AGENTSanswers - 2002

Issue 35 July 2002

• Tax simplification impacts
• L letter unavailability
• PTS only for salary and wage earners
• FBT filers' prescribed interest rates for loans
• Deemed rate of return for foreign investment fund interests
• Specified livestock determinations for 2002
• Inland Revenue no longer requires 2002 IR 68A returns
• Income equalisation deposits
• Late payment penalties from 1 April 2002
• Use-of-money interest and penalties
• Further clarification of rules for non-resident contractors
• Industry guidelines for winemakers
• Recently updated publications

Tax simplification impacts

In June 2001 we surveyed 400 randomly selected tax agents to see how the changes that simplified PAYE for taxpayers affected agents after two years' experience. The survey was carried out by ACNielsen for Inland Revenue. The results reflect a wide range of experience but are definitely weighted towards a preference for the new system over the previous one. The more salient results are:

• 66% of agents preferred the new system compared with 21% preferring the old one.
  
  
• The summary of earnings (SOE) was particularly appreciated, 68% finding it easier to manage than the previous IR12s and IR13s. This compares with 13% preferring the older system. The success of the SOE lies in the source and quality of the information, the fact that complete information comes directly from Inland Revenue rather than relying on clients to supply it. The issue relating to the timing of the SOE was a major reason for the minority preferring the previous system.
  
  
• The amount of time spent on these clients' affairs remained the same for 57% of agents, reduced for 25% and increased for 20%.
  
  
• The six-month deadline for claiming donation rebates still existed at the time of the survey and this affected agents in unsatisfactory ways. 61% found the new rebate claiming process less easy to manage than the previous one--it led to double-handling of clients' affairs and was more time consuming. The removal of the time limit in 2001 should remedy these unfavourable impacts.
  
  
• 70% of agents said the simplification changes impacted on their business, in mostly minor but negative ways. The one significant impact was on workflows.

Over and above the changes that have already been made to the rebate claiming process, the lessons of the evaluation are being incorporated into future simplification work. Simplifying tax obligations continues to be a major direction in Inland Revenue's work, with the focus now shifted to small business. Thank you to all of you who participated in the survey.

L letter unavailability

In the March 2002 issue of AGENTSanswers we advised that you would not be able to issue L letters to your clients from 1 April 2002 until 30 June 2002 because we were updating the system.

Updating the system is taking longer than expected and as a result the issuing of an L letter will now not be available until 12 August 2002.

We apologise for any problems that this extension may cause.

PTS only for salary and wage earners

Please do not file an Individual Tax Return (IR3) for clients who are salary or wage earners. If these clients need or want an end-of-year tax square-up, a PTS must be requested if one was not automatically issued.

You may experience delays if an IR3 return is filed for a salary or wage earner. Instead of processing the IR3 we will issue your client with a PTS.

If an IR3 is received but a PTS has already been issued, and the additional information does not change their entity type to that of an IR3, we will add the newly supplied information from the IR3 to the PTS and an amended PTS will be issued. However, an amended PTS will not be issued if the original PTS has become a formal assessment. In this case, you must follow the disputes process to make any changes.

FBT filers' prescribed interest rate for loans

For the quarter beginning 1 July 2002 the prescribed rate of interest for calculating the fringe benefit value of low-interest, employment-related loans is 7.5%. This is an increase from the previous quarter's rate of 6.7%.

To view a complete list of the rates set since 1 January 1991 see Prescribed rates of interest at under the Work it Out section of our website.

The rate is reviewed regularly to ensure it is in line with the results of the Reserve Bank's regular survey of first mortgage interest rates. It last changed on 1 January 2002.

Deemed rate of return for foreign investment fund interests

The deemed rate of return for foreign investment fund interests has increased from 10.29% to 10.46% for the 2002 income year.

The foreign investment fund rules tax New Zealand residents on undistributed profits arising in foreign entities in which they have invested but do not control.

