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Kia ora everyone and welcome to this webinar my name is Rata Kamau and I am an Account Manager at Inland Revenue.
There are a number of changes which are proposed to come into effect on or before 1 April 2023, today I'll be taking you through the ones that may be of interest to businesses, this includes changes for:
- Property
- Trusts
- Dual resident companies, and
- other changes.
The information in this presentation is correct as of the 16th of March 2023.
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Last year, the Government introduced the Taxation (Annual Rates for 2022-23, Platform Economy, and Remedial Matters) Bill and this introduced a number of proposed changes and clarifications for property rules, including:
- build-to-rent exclusion for interest limitation
- extinguishing losses carried forward
- rollover relief clarifications, and
- changes to the 2023 income tax returns
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The first Property change we will talk through today is the proposed build-to-rent exclusion, which is due to be passed into law before 1 April 2023.
A development that meets the build-to-rent land definition will be excluded from the interest limitation rules for residential rental properties.
The requirements are still being considered by Parliament and will only be finalised once the law is passed in late March 2023.
In general, build-to-rent land includes medium-to-large scale, multi-unit residential housing developments that are built to provide long-term rental accommodation.
I won't go through all of it now, but currently the proposed requirements include:
- It must have at least 20 dwellings in one or more buildings that comprise a single development and have a single owner
- the dwellings are used or available for rent under the Residential Tenancies Act of 1986, and
- tenants must be offered a fixed-term tenancy of at least 10 years
If you're interested, you can find the proposed requirements on the Te Tūāpapa Kura Kāinga - Ministry of Housing and Urban Development (HUD) website.
To qualify the Ministry of Housing and Urban Development must be satisfied the development meets the build-to-rent land definition requirements. Approved assets will be recorded on a register of build-to-rent assets that is maintained by the Ministry of Housing and Urban Development.
If you have any questions on meeting the requirements, they will need to be directed to the Ministry of Housing and Urban Development.
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The exclusion will be available to both existing and new developments that meet the definition requirements. Any existing developments will have until 1 July 2023 to meet the requirements. If this deadline is met, the interest incurred on or after 1 October 2021 can be claimed.
If a return for the 2022 income year has already been filed, you can request for the return to be amended by using the web message service in myIR and sending Inland Revenue a message under the 'Interest Limitation option'.
For a new development completed after 1 July 2023, the requirements will need to be met as soon as it is built.
The exclusion will continue for as long as a development meets the definition requirements.
A development, or dwelling, that no longer meets the requirements will cease to qualify immediately and cannot qualify for this exclusion again, even if it meets the requirements in the future.
If a development no longer meets the requirements for the build-to-rent exclusion it can still access the ‘new build exemption for a period of 20 years after the development is complete.
To enable Inland Revenue to correctly apply the build-to-rent exclusion, the Ministry of Housing and Urban Development will share information with Inland Revenue on a regular basis.
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The first update is that income tax returns for 2023 onwards will include a new tick-box for 'Approved build-to-rent exclusion' under ‘Reason for interest expense claimed'. This should only be ticked if approval has been received from the Ministry of Housing and Urban Development and the development is on the build-to-rent asset register.
The second, is that the ‘Total residential income' key point, that was included in 2022 returns, has been separated into the following 3 key points for 2023:
- Gross residential rental income
- Net bright-line profit (excluding losses)
- Other residential income.
This impacts all income tax returns for all entity types.
Further changes will be made to the 2024 returns to make it easier for you to report property information.
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Remedial amendments are proposed to clarify rollover relief for the bright-line property rule and interest limitation rules for:
- trusts,
- Māori authorities,
- Te Tiriti o Waitangi settlements,
- look-through companies (LTC),
- partnerships, and
- transfers within companies.
The extent of relief under the bright-line property rule generally depends on the amount of consideration paid for the transfer to determine if full or partial relief is provided within the relevant bright-line period.
The Bill also includes clarifications and amendments to ensure various rules work as intended for the Bright-line property rule. These include the rules for inherited property and co-ownership.
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There will be more information published on our website and in our guides after the Bill is passed into law. This will include updating existing guided help for interest limitation and new guided help for rollover relief for the bright-line property rule. We're expecting a special report to be published in early April, including information on the build-to-rent exclusion and the remainder of the property legislative changes will be discussed in a TIB due to published in either May or June.
We're updating our forms and guides in preparation for 1 April – those impacted most are listed on your screen.
That brings us to the end of our changes for property – I'll now take you through the changes for trusts.
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There are a number of proposed changes coming for trusts – we've split these into two sections:
- Foreign trusts, and
- Non-active trusts
We'll start by looking at the changes for foreign trusts.
The Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Bill (No 2) proposes a number of remedial changes for foreign trusts. The changes include a mixture of amendments to rules, and clarifications which are intended to remove uncertainty and make it easier for foreign trusts to comply.
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Foreign trusts are trusts where no settlor has been resident in NZ, between the date the trust was first settled and the date of the distribution.
A settlor is any person who transfers value or provides financial assistance to the trust.
As a general rule, foreign trusts can access the foreign-sourced income exemption (section HC26), so they are only taxed on their New Zealand sourced income, rather than their worldwide income.
Ok, now let's have a look at what's being changed.
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Generally, the trustee of a trust that does not have a settlor resident in NZ for an entire income year would have a tax exemption on foreign sourced income. This includes foreign trusts and non-complying trusts (which previously had a settlor resident in New Zealand). In 2017 the foreign trust registration regime came into force, creating a registration regime to collect information on foreign trusts that used the exemption. This regime is being expanded to cover all trusts that get the exemption.
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To support this, the first proposed change will introduce the new definition, “foreign exemption trust.
This new definition will cover all registered New Zealand foreign trusts, but it will also include any trust where a resident trustee has made use of the foreign-sourced income exemption, unless they have elected to be a complying trust under section HC33.
This is to ensure that the foreign trust disclosure obligations are being applied as intended and will mean that any trust that has a New Zealand resident trustee who uses or has previously used the foreign sourced income exemption will need to comply with the disclosure requirements by filing annual returns, including the trust's financial statements, and details of settlements and distributions made over the year.
This change will take effect on the day after the Bill receives Royal assent.
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To qualify for the foreign-sourced income exemption, a foreign trust must meet certain conditions. One of those conditions is that it must be both registered at the beginning of the income year and at the time when the foreign-sourced income is obtained or received.
The Commissioner currently has the discretion to allow a foreign-sourced income exemption to apply despite minor compliance failures, but this discretion does not apply when the trust is not registered in time. This can be quite limiting in circumstances where a customer has made reasonable efforts to be registered on time.
To resolve this, a further amendment will give the Commissioner the discretion to backdate a foreign trust's registration if the trustee has made reasonable efforts to be registered on time.
This discretion will be available from the day after the date the Bill receives the Royal assent, regardless of whether the trust applied for registration before or after that date.
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There is another proposed amendment that is intended to make things fairer for foreign trusts that are making reasonable efforts to comply.
The Commissioner currently has a discretion to allow the foreign-sourced income exemptions to apply where there has been a failure to comply, but only if a trustee has corrected that failure within a reasonable time.
However, there are some failures that cannot be corrected. For example, the loss of historical information due to prior mismanagement.
To remedy this, a proposed amendment will give the Commissioner a discretion to allow a trust to use the foreign-sourced income exemption where the trustees have made reasonable efforts to comply, and the non-compliance is minor.
This discretion would be able to be exercised from the date the Bill receives the Royal assent.
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We're also clarifying the timeframes that NZ foreign trusts will have to let us know about any changes to details.
For changes to trustee's details and/or contact details the contact trustee will be required to notify us of changes within 30 days from when the change is known.
For changes to other information, such as protector contact details, these must be updated in the next annual return.
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When the foreign trust disclosure rules were enacted in 2017, the penalties were not updated. So, the current penalties that apply are the general criminal penalties in the Tax Administration Act. For foreign trusts this means that the main consequence for not complying with the disclosure requirements is that they cannot use the foreign-sourced income exemption.
This one size fits all approach can sometimes mean that a trust is disproportionately penalised.
To remedy this, a new civil penalty of up to $1,000 will be introduced. This penalty would be applied for failure to comply with the disclosure rules, such as when a trustee misses a deadline, provides an incomplete annual return, or provides false information.
The penalty will allow for a more flexible and proportionate response to non-compliance, as the penalty could be applied instead of, or in addition to, the trust being denied the foreign-sourced income exemption.
The penalty would not be applied if the Commissioner was satisfied that the failure occurred through no fault of the trustee or that the trustee made reasonable efforts to meet the requirements.
The proposed new civil penalty can be applied for any failures to comply from the date the Bill receives the Royal assent.
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There are a handful of other proposed amendments and clarifications which are also included in the Bill. I'll run through those now:
We're clarifying that:
- the Commissioner of Inland Revenue can deregister a trust if the trust is not meeting its obligations or the trust requests to be deregistered. Inland Revenue are required to give 30 days notice minimum before forced de-registration.
- declarations are required in relation to settlements after registration
- residual beneficiaries are subject to the same disclosure requirements as discretionary beneficiaries, and
- currently a testamentary trust needs a trust deed to access the foreign-sourced income exemption. From the day after enactment, they can either provide a Will or a trust deed.
