paid by the Australian Taxation Office based on the tax withheld. So after you pay PAYE they'll then give you a refund.

Here in New Zealand, the response has been more muted to date. But given the turmoil in the markets, I think we can expect to see more concrete proposals come in the next few days. Inland Revenue has given some guidance for anyone affected by the Covid-19 outbreak so far, but most of this involves basically asking Inland Revenue if you want to delay payment of tax or enter into an instalment arrangement to pay your tax. As far as I can sit, tell the use of money interest on unpaid tax of 8.35% will still apply.

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As I said, we should expect to see something more concrete coming out in the next few days. But here's just a few ideas Inland Revenue and government might want to consider. Inland Revenue should automatically allow anyone owing say under $50,000 of tax to enter into an instalment arrangement with it over say a three year period. Inland Revenue should also cancel all late payment penalties for the foreseeable future and then also lower the use of money interest rate from the current 8.35% To maybe the FBT prescribed interest rate of 5.26%. And as I said a few minutes ago, a measure similar to the Australian proposal for small and medium sized businesses would be hugely welcome.

Aussie tax grab

Speaking of Australia, I'm currently dealing with three separate cases in relation to the issue of Australian tax residents receiving distributions from New Zealand complying trusts.

There are about 600,000 Kiwis in Australia. And the very valuable temporary migrant temporary residence exemption is available to many of them. Unsurprisingly, quite a few trusts have been making distributions to beneficiaries resident in Australia. But the Australian tax treatment depends on the immigration status of the Kiwis resident in Australia.

And in one or two cases I've come across, the intended beneficiaries actually are married to Australian citizens because they arrived prior to 2001 when the current set of rules were largely implemented. They have returning residence visas so they don't qualify for the temporary resident's exemption.

What's also become apparent is a few of these trusts in New Zealand have, as I said, beneficiaries who have been resident in Australia for some time. And in some cases people have been extremely careless, and these persons may still be trustees of a New Zealand Zealand Complying Trust - in which case under Australian law, the trust is deemed to be tax resident in Australia. So that's a massive headache for all the trustees.

But the other power that I've noticed come in at least one example is that an Australian resident holds the power of appointment of trustees. They're not actually a trustee, but they still held a power of appointment. For Australian tax purposes holding the power of appointment of trustees effectively gives you control and management of the trust. Under the Australian Tax Office's view, the trust is therefore tax resident in Australia.

Now, none of that is good news. And what it means in particular where distributions of capital are to be made to an Australian tax resident, there is a very real risk that what is thought to be a capital gain and tax free for New Zealand tax purposes actually turns out to be a capital gain taxable at the full 45% rate in Australia.

So this is a real issue and what I've encountered is a mixture of people wanting to make distributions to Australian residents or suddenly realising that one of the Australian residents actually has retained a power of appointment over a New Zealand settled trust. And I expect we'll see more of this.

I've mentioned in a previous podcast that we have a new Trusts Act coming into force in January next year. So I would suggest that as part of the review in preparation for the implementation of the Trusts Act, people should be looking at where the beneficiaries are located and what what powers, if any, they retain in relation to the trust and what distributions  are being considered to be made.

The Baby Boomer generation is dying off and that is going to result in one of the greatest wealth transfers in history as that generation passes its wealth down to Gen Z, Gen X and Millennials. And that's going to trigger a whole pile of tax implications. Particularly since as I said, there are 600,000 Kiwis in Australia, 60,000 in Britain, and many thousands more scattered all around the globe and ever. All of them will face some very interesting tax challenges. So if you're thinking about distributions, you should think very carefully about the tax implications of what you're proposing.

End of tax year tips

The March 31st tax year end is fast approaching. So here's a quick reminder of some of the matters you should be thinking about before the year end happens.

Firstly, have a look at your trading stock and either dispose of the obsolescent stock or revalue it at the current market value. Now, if you're writing down the value of stock, you need to be able to substantiate that value in case Inland Revenue challenges you.

Similarly, if you're a professional services firm, review work in progress and either invoice it or write it off by March 31st.

Obviously at this time you may have some debts outstanding and bad debt deductions can only be claimed if the debt is actually written off by  March 31st. So now is the time you need to be ruthless with your aged debtors.  Either call in the debt collectors or simply accept that it's going to be gone and write it off.

Now if you're thinking about paying a dividend before tax year end, just remember that there's a 10% penalty if your imputation credit account is in debit (negative) balance. So check what the balance of your imputation credit account is. Check the tax payments have been properly recorded as well as resident withholding tax deductions. And also just be sure that if any shareholding changes have happened during the year, you have factored in the possible impact of those changes.

Remember that in order for imputation credits to be carried forward for use against future distributions, there must be 66% of the same shareholders from the date the imputation credit arose (i.e. a tax payment was made) to the date of distribution.

This is a trap that some people fall into, but you have until March 31st to fix it. If that means paying a terminal tax a little earlier or making a payment through tax pooling, get to it.

More on cheques

And finally, on the long running issue of Inland Revenue's decision to stop accepting cheques, I have actually received replies this last week from both the Minister of Revenue and the Commissioner of Inland Revenue's office.

Both letters basically repeated the position that it's going to change. Both noted that actually Inland Revenue's mechanism for processing cheques in house will soon become obsolete and they believe it's not economic for it to upgrade that technology. The Commissioner’s Office commented

"We are firmly discouraging use of cheques because we are confident for most customers the alternative options will meet their needs, so tax obligations are easily met".

I'm not so sure about how easily met they are for some clients, but that's the view they've taken.

The Minister just noted that there's been a steady decline in the use of cheques over the past four years, and only now only 5% of any cheques and payments made to Inland Revenue are made by cheque. Interestingly, the Minister also noted that the after the announcement was made last September that cheques would no longer be accepted, the number of cheques received immediately dropped by between 41 and 48% compared with the same month the previous year [2018]. So obviously in Inland Revenue's mind that justifies their move because there were probably a number of taxpayers who could have paid electronically but kept paying by cheque until they reached a position where they had to change.

I'm still not satisfied by this. This position is driven from a business perspective for the Inland Revenue and not from the fact that we are required by law to meet our tax obligations. We don't have any alternative about that, and there's going to be a significant group of elderly people in particular who are uncomfortable using internet payments or do not have access to those online. So, I think Inland Revenue still is sliding round that issue and shouldn't duck it. We have to pay our taxes required by law and that's just tough. What I resent is as a small business, we get those costs passed on to us to try and sort this out. But thanks to something called anti-money laundering, it's actually procedurally for us a little bit more complex than Inland Revenue perhaps appreciates.

Anyway, that's it for the week in tax. I'm Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Please send me your feedback and tell your friends and clients until next time. Have a great week. Ka kite āno.

This article is a transcript of the March 13, 2020 edition of The Week In Tax, a podcast by Terry Baucher. This transcript is here with permission and has been lightly edited for clarity.

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