Clauses / page of RT version of Bill. Report (OR)/ Specialist Tax Advisor s (STA) report. Closely Held Companies Look through company eligibility:

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1 IRD SRTBA 1.0: Taxation (Annual Rates for 2016/17, Closely Held Companies, and Remedial Matters) Bill Issues included in specialist tax advisor s report and/or raised by the Committee Item Clauses / page of RT version of Bill Recommended amendment Considered in Officials Report (OR)/ Specialist Tax Advisor s (STA) report Closely Held Companies Look through company eligibility: Need for wider grandparenting Clause 118B, page 82, HZ 4E Clause 247(104B), page 145, YA 1 tax position Remove exit consequences for LTCs affected by the provisions of the Bill in relation to loss of status in tax year OR, pages 6-7 STA report (part 1), page 5 Grandparenting Maori authorities and charities that hold interests in LTCs Clause 262(48), page 138, YA 1 grandparented Maori authority Restrict to interests held or arranged before 3 May 2016 OR, pages STA report (part 1), pages 3-4 Clause 262(47B), page 138, YA 1 grandparented charity Counting trustees who have made no distributions Clause 262(58), page 40, YA 1 look-through counted owner para (c) Default rule for counting trustee as owner if no distributions OR, page 15 STA report (part 1), pages 2-3 Corporate beneficiaries: minor drafting issue Clause 262(57), page 140, YA 1 look-through counted owner para (bb) Test distributions in income years after and beneficial interests in income years after OR, page 20 STA report (part 1), pages 2-3 Look through company debt remission: Provision and extension Clauses 38B, 56, 56B, 262(97), pages 38, 53, and 144, DB 11(1B), EW 31, EW 39(4), YA 1 self-remission Provide that creditors of look-through entities that are also owners automatically have a deduction for a self-remitted debt. Extend application to liquidations and cessations of entities OR, pages 31, 32 STA report (part 1), page 8 1

2 Qualifying companies continuity of ownership: Sale of shares to close relative Clause 262(58), page 140, YA 1 look-through counted owner NRWT: Related party and branch lending Exclude from the continuity rule transfers of interests in a qualifying company to close relatives OR, page 37 STA report (part 1), pages 8-9 Non-resident financial arrangement income definition, formula, payments basis, NZ branch Clause 253, page 124, RF 12D (include general rules for expenditure (1C), spreading method (1D), forex movements (1E)) Refine definition of NRFAI OR, pages 68-69, 71, 72, STA report (part 2), pages 10-11, para 3.8 Clause 248, page 122, RF 2B(5), items in formula Ensure consistency of items in formula ( to all non-residents ) Clause 247, page 118, RF 2(2B)(c) for interest giving rise to NRFAI (when amount treated as paid) Exclude from interest that is NRPI an amount that has given rise to NRFAI under RF 12E Clauses 248, page 121, RF 2B(1)(b), and 247, page 118, RF 2(2B)(a), for fixed establishment Exclude amounts from NRFAI for onshore branch exemption Clause 5(4)(c), page 22, extension to entities with particular core business Extend onshore branch grandparenting to certain securitisation vehicles Indirect associated lending and back-to-back loans Clause 253, page 131, RF 12J(3) to (5) Clause 253, page 129, RF 12I(2) Clause 253, page 129, RF 12I(2)(b) and (c) Clarify as agent treatment of indirect associated funding Add intention test to prevent application to genuine commercial arrangements Clarify application when borrower and direct lender are associated OR, pages 85-86, STA report (part 2), pages 12-16, paras 4.2, 4.3, 4.4 (third bullet point) Clause 253, pages 128-9, RF 12H(1)(a))(iii) and RF12I(5), member of non-res owning body treated as associated with borrower, new RF 12H(3) Restructure acting together provisions 2

