Corporates Contact - 2002

Issue 16 December 2002

• Max on tax
• Taxation (Relief, Refunds and Miscellaneous Provisions) Act 2002
• Voluntary disclosures
• Shortfall penalties and corporate taxpayers
• Superannuation schemes
• Crown Sector profile
• Amending assessments
• Taxpayer self-assessment
• Format of electronic payment information
• Annual return to account for conduit tax relief
• Christmas closure
• Resident withholding tax exemption certificates
• Late payment penalties from 1 April 2002

Max on tax

Another year has almost gone - the challenges of 2003 await us. Here are a few pertinent issues as we say goodbye to 2002.

I am pleased to note that we have been receiving a significant number of voluntary disclosures. In the year ended June 2002 we processed 148 with tax of $56 million. I say I am pleased because:

1. the voluntary disclosure system is an integral part of the voluntary compliance concept on which our tax system relies
2. they enable a wider spread of our audit resources, and
3. they are indicative of a desire on the part of some taxpayers to get it right.

Since the start of July we have answered over 14,000 pieces of correspondence - 81% has been replied to within two weeks and a further 14% within a total six-week timeframe. In the main the unanswered 5% are requests for opinions of a complex nature. Overall, we are in a far better position than we have been for some years with only 700 pieces of correspondence on hand.

An analysis of large corporate 2001 income tax returns showed 17% were filed after 1 April 2002 and a far greater percentage filed in late March. I must confess that this surprises me when, to a large extent, large corporates have completed other statutory requirements within six months of balance date (obtained signed audited accounts, notified the stock exchange and filed their Companies Office returns). I have therefore instructed staff to exercise greater stringency with those who have not filed by 1 April 2003.

The Commissioner has announced that from February 2003, Corporates will start to handle Binding Ruling requests for corporate taxpayers. This process will be phased in gradually. We are excited about the opportunity this represents and look forward to the challenge this creates for us in 2003. A design team is working on exactly how this will be undertaken through the Corporates Segment.

All the best for 2003

Max Carr
National Manager Corporates

Taxation (Relief, Refunds and Miscellaneous Provisions) Act 2002

The Taxation (Relief, Refunds and Miscellaneous Provisions) Act received royal assent on 17 October 2002. Full details of the legislation can be found by visiting our Taxpolicy page or Tax Information Bulletin (TIB), Vol 14, No 11.

The following are some items that may be of interest to Corporates Segment customers (references to "the TIB" in theses items are to the TIB mentioned above).

Unit trusts - a solution to the negative dividend problem
Following consultation with industry representatives, legislative changes have provided a solution to the issue of "negative dividends" in the unit trust industry. The new provisions have been inserted to prevent the over taxation of qualifying unit trusts and Category A group investment funds.

At the heart of the negative dividend issue is the loss of available subscribed capital (ASC). ASC is the paid up capital that unit holders invest in the funds. Under current company tax rules, ASC can generally be returned to unit holders without a tax cost. As a consequence of losing ASC, some funds were effectively overpaying tax in order to provide sufficient imputation credits on redemption proceeds, to meet unit holder expectations of receiving fully imputed dividends.

The amendments will preserve ASC previously lost to qualifying unit trusts and Category A group investment funds. A new supplementary ASC account will record amounts of ASC contributed by but not returned to unit holders on redemption of their units. The supplementary ASC account balance can then be converted to imputation credits and transferred to the fund's imputation credit account at the end of an imputation year or when the fund ceases to operate an imputation credit account. Only a supplementary ASC account balance sufficient to meet the debit balance in the fund's imputation credit account can be converted and transferred.

The amendments will apply from the 2002/03 imputation year, which commenced on 1 April 2002. Fund managers may choose to calculate an opening balance of the supplementary ASC account under one of two methods. Inland Revenue will be seeking details of these opening balances and will be closely monitoring the application of the legislative changes.

For information on calculating the opening balance and further background on this issue, please refer to the TIB.

GST on warranty receipts from non-residents

From 1 August 2002 the supply of warranted repair services to a non-registered offshore warrantor, in relation to goods that were imported with a warranty agreement that was subject to GST on importation, is zero-rated under new section 11A(1)(ma) of the Goods and Services Tax (GST) Act 1985. The consideration paid by the warrantor (including any amount attributable to the full or partial replacement of parts) is regarded as relating to the supply of such services.

