Date posted: 17/06/2020

Taxation (Annual Rates for 2020-21, Feasibility Expenditure and Remedial Matters) Bill introduced

As of the time of writing, a closing date for consultation on this Bill has not yet been set. However, CA ANZ will be submitting on this Bill and welcomes feedback from members.

In brief

  • Omnibus Tax Bill Introduced
  • Feasibility Expenditure
  • Purchase Price Allocation

Omnibus Tax Bill introduced

The long-awaited Tax Bill has been introduced in parliament after a significant delay from our usual tax timetable due to COVID-19. The Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill contains several key proposals that have already been subject to consultation, including feasibility expenditure which was the only significant tax measure signalled in this years’ Budget and was announced by the Minister of Revenue in September 2019.

Feasibility

When announcing innovation changes for small businesses last year, the Minister of Finance noted that “At present, the costs associated with exploring whether to invest in a new asset or business model are often not deductible for tax purposes. Business owners tell us this can deter them from spending money looking at better ways of doing things”. Feasibility expenditure has been an ongoing area of concern following the Trustpower v CIR decision by the Supreme Court in 2016 which limited deductions for expenditure relating to exploring a new asset that is subsequently abandoned. CA ANZ provided feedback on the Feasibility and Blackhole expenditure discussion document in 2017 and the Tax Working Group later recommended the rules be reviewed. 

The intention of these proposed amendments is to “ensure tax is not a barrier for businesses seeking to invest in new projects or assets, except when there is an explicit denial of deductions”.

CA ANZ is pleased to see a simple and low compliance cost approach for smaller businesses included in the Bill, allowing for qualifying expenditure of less than $10,000 to be immediately deductible in the current year. For larger feasibility projects, businesses will be able to claim a deduction spread over five years. 

However, the Bill also states “the expenditure must satisfy the general permission requirements, in that the taxpayer must have an existing income-earning process and to which the expenditure must have sufficient nexus. The capital limitation, however, is overridden.” This could be a roadblock for start-ups or businesses looking to expand into new areas if the feasibility expenditure isn’t considered to be tied to an existing income-earning process. 

The proposed Feasibility amendment will apply (if enacted) to qualifying expenditure incurred in the 2020-21 and later income years.

Start ups and innovators get support

Read our thoughts on the Ministers’ original announcement

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Purchase Price Allocation

For those who’ve listened to this year’s ‘virtual’ NZ Tax Roadshow, purchase price allocation was a topic specifically requested in advance of the session and you would have heard our Senior Tax Advocate Teri Welham speak about this in detail. Currently in a mixed supply sale, say a business sale, the vendor and the purchaser have opposing interests in how total sale price should be allocated across the different assets of the business. The intention of the proposed amendments is to prevent an overall revenue loss when vendors and purchasers adopt different price allocations that minimize their own tax liabilities. 

The proposed amendments, if enacted, would apply to agreements for the disposal and acquisition of property entered on or after 1 April 2021. The key points of the proposal are:

  • If the parties agree on an allocation, it must be used in both tax returns
  • If the parties do not agree, the vendor determines the allocation and must notify the Commissioner and purchaser within two months of the sale
  • If the vendor does not make an allocation within two months the purchaser is entitled to
  • The Commissioner can change any allocation if she considers it does not reflect market value
  •  Will not apply to transactions where the total purchase price is less than $1 million or the purchaser’s total allocation to taxable property is less than $100,000.

Habitual Buying and Selling of Land & Other Tax Issues

The proposed amendments in the Bill would widen the regular pattern restrictions in the main home, residential and business premises exclusions to include regular patterns of buying and selling land by a group of persons acting together. The amendments will also expand the regular pattern restrictions in the residential and business premises exclusions, focusing on the regularity of the transactions, rather than what is done with the land while it’s held and will clarify that the exclusions apply only when the land was acquired with a purpose or intention of disposal. 

The changes are proposed to apply from the date of enactment. 

There is a wide range of other tax issues and remedial items in this Bill, including:

  • The income tax treatment of leases subject to NZ IFRS 16
  • M. bovis tax issues
  • An amendment to the definition of eligible R&D expenditure and,
  • An amendment to clarify that a cash dividend is allocated to the income year in which the person receives it

As of the time of writing, a closing date for consultation on this Bill has not yet been set. However, CA ANZ will be submitting on this Bill and welcomes feedback from members.

Omnibus tax bill introduced

Read the Tax Bill

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