AGENTSanswers - 2007

AGENTSanswers Issue 94 September 2007

New GST and provisional tax return (GST103)
Changes to investment income rules
Tax pooling
Reminder

New GST and provisional tax return (GST103)

From the start of the 2008-09 tax year, provisional tax can be paid at the same time as GST on our new GST and provisional tax return (GST103). For your clients who pay GST and provisional tax, the GST103 will replace the Goods and services tax return (GST101) we currently send you. If they pay provisional tax only, you can continue to follow your existing processes for the payment of their provisional tax. For your clients who only pay GST, we'll continue to send the GST101 as we have in the past.

Layout of new return

The information required by the GST103 will be tailored to different situations depending on your clients' balance dates, GST filing frequencies, provisional tax calculation option (ratio, standard or estimation) and whether they file GST for multiple locations. For periods when compulsory provisional tax instalments aren't due, your clients will be able to make voluntary payments using the GST103.

Please note, the GST103 will have a letter immediately after the shoulder number (eg GST103E) at the top right of each return. This specifies the version of the return, and is for our internal use only, to assist us processing these returns.

Return example

The following pictures show you how the new GST103 looks (note the shoulder number GST103E). It's tailored for a client who:

has a GST and provisional tax payment due
files and pays GST monthly
files GST returns for multiple locations
has elected to use the ratio option to calculate their provisional tax instalments.

For a client who has most of the same circumstances above, but files GST two-monthly, we will send a GST103F instead. The front page is the GST portion of the return, and the back page contains the provisional tax section and payment slip.

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Changes to investment income rules

The Taxation (Savings, Investment and Miscellaneous Provisions) Act 2006 (as amended by Taxation (KiwiSaver and Company Tax Rate Amendments) Act 2007) saw the introduction of portfolio investment entities (PIES) and substantial changes to the foreign investment fund (FIF) rules.

We've listed below some information about how these changes may impact on you and your clients.

Recent changes to the FIF rules you need to consider are:

the removal of the "grey-list" exemption for attributing interests that are less than 10% in any offshore company
the introduction of two new methods for calculating a person's FIF income or loss: the fair dividend rate method (commonly known as "FDR") and the cost method
the introduction of new exemptions such as attributing interests held in some Australian-listed companies, Guinness Peat Group (until 31 March 2012), New Zealand Investment Trust (until 31 March 2009) and venture capital investments in grey-list countries that were previously resident in New Zealand and maintain a significant presence in New Zealand
certain investment types being excluded from using the FDR calculation method - eg fixed rate return investments
the removal of FIF loss ring-fencing except for loss calculated under the branch equivalent method
changes to currency conversion rules.

You also need to bear in mind these impacts for your clients:

If the original cost of offshore investments is greater than $50,000, FIF income will now generally be calculated using the FDR method.
There is an alternative method for establishing the cost of shares acquired before 1 January 2000.
FIF income will now potentially be derived from offshore investments in grey-list countries. This will increase the tax liability, possibly impacting on provisional tax payments.
You will need to establish the open market value of offshore investments at the beginning of your client's income year.
Investors who hold shares as traders will need to carry out the deemed disposal and reacquisition in their 2007 income year. Any additional tax arising from that deemed disposal will need to be identified, and notification of the details provided with the return so that payment of any additional tax may be spread over the next three income years.

Portfolio investment entity (PIE)

The Act changes the way that collective investment vehicles such as managed funds are taxed to better align the tax treatment of direct and indirect investors. Entities that meet the criteria may elect to become a PIE from 1 October 2007. There are several different types of PIEs that an eligible entity may elect to become. Each type has different tax implications.

Prescribed investor rate (PIR)

The main type of PIE is known as a portfolio tax rate entity. This type of PIE can use its investor's PIR to calculate the tax on the income it derives. You may begin to receive requests from your clients for details of their taxable income so they can determine their PIR. A PIR flowchart has been created to help identify the correct PIR to use. You can download this from Inland Revenue's website.

Impacts of becoming a PIE

Entities that elect to become a PIE need to consider the following impacts:

The potential change of balance date and the extension of the period covered by the final income tax return.
Deemed disposal and reacquisition of certain investments resulting in additional tax to pay.
No liability for any use-of-money interest or penalties where any inaccuracy or shortfall in provisional tax arises because of the potential extension of your client's income year, or the tax liability from the deemed disposal and acquisition of certain investments.
Resident investors can generally decide whether or not to include dividends from portfolio-listed companies who become PIEs in a tax return. Entities will also need to file a return in the prescribed form by including the amount of:
- additional tax they will be paying in three instalments, and
- the amount of any formation loss - entities should advise Inland Revenue of this amount by the due date for filing the PIE's periodic return.

Further information

You can find more information about the FIF changes and the new PIE rules:

in Tax Information Bulletin Vol 19, No 3, April 2007 and Tax Information Bulletin Vol 19, No 6, July 2007
in the Income Tax Act 2004, the Tax Administration Act 1994, and the Taxation (KiwiSaver and Company Tax Rate Amendments) Act 2007

Note

Information about the FIF changes and the new PIE rules is continually being updated, so check the website often.

Tax pooling

We have recently reaffirmed the rules surrounding the use of funds sourced from a tax pooling account after reviewing the way these funds were being used. In the course of the review, we noted that funds purchased from a tax pooling intermediary were subsequently used to pay non-provisional tax debts such as GST and PAYE. Tax Information Bulletin Vol 15, No 5 (May 2003) explains how tax pooling works and is Inland Revenue's view of the law. Under that view, taxpayers are generally not able to use funds transferred from a tax pooling intermediary with a back-dated effective date of transfer, to pay non-provisional tax debts. Although we do accept that funds may be sourced from a tax pool to fund nonprovisional tax debts, the effective date of transfer will be the date that we were asked to make the transfer, not the original date of transfer into the pool. To assist taxpayers and agents who are considering sourcing funds from a tax pooling intermediary to pay tax obligations, we have produced a flyer which provides an overview of what tax pooling funds can and cannot be used for.

We will not revisit transfers of funds sourced from a tax pooling account which are inconsistent with Inland Revenue's view of the law as long as the funds were purchased from a tax pooling intermediary on or before 29 May 2007. However, we will not allow any transfers of funds purchased after 29 May 2007 to be made at effective dates and/or using destination tax years which are not in line with Inland Revenue's view of the law.

We will provide written notification of any decision to change the effective date and/or destination tax year of any funds purchased from a tax pooling account. All such decisions are disputable and taxpayers have the right to dispute them. They can do this by filing a valid notice of proposed adjustment within four months of the date of Inland Revenue's letter advising the effective date and/or destination tax year of any transfer that has been changed.

Reminder

The Companies Office and Inland Revenue have gone real time. This is now the fastest way for you to start your clients up in business, enabling you to incorporate their company, apply for a company IRD number and register them for GST - all at the same time. For more information please see the August 2007 edition of AGENTSanswers.