That brings me to the end of the changes for foreign trusts. I'll now take you through the changes for non-active trusts.
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To be non-active, a trust must meet certain criteria.
It must be a complying trust, in short that means it has met its tax obligations over its lifetime.
It has to have made a declaration, either via myIR or the IR633, that it meets the non-active criteria.
The general criteria is also that the trust has no income and no expenses and has done nothing with its assets that results in income to any other person.
When considering the criteria we can ignore a few things, such as
- Bank interest of less than $200
- Reasonable professional fees
- Bank fees and admin charges of less than $200
- Any occupancy costs associated with a beneficiary occupying a trust property, the current wording specifically mentions insurance, rates and other expenditure.
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When we introduced the new trust disclosure rules last year, we made sure they excluded any non-active trust, logically because those trusts don't actually file returns.
During our consultation on the trust disclosure rules, we received a lot of feedback about the non-active criteria.
It highlighted that the costs of complying with the disclosure rules far outweighed the income that many small trusts are earning, so they effectively incur a loss because they have to file a return.
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To resolve the range of issues raised, we have introduced two new criteria, the first, criteria A, is very similar to the existing rules.
The trust still needs to have met its tax obligations and made a declaration.
But we've broadened the types of income that can be earned from just bank interest to reportable income.
We have also increased the amount of income a trust can earn to $1,000. It's important that this income is taxed correctly at source otherwise the trust will no longer meet the requirement to be a complying trust.
We have increased the expenditure threshold to $1,500.
We have also changed the wording around transactions with other parties to only include associated persons.
We will continue to ignore any costs associated with a beneficiary occupying a trust property, and that extends to ignoring any deemed income that arises if the beneficiary pays those costs. We have slightly tweaked the wording in the legislation to clarify that occupancy costs include interest.
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We have also introduced a new set of criteria specifically for testamentary trusts that don't meet the criteria for category A.
A testamentary trust is a trust that is created by the terms of a Will that states, or implies, that the trustees must hold some assets in trust for beneficiaries. For example, this may occur where there are underage children nominated as beneficiaries and the assets must be held in a trust until they turn 18.
Testamentary trusts can earn reportable income up to $5,000 and any other income up to $1,000 as long as they have deductions that would reduce the income to below $200.
There are no other requirements for these trusts, so they can have any level of expenses, and they can still allocate income to beneficiaries. Beneficiaries of non-active testamentary trusts still have an obligation to include the income in their personal tax returns.
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These changes are proposed to come into effect on 1 April 2023, but they are being retrospectively applied to the 2021/22 income year to align with the trust disclosure rules.
Because they don't come into effect until 1 April 2023, if you make a non-active declaration for the 2022 income year before 1 April, you still need to meet the lower threshold criteria. You can't make declarations under the new criteria until the law passes.
This means there is a timing issue because the 2022 income tax returns are due at the end of March, so it doesn't allow you any time to make the declaration on behalf of your client before the return becomes overdue.
To prevent us from having to follow up on returns that won't need to be filed, we have designed a transitional process for intermediaries. This process will allow you to provide us with a list of your clients who will be able to be non-active under the new criteria.
You can find the transitional process on our website.
That brings me to the end of the proposed changes for trusts, I will just note that the criteria for non-active companies has not changed, the income threshold for companies is still only $50.
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In 2019, the Australian Tax Office issued new technical interpretations of Australia's corporate tax residence rules. In particular, new guidance was provided on how to apply the central management and control test, a key element for determining whether a company has tax residence in Australia. This new interpretation effectively meant that companies with Australian directors could now be Australian tax resident, even if the company's commercial activities are carried on outside Australia. This change may affect New Zealand companies with Australian-based directors, by potentially making them a tax resident in both countries.
Three New Zealand tax regimes have been identified as needing changes to resolve concerns with the application of Australia's residence rules.
If enacted, these proposed changes will be applied retrospectively from 15 March 2017.
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The first tax regime is the loss grouping rules.
The proposed changes would repeal the section that requires that a New Zealand resident company must not be either a:
- double tax agreement non-resident company, or
- liable for tax in another jurisdiction for the duration of the commonality period.
This would mean a company that is both a New Zealand tax resident and tax resident in another jurisdiction would be able to use the loss grouping rules and offset its losses against the profits of another company in the same group of companies for New Zealand tax purposes.
This is provided the company still satisfies the other requirements, including that it is either incorporated in New Zealand or carrying on a business through a fixed establishment in New Zealand.
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The second regime is imputation credit accounts.
A New Zealand resident company is required to maintain an imputation credit account. An Australian resident company can choose to maintain an imputation credit account, but it cannot do so until it makes an election to the Commissioner of Inland Revenue. This requirement can result in a New Zealand resident company losing its imputation credit account credit balance if it becomes Australian tax resident before making the relevant election.
