New thin cap and land acquisition tax rules due this month

Tax legislation will be introduced to Parliament later this month to tighten the rules relating to thin capitalisation, where foreign companies seek to reduce tax in New Zealand by loading the local subsidiary with tax deductible debt.

The move was announced this morning at the New Zealand Institute of Chartered Accountants' annual conference in Auckland by Revenue Minister Todd McClay.

Also to be amended in a bill to be introduced this month will be rules relating to the date of land acquisitions, in a move to require taxpayers to state their intentions with respect to their purchase at the date of purchase.

McClay also outlined a tax reform work programme that will cover a range of vexed areas including the tax treatment of annuities, review and refreshment of double tax agreement with foreign trading partners, and the rules relating to closely held companies. The politically charged issue of whether and how to charge GST on privately imported goods for personal use will also be on the agenda.

Questions over the future of both the provisional tax system and the use and role of withholding taxes would also be examined.

Trans-Tasman mutual recognition of imputation credits, a hardy perennial of the Australasian tax relationship since the 1990's, will continue to be pursued, although indications from Canberra are that there is no appetite for a move that would reduce the Australian tax take.

The government will also continue to be involved in the OECD's global programme to try and reduce cross-border tax avoidance by companies with operations in more than one country.

The thin capitalisation rule changes foreshadowed today are a small part of that effort.

"These rules place limits on how much debt foreign investors are able to place in New Zealand, limiting the interest deductions that can be taken here and therefore helping to ensure they pay the appropriate amount of New Zealand tax," McClay said.

On the rules governing the date of acquisition of land, McClay announced this month's amending legislation would "clarify that the date a person's intention or purpose should be tested is at the beginning of a period when the land is acquired."

"This means the intention is tested on the date a person enters into a binding agreement for the sale and purchase of land. The amendment should help to provide greater clarity around the rules, and will apply from the date the legislation is introduced," he said.

The Inland Revenue Department was also now scoping a review of tax setting governing annuities in response to concerns that current rules "may be discouraging the use of annuities when these would otherwise be sensible."

The review of closely held company rules would cover dividend rules and "include a number of tax technical issues raised by NZICA and look at simplifying some of the look-through company rules with a view to making them more workable."

A major priority for IRD would be the upgrading and modernisation of its services, including its information technology platform, FIRST.

"It is my strong expectation that there will be significant commercial opportunity for New Zealand companies to play a major part in the development, build and implementation of BT (business transformation) over the next 10 years," said McClay, with the first of four stages focused on secure digital service and a discussion document due in mid-2014.

"This work will require us to have the necessary policy and legislative framework to give taxpayers confidence in the security of their information and allow improvements to be made to the collection of PAYE and GST systems by integrating that information into business processes and software."