Australia
New taxation Bill responds to changing business practices and technology
14 October 2021 | Minutes to read: 7

New taxation Bill responds to changing business practices and technology

By William Buck

The new Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill includes a range of proposed improvements and remedial measures to ensure the tax system functions smoothly. The Bill has been through its first reading and public submissions close on 9 November 2021. It is expected to be passed by the end of March 2022.

The draft tax legislation is required to confirm the income tax rates for the 2021–22 tax year. The basic income tax rates stay the same, with the inclusion of a top personal income tax rate of 39%.

The rest of the Bill covers a long list of GST and income tax policy and remedial amendments. In this summary we focus on some of the main changes that may soon become part of our tax system.

Excluding cryptoassets from GST and financial arrangement rules

Under the proposed amendments, and based on an amended tax definition, cryptoassets (also known as cryptocurrencies) would be excluded from GST. However, GST will continue to apply to supplies of goods and services that are bought using cryptoassets (the same as if those goods or services had been purchased using money). This would apply from 1 January 2009, the date the first cryptoasset (bitcoin) was launched.

Non-fungible tokens (NFTs) which represents ownership of items like video clips, photos and music that can be owned or traded using a blockchain, have been excluded from the proposed definition of cryptoassets and will remain subject to GST.

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GST-registered businesses that raise funds through issuing cryptoassets with features similar to debt or equity securities would be allowed to claim input tax credits on their capital-raising costs.

Cryptoassets would also be excluded from the financial arrangements rules by amending the Income Tax Act to include cryptoassets as an excepted financial arrangement. But the amounts you receive from selling, trading or exchanging cryptoassets can be taxable. You may have to pay tax if you are acquiring cryptoassets for the purposes of disposal (for example to sell or exchange), trading in cryptoassets, or using cryptoassets for a profit-making scheme.

Modernising GST invoicing and information requirements

Since GST was introduced in 1986, there have been very few changes for the requirements for tax invoices, however, much has changed in the business practices relating to transactional information and the use of technology.

The Bill proposes amendments that modernise the GST invoicing rules. This is by replacing the requirements for the issue of documents with requirements for the provision of information, with no prescribed formats. The proposed information requirements will replace the formal requirements that registered persons must create and retain tax invoices for taxable supplies including credit notes and debit notes for adjustments to taxable supplies. The processes for calculating GST payable for each taxable period remain unchanged.

Removing the threshold for apportionment

Under current law, only GST registered persons that expect to supply goods and services with a value of more than $24 million in a 12-month period can agree to an apportionment method with the Commissioner for determining the taxable and non-taxable use of goods and services. GST registered persons below this threshold are currently unable to negotiate a specific apportionment method with the Commissioner and must apply rules that can be seen as complex.

Under the proposed amendment, this threshold would be removed allowing all GST registered persons to apply for an apportionment method.

Removing cap on input tax deduction for disposal of assets

When a GST registered person disposes of an asset which they have partly used to make taxable supplies and also partly used for a non-taxable use (such as a private or exempt use), they are allowed to claim an additional input tax deduction to reflect the non-taxable use of the asset. This deduction is currently capped at the GST fraction of the purchase price when the asset was acquired. Under the proposed amendments the cap on input tax deductions would be removed to ensure that disposals of appreciating assets, such as land, are not overtaxed.

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Example

 

Sally purchases a home in Whangamatā for $690,000. The holiday home is used to supply short-term commercial accommodation and because the expected revenues from this activity will exceed $60,000 per annum, Sally registers for, and charges GST on the short-term accommodation.

 

As Sally has also stayed in the holiday home for long periods over the winter months, her private (non-taxable) use of the house has been 20%. Because the taxable use of the holiday home is 80%, Sally has already claimed an input tax deduction of $72,000 during her period of ownership ($72,000 is 80% of the tax fraction (3/23rds) of the $690,000 purchase price of the house).

 

After many years she sells the holiday home for $1,150,000 (including GST). As Sally is GST registered and disposing of an asset which was used in the course and furtherance of her taxable activity of supplying short-term commercial accommodation, she is required to return $150,000 of GST output tax.

 

Sally does not have a taxable activity of selling land. This means that in the absence of the supplies of short-term commercial accommodation Sally made from the holiday home, the sale of the holiday home would not be considered as being made in the course or furtherance of a taxable activity. Under the proposed change in the Bill the cap on adjustments in section 21F would therefore not apply to the disposal of the holiday home so Sally can claim an input tax deduction of $30,000.

