Agents Answers - 2010

Agents Answers Issue 124 May 2010

• Reminders
• New calculations needed for provisional tax - 2011 tax year
• Compliance and tax agents
• Incorrect interest calculations for some non-resident companies
• New tax treaties
• PTS requests for student loan borrowers
• Interest-free student loans for charity's volunteers
• Foreign tax credits from FIF income
• Changes to interest-free exemptions for student loan borrowers
• Changes to international tax rules
• Warning over hoax email

Welcome to Agents Answers

If you have any suggestions for topics you'd like covered in this newsletter, email agents.answers@ird.govt.nz.

Reminders

7 May: Provisional tax and student loan interim payments due. For provisional taxpayers using the standard or estimated option this is your third and final payment for the 2010 tax year.

31 May: IR3 taxpacks issued in May should have been received. If your client hasn't received theirs, you can request one from "Get it done online".

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New calculations needed for provisional tax - 2011 tax year

Budgeting for tax is a balancing act for many of your clients. With the 2011 tax year now on us it's important that businesses know what has changed when they calculate provisional tax. Setting aside the correct amount of provisional tax will help prevent a large tax bill at the end of the tax year.

The standard option for calculating provisional tax has changed for the 2011 tax year and beyond. Rates of personal income tax from the 2010 tax year have changed and this will affect how provisional tax instalments are calculated.

The standard option of calculating provisional tax for the 2010 year was the residual income tax (RIT) for the immediately preceding income year minus $730. However, to calculate your provisional tax for 2011 and beyond, you'll need to add 5% to the previous tax year's residual income tax, or 10% to the residual income tax from two years previous.

For individuals

Year for provisional tax being calculated	Year of RIT amount used	Adjustment
2011	2009 (back to original calculation)	RIT + 10%
	2010 (back to original calculation)	RIT + 5%

For companies and those taxed as companies

Year for provisional tax being calculated	Year of RIT amount used	Adjustment
2011	Two years previous	RIT + 10%
	Previous year	RIT + 5%

For other non-individuals not taxed as a company (eg, trusts or estates)

Year for provisional tax being calculated	Year of RIT amount used	Adjustment
2011	Two years previous	RIT + 10%
	Previous year	RIT + 5%

How this affects the ratio percentage

The rate change for personal income tax from the 2009 tax year affects how your ratio percentage is calculated, as follows.

Year	RIT previous year formula	RIT two years previous formula
2011	(2010 RIT (original formula))  (2010 taxable supplies - asset adjustments) × 100	(2009 RIT (original formula))  (2009 taxable supplies - asset adjustments) × 100

If your business's income is taxed at the company rate the ratio percentage is calculated as follows.

Year	RIT previous year formula
2011	2010 RIT  (2010 taxable supplies - asset adjustments)

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Compliance and tax agents

Tax agents play a key role in making the tax system work effectively by helping people and businesses understand and meet their obligations and by modelling good compliance behaviours.

To help you deliver accurate and timely services to your clients we provide online resources, tools and services through our website and continually strive to improve these services.

The "Look at account information" service on our website lets you view account balances, transaction details and due dates for clients' accounts, transfer credits and link and delink clients.

Our agent account managers will work closely with you, supporting you to meet your filing obligations. They'll help educate, support and inform you about your obligations under new and existing laws, and resolve tax issues.

The law requires us to maintain a list of tax agents. We can refuse to list someone as a tax agent or remove their tax agent status under certain circumstances. For example, agents who have defrauded their clients or Inland Revenue.

Tax agent's own compliance behaviour

We've found the compliance behaviour and attitude of a tax agent towards their own personal tax affairs generally reflects the advice they give their clients.

The majority of tax agents comply with the tax rules. At the end of January 2010 just 8.6% had outstanding personal debt not under arrangement and only 2.2% had outstanding returns.

What we're doing to aid compliance

We are:

• working closely with professional industry groups
• monitoring and reporting on tax agents' filing and payment performance at the professional body level, and working directly with individual tax agents to manage and improve their performance
• recognising tax agents who have a good performance record with:
  • congratulation letters at 98% and 99% filing
  • certificates at 100% filing.

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Incorrect interest calculations for some non-resident companies

Due to a system fault all non-resident contractor companies, non-resident entertainer companies and agents for foreign insurers with balance dates between October and February will have incorrect use-of-money interest (UOMI) calculations.

End-of-year tax for a company with no fixed establishment in New Zealand and deemed non-resident in New Zealand is due and payable on:

• 7 February in the next income year, or
• 7 April if the company is linked to an agent.

If you have affected clients, please call Large Enterprises on 0800 443 773 and we'll put a hold on the account and arrange a correction.

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New tax treaties

New TIEAs signed

New Zealand has signed tax information exchange agreements (TIEAs) with Dominica, and St Vincent and the Grenadines. Once in force the agreements will allow the full exchange of information on criminal and civil tax matters.

Australia-New Zealand DTA comes into force

The new double tax agreement (DTA) with Australia came into force in April. New withholding tax rates will apply from 1 May 2010. For other New Zealand taxes, the treaty will apply for income years beginning on or after 1 April 2010.

Find out more about these treaties on the Policy Advice Division website.