The rate, which is set annually, applies to all types of investments, including interests in superannuation schemes and life insurance policies. It is based on an average of five-year government stock rates to which a margin of 4% is added.

Specified livestock determinations for 2002

National average market values
The national average market values of specified livestock determination 2002 is now available on our website.

This determination sets out the national average market values of specified livestock for the 2002 income year for the purposes of section EL 8(1) of the Income Tax Act 1994.

National standard costs
The National standard costs for specified livestock determination 2002 is also available on our
website.

This determination is made in terms of section EL 3A of the Income Tax Act 1994. It applies to any specified livestock on hand at the end of the 2002 income year, where the taxpayer has elected to value that livestock under the national standard cost scheme for that income year.

Inland Revenue no longer requires 2002 IR68A returns

From 1 April 2002 ACC will collect both cover and residual levies from employers, so we are no longer able to process ACC residual claims levy statement (IR68A) returns for employers for the 2002 year. ACC will invoice employers directly from Employer monthly schedule (IR348) data provided by us. Invoicing for employers will start this month.

All 2002 IR68A returns received by us after 1 April 2002 are being sent back to the taxpayers with a covering letter asking that they match this information with the ACC invoice they receive.

If a cheque is received for payment, the cheque is also being returned to the taxpayer. These are being returned to the taxpayer's address shown on the IR68A.

If you have any questions, contact the ACC's Tax Agents helpline, 0800 222 991.

Income equalisation deposits

In the December 2001 issue of AGENTSanswers, available under the Newsletters and Bulletins section of our website, we advised that our stated policy for deposits to the income equalisation scheme was to allow up to 31 March for taxpayers with an extension of time (EOT).

This policy is currently being reviewed. In the interim, however, we will continue to use the above policy.

Staff at the Upper Hutt Processing Centre have been advised to accept deposits from tax agents who have an EOT arrangement up to 31 March following the end of the accounting year in which the taxpayer wishes to claim the deduction.

Late payment penalties from 1 April 2002

From 1 April 2002, for all revenues (except student loans and child support) the initial late payment penalty is staggered and charged as follows:

• an initial 1% penalty charged on the day after the due date
• a further 4% initial penalty charged if there is still an amount of unpaid tax (including penalties) at the end of the 7th day from the due date.

Note: The 4% penalty is charged seven days after the initial 1% penalty and not seven working days.

Example
2002 income tax due on 7 April 2003.

• 1% penalty imposed on 8 April 2003
• 4% penalty imposed on 15 April 2003.

A payment is accepted as being received on time if it is mailed and postmarked on or before the due date. A payment will also be accepted as being on time if it is physically deposited in an Inland Revenue office drop-box or at a Westpac Trust branch by the close of business on the due date.

Therefore, the initial 1% penalty will not be charged if the payment is received, or mailed and postmarked on or before the due date.

However, the above rules do not apply to the 4% initial late payment penalty. To avoid this penalty, the payment must be received before the end of the 7th day from the due date.

Paying a tax bill by the due date is still the best option.

Use-of-money interest and penalties

We have recently become aware of a problem with the interaction between the use-of-money interest (UOMI) rules and late payment penalties. As a result, some taxpayers have been incorrectly charged late payment penalties on debit UOMI that had been unpaid at the terminal tax due dates for the 1995, 1996 and 1997 income years.

We have determined that there are around 29,000 cases where additional tax may have been incorrectly charged. We are currently working on a process to reverse the additional tax incorrectly imposed on all of the affected accounts. We will recalculate the penalties and, where necessary, refund any overpaid tax to the affected parties.

As a result of this process we expect that a number of statements of account and/or refunds will be issued to taxpayers.

We expect this process to take around two to three months and ask that taxpayers be patient.

