Corporates Contact - 2004
Issue 24 December 2004
- Message from Group Manager
- GST on fringe benefits
- Principal Advisors
- Escalation process
- Adjustments for entertainment expenses
- A reminder about annual disclosure and filing requirements for controlled foreign companies and foreign investment funds
- Views sort on imputation
- Making electronic payments correctly
- Royalty payments and non-resident withholding tax
Message from Group Manager
The year has almost gone. For most of us the holidays will be a time to re-charge the batteries, enjoy some sun and relax, before we take on the challenges of 2005.
It has been a year since I took up the position of Group Manager, Corporates. During that period I have been keen to build on the relationships between companies (including their agents) and the department. A good relationship is important to improve ongoing voluntary compliance by companies, in fact it is fundamental to the tax system.
I thought readers may be interested in some of the points below. There are also some very relevant items in this issue of Corporates Contact.
The appointment of Principal Advisors has been beneficial to Corporates and taxpayers in that they bring industry knowledge to assist staff to ask the right questions in investigations, binding ruling requests and in training our staff. Similarly, the additional legal counsel has also been an advantage in handling some of the difficult issues with the objective of reaching a conclusion.
The newly created Risk and Intelligence Unit has focused on identifying risks, particularly for the largest companies. We are currently communicating these to the corporates concerned. We will be meeting with them individually and with the Corporates Taxpayer Group to discuss interpretation of these results. This process enables us to identify priorities, the efficient allocation of our resources and referring items for policy consideration.
We have taken a greater role in the binding rulings cases and the opportunity is there for companies to request these, particularly as the allocation time is now very short.
I am delighted that our time to action correspondence has improved. At this stage we have actioned 11,800 pieces of correspondence since 1 July 2004, and on average we only have 400 pieces on hand. Also pleasing are the results of the recent survey conducted by independent researchers on both our account manager role and our Corporates 0800 call centre. Your feedback showed a 91% satisfaction level. Thank you for taking the time to reply to "yet again another survey".
I would like to extend to you all a happy and restful festive season and best wishes for 2005.
Spyros Papageorgiou
Group Manager
Corporates
GST on fringe benefits
If you are registered for both GST and FBT you may have to make an adjustment for GST in your FBT returns for fringe benefits you have provided.
Example
If an employee has private use of a company car during the FBT quarter ending 31 December 2004, you have to show the GST on that fringe benefit in Box 7 of the Fringe benefit tax quarterly return
(IR420) for that period. This GST adjustment is payable to Inland Revenue with your FBT for that period.
No further adjustments are required in your GST return as you will already have claimed the GST content of the company car at the time of purchase.
Principal Advisors
This year, Corporates appointed four Principal Advisors. This is a new position in Corporates.
Principal Advisors provide leadership on complex, high-risk issues in the following specialist technical and commercial areas:
- financial arrangements (Paul Hale)
- international tax (Andrea Black)
- mergers, acquisitions and losses (Bridget Stairmand)
- banking and structured finance (Roland Shelton-Agar).
The Principal Advisors were selected for their tax technical and/or commercial expertise. Their four main responsibilities are to:
- provide advice in their specialist area to Corporates staff in investigations and rulings
- contribute to the early detection of tax risks
- provide input into the policy advice process in their specialist area, and
- provide commercial and/or technical training to Corporates and other Inland Revenue staff.
We consider that the appointment of the Principal Advisors will ultimately benefit taxpayers and their agents by:
- helping investigators to refine information requests and target essential documents/information
- assisting investigators to identify and consider issues and conclude investigations more quickly
- bringing an increased understanding of commercial transactions to our processes, and
- upskilling Corporates' staff in technical and commercial issues, enabling them to manage investigations and correspondence more effectively.
Escalation process
We have been asked why technical issues can sometimes take a long time to be resolved. One of the reasons is that we want to ensure correctness and consistency across Inland Revenue as a whole.
Inland Revenue is a large organisation with nearly 5,000 staff located throughout the country. It is crucial for the integrity of the tax system, taxpayers' perceptions and our obligation to act fairly and impartially that we apply the law in a consistent manner across the country and in all areas.
Where an Inland Revenue staff member becomes aware of a different interpretation being applied to an arrangement or disagrees with the technical correctness of a published policy or practice being adopted, it is vital that the issue is dealt with and any differences in views or practice are resolved, so that we can comply with our obligations under the Tax Administration Act to treat taxpayers fairly and impartially.
To facilitate this, we have a technical issues escalation process. If a staff member is aware that a different practice has been or is being adopted elsewhere in Inland Revenue, or is aware of a published interpretation which they consider to be legally incorrect, they are required to bring the matter to the attention of their reporting officer, with a view to escalating the issue to establish a single correct position within Inland Revenue.