Prior to 1 August 2002, the Court of Appeal case, Suzuki New Zealand Limited v CIR (2001) 20 NZTC 17,096, governed the treatment of GST on warranty receipts from a non-resident warrantor. The Court held that certain payments in respect of repairs to motor vehicles under warranty were subject to GST. This case had implications for all industries providing warranties, not just the motor vehicle industry. Companies that have received warranty payments from non-residents before 1 August 2002 need to check that they have correctly accounted for GST on these warranty receipts.

Example:

If a $1,000 warranty payment was received for warranted repair services from a non-resident warrantor, the following would apply:

1. On or after 1 August 2002, the $1,000 receipt would be zero-rated and placed in Boxes 5 and 6 of your GST 101 form to the extent that:
   • the services are provided under the warranty, and
   • the services are supplied for consideration given by a warrantor who is not resident in New Zealand, not a registered person and who is outside New Zealand at the time the services are performed, and
   • the warranty agreement was included with the goods and not separately identified at the time of importation, and
   • GST was paid on the original goods (including the embedded warranty) at the time of importation under section 12(1) of the GST Act 1985.
2. Prior to 1 August 2002, the transaction would be subject to GST of $111.11 in most cases. The $1,000 receipt should be entered in Box 5 of your GST 101 form.

Corporates clients can contact their Account Manager directly or see the TIB for more information.

New transfer rules
The enactment of the Taxation (Relief, Refunds and Miscellaneous Provisions) Act has introduced a new set of rules for the transfer of overpaid tax between accounts. The new rules have been introduced to address uncertainty and inconsistent practice when overpayments are transferred.

Full details of the new rules are included in TIB.

New rules for taxpayer financial relief
The new taxpayer financial relief rules provide a framework for Inland Revenue to consider how best to provide relief for taxpayers in financial difficulties. They provide us with considerable flexibility in our approach to debt recovery and allow us to reach a decision that is right for both Inland Revenue and the taxpayer. Refer to the TIB for more detail.

Voluntary disclosures

Recently an article appeared in Corporates Contact entitled "Compliance and Penalties Regime". The article stated that the regime is designed to encourage taxpayers to comply voluntarily with their tax obligations. The voluntary disclosure system reflects the savings in revenue from voluntary disclosure of irregularities and other benefits of taxpayer cooperation. By making a full and complete voluntary disclosure, a taxpayer will get the advantage of reduced levels in any shortfall penalty imposed.

Any disclosure must be full and complete. The minimum details are:

• taxpayer's details (name, trade name, IRD number, address, date of incorporation, contact phone number and contact times)
• the nature of the errors or omissions
• an explanation as to how the errors or omissions occurred
• adequate information to enable an assessment of the tax shortfall to be made
• a declaration signed by the taxpayer (or an authorised officer if a company).

Other information that is useful to include is:

• how the return is completed (explain the process from the source documents used to when it is sent to us)
• what checks or controls you have in place to ensure accuracy
• what measures have been put in place to prevent a similar situation in the future.

When a pre-notification disclosure is made (prior to being notified of a pending tax investigation) any resultant shortfall penalty is reduced by 75% and there is full immunity from prosecution.

If a post-notification disclosure is made (after the first notification but before the investigation commences) any resultant shortfall penalty is reduced by 40%. However, prosecution may be considered in cases of evasion or a similar offence.

An investigation commences at the end of the first interview, after the time in which the notification was received.

If you wish to make a voluntary disclosure, send a letter including the above information to the Team Leader Corporates as soon as possible. If an investigation has already commenced, please contact the investigator.

For further information on voluntary disclosure, read Tax Information Bulletin (TIB), Vol 14, No 4 which details the Standard Practice Statement INV 251, or our booklet Putting your tax returns right (IR280).

Shortfall penalties and corporate taxpayers

There has been some interest in the types of situations where penalties are applied to shortfalls affecting corporate taxpayers. Here are some brief outlines of situations where penalties have been applied.

