A deduction for the cost of providing employee share schemes by reference to an employee s taxable income is practically unworkable.

Transcription

1 5 July 2017 Committee Secretariat Financial and Expenditure Select Committee Parliament Buildings Wellington 6160 Dear Chairperson and Committee members, Submission on Taxation (Annual Rates for , Employment and Investment Income, and Remedial Matters) Bill Thank you for the opportunity to provide feedback to the Finance and Expenditure Select Committee (the Committee) on the Taxation (Annual Rates for , Employment and Investment Income, and Remedial Matters) Bill (the Bill). ANZ Bank New Zealand Limited (ANZ) submits on four parts of the Bill being: investment income, employment income, employee share schemes and bank account requirements for IRD numbers. By way of general comments on the Bill: ANZ considers significant and on-going partnership is required with the Inland Revenue (IRD) on many of the matters in the Bill to ensure they can be implemented as intended. At present there is insufficient clarity or certainty within the Bill regarding the employment and investment income requirements particularly in light of how the overall Business Transformation programme will operate. Obtaining clarity and certainty in a timely manner will be critical to ensure the systems and process development required to successfully implement the requirements occurs in a timely and cost effective manner. From the Commentary to the Bill, the purpose of modernising New Zealand s tax administration system is to make tax administration simpler, more certain and to reduce administration costs. While ANZ supports this purpose particularly for the mass (i.e. New Zealand individuals), some of the information requirements and timing of providing the information in the Bill goes beyond this purpose, resulting in little benefit to the purpose but high compliance costs. A deduction for the cost of providing employee share schemes by reference to an employee s taxable income is practically unworkable. This submission summarises ANZ s key messages on the Bill and then provides further detail in the attached appendices.

2 The key messages to which we would like to specifically draw the Committee s attention to are: Key messages Investment income 1. Further clarity and certainty of the detail within the Bill is required, particularly in consideration of the wider Business Transformation programme. This can only be achieved through ongoing partnership between impacted taxpayers and the IRD. Obtaining clarity and certainty needs to occur swiftly to manage the systems and process changes in a timely and cost efficient manner. 2. ANZ does not support advancing the filing deadline for Resident Withholding Tax and Non-resident Withholding Tax annual reconciliations from 31 May to 15 May. 3. The Bill should clarify that the AIL information requirements of investors does not extend beyond the initial investor (such as nominees). 4. The Bill should clarify that foreign companies are not required to provide detailed investor information and should also remove the obligation to provide detailed information in respect of dividends paid between wholly owned group members. 5. Further clarification is required on who is considered to be joint account holders, particularly in the case of partnerships, trusts and companies. 6. Date of birth and joint account holder information should only be provided if it is held and reasonable accessible. 7. Flexibility should exist for investment income to be provided in either cumulative (year to date) or non-cumulative (month by month) formats. 8. Flexibility should exist for investment income to be provided in either combined or separate formats. 9. ANZ supports the removal of the requirement to provide annual withholding tax certificates (with the exception if IRD numbers have not been provided) but considers a significant benefit will not arise from removing this obligation. 10. Ongoing partnering between payers of investment income information and the IRD is required to ensure cohesive and collaborative communications occurs to as many New Zealanders as possible regarding the upcoming changes. 11. ANZ is supportive of the approach to amend errors to RWT and NRWT but recommends extending this threshold to PIE investment income. 12. Greater partnering is required in respect of the potential for IRD to request changes in a banks customer information in its banking systems. 13. ANZ supports creation of a database of certificates of exemption from RWT. This will ease customer on-boarding requirements by removing the requirement for a customer to supply copies of such certificates. 14. Further partnership is required between payers and the IRD regarding the proposed gateway for electronic filing. 2