Further clarification of rules for non-resident contractors

The tax-rules for non-resident contractors, in New Zealand for short periods of time, were recently simplified. From 1 April 2002, non-resident contractors who are present in New Zealand for less than 62 days in total in any 12-month period and are exempt under a double tax agreement, no longer have to apply for a certificate of exemption.

Applying this initiative in practice
We have received a number of queries on how this initiative would work in practice. The article "Tax simplification--reducing compliance costs for non-resident contractors" in Tax Information Bulletin (TIB) Vol 14, No 3 outlined a number of scenarios in which the new rules would or would not apply. You can find this under the Newsletters and Bulletins section of our website. The two primary considerations are:

(a) New Zealand presence of less than 62 days in any 12-month period
The "presence" test requires a non-resident contractor to have been present in New Zealand for a total period of less than 62 days in any 12-month period. The test takes into account prior, as well as current (or proposed), presence in New Zealand.

For example, if a non-resident contractor who intends to be present in New Zealand for a period of 20 days starting on 1 June 2002, was also present for a period of 15 days in August 2001, the total time expected to be spent in New Zealand in the relevant 12-month period (from 21 June 2001 to 20 June 2002) would be 35 days. The non-resident contractor would, therefore, comply with the presence test under the new rules.

On the other hand, if the non-resident contractor expected to be present in New Zealand for a longer period--say, from 1 June to 20 July 2002 (50 days)--then his or her total expected presence in New Zealand for the relevant 12-month period (from 21 July 2001 to 20 July 2002) will exceed the prescribed limit.

(b) Whether the non-resident contractor is exempt under a double tax agreement
New Zealand has double tax agreements with 26 countries including Australia, the United Kingdom and the United States, and agreements with several others are pending. A full list of New Zealand's double tax agreements follows at the end of this article. While these agreements generally exempt short-term non-resident contract activities in the respective countries, specific exclusions apply.

For example, if a non-resident contractor is deemed to have a permanent establishment or other fixed base in New Zealand for the purposes of conducting a contract activity, that activity is taxable in New Zealand. A "permanent establishment" is a defined term and means a fixed place of business through which the business of an enterprise is wholly or partly carried out. This can range from a branch or an office to a factory or other worksite.

Some double tax agreements also deem a permanent establishment to exist where activities are carried out in connection with the exploration or exploitation of natural resources, or if substantial equipment is used in respect of a contract being undertaken here. Our double tax agreements with Australia and the United Kingdom, for example, have an exploration/exploitation clause. The treaty with Australia also has a substantial equipment clause. Our double tax agreements with other countries, such as Japan and Canada to name a few, also have their own distinctive provisions.

Most double tax agreements also allow New Zealand to tax "royalties" derived by non-resident contractors from New Zealand. Royalties are typically defined for purposes of double tax agreements as including, for example, payments for the supply of commercial, industrial and scientific equipment and/or certain forms of knowledge. If the non-resident contact activity involves the supply of such equipment or information, that activity is likely to be taxable in New Zealand.

Once again, not all double tax agreements are the same, and some will allow the taxation of services that would not normally be considered as royalties. For example, our double tax agreement with Canada extends to payments made in respect of the supply of scientific, technical, industrial or commercial assistance, including the provision of management services. Other double tax agreements may only tax equipment rentals if they are based on production. While this is not usually referred to in the royalty article, it is contained in the agreement's "protocols".

Obligations on non-resident contractors and their employers
It is the responsibility of non-resident contractors and their employers, when applying this initiative, to take reasonable care ensuring that the New Zealand presence test is met and in determining whether the contract activity being undertaken is exempt under a double tax agreement. If reasonable care has not been taken, resulting in a breach of the legislation and/or default of tax, Inland Revenue may take the appropriate steps to recover any tax payable and may also impose penalties and interest.