3 Drafting issues Clause 248, page 119, new RF 2BA (outline and concepts) and amendments to RF 2B (lender and borrower) Clause 253, page 129, RF 12I (active provisions moved to RF 12J) Clause 253, page 129, RF 12I(2) (extended requirements for indirect associated funding) Clauses 262(68B), page 141, (definition moved), consequential, 80, 80B, pages 71-2 (FE 2(1B), FE 4) Clauses 269, 270(2), (5), page 147 ( interest or redemption payment ) Clause 270, page 148, YD 5(5) Clause 5(4), page 22, 253, page 128, RF12H(2) AIL registration Clause 330, page 174 Clause 331, page 177 Clause 332(2), page 177 Clause 294, page 158 Clause 246(3), page 118 Related parties debt remission Drafting structure and terms Clause 57, page 55, EW 46 Clause 262(16), (17), (18), (64B), (74), (85B), (85C), pages 136, 141, 142, 144, YA 1 Clause 342, page 183, EW 46B Clause 343(2), (3), (4), (4B), (4C), (5), page 188, OB 1 Simplify the drafting structure and style Separate descriptive and active provisions Refine meaning of indirect associated funding Move definition of non-resident owning body to YA 1 Include redemption payments in scope of provisions, clarify what is apportioned Ensure amount is full value of interest payment for apportionment formula Use defined term New Zealand banking group Strike out amendment, along with consequential amendments Ease flow, correct consequential minor interpretive issues, and deal with partial remission scenarios OR, pages 72, 78-79, 91, 93, 96, STA report (part 2), pages 9-10, 15-16, 19-20, paras 3.7, 4.4, 5.4 OR, page 122 STA report (part 2), page 22, para 6.0 OR, pages STA report (part 1), pages 6-8 3

4 Nominal shareholdings Clause 262(64B), page 141, YA 1 In calculating proportionality of debt remission with relative shareholdings, ignore nominal shareholdings relating to employees OR, page 184 STA report (part 1), pages 6-8 Available subscribed capital and cost base Clause 22, page 30, CD 43 Clause 23, page 32, CD 44 Clause 41B, page 39, DV 18B Clause 338, page 180, CD 32 Give ASC and cost base to intermediate companies in a group situation, allowing the tax-free flow of the intra-group remission OR, pages STA report (part 1), pages 6-8 Clause 339, page 181, CD 33 Clause 340B, page 183, DV 10C Foreign benefit of debt remission dividend Clause 16, page 28, CD 5 Clause 337, page 179, CD 4 The change in the rule for company intra-group remissions of debt should not apply for the benefit of foreign shareholders OR, page 187 STA report (part 1), pages 6-8 Wholly owned group dividend Clause 29C, page 35, CW 10(4) Consequentially repeal subsection OR, page 188 Bad debt rule Clause 41, page 38, DB 31 Limit the change in the bad debt rule to cases where there is a tax deduction in New Zealand for the financial arrangement expenditure Debt guarantees Clause 59, page 57, EW 49B The creation of a new debt is limited to guarantees with recourse to the debtor OR, page 189 STA report (part 1), pages 6-8 OR, page STA report (part 1), pages 6-8 Aircraft overhaul expenses Measure of use Clause 262(95), page 144, YA 1 scheduled overhaul period Ensure relevant measure OR, pages Spare parts for repairs and maintenance, overhauls Clause 42, page 42, DW 5(5B) Clause 43B, page 45, EA 2 Clarify difference in treatment for parts used in aircraft engine overhaul and parts used in other repairs and maintenance OR, page 214 4