The escalation process involves technical issues being forwarded to and discussed in a wider forum to find a broader, collective view. If the issue cannot be resolved by consensus, it will be forwarded for resolution at National Office level. While we acknowledge that timeliness is important, we also consider that certainty and correctness of the outcome are fundamental. To that end, we prefer to take the necessary time and achieve a complete and correct answer. Taxpayers will be kept informed of the process of an issue that has been escalated.
Adjustments for entertainment expenses
Some entertainment expenditure incurred by a company is only 50% deductible in accordance with Schedule 6A of the Income Tax Act 19941. An adjustment for income tax is required to allow only 50% of the total amount of the entertainment expenditure.
The 50% non-deductible portion of entertainment expenditure is treated as a taxable supply, so a GST adjustment must be made to the company's GST return as well.
Note
The GST adjustment cannot be claimed as a deduction for income tax purposes.
The GST adjustment for entertainment expenditure is an area where errors commonly occur. The following example demonstrates the tax consequences of entertainment expenditure incurred in the 2003 income tax year. The example is based on the taxpayer having a standard balance date and a tax agent who has an extension of time to file the taxpayer's income tax return until 31 March 2004.
| Income tax return of ABC Ltd | ||
|---|---|---|
| Statement of financial performance (accounting) | 31 March 2003 | 31 March 2004 |
| Entertainment expenditure | ($100,000) | |
| GST on entertainment adjustment | ($5,556)2 | |
| Tax reconciliation | ||
| Tax adjustments: | ||
| Addback: Entertainment - 50% non-deductible | $50,000 | |
| GST on non-deductible entertainment | $5,556 | |
| GST return of ABC Ltd - period ended 31 March 2004 | ||
|---|---|---|
| Total sales and income |
|
$6,500,000.00 |
| Zero-rated supplies |
|
$0.00 |
| Subtract Box 6 from Box 5 |
|
$6,500,000.00 |
| Divide amount in Box 7 by nine |
|
$ 722,222.22 |
| Adjustments from your calculation sheet |
|
$ 5,555.553 |
| Add Boxes 8 and 9 = total GST collected |
|
$ 727,777.77 |
| Total purchases and expenses |
|
$3,000,000.00 |
| Divide amount in Box 11 by nine |
|
$ 333,333.33 |
| Credit adjustments from your calculation sheet |
|
$ 0.00 |
| Total GST credit for purchases and expenses |
|
$ 333,333.33 |
| Difference between Box 10 and Box 14 is GST to pay |
|
$ 394,444.44 |
For more information, see page 71 of the GST guide (IR375) or page 15 of our Entertainment
expenses (IR268) booklet. You can also refer to section DG 1(1) of the Income Tax Act 1994 and section 21I(4) of the GST Act 1985.
1 The Income Tax Act 2004 applies to 2005/2006 and subsequent tax years. The new Act rewrites parts A - E and Y and re-enacts the remainder of the Income Tax Act 1994.
2 This adjustment is made in 2004 as this is the year in which the GST adjustment has been made.
3 $50,000/9 = $5,555.55 - note that the calculation is based on the exclusive amount.
A reminder about annual disclosure and filing requirements for controlled foreign companies and foreign investment funds
With the number of our Corporates clients who have offshore interests in foreign companies, we'd like to briefly remind you that all annual disclosure and filing requirements for such interests are to be filed at the same time as the return of income.
You can find these forms on our website.
Disclosure
Any taxpayer with an income or control interest in a foreign company or foreign investment fund, not exempted under the international tax disclosure exemption, is required to disclose that interest.
The most recent "International Tax Disclosure Exemption - ITR15" can be found in
Tax Information Bulletin, Vol 16, No 3 (April 2004).
We may also exempt a taxpayer from these disclosure requirements if we consider that disclosure is not necessary for the administration of the international tax rules. However, it is important to note that if an exemption is given it can be cancelled at any time.
The relevant forms include:
- Interest in a foreign company disclosure schedule (IR477)
- Interest in a foreign company disclosure schedule (for Schedule 3, Part A countries) (IR479)
- Interest in a foreign investment fund disclosure schedule (branch equivalent method) (IR440)
- Interest in a foreign investment fund disclosure schedule (comparative value method) (IR441)
- Multiple interests in foreign investment fund disclosure schedule (comparative value) (IR442)
These forms include the disclosure of any respective attributed foreign loss or foreign investment fund loss offsets.
Filing
In addition, we require an annual return for any dividend withholding payment accounts, branch equivalent tax accounts, or conduit tax relief accounts held by a taxpayer.
The relevant forms are:
- Dividend withholding payment account return (IR4D) or (IR4J)
- Branch equivalent tax account return for companies (IR408)
- Conduit tax relief account return (IR406)
Views sought on imputation
In line with Inland Revenue's strategy of streamlining our processes to make it easy for taxpayers to meet their obligations, we want to identify any issues with the imputation scheme to determine if a review is required.
The imputation scheme has applied from the 1989 income year onwards. The objective of the scheme is to tax, as far as possible, income derived through companies at the tax rates of their shareholders and is a mechanism for the relief of double taxation of corporate profits.