 

Applying the formula in proposed section 21F(4) to Sally’s holiday home:

 

Tax fraction × consideration × (1 − previous use)
= 3/23          × $1,150,000    × (1 – 0.8)
= $30,000

 

Sally returns $150,000 of GST output tax and claims an input tax deduction of $30,000 in her next GST return. The $120,000 of net GST she returns reflects 80% of the output tax charged on the sale of the holiday home which is consistent with the fact that 80% of the holiday home was used to make taxable supplies.

 

IRD example

It is also proposed the existing cap remain in place for land disposed of by a property developer, as an increase in the value of the land is directly connected to their taxable activity.

Zero-rating GST for transporting exported goods domestically

Services provided to transport goods to and from New Zealand are zero rated under the Goods and Services Act. This is because exported goods are zero-rated, and the value of transport services for imported goods are already included in the cost of imported goods (and are subject to GST). Under the current law, the transport of goods within New Zealand, as part of the international transport of goods, may be zero-rated but only when these services are supplied by the same supplier as the international transport.

The proposed amendment would expand zero-rating to accommodate sub-contracting arrangements. This would enable domestic transport suppliers (for example, a courier company) providing services to non-resident/international transporters to subject their domestic transport services (where they relate to the international transport of goods) to 0% GST.

Using tax pooling to satisfy a backdated tax liability

Currently tax pooling cannot be used where there is no existing assessment or quantified obligation. Under the proposed amendment, a taxpayer would be able to use tax pooling, and thereby reduce their exposure to UOMI, for voluntary declarations related to tax types other than RWT and income tax.

Allowing input tax credit for second-hand goods from an associated person

The current rule prevents a registered person from having an input tax credit for second-hand goods acquired from an associated person who had not previously acquired those goods as a taxable supply. The proposed amendment would allow for this tax credit.

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Example

 

John buys a property for $1,150,000 from a non-GST registered person. He lives in the property for five years and then sells it to his non-registered family trust for $1,200,000. As this sale is not subject to GST, there is no GST included in the sale price. Five years later the trust sells it to an associated GST registered development company for $1,500,000.

 

Under the current law, the company is unable to claim a second-hand goods input tax credit as it purchased the property from an associated trust which paid no GST when it acquired it.

 

Under the proposed amendment, the company will be able to claim an input tax credit of $150,000, being 3/23rds of the price paid by John when he acquired the property. As the trust acquired the property from an associated person, the chain of transactions is looked through to determine the first purchase from a non-associated person (in this case, John).

Changes to fringe benefit tax and loss continuity

In late September 2021, the Government released draft legislation proposals under Supplementary Order Paper 64 (SOP) containing further measures to be added to the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill. The proposed changes include limiting the deductibility of interest incurred for residential property investments and introducing a five-year bright-line period for owners of new build properties (our earlier article on the interest deductibility rules provides more information on these proposals). Also included in the SOP is a new option for calculating fringe benefit tax and a proposal to clarify the application of the business continuity test for carrying forward losses.

Fringe benefit tax (FBT)

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The calculation of the employer’s FBT liability can be a complicated exercise with different options to choose from. They may choose to pay FBT at the current flat maximum rate of 63.6% (49.25% prior to 1 April 2021) or a rate based on the employee’s personal tax rate. Using a flat rate may result in a higher FBT liability for employees earning under $180,000, while a more accurate alternative requires complex calculations to be carried out for each employee.

To improve the compliance burden, particularly for SMEs, the draft legislation proposes a new option for calculating FBT on fringe benefits. Under the proposed option, employers would pay FBT at the rate of 49.25% for all employees with all-inclusive pay under $129,681. FBT would be payable at the rate of 63.93% for employees with all-inclusive pay on or over $129,681 (generally for those employees earning over $180,000 in (pre-tax) salary or wages).

This new option would apply for the 2021–22 tax year and future years.

Loss continuity

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The business continuity test (BCT) allows a company to carry forward tax losses to future years if they have a change in ownership if there is no major change in the nature of the company’s business activities. The intention was for tax losses incurred in an income year in which a breach of ownership continuity occurs could be carried-forward (to the extent to which they are incurred post-ownership continuity breach). However, for companies that have a breach of business continuity, the legislation does not currently allow tax losses incurred in earlier years to be offset against a profit for the pre-breach part-year.

The proposed legislation amendments would allow losses incurred in years prior to a breach of business continuity to be offset in the same way when ownership continuity is breached. The proposed amendment would apply from the 2020–21 income year.

The Finance and Expenditure Committee is seeking public submissions on the Taxation (Annual Rates for 2021-22, GST, and Remedial Matters) Bill and Supplementary Order Paper 64. To make a submission to the Committee, click here. The proposals will be considered by Parliament and may change. Further information on the Bill can be found here.

Our William Buck advisors are also able to provide additional support if you have any questions or need advice – we’re here to help.

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