As the onus is on the payer--typically the employer--under the non-resident contractors' withholding tax rules to deduct tax where applicable, if there is a default, Inland Revenue will have to consider what penalties (and interest) should be imposed. Each case will be looked at on its merits when deciding whether reasonable care has been taken by a payer. Depending on the circumstances, Inland Revenue may have to consider if a taxpayer has displayed gross carelessness, made an unacceptable interpretation of the legislation, taken an abusive tax position, or committed evasion.

For further information
The application of New Zealand's double tax agreements can be complex. Similarly, establishing the period of presence of a non-resident contractor in New Zealand may prove difficult. Circumstances may also arise which unexpectedly result in the qualification criteria being breached.

For further information about how this tax simplification change affects your clients, contact our Overseas Contractors team on 04 802 6056, or by email nr.contractors@ird.govt.nz

Countries with which New Zealand has double tax agreements

Australia	Belgium	Canada
China	Denmark	Fiji
Finland	France	Germany
India	Indonesia	Ireland
Italy	Japan	Korea
Malaysia	Netherlands	Norway
Philippines	Singapore	Sweden
Switzerland	Taiwan	Thailand
United Kingdom	United States of America

 

Industry guidelines for winemakers

As part of our commitment to making it as easy as possible for taxpayers to comply with their tax obligations, various industry guidelines are being developed and made available on our website.

A new guideline, The valuation of trading stock for winemakers for income tax purposes has been added to our website.

The Income Tax Act 1994 sets out the rules for the valuation of trading stock at balance date. Trading stock held at balance date for wineries includes stock in the process of fermenting, maturing wines and wines held for sale.

These guidelines set out the approach taken by Inland Revenue to the valuation of trading stock for "small" taxpayers and others. Discussed are the simplified rules for "small" taxpayers, those who, together with associates, have an annual turnover of $3 million or less.

These guidelines were developed in consultation with the Wine Institute of New Zealand.

Recently updated publications

The following publications have recently been updated and are available from our website or they can be ordered through INFOexpress or StationeryXpress.

Foreign dividend withholding payments guide (IR273)

This booklet (previously IR274A) explains in detail:

• foreign dividend withholding payments (FDWP)
• the attributed repatriation (AR) rules, and
• the underlying foreign tax credit (UFTC) rules.

INFOexpress (IR355)
Tax agents' guide to using INFOexpress. Included is a new detachable one-page summary sheet.

Gift duty (IR194)
A guide to gift duty and how to pay it.

Fringe benefit tax guide (IR409)
Explains fringe benefit tax (FBT) obligations of anyone employing staff, or companies that have shareholder-employees.

The main changes to note since the June 2001 version include:

• changes to examples and how to complete the new look returns
• introduction of a new remuneration adjustment worksheet
• options, completion and due dates for the final FBT return where employer has ceased employing staff
• late payment penalties updated to reflect recent changes.

International tax forms
The 2002 year version of the international tax forms included a change in shoulder number. Here is a list of these changes.

New number	Old number	Item name
IR308	IR3X	Branch equivalent tax account return
IR408	IR4X	Branch equivalent tax account return for companies
IR439	IR4H-AP	Interest in a foreign investment fund disclosure schedule (accounting profits method)
IR440	IR4H-BE	Interest in a foreign investment fund disclosure schedule (branch equivalent method)
IR441	IR4H-CV	Interest in a foreign investment fund disclosure schedule (comparative value method)
IR442	IR 4H-CVS	Multiple interests in foreign investment fund disclosure schedule (comparative value method)
IR443	IR4H-DR	Interest in a foreign investment fund disclosure schedule (deemed rate of return method)
IR467	IR 100A	Notice of election to determine control and income interests on a daily measurement basis
IR469	IR 100C	Notice of election to voluntarily change the method of calculating foreign investment fund income or loss
IR477	IR4G	Interest in a foreign company disclosure schedule
IR478	IR4GA	Attributed (non-dividend) repatriation worksheet
IR479	IR&4GS	Interest in a foreign company disclosure schedule (for Schedule 3, Part A countries)

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Date published: 19 Nov 2004

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