Entity	Scenario	Issue	Shortfall category
Large corporate	claimed GST inputs using buyer created invoices	no approval sought for buyer created invoices	Lack of reasonable care (LORC)
Large resource-based group	claimed losses on disposal of assets (included losses on buildings)	loss had been broken down into different categories-interpretation taken was unacceptable	Unacceptable interpretation (UI)
Equipment rental and sales company	capital expenditure claimed as deductible	no effort to determine tax treatment	LORC
Local Authority trading enterprise	carried out contract for major work using many suppliers and subcontractors including three overseas contractors	no system for identifying NRCWT liability	LORC
Local Authority	GST returns on payments basis-creditors added rather than deducted	inadequate systems in place	LORC (voluntary disclosure reduction)
Large manufacturing company	policy in place for capital and revenue	policy not followed	LORC
Subsidiary of medium-sized corporate	substantial errors in GST input claims occurring over a period of time	insufficient checks in system	LORC
Manufacturing company	relies on external advice for complex tax matters but tax credit claimed without seeking advice	company says no interpretation made-as they applied their general understanding, we say interpretation was made	UI. Alternative is LORC as they did not seek advice on a complex issue beyond their knowledge level
Communication company	supplies made by third party to associated company. Tax invoices sent to associated company. Associated company cannot claim GST inputs. (The associated company was involved in overall transactions)	claimed input tax deductions	UI
Medium-sized manufacturing company	systems in place, however errors in programming over a period of time	no proper review-inadequate checking of new systems	LORC
Major manufacturer	ceased manufacturing in New Zealand sold plant overseas-stated uncertainty that sales proceeds will be received	claimed full loss of book value in year of sale-returned proceeds the following year	UI in year of loss (temporary shortfall)

Superannuation schemes

The article in the June 2002 Corporates Contact, "Superannuation schemes, reporting taxable income" focused on equity type investments. There are, however, some investments that are required to be calculated on an unrealised basis for tax purposes-a similar basis to Financial Reporting Standard 32 (FRS 32).

FRS 32 requires superannuation schemes to account for investments on an unrealised basis. This is generally consistent with the tax treatment for investments within the scope of the accruals rules (i.e. financial arrangements) or the foreign investment fund regime (e.g. certain investments in non-grey list countries).

However, for revenue account investments not subject to a specific accrual or unrealised basis of income calculation (e.g. equity or unit trust investments not subject to the FIF regime), you will be required for tax purposes to calculate any realised gain or loss on a historical cost basis. Accordingly, for equity type investments, a tax adjustment will be required from the position reported in the financial statements prepared in accordance with FRS 32.

If you'd like to discuss this item, please contact the Investment Desk, Banking and Insurance Sector, Corporates, Inland Revenue, Box 2871, Christchurch or phone 03 363 1587.

Crown Sector profile

The Crown Sector of Corporates deals with the tax affairs of a diverse range of organisations, including:

• government departments, ministries and other government agencies
• local authorities and their trading subsidiaries
• state-owned enterprises and other Crown-owned companies
• Crown Research Institutes
• electricity lines, generation and retail companies
• port and airport companies
• tertiary education institutes
• public sector hospitals.

Of New Zealand's top 100 companies by turnover, 12 fall within the Crown Sector. Most of New Zealand's largest employers are also in the Crown Sector.

The majority of the Crown Sector's 40 staff are based in Wellington, but we also have investigations staff in Auckland, Tauranga, Palmerston North, Christchurch and Dunedin.

Our functions include providing advice on a wide range of tax issues, either over the phone, by mail or in person, and auditing selected organisations to ensure that they are complying with their tax obligations.

In a normal year we expect to reply to more than 7,300 phone calls and 6,100 letters from our clients. Our audit teams plan to spend more than 29,000 hours reviewing the various types of tax returns provided to us. We also have a team based in Wellington who are dedicated to ensuring the employer monthly schedules are processed correctly and resolving errors in these, such as incorrect IRD numbers, unbalanced accounts and changes to income and tax deduction details.

Contact details
Manager:	Team Leader, Business Services:
John Moreno	Vicki Kennedy
Phone 04 802 6024	Phone 04 802 6036
Postal address:	Phone:
Private Bag 39984	Employer enquiries 0800 443 553 or 04 381 9433
Wellington	Other enquiries 0800 443 773 or 04 470 7577
	Fax 04 802 7207

Amending assessments

INV-510 requests to amend assessments

This standard practice statement sets out when the Commissioner may exercise the discretion to amend assessments to ensure correctness under section 113 of the Tax Administration Act 1994 and section 27(2) of the Goods and Services Tax Act 1985.

This standard practice statement applies from 1 September 2002 and can be found in the Tax Information Bulletin (TIB), Vol 14, No 8.

Taxpayer self-assessment

Legislation has been enacted to formally recognise that taxpayers have a responsibility to self-assess their tax liability as part of meeting their return filing obligations. This change applies from 1 April 2002 for the 2002/03 income year. Previously, the legislation indicated that the Commissioner of Inland Revenue performed all assessment functions.

This change is to acknowledge and formalise that self-assessment adds to and enhances other improvements towards the simplification of tax administration by:

• making responsibility clearer, and
• removing ambiguity.