The proposed changes would automatically make a New Zealand resident company an Australian imputation credit account company when it becomes an Australian tax resident under the Australia/New Zealand double tax agreement. The company would be required to continue to maintain an imputation credit account.
A further proposed change would ensure that the company's Imputation credit account balance, at the point of becoming an Australian imputation credit account company, is preserved and consequently any accumulated imputation credits up until the point of becoming an Australian imputation credit account company are retained.
This is consistent with the overall approach of allowing both New Zealand and Australian tax resident companies to maintain an imputation credit account.
The proposed changes would also allow an Australian imputation credit account company to preserve its imputation credit account balance if the company's residence was to revert to New Zealand.
These changes would not apply where a New Zealand resident company becomes tax resident in any country other than Australia.
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The third regime is imputation groups.
The proposed changes also include a consequential change to the eligibility rules for imputation groups.
Australian imputation credit account companies can continue to be members of an imputation group. But when these changes are enacted, they will no longer need to have elected to be an Australian imputation credit account company.
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Further proposed changes would remove the domestic dividend exemption for certain dividends paid to New Zealand resident companies whose residence tie-breaks to another country under a double tax agreement and extend the corporate migration rules to certain companies whose residence tie-breaks from New Zealand.
These proposed amendments would not have the same effective date as the previous amendments, instead these would take effect from 30 August 2022.
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I'll now take you through the assortment of other proposed changes, starting with the rate and threshold changes.
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From 1 April 2023, the following rates and thresholds are expected to increase:
The student loan repayment threshold will increase from $21,268 to $22,828,
The ACC earners levy will increase from 1.46% to 1.53%.
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A fringe benefit tax exemption will be introduced for certain public transport fares (bus, train, ferry and cable car) when these are subsidised by an employer for the main purpose of their employee travelling between home and work.
The proposed amendments will have effect for fringe benefits provided on and after 1 April 2023.
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Businesses with a multi-year general approval for the Research and Development Tax Incentive will only need to notify the Commissioner when there is a material change to their pre-approved Research & Development activities and not each year as they currently must.
Businesses with a multi-year general approval, and who have material changes in their activities, or their criteria and methodologies approval, will need to apply to the Commissioner for a variation if they want the change to be covered by their existing approval.
The due date to notify the Commissioner that there has been a material change is the 7th day of the 2nd month after the balance date for the corresponding income year.
Once passed, these changes will be effective for the 2020-21 and later income years.
The Research and Development Tax Incentive: Guidance, IR1240, will have further information.
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A 4-year time bar will apply for student loans. As with other time bars, this will prevent the Commissioner from amending assessments including salary or wages deductions for student loans after 4 years. Exceptions may apply for fraud or if it would have a significant adverse event on a borrower.
The aim of the change is to provide increased certainty for a borrower.
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Members of consolidated or income groups will only need to file an annual imputation return (IR4J) when they have a debit or credit balance during the imputation year.
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Owners and administrators of non-individual entities (i.e. directors or trustees) will be able to manage the entity's myIR logons using their personal myIR logon.
This means they will not be required to log in to the entity's myIR account to manage account access or change the level of access a logon has. Instead, they can navigate to Manage third party access following the below.
Log in using personal myIR logon,
Go to Manage my profile
Select I want to
Select Manage third party access
Select the logon you want to manage
However, they will not be able to create new logons using their personal myIR logon, they will still need to log in to the entities myIR account to create a new logon.
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Various rules are also being clarified or amended to ensure they work as intended.
This includes the following changes for provisional tax:
Provisional tax customers, who have elected to use the standard option, will not be able to calculate their second provisional tax instalment using their residential income tax from two years ago plus 10% if their preceding years return is filed on or before the second instalments due date.
Adding to this, there is a further related clarification – if a provisional tax instalment due date falls on a weekend or public holiday, payments received or returns filed on the next working day will be deemed to be received on time.
Plus,
Companies who elect to become a look-through company will need to keep the original acquisition date for assets acquired by the preceding company. This will be backdated to take effect from 1 April 2011.
The beginning of the period of measurement for shareholder continuity for a company carrying forward tax losses under the business continuity test will be modified from the date the loss was incurred to the date the company became subject to the business continuity test. This is to ensure the ownership continuity provisions work correctly in relation to the 5-year business continuity period requirement.
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That brings us to the end of our webinar. Thank you for watching.
We have other webinars available on the upcoming April changes, including changes for GST invoicing and record keeping, and other GST changes. You can find these by going to
If you have any questions about our webinar, please email [email protected]