We invite you to put forward your concerns, comments and suggestions about the imputation scheme so these can be considered. We want to understand the difficulties and costs to companies and their tax agents in complying with the imputation rules and the ideas you have to reduce these.
Send your feedback to:
The Editor
Corporates Contact
Inland Revenue
PO Box 2198
Wellington
Or email corps.contact@ird.govt.nz
We'd like your feedback by 24 December 2004.
Making electronic payments correctly
Some content changes made in a revised edition of our Making payments (IR584) booklet are causing confusion.
This revised edition is currently only available on our website. The processing of your payments is not affected by these changes and we expect to update the hard copy of the booklet with the same details in the near future.
In the banking or payroll software package you use for making electronic payments, after you have entered the usual "Payee name", "Amount", and IRD's bank account number, enter your IRD number in the first available field. In the second available field, enter the relevant tax type code followed by the tax period this payment is for.
An example of the new format is shown on page 10 of Making payments (IR584).
Complete your electronic payments based on the example provided. Enter your IRD number without dashes, slashes or spaces. Specify the tax type being paid using the appropriate abbreviation from the tax type codes list. Leave a blank space between the tax type code selected and the tax period. Enter the tax period without dashes, slashes, spaces or abbreviations to the ddmmyyyy format.
Guidelines for electronic payments
Please provide the following information for all types of electronic payments.
- In the payee name and bank panels, enter "Inland Revenue" and our account number 03 0049 0001100 - 27. These details stay the same every time.
- In the amount panel, enter the amount you want deducted from your bank account.
- In the particulars panel, enter the IRD number of the person or organisation the payment is for. Start from the left and leave the remaining boxes blank.
- In the payee code panel, enter the code for the correct tax type. Leave the next box blank, then enter the period end date this payment is for, not the date you are making the payment. The period must show the day, month and all four digits of the year as in the example above. If you are an employer, the correct period end date is printed on your employer monthly schedule or notice of assessment. Individual taxpayers will have the period end date printed on the return or notice of assessment.
Note: You do not need to fill in this panel for an NCP (non-custodial parent) payment, as it automatically goes to the current period.
- In the reference panel, leave this panel blank.
Royalty payments and non-resident withholding tax
Royalty payments to a non-resident may be liable for non-resident withholding tax (NRWT)
If you have made payments to non-residents, please check whether any of the payments relate to royalties. If you have paid a royalty to a non-resident it may be liable for non-resident withholding tax (NRWT).
What is a royalty payment?
Section OB 1 of the Income Tax Act 1994 gives a wide definition of a royalty. It includes a payment of any kind, whether periodical or not, and however described or computed, for the use or right to use any copyright, patent, trademark, design or model, plan, secret formula or process, or other like property or right. It can also include the supply of scientific, technical, industrial, or commercial knowledge or information.
How much NRWT is paid?
NRWT on royalties is 15% of the gross royalty. However, in most cases the rate is reduced to 10% where New Zealand has a double tax agreement with the overseas country selling the franchise to New Zealand.
The 10% tax is on the gross royalty amount. If a payment is made net of any NRWT the royalty needs to be "grossed up" to calculate the correct amount of NRWT payable.
NRWT on computer software royalties
An interpretation guideline is published in our Tax Information Bulletin, Vol 15, No 11 (November 2003).
Voluntary disclosures
If you think you are liable for NRWT you can make a voluntary disclosure at any time. Any shortfall penalties may be substantially reduced.
Paying NRWT
NRWT payments must be sent with a completed Non-Resident withholding tax (NRWT) (IR67P) payment slip and reconciled at the end of the year on the Non-resident withholding tax on interest, dividends, and royalties reconciliation statement (IR67S).
Sometimes an outside registry is used to make payments for dividends, but if you wish to make the payments please note the following:
- Only one return (IR67P or IR67S) per return period can be accepted.
- Only one address can be used for NRWT purposes per IRD number.
If two parties are making payments subject to NRWT, it is necessary to discuss matters between the parties and sort out who receives and files the returns (monthly and yearly). Whichever party, whether a company or a registry manager, needs to have the appropriate address updated on our records.
Our system allows more than one payment per return period, so each party can make a payment, if they wish. Please remember the correct details should be shown on all electronic payments. Please refer to pages 10 and 11 of our guide Making payments (IR584).
Please also remember that the yearly reconciliation statement (IR67S) is based on an April to March financial year and the appropriate IR67 certificates must be attached to it. The correct address for mailing all NRWT forms is:
Inland Revenue
Southern Processing Centre
Box 3753
Christchurch
If you wish to use electronic formats for NRWT purposes, please use our Magmedia updates on our website under Software Developers.
Contact/information details
You can call your account manager or use the toll-free number for general business tax enquiries 0800 377 774. More information can be found in the Non-resident withholding tax payer's guide
(IR291) or by calling the Non-resident Centre on 03 467 7020.
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Date published: 06 Dec 2004
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