3 Employment income 1. Schedular payments and other PAYE income payments outside regular salaries and wages should be reported to the IRD on a fortnightly basis rather than the proposed payday reporting, due to the increase compliance costs that would result from payday reporting. 2. The reporting of employee share scheme information should be excluded from the payday reporting proposals due to the significant increase in compliance costs from reporting on a payday basis employee share scheme information should be reported on a fortnightly basis to alleviate the increased compliance cost. 3. The reporting of employment income information in respect of internationally mobile employees will not be achievable and should be explicitly excluded from the Bill. Employee share schemes 1. A deduction by reference to an employee s income ignores the cash cost to the employer of providing an employee share scheme benefit. 2. A deduction by reference to an employee s taxable income is practically unworkable. 3. The formula in proposed section DV 27(7) requires clarification and should only apply to new grants. 4. Denial of employer deductions for exempt share schemes should be reconsidered. Bank account requirements for IRD numbers 1. ANZ welcomes the repeal of section 24BA of the Tax Administration Act with replacement and update by way of new section 55B. ANZ recommends the IRD work with the banking industry to develop guidance when the Commissioner will apply her discretion under new section 55B. Further detail on the above key messages is set out in the attached Appendices. 3

4 About ANZ ANZ is the largest financial institution in New Zealand. The ANZ group comprises brands such as ANZ, UDC Finance, ANZ Investments, ANZ New Zealand Securities and Bonus Bonds. ANZ offers a full range of financial products and services including a significant range of financial advisory services, personal banking, institutional banking and wealth management services. Appearance before the Committee and contact for submission ANZ would welcome the opportunity to make an oral submission to the Committee on the Bill. Please contact myself on regarding times for appearing before the Committee. Once again, we thank the Committee for the opportunity to provide comments on the Bill. Yours sincerely Phil Leath GM Tax ANZ Bank New Zealand Limited 4

5 Appendix 1 Investment Income Significant and ongoing partnership required 1. Further clarity and certainty of the detail within the Bill is required, particularly in consideration of the wider Business Transformation programme. This can only be achieved through ongoing partnership between impacted taxpayers and the IRD. Obtaining clarity and certainty needs to occur swiftly to manage the systems and process changes in a timely and cost efficient manner. 1.1 At present the provision of annual investment income to the IRD is a heavily manual process. The combination within the Bill to provide additional information from what is currently provided, the increased regularity of providing information and to provide the information electronically will require significant systems and process development. Having clarity and certainty of the detail before embarking on systems and process development will be critical. If clarity and certainty of detail are not obtained well in advance, risks arise of the project required to develop the systems and processes facing re-work, delay and errors which all culminate in unnecessary compliance costs. At present, there is insufficient detail within the Bill to embark on any systems and process development. 1.2 The required clarity and certainty of detail can only be obtained through significant and ongoing partnering between impacted taxpayers and the IRD. While we identify some of the additional detail that is still required through this submission, the items we have identified cannot be exhaustive. Such an exhaustive list can only occur through partnership which needs to continue. As this detail will only be identified over time, it is critical that further necessary law changes occur in a swift manner. Advancing the filing deadline from 31 May to 15 May 2. ANZ does not support advancing the filing deadline for Resident Withholding Tax (RWT) and Non-resident Withholding Tax (NRWT) annual reconciliations from 31 May to 15 May. 2.1 The Bill requires the filing deadline for annual reconciliations for RWT and NRWT to be brought forward from 31 May to 15 May for the and the income years. 2.2 ANZ does not support advancing this filing deadline. As above, the provision of this information is currently a heavily manual process which takes significant time to complete. The advancement in filing will occur in May 2019 and May 2020, which will be over the same period that significant systems and process development will need to occur to meet the new monthly information reporting requirements. Advancing the filing deadline creates a risk of errors arising in the annual filings as the same resource involved in completing the annual reconciliation within a compressed timeframe will also be involved in the systems and process development. 5