5 Alternative methods, CIR agreements, transitional provisions Clause 53, pages 50-51, EJ 25(3), (4), EJ 26(3) Clause 43, page 44, DZ 22(1)(d) Clause 43C(2), page 45, EA3(4B) Transitional deduction Clause 72, page 68, EZ 23BA(5) Specify timing of elections and agreements Clarify that person electing single aircraft method does not have transitional deduction Clarify apportionment of tax depreciation values for transitional deduction OR, page 215 OR, page 216 Interface with depreciation rules Clause 47, page 46, EE 7(fb) Clause 49B, page 47, EE 45(12) Clarify interface between depreciation rules and amendments OR, pages Clause 50(3), page 47, EE 47(11) Clause 51B, page 48, EE 57 Clause 51C, page 48, EE 58 Clause 51D, page 48, EE 60 Leased aircraft Clause 53, page 52, EJ 27(6), (7) Land tainting and council controlled organisations Ensure that consideration for disposal of a leased aircraft is not taxed twice OR, page 217 Consolidated groups Clause 29B, page 35, CV 2(3) Clause 85B, page 75, FM 9(3) Ensure exempt income under section CB 15C not taxable under consolidated group rules Unrelated CCO Clause 30B, page 36, CW 39 Limit exclusion from local authority tax exemption to income of related entities OR, page 229 OR, page 231 Drafting suggestions Clause 12, page 24, CB 15C(1) Ancillary taxes and time bar Widen references to control by local authority OR, page 232 Starting date for the time bar Clause 295, page 159 Base amendment on return for a period rather than treating the return as if it were an annual income tax return OR, pages STA, part 2, page 28, para 9.3 5

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7 RT Bill amendments: Issues only raised in Officials Report Item Clauses / page of RT version of Bill Recommended amendment Considered in Officials Report (OR)/ Specialist Tax Advisor s (STA) report Closely Held Companies Look through company eligibility: Classes of shares: Allowing LTCs to have shares with disproportionate voting rights Clause 262(59), (60), page 140, YA 1 look-through interest paras (a) and (b) Remove requirement for look-through interest that all shares be effectively in same class. Retain requirement for proportional distributions OR, page 8 Foreign income restrictions: Reference to non-resident settlor Clause 262(43), page 137, YA 1 foreign LTC holder para (b) Change ownership test for loss of LTC status. If owner is trust with foreign settlor, test the settlement value. Some settlements ignored OR, page 12 Double counting for trusts Clause 262(58), page 140, YA 1 look-through counted owner para (c) Trustee is look-through counted owner if no beneficiary is lookthrough counted owner OR, page 15 Corporate beneficiaries - distribution of income to company Clause 262(56), page 139, YA 1 look-through company para (eb) Remove requirement that distribution be income OR, page 19 Look-through company entry tax: Clarification of LTC rollover provision Clause 106, page 80, HB 13(6) Clarify that, when a company becomes an LTC, the same valuations apply for the company and the LTC OR, page 26 Clarifying application date Clause 14(2), page 28, CB 32C first year of look-through company Clarify section applies for income years OR, page 26 7

8 Other Closely Held Companies issues: Qualifying companies continuity of ownership: Dividends by exqualifying companies within wholly owned groups Clauses 99B, 342B, 342C, pages 79 and 187, HA 17, HG 10, HG 10B Relax the rule against former qualifying companies using the exemption for intra-group dividends OR, page Application to tainted capital gains from Clause 36B, page 37, CZ 9B Repeal provision preventing old capital gains being brought into new regime OR, page 42 RWT on dividends: Equivalent amendment to RD 36(2)(b) Clause 238B, page 114, RD 36 Repeat amendment to section CD 39(9)(c) OR, page 49 PAYE on shareholder-employee salaries Clauses 234, 235, pages 111 and 112, RD 3 Clarify the relationship between the new elective rules and the current PAYE rules. Remove irrevocability of elections OR, pages NRWT: Related party and branch lending Definitions of money lent and interest Clause 262(51) and (64), pages 138, 141 (remove resident in NZ ) Clarify that definitions apply to NZ branches of non-residents OR, pages 59, 62 Clause 247, page 118, RF 2(2B) Clarify that interest is derived from money lent 8

