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Unconditional gifts IS | Application of DTA’s to Trusts | Tax avoidance items

By January 10, 2021 No Comments

Unconditional gifts IS

IS 20/09 was released by IR just prior to Christmas, and provides commentary on the subject of unconditional gifts and GST. Determining whether a payment made to a non-profit body is an unconditional gift is important from the non-profit body’s perspective, both in establishing whether the payment is subject to GST as consideration for a supply of goods or services (for a GST registered non-profit body), or whether an unregistered non-profit body should in fact be GST registered due to exceeding the registration threshold.

A payment made to a non-profit body is an ‘unconditional gift’ where:

  • the payment is voluntarily made for the carrying on or carrying out of the non-profit body’s purposes; and,
     
  • no ‘identifiable direct valuable benefit’ in the form of a supply of goods and services to the payer (or an associated person) arises or may arise in respect of the payment.

Where a statutory or legal obligation to make the payment exists, it is unlikely that the payment would be considered to have been made voluntarily.

In relation to whether there is an ‘identifiable direct valuable benefit’ arising from the payment, IS 20/09 defines this to mean an advantage or gain in the form of a supply of goods or services to the payer (or an associate of the payer) which is:

  • clearly able to be defined or identified;
  • sufficiently closely connected to the payment;
  • useful, important and of real value;
  • capable of being valued; and,
  • not of only nominal worth.

Note that the benefit need not arise when the payment is made, and instead the benefit can arise in the future or be contingent on a future event or action occurring after the payment is made.

Amounts can also be donated to a non-profit body for a specified purpose with stipulations as to how the funds are to be used and still qualify as unconditional gifts, provided no identifiable direct valuable benefit arises or may arise in the form of a supply of goods and services for the payer (or an associated person).

Finally, a payment made by the Crown or a public authority to a non-profit body is not an unconditional gift.

Application of DTA’s to trusts

For those of you who deal with client’s trusts which have cross-border connections (e.g. trustees/beneficiaries resident in more than one jurisdiction), then the recent release of a draft issues paper on the topic of ‘Income tax – trusts and the Australian–New Zealand Double Tax Agreement’ will no doubt be of interest to you.

Referenced IRRUIP15, the document has been released in response to questions to IR to clarify the tax treatment of trusts under the network of double tax treaties that New Zealand has entered into with other countries. What better place to start therefore, with the NZ/AUS DTA considering the number of kiwi’s who presently live on our fourth island.

The Issues Paper addresses seven specific questions being:

  • What is the taxable entity in a trust context?
     
  • Is it the residence of the trustee or the settlor, or both, that determines eligibility to the benefits of the Aus–NZ DTA?
     
  • Does the Aus–NZ DTA require that a trustee be treated in a separate capacity from their personal or private capacity?
     
  • How does the residency tie-breaker provision deal with two or more trustees of mixed residency and is the test only that for non-natural persons?
     
  • What is the scope of the requirement to recognise income derived by or through a trust that is treated as resident in one country as the income of a beneficiary who is taxable on it in the other country?
     
  • How does the obligation in the question above sit with the rights of each country to tax its own residents?
     
  • What is the extent of the obligation to grant a tax credit for tax paid in the other country by either the trustee or a beneficiary?

IRRUIP15 is 74 pages in length, so potentially a good pre-bedtime read, and if you are still awake at the end and wish to make any comments to those responsible for its drafting, then you should do so no later than 1st March 2021.

If you have any questions or would like a second opinion on any national
or international tax issues, please contact me richard@gilshep.co.nz.

Tax avoidance items issued for comment

IR has released three items for comment which have tax avoidance as their subject matter.

The first is PUB00305 titled ‘Tax avoidance and the interpretation of the general anti-avoidance provisions sections BG 1 and GA 1 of the Income Tax Act 2007’ which sets out to explain the Commissioner’s view of the law on tax avoidance in NZ, and upon finalisation will replace the current interpretation statement IS 13/01 – ‘Tax avoidance and the interpretation of ss BG 1 and GA 1 of the Income Tax Act 2007’.

You may also recall a number of QWBA’s issued by IR in 2014/2015 which commented on various scenarios and whether IR considered that tax avoidance arrangements were in existence. Once PUB00305 is finalised, QB 14/11, QB 15/01 and QB 15/11 will also be withdrawn, on the basis that they either no longer reflect the Commissioners approach or subsequent legislative changes have now outdated the original QB.

However to the extent that the previous scenarios still have relevance, the QB’s have now been updated and also released for comment as drafts:

  • PUB00305 QB 1: ‘Income tax: scenarios on tax avoidance – reissue of QB 14/11 scenarios 1 and QB 15/11 – scenario 2’; and,
     
  • PUB00305 QB 1: ‘Income tax: scenarios on tax avoidance – reissue of QB 15/11 – scenarios 1 and 3’.
    It should be noted that the scenario updates have not resulted in any changes to the previous conclusions reached by IR.

Should you wish to make a submission with respect to any of the 3 items, 18th February 2021 is the cut-off.

And just as a side, if you keenly follow tax avoidance cases through the Courts, the Supreme Court has granted both Frucor and the Commissioner leave to appeal the Court of Appeal’s decisions, so it’s not over yet.

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