6 Approved Issuer Levy (AIL) 3. The Bill should clarify that the AIL information requirements of investors does not extend beyond the initial investor (such as nominees). 3.1 The Bill requires a person who pays non-resident passive income and who chooses to pay AIL in relation to domestic debt to provide, amongst other things, information about the investor to the IRD. ANZ understands that the purpose of this requirement is for the IRD to confirm whether New Zealand residents are holding such debt and, if so, are inappropriately applying the AIL regime. 3.2 In seeking this information care should be taken to ensure the 80:20 rule is applied. Holders or investors of domestic wholesale debt issued by ANZ include nominees. While nominees inform ANZ of the amount of AIL to be paid in respect the investors they hold on behalf of, ANZ may not have access to the detail required in the Bill of who they hold the debt on behalf of. As such, it would be prohibitive, and in some cases potentially impossible due to foreign privacy laws, to trace through nominees to obtain and provide detail of ultimate investors to the IRD. 3.3 By way of contrast, if interest is paid to a nominee with an exemption certificate from RWT or an agent (in the case of NRWT), the initial payer of the interest is not required to deduct the RWT or NRWT. As such the initial payer of the interest should not be required to provide the information referred to in Schedule 6 of the Bill. This however, is not the case for AIL as it is a levy imposed on the issuer of the debt and not a tax withheld on behalf of the investor. 3.4 Consequently, ANZ recommends that the Bill clarify that the AIL information requirements in respect of investors does not extend beyond the initial investor (such as nominees). Dividend information 4. The Bill should clarify that foreign companies are not required to provide detailed investor information and should also remove the obligation to provide detailed information in respect of dividends paid between wholly owned group members. 4.1 The Bill requires a company that pays a dividend to a person (i.e. the investor) to provide significant information about the investor to whom it has paid that dividend, on a monthly basis and which must be transmitted in electronic format. 4.2 ANZ is concerned that the Bill may be seeking extra-jurisdictional reach beyond New Zealand as well as extending beyond what it considers is the purpose of the investment income proposals, being for the mass of New Zealanders. Two specific example identified are: ANZ s ultimate parent is an Australian company and attaches New Zealand imputation credits to dividends paid to shareholders. Only a small proportion of who are New Zealand shareholders. ANZ s ultimate parent also has a presence in New Zealand through its branch operations. While ANZ s ultimate parent attaches New Zealand imputation credits to its dividends, it is not required to withhold any New Zealand tax from its dividends (nor should it from a jurisprudence perspective). 6

7 However, it is uncertain from the wording of the Bill whether ANZ s ultimate parent would be required to provide the detail stipulated in section 25G (1) of the Bill (which sets out the information requirements to be reported for companies that pay a dividend). This uncertainty arises from how Subpart 3E appears to operate. In essence, Subpart 3E requires a person (listed in section 25E) who pays investment income (listed in section 25C) to provide certain information as set out in Schedule 6 (sections 25F to 25O set out what information within schedule 6 is relevant for the different persons listed in section 25E). It appears, from the operation of Subpart 3E, that if a person does not pay investment income (as set out in section 25C) it should not be required to provide investment income information. However, this does not appear to be the case, as a company that does not pay investment income (e.g. an Australian ICA company) is still required to provide certain investment income information under section 25G (2). How this can be the case from the general operation of Subpart 3E is uncertain given an Australian ICA company does not get past the first requirement of paying investment income (i.e. an Australian ICA company does not meet the requirements of section 25C). This leads to a concern that an Australian ICA company may also required to provide the information stipulated in section 25G (1). If ANZ s ultimate parent is required to provide the information required under section 25G (1), the IRD will receive a significant amount of information about all of its shareholders (a vast majority of whom are not New Zealand Shareholders and have no connection with the New Zealand tax system). Obtaining such information would require the need to engage with non-new Zealand registry services, resulting in high ongoing compliance costs which would appear unnecessary in light of the overall purpose of the proposals (i.e. to ensure tax administration for New Zealanders is simpler, more certain and reduces compliance costs). Such an approach would also appear to be extrajurisdictional. ANZ, therefore, recommends that the Bill be clarified to ensure that a non- New Zealand company need not provide the information stipulated in section 25G (1) The Bill, as currently worded, requires Companies that pay dividends to other companies within a wholly owned group to provide detailed information about the recipient of the dividend on a monthly basis in electronic format, even though such dividends are exempt from income tax to the recipient. Relevant information in respect of such dividends is already provided to the IRD on an annual basis. ANZ recommends the Bill be amended to exclude dividends paid between wholly owned group members from the detail information reporting requirements. 7