9 Notional loans to NZ branches Clause 83, FG 1, FG 2, pages 72, 73 Clause 83, page 73, FG 1(2), new definition inserted Clause 83, page 73, FG 2(1B), exclusion Clause 83, page 74, FG 3, interest that is NRPI Clause 83, page 74, FG 3, amount recorded as an expense Clause 83, page 74, FG 3(b) deleted Clause 83, page 74, FG 3(a), extension to third month after balance date Clause 83(2), page 74, remove references to transactions Clarify that rules apply for NRWT rules and SCDA Amend definition of foreign bank Clarify amounts excluded for borrowing already subject to NRWT or AIL Limit rule to interest that is NRPI Refer to expense to be consistent with accrual approach Remove reference to incurred Extend timeframe for determining amount of interest Redraft application provision to be more consistent with clause 5 OR, pages AIL - interaction with transfer pricing rules, application date Clause 330B, page 176, 86GB(1)(b) SCDA, refund of AIL, and 86GB(2), use of refund Clarify interaction of rules, provide refunds available to meet NRWT liability OR, pages , 117, Clause 5(1)(f), page 21, reference RF 12, cl 252, removed from application provision Remove limit on start of new AIL rules from first day of income year after assent Prepayments Clauses 261, page 133, RZ 13(3), 253, page 125, RF 12D(1E) for foreign exchange movements Clause 253, page 124, RF 12D(1C) and (1D) which apply by (1B) Ensure that foreign currency gains to not trigger prepayment rule Exclude amounts that are not interest from rule 9 OR, page 120, 121

10 GST Capital raising costs Clause 311(4), page 167, 11A(1)(rb) (zero-rating supplies of financial services in fund raising) New clause 314B, page 169, new 20H (deductions for supplies), 20H(1)(d) Clarifying amount of consideration for zero-rated supplies is difficult: instead, have special deduction rule Allow for failed attempts to raise funds OR, pages Clause 314(1B), page 168, cross-reference in section 20(3) to new 20H Services connected with land Clause 311(3), page 166, 11A(1)(k) (zero-rated services) Supplies of land leases Clause 310(4), (5), (7), pages , new paragraphs in 11(8D) (zerorating of land) Clause 310(4), page 164, 11(8D)(b) periodic supplies under lease Remove unnecessary words OR, page 139 Clarify limit on irregular payments for supplies OR, pages Clause 310(5), page 164, replacing 11(8D) including new para (c) for surrender and new lease Clause 310(7), page 166, application of change made by subcl (5) (Replacement allows for retrospective amendments of subsection by other Acts) Include savings provision Time of supply when total consideration not known Clause 308, page 163, 9(6) timing Drafting revised, more limited override by other subsections OR, page Time period to repay overpaid GST Clause 321, page 171, 45(4) cross-reference Delete transitional provision and make commencement 1 April 2005 OR, page

11 Cross-border business-tobusiness supplies Clause 324, page 172, 54B, registration of non-residents OR, page Clause 324(1), page 172, 54B(1)(b) Remove reference to input tax for imported goods, refer to liability for tax on imported goods Clause 324(3), page 172, 54B(1)(d) Clarify references to carrying on taxable activity in NZ by referring to making taxable supplies Clause 324(4), page 173, 54B(4) to (6) Horse racing and prizes Clause 306(3), page 162, 5(11CB) Clause 306(4), page 162 Sales under security interest Clause 323, page 172, 51B(1)(b), treatment of person as registered Provide for separate registration of non-resident head office and branch Technical points. Include greyhound races and prizes from racing code. Restrict to owner rather than person entering horse or greyhound in race Grandparenting provision Remove treatment of creditor as registered person when section 5(2)(a) and (b) apply. Limit treatment of debtor as registered person to cases in which provides incorrect statement OR, page OR, page Definition of non-taxable use Clause 304(2), page 161, 2(1) definition of non-taxable use Insert missing word OR, page 172 Remote services provisions Clause 307B, page 163, 8B Clause 324B, 54C Correct cross-references Correct section heading OR, page 176 Resident suppliers and nonresident marketplaces Clause 311(2B), page 166, 11A(1)(j) to (jc) Zero-rate supplies of remote services to which section 60(1C) applies OR, page Requirement for bank account Clause 274B, page 151, 24BA Tax Administration Act 1994 Remove reference to supplier of goods and services for registration under section 54B OR, page