Implementing the change
The change affects income tax only. No significant policy changes are required as the legislation has been aligned more closely with current practice. Also, there are no significant changes required to returns or assessment procedures.

You will notice minor changes to the wording on the 2003 year income tax returns making the status and purpose of the forms clearer. For example, it will be clear that taxpayers make an assessment with their return, and that the Commissioner either acknowledges the return or makes an alternative assessment if there is an error in the taxpayer's version.

What about early balance dates?
Early returns will need to be completed on 2002 stationery altered in the usual way by crossing out the "2002" at the top of the form and clearly marking it "2003".

More information
Self-assessment is discussed in more detail in the Tax Information Bulletin (TIB), Vol 13, No 11.

Format of electronic payment information

We have received queries seeking clarification of the electronic payment information given in the last edition of Corporates Contact. Please ensure that the format of your electronic payments follows the examples given in our Making payments (IR584) booklet. That is:

Any variation from this format may result in a delay in processing your payments.

We apologise for any confusion caused by the October article. If you have any queries about electronic payments, please contact your Business Services Account Manager or phone 0800 443 773.

Annual return to account for conduit tax relief

We have had a number of queries about the availability of an annual conduit tax relief account return.

We are currently in the process of developing the Conduit tax relief account return (IR 406) and aim to have a version available to download from the Forms, Books, Newsletters section of our website in early January. Printed versions of the return will be available in February 2003.

We apologise for any inconvenience caused by the unavailability of this return.

Christmas closure

Our offices close at midday on Tuesday 24 December and reopen for the new year on Monday 6 January 2003 at 8.00 am. Our 0800 443 773 enquiry line will also be closed during this period.

Resident withholding tax exemption certificates

Corporates Segment may issue limited RWT exemption certificates (for periods to the following 31 March, not the company's balance date) where exemption is requested on the grounds of:

• tax losses (or an expected refund of over $500 RWT), or
• estimated income over $2 million.

Please note that evidence of income should accompany applications for exemption under these categories.

Exemption certificates with no end date are issued for:

• income or group income over $2 million (available even to new companies within a group, providing the group has established income of over $2 million), and
• specific types of taxpayers, such as those in the Banking and Insurance and Crown sectors.

In addition to the queries on the above, we also receive a number of enquiries about missing or lost exemption certificates. Please note that replacement certificates are produced and issued through our correspondence system and take 7 to 10 days to be generated and posted.

Therefore, if you or your group of companies may be involved in a sale, investment or other financial transaction involving considerable sums of money, it would be wise to check now that you (or your tax agent or legal advisor) hold a copy of your current certificate of exemption.

If not, please contact us to request a copy, before the matter becomes urgent. You can phone your Business Services Account Manager or our general enquiry line 0800 443 773 between 8.00 am and 4.30 pm.

Late payment penalties from 1 April 2002

There seems to be some confusion about the changes to penalties that apply from 1 April 2002.

Prior to 31 March 2002 a late payment penalty of 5% of the tax owing was charged on the day after the due date. Now an initial 1% late payment penalty is charged on the day after the due date and a further 4% penalty is charged if there is still an amount of unpaid tax (including penalties) outstanding at the end of the 7th day from the due date. Every month the amount owing remains unpaid we add a further 1% incremental penalty.

Use of money interest (UOMI) is also charged on a daily basis-currently at the rate of 11.93%.

Please ensure any staff involved in preparation of any type of tax return or who are responsible for tax payments are aware of these new rules.

The following may also be useful.

• Payment of the 1% penalty plus the appropriate number of days UOMI will stop the debt escalating if it is made (i.e. received by IRD or Westpac) within six calendar days of the due date.
• Inland Revenue's normal "Received in time" policy does not apply to payments after the due date. This advantages companies who pay electronically.

If you wish to pay by cheque, it must be received by Inland Revenue or Westpac by the close of business on the 6th calendar day after the due date. A postmark date will not stop the 4% penalty being charged.

Payments not received within that timeframe, will incur the additional 4% charge.

No allowance is made for weekends or public holidays.

• Payment of the penalty and interest does not preclude a written remission request being made (note that UOMI is not normally remitted).
• All companies need a regular checking mechanism to ensure tax payments have been made on time and if they are missed, that payment of the tax plus penalties and interest is made within that new timeframe of one week.

More details can be found in our Taxpayer obligations, interest and penalties (IR240) booklet. If you have any questions, please phone your Business Services Account Manager or our enquiry line 0800 443 773.

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Date published: 06 Dec 2004

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