8 Information on joint account holders 5. Further clarification is required on who is considered to be joint account holders, particularly in the case of partnerships, trusts and companies. 5.1 The Bill requires provision of names, tax file numbers, tax rates and contact details of persons who are joint account owners, if held by the payer. While ANZ considers that it can provide details of joint account holders in various scenarios, other scenarios will require further exploration with the IRD. For example, it is uncertain what will constitute a joint holder in the case of a partnership, a trust or a company having an account with a bank (i.e. will it be necessary to identify all partners in the partnership, all trustees or beneficiaries in respect of a trust and all shareholders in respect of a company). Identifying the controlling persons of such entities for Automatic Exchange of Information purposes has caused (and continues to cause) significant issues for both financial institutions and customers. ANZ strongly recommends a lighter touch is adopted for the purposes of the Bill. 5.2 Care will also be required with how the IRD may split investment income between joint account holders and equally how it communicates that with relevant holders. If this does not appropriately occur, risk of customer complaints being received by banks will arise. Banks will be unable to respond to such complaints given it is the IRD that determines any split of income. 5.3 ANZ supports the approach in the Bill that only customer information is required in respect of joint holders and that banks are not required to split that investment income between joint holders. ANZ notes that determining such a split by banks would be impossible. Certain information should be provided only if held and reasonably accessible 6. Date of birth and joint account holder information should only be provided if it is held and reasonable accessible. 6.1 As drafted, the Bill requires provision of date of birth and joint account information if held. While we expect in most cases it will be possible to access such information, there are likely to be some circumstances where it will be more prohibitive. This could arise, for example, if the date of birth information is held in a paper format and not linked into bank systems. Accessing such information could be extremely difficult and time consuming. 6.2 As such, we recommend the Bill be amended such that date of birth and joint account information is provided only if it is held and reasonably accessible. 8

9 Flexibility to provide cumulative or month by month information 7. Flexibility should exist for investment income to be provided in either cumulative (year to date) or non-cumulative (month by month) formats. 7.1 At present the Bill is silent on whether the investment income information should be provided in cumulative format (i.e. year to date) or non-cumulative format (i.e. month by month). ANZ recommends that the Bill (or subsequent guidance) clarify that the investment income can be provided in either cumulative or non-cumulative format. Optionality will minimise compliance costs by aligning with how information is produced by systems of the payer. For example, it may be easier to provide cumulative information about interest income (as this aligns to ANZ systems) but this is not the case for certain dividend income, particularly dividends between wholly owned group members (which is more ad-hoc and manual). Optionality for provision of combined or separate information 8. Flexibility should exist for investment income to be provided in either combined or separate formats. 8.1 The Bill is also silent on how the investment income should be provided to the IRD. ANZ recommends that flexibility be built into how the information can be provided including the option for the information to be provided either in combined or separate formats. Such flexibility will ease compliance burdens of impacted taxpayers by aligning to how impacted taxpayers currently store such information across multiple systems. As one example, it would be preferable to provide dividend information separately (particularly if it is decided to retain the need to electronically file information about dividends between wholly owned group companies) as such information is obtained from manual processes or from third parties. ANZ also recommends manually generated information (such as dividends between wholly owned group companies) can be submitted in a non-electronic format, otherwise errors risks may arise from the need to manually insert such information into automated systems. As another example, it would be preferable to provide PIE investment income separately than, say, interest investment income as entirely different systems are used to manage such investment income. 8.2 ANZ recommends swift clarification on this topic is provided (either through amending the Bill or through subsequent guidance form the Commissioner) to ensure systems can be developed within sufficient time to ensure the information can be appropriately transmitted in electronic format. This is another example where ongoing partnering between impacted taxpayers and the IRD is essential. Tax certificates 9. ANZ supports the removal of the requirement to provide annual withholding tax certificates (with the exception if IRD numbers have not been provided) but considers a significant benefit will not arise from removing this obligation. 9.1 ANZ supports removal of the requirement to produce annual withholding tax certificates for interest investment income (with the exception where IRD numbers have not been provided). The removal of annual withholding tax certificates is unlikely to result in a significant cost reduction to ANZ. ANZ considers it will still provide this information to customers to meet their preference to be able to verify their end of year tax position from IRD with information provided by ANZ. In addition, ANZ will need to incur systems changes if it were to only produce annual withholding tax certificates to those customers who have not provided IRD 9