12 Other issues Loss grouping and imputation credits: Continuity Clause 186, page 103, OB 83(5) Correct the beginning of the continuity period OR, page 195 Remission income, tax losses, and insolvent individuals: Tax treatment in bankruptcy Clause 78, page 70, FC 2 Correct cross-references OR, page 201 Charities with overseas purposes Clause 272(1), page 149, Schedule 32 Update reference to New Zealand Red Cross Incorporated OR, page 227 Information sharing Clause 2(30), page 21 Empower provisions repealing redundant information sharing provisions to commence under Orders in Council OR, page 233 Remedial amendments Zero percent AIL rate for securities issued under limited disclosure document Clause 332B, page 177, 86IB Permit a security issued under a limited disclosure document qualifying for zero per cent AIL OR, pages Life insurance business: Nature of investment management services Clause 61(1), page 58, EY 2 Clause 62(1), page 60, EY 3 Clarify nature of services provided by life insurer to which provisions apply OR, page Clause 63, page 60, EY 16B(a) Clause 66, page 62, EY 19B(a) Relationship of sections EY 16B and EY 19B with existing provisions Clause 63, page 60, EY 16B(b) Clause 66, page 62, EY 19B(b) Ensure deductions under new provisions are not also available under other provisions OR, pages Transitional provisions for earlier tax positions Clause 61(3B), page 59 Clause 62(4), page 60 Validate earlier tax positions consistent with amendments OR, pages Clause 64(4), page 61 Clause 67(4), page 63 Clause 70(10), page 66 Clause 71(10), page 67 12

13 Excess policyholder allowable deductions Clause 61(2B), page 59, EY 2(5B) Clause 278B, page 152, 30E Provide for the transfer of excess policyholder allowable deductions when policies transferred OR, pages Excess policyholder allowable deductions ordering Clause 61(1B), page 59, EY 2(3) Insert ordering rule for use of excess policyholder allowable deductions OR, pages 256 Valuation and attribution of life reinsurance Clause 70(2), (3), page 65, EY 28 Require amounts to relate to current income year OR, page 257 Clause 71(2), (3), page 66, EY 29 Bonus declarations Clause 70(6), page 65, EY 28(6) Clause 71(6), page 66, EY 29(8) Amend description of bonus declarations to refer to time of vesting OR, page 257 Cost of revenue account property Clause 40B, page 38, DB 23(2) Exclude expenditure allocated as a policyholder base allowable deduction from deduction under section DB 23 OR, page 257 Pre-amalgamation losses Clause 124(2), page 86 Include transitional provision protecting earlier tax positions OR, page 259 Refunds for ICA companies Clause 257, page 132, RM 13 Clarify relationship of amendment with general rule Thin capitalisation and Kiwibank OR, page 260 Clause 82B, page 72, FE 36B Allow for transfer of Kiwibank OR, page 261 R&D loss tax credits Clause 148, page 93, MX 7 Refine description of period taken into account in calculating R&D repayment tax OR, page 263 Exempt income from personal services Clause 30(2), page 35 Change application so that amendment applies to visits commencing on or after 1 April 2017 OR, pages

14 Drafting issues Cross-reference to Health and Safety at Work Act 2015 Clause 291D(1), page 155, 81(4)(ec) Correct cross-reference OR, page 266 Amendment to section FE 28 Clause 82, page 72 Delete clause OR, page 267 Available capital distribution amount and capital loss Clause 23(1), page 32, CD 44(9), (9A) Prevent negative amounts OR, page 268 Clause 339, page 182, CD 33(9), (9B) 14