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PTS requests for student loan borrowers

If you have clients who have or had a student loan in the year you're requesting a personal tax summary (PTS) for and they've been out of the country for more than 183 days they may be required to file an Individual income tax return (IR3) instead. Therefore it's important that you confirm your client wasn't out of the country (apart from short holidays) in the year you request a PTS for.

For student loan purposes, if a borrower has been in New Zealand for 183 days or more before going overseas, the loan will remain interest-free provided their absence is less than 184 days.

Student loan borrowers generally aren't eligible for an interest-free student loan if they're away for six months (184 days) or more.

Where the absence exceeds 325 days your client will need to re-establish residency for income tax purposes. A New Zealand tax residence questionnaire (IR886) should be completed by, or on behalf of your client. For a copy go to "Forms and guides".

Where your client remains a New Zealand tax resident and earns money overseas during this time, then we need to know after the end of the tax year. In these cases a student loan borrower is still considered a New Zealand-based borrower and needs to make repayments based on worldwide income.

If a PTS is requested incorrectly it may result in the client receiving an incorrect income tax assessment and an incorrect assessment of student loan for that period.

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Interest-free student loans for charity's volunteers

From 1 April this year, volunteers working for the charity Partners Relief and Development NZ may qualify for interest-free student loans while working for the organisation in overseas aid activities.

Borrowers are generally required to be present in New Zealand for six months to qualify for an interest-free loan. However, an exemption may be granted for certain borrowers who are overseas, including those working for free or for a token payment for a charitable organisation that has been accepted and "named" by an Order in Council as a qualifying organisation.

Borrowers working overseas for any named charitable organisation must still apply to Inland Revenue to see if they qualify for the interest write-off.

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Foreign tax credits from FIF income

We've noticed a number of taxpayers incorrectly claiming foreign tax credits from foreign investment fund (FIF) investments. The following explanation should help you apply the segment rules correctly.

If a tax calculation confirms there is New Zealand income tax payable on the total net income (New Zealand and foreign sourced), the agent has to identify the segments as follows:

• for FIF interests - each attributing interest that has FIF income is a segment
• for dividends - this is by country unless using AP or BE methods
• for interest - generally the segment will be by country
• for other income - the segment will be by country and by source or nature.

Each attributing interest in a FIF is a segment for the foreign tax credit calculation.

Foreign dividends from attributing interests in a FIF are non-assessable if the investor uses the fair dividend rate, comparative value, deemed rate of return or cost methods. However, foreign tax paid on that dividend can still be used as a tax credit against FIF income calculated under those methods.

The Taxation (International Taxation, Life Insurance and Remedial Matters) Act 2009 clarifies that in determining a foreign tax credit for tax paid on the non-assessable dividend, the segment is to be defined as FIF income from the relevant FIF interest.

Ref: Section L J 2(7) which repealed section L J1(3) of the Income Tax Act 2007.

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Changes to interest-free exemptions for student loan borrowers

If you have student loan borrower clients who go overseas for six months (184 days) or more, generally they'll pay interest on their student loan. However, they may be eligible for an interest-free loan while overseas if some special circumstances apply.

Find out more about eligibility for an interest-free loan while overseas.

Recent legislation has updated the list of interest exemptions for borrowers who are overseas:

• in one of New Zealand's Realm Countries (Niue, Cook Islands, Tokelau or Ross Dependency)
• studying as part of a formal exchange program
• studying at post-graduate level because their course isn't offered by a New Zealand tertiary education provider.

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Changes to international tax rules

We thought it timely to remind you of some changes to international tax rules introduced by the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009.

Under the new rules, foreign dividend payments (FDP) are no longer payable on dividends paid by controlled foreign companies and non-portfolio foreign investment funds to New Zealand companies. Therefore, you're not required to file the corresponding IR4F return. Dividends paid that are tax deductible for the foreign entity and dividends paid on fixed-rate shares will now be subject to income tax and not FDP.

These changes apply for all income years beginning on or after 1 July 2009. Entities with late balance dates between 30 June 2010 and 30 September 2010 (inclusive) will begin their 2010 income year on or after 1 July 2009. Therefore, entities with balance dates between 30 June and 30 September (inclusive) will apply the changes from their 2010 income year and all other entities will apply the changes from their 2011 income year. For example if your balance date is:

• 31 March, you're required to apply the new rules from 1 April 2010 with your final FDP return for the quarter ended 31 March 2010
• 30 June, you're required to apply the new rules from 1 July 2009 with your final FDP return for the quarter ended 30 June 2009
• 31 December, you're required to apply the new rules from 1 January 2010 with your final FDP return for the quarter ended 31 December 2009.

You'll find an in-depth discussion of all amendments to the international tax rules in the Tax Information Bulletin Part II, Vol 21, No 8 (October/November 2009).

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Warning over hoax email

Hoax emails have been circulating that claim to be from Inland Revenue asking you to send your personal details and IRD number.

We'll never ask you to forward any personal information by email, and you should always be very careful about giving out your personal details or IRD number.

Don't click on any links within a suspicious email or reply to it. You should delete it immediately from your inbox.

If you think you've given out your personal details or IRD number to a possible hoax email contact us on 0800 227 774.

Footnote

Agents Answers comments generally on topical tax issues relevant to tax agents. Every attempt is made to ensure the law is correctly interpreted, but articles are intended as a brief overview only. The examples provided are not intended to cover every possible factual situation.

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Date published: 01 May 2010

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