10 numbers. While a number of customers can obtain their annual withholding tax certificates in digital format (internet banking and via digital mobile applications), not all customers have access to such technology and hence, it may still be necessary to produce annual withholding tax certificates from a customer service offering perspective. Communication on law changes (including increase to the non-declaration rate) 10. Ongoing partnering between payers of investment income information and the IRD is required to ensure cohesive and collaborative communications occurs to as many New Zealanders as possible regarding the upcoming changes ANZ recommends unified and coherent communications by the IRD and payers of investment occur to as widespread audience as possible about the upcoming changes. This is particularly relevant for the increase of the non-declaration rate on interest income to 45%. In this regard, ANZ recommends partnering between the IRD and payers on such communications. Well managed communications will be mutually beneficial to the IRD, payers and customers/ taxpayers It would be useful to also explore an ability to share IRD number information between IRD and payers of investment income. It is highly likely that the IRD will have IRD number data which banks do not have and vice versa (albeit probably to a lesser degree). Sharing such information in advance of 1 April 2020 will minimise the number of impacted taxpayers from the increase in the non-declaration rate. While this will require consideration and, potentially, amendment of secrecy and privacy laws, it will provide mutual benefits to all parties involved. Error correction 11. ANZ is supportive of the approach to amend errors to RWT and NRWT but recommends extending this threshold to PIE investment income ANZ is supportive of the approach to amend errors, including by applying the greater of a $2,000 dollar threshold or 5% of the payer s annual RWT or NRWT. However, ANZ considers this threshold should also extend to PIE investment income The Bill also requires the payer to notify the IRD of any correction of errors. ANZ agrees that such notification occurs separately from any monthly electronic filings. Correction of errors identified by IRD 12. Greater partnering is required in respect of the potential for IRD to request changes in a banks customer information in its banking systems The Bill is silent as to how the IRD will seek correction of information if it becomes aware of errors. This could arise, for example, if the IRD identifies that a withholding tax or PIE tax rate applied by a bank customer is incorrect based on the information the IRD holds about that customer s total income. ANZ recommends that any such approach to correct information should be undertaken in a way that minimises compliance burdens and ensures clear communication is provided to taxpayers of any such change, including the reasons for such change. Because banks are reliant on the accuracy of tax rates provided by customers and cannot advise customers of what specific tax rate they should use, ANZ is of the view that any such communications should come from the IRD. The IRD holds the 10

11 information of taxpayers total income and, therefore, can best manage queries from impacted taxpayers. RWT exempt status 13. ANZ supports creation of a database of certificates of exemption from RWT. This will ease customer on-boarding requirements by removing the requirement for a customer to supply copies of such certificates. Electronic gateway 14. Further partnership is required between payers and the IRD regarding the proposed gateway for electronic filing The specifications around any electronic gateway and what will be required from a payer s perspective to transmit data to the IRD remains an essential component of Business Transformation that requires further consideration. We recommend these specifications are worked on between the banking industry and IRD sooner rather than later to ensure timely and cost effective compliance which will need to include security of customer data and testing. 11

12 Appendix 2 Employment Income 1. General comments 1.1 ANZ generally supports the proposals included in the Bill for real time employment information flow between employers and the IRD. This should enable greater accuracy of tax withheld and a more timely intervention to correct errors during the year. The success of these proposals will depend on the ability of the IRD systems to receive and process employment income information efficiently when received by employers. If the proposal to increase the amount of employment income information provided to the IRD is not achievable with minimal manual intervention by both employers and the IRD, the benefits will be outweighed by the significant compliance cost that will be imposed on both employers and the IRD. 1.2 The ability to file employment income information on a payday basis will require significant changes to current payroll software. While the mandatory date for payday reporting by employers is 1 April 2019, many employers will consider early adoption of the changes to enable full testing of payroll systems and identification of issues before the changes becomes mandatory. To enable employers (and payroll software suppliers) sufficient time to make system changes and perform full testing, the IRD must release comprehensive Payroll Software Specifications and guidance on the proposed changes well in advance of voluntary payday reporting (1 April 2018). 2. Schedular payments and other PAYE income payments outside regular salaries and wages should be reported to the IRD on a fortnightly basis rather than the proposed payday reporting, due to the increase compliance costs that would result from payday reporting. 2.1 While the proposed change to payday reporting should be achievable for the majority of PAYE income payments, the change to payday reporting will result in a significant increase in compliance costs for payers of certain types of PAYE income payments. Some employers make schedular payments on a daily basis (e.g. insurance sales commissions paid to advisors). The proposals in the Bill would require that each day is treated as a payday, and therefore payers of schedular payments would be required to file employment income information on essentially a daily basis (the information to be filed two working days after payday for large online group employers). A similar issue would arise with employers who regularly make additional payments to employees outside of the set fortnightly/monthly pay cycle for salaries and wages. An employer could be required to prepare and file employment income information with the IRD on numerous days, in addition to their scheduled salary and wages paydays. 2.2 ANZ considers that the significant compliance cost imposed on employers (or payers of schedular payments) to manage what could be daily reporting to the IRD outweighs the benefit of payday reporting for the above types of PAYE income payments. An option to alleviate this compliance burden would be to report these types of PAYE income payments on a fortnightly basis, rather than on a payday basis. 12

13 3. The reporting of employee share scheme information should be excluded from the payday reporting proposals due to the significant increase in compliance costs from reporting on a payday basis employee share scheme information should be reported on a fortnightly basis to alleviate the increased compliance cost. 3.1 The proposed payday reporting would result in a material increase in compliance for employers who offer employee share schemes, particularly where the date of exercise of those share options is at the employee s discretion. Although the 20 day ESS deferral date provided for in the Bill will assist employers by providing sufficient time to obtain the information, the proposals require reporting of this employee share scheme information on a payday basis (as confirmed in the example on page 34 of the commentary on the Bill). An employer with multiple employees exercising options at their discretion could end up having to file this employment income information with the IRD on numerous days outside of their standard payday reporting of salaries and wages. 3.2 ANZ considers there will be no benefit to the IRD in requiring such irregularity of reporting and it will result in an increase in compliance costs by requiring systems reporting outside typical pay dates. ANZ s view is that employment income information relating to ESS should be reported to the IRD on a fortnightly basis, rather than on a payday basis. 4. Payday reporting of employment income information in respect of internationally mobile employees will not be achievable and should be explicitly excluded from the Bill. 4.1 Multinational groups will often have employees of an offshore entity working in New Zealand on short term work assignments. While those employees are paid employment income in their home country (and taxed in their home country on that income), a New Zealand PAYE tax liability may also arise on that employment income. The New Zealand entity in the multinational group will often be responsible for processing the PAYE payment and filing of the PAYE information with the IRD. This is often a very manual filing process, done outside of the standard electronic payroll process. 4.2 The process of determining the NZ taxable income includes not only obtaining employee payment information from offshore payroll providers (either the payroll system of an offshore entity in the multinational group, or a third party payroll provider), but also engaging tax agents to confirm the calculation of New Zealand taxable income of that employee. This can be time consuming and complex. 4.3 ANZ submits that there should be an exemption from the proposed payday reporting for employment income information relating to internationally mobile employees. ANZ considers that applying the proposed payday reporting to this type of employment income information would not only increase compliance costs significantly for employers, but would also be impossible to comply with given the proposed timeframes (i.e. filing of employment income information two working days after each payday). ANZ submits that the current reporting basis should be retained for the purposes of filing employment income information for internationally mobile employees. 13

14 Appendix 3 Employee share schemes 1. A deduction by reference to an employee s income ignores the cash cost to the employer of providing an employee share scheme benefit. 1.1 Under proposed new subsections DV 27(6) to (8), an employing company will be allowed a deduction in respect of share scheme benefits provided to employees which effectively matches, in amount and timing, the amount of the benefits received by employee under new section CE 2(1). 1.2 It is common for large employers to either acquire (on market) the shares which are to be provided to its employees pursuant to an employee share scheme or to pay another party (such as the group parent) for providing those shares to the employees. Either way, there is an underlying cost to the employer associated with the provision of the shares. Under current tax settings, the amount of this cost is ordinarily deductible to the employer. However, under proposed section DV 27(6), an employer s deduction would be limited to the amount of income recognised by employees from the derivation of the share scheme benefits. Ignoring the underlying cost and cash flow of the employer and instead referencing the employer s deduction to the amount of the employee s income may lead to unusual and unprincipled results: The employer s deduction is unlikely to be the actual cost incurred by it in providing or procuring the provision of the shares. The deduction could be greater, as well as less than, that actual cost. If the deduction is greater than the actual cost this represents an unexpected gain to the employer. If the deduction is less than the actual cost, this excess effectively becomes a capital non-depreciable cost for the employer. This would be an odd result at a time when the tax system is generally being reformed to remove the potential for expenditure to be so-called blackhole expenditure (i.e. nondeductible, non-depreciable expenditure) The mismatch between an employer s deduction and the actual cost incurred by the employer could be compounded by a timing mismatch, with the deduction to which the employee is entitled only being available some years after the actual costs were incurred. 1.3 To the extent that the concept of neutrality (i.e. between employer deductions and employee income) is cited as the justification for the position taken in the Bill in this respect, that should be reconsidered. It has never been a principle of tax law in New Zealand that two parties to an arrangement should have neutral (reciprocal) tax treatment. Reciprocity has been used in recent years to justify reforms in the land-related lease payments area, but that should not be used as a justification for this proposed reform, including because the land-related lease payments reforms did not require one party to the arrangement to file its tax returns taking into account the actual tax consequences of the arrangement for the other party, which is what the currently proposed reforms require. 1.4 Accordingly, ANZ submits that the approach of the Bill to an employer s deduction is unprincipled and should be reconsidered. The current approach of deductibility based upon actual costs (subject to relevant regimes such as the transfer pricing regime where relevant) should be continued. 14

15 2. A deduction by reference to an employee s taxable income is practically unworkable. 2.1 The proposed approach of determining an employer s deduction for the costs of providing share scheme benefits by reference to an employee s income is not only unprincipled but will be practically unworkable, leading to increased compliance costs for employers and potentially requiring employers to take unfair risks in filing returns based on incomplete or inaccurate information through no fault of their own. These compliance costs and risks may result in employers reconsidering whether to make share scheme benefits available to employees. A decrease in the usage of share scheme remuneration would be inconsistent with the Government s broader goals of increasing retirement savings, capital markets participation and financial literacy of the general public. 2.2 To calculate a deduction available under proposed new section DV 27(6), an employer will be required to have details of the income arising under proposed new section CE 2(1) to which the deduction is matched. An employer will often not be in a position to determine the amount of income derived by its employees. The circumstances of two sets of employees (former employees and employees who move in or out of New Zealand during the period of the relevant share scheme) illustrate this, although the concern applies equally for current employees based solely in New Zealand Employees can cease employment after entitlement to share scheme benefits has vested but before actual delivery of those benefits (for example before exercise of options which have vested). Employers may have no contact with former employees and yet be required to take tax positions based on information which they will need to obtain either from the former employee or from a share registry provider who may administer the scheme. Both scenarios are unsatisfactory for an employer, as each will in effect mean that the employer is forced to take a tax position based on information over which it has no control or means of verifying. A mistake could result in significant tax non-compliance by the employer through no fault of its own The apportionment rule for overseas service in proposed sections CE 2(5) and (6) is another example of how matching an employer s deduction to income recognised by an employee in respect of an employee share scheme benefit is likely to be unworkable in practice: (i) The proposed apportionment rule would deem a portion of the benefit received by an employee under a share scheme to be non-residents foreign-sourced income and therefore not subject to tax in New Zealand. The non-taxable portion of the benefit is calculated by reference to the beneficiary s offshore period and his or her earning period. To determine the earning period, recourse must be had to the number of days during the relevant period where the employee is not tax resident in New Zealand and services performed for the relevant employer give rise to income that is a foreign-sourced amount. This apportionment rule is also relevant to the calculation of an employer s deduction in respect of share scheme expenditure, pursuant to proposed section DV 27(6). This is explained in the Commentary accompanying the Bill by reference to the principle of neutrality (refer discussion at pages 99 and 100), the relevance of which we have commented on above. 15

16 (ii) (iii) (iv) However, determining an employer s deduction by reference to an employee s income in these circumstances is unworkable from a practicable perspective. While an employer will have access to an employee s termination and commencement dates when the employee undertakes a cross border transfer or secondment between group entities, the employer will usually have no knowledge of whether the employee is tax resident in a particular jurisdiction and if so when that residence may terminate (or commence). The proposed rule will require the employer to form a view on the application of the residency tests in the Income Tax Act 2007 (a complex area of the law requiring detailed analysis of the relevant facts) to the circumstances of an individual employee (of which the employer will not know). The complexity of this area of the law is evidenced by the Inland Revenue s 83 page Interpretation Statement on Tax Residence (IS 16/03), approximately 50 pages of which address the tax residence of individuals and references some of the case law relevant to this area of the law. The employer will in most cases not have access to the information required to make an assessment of the tax residency of the employee. More specifically, if the employer is to form this view it will need to require the employer to provide it with detailed personal information including as to (for example): (A) with respect to determining residence of the employee under the permanent place of abode test, availability to the employee of a residence in New Zealand (a consideration which substantially more analysis than mere ownership of a house in New Zealand and can for instance include consideration of the employee s personal domestic living arrangements and relationships with spouses or other partners); and (B) with respect to determining residence under the day count test, the employee s travel dates where those dates will often take into account personal holidays and other travel arrangements unrelated to the performance of the employee s employment duties. Employees are likely to be reluctant to share this personal information with employers. While employers could make it a condition of participation in employee share schemes going forward, this is an imperfect solution at best: (A) even if employees do provide information, it may be wrong or incomplete, requiring employers to take a tax position based on incorrect or imperfect information (and therefore potentially subjecting the employers to penalties and interest if that tax position is subsequently determined to have been wrong); and (B) employees may feel pressured to provide the information which they would prefer not to provide, potentially leading to difficulties in the employee / employer relationship and possibly giving rise to personal grievance claims by an employee who feels he or she has been subjected to an unjustified disadvantage (exclusion from participation in the employee share scheme) or workplace bullying. 16

17 3. The formula in proposed section DV 27(7) requires clarification and should only apply to new grants. 3.1 We have submitted above that the proposed approach to determining an employer s deduction for the costs of providing share scheme benefits should be reconsidered. Without prejudice to those submissions, we have concerns with the manner in which the formula in proposed section DV 27(7) is drafted. 3.2 Proposed section DV 27(6) provides that an employer has an amount of expenditure or loss in connection with an employee share scheme calculated using the formula in proposed subsection (7). That formula requires the calculation of the employee amount and the previous deductions. These terms are defined in proposed section DV 27(8). Employee amount is defined by reference to the income amount derived by an employee from the provision to that employee of specific benefits under a share scheme. The amount of previous deductions to which an employer has been entitled is to be deducted from that employee amount to determine the deduction available to the employer. If the resulting amount is negative, the balance is income to the employer. 3.3 We have two concerns with this approach: Previous deductions is not defined by reference to the specific share scheme benefits which have given rise to the income amount to the employee. Rather, it is defined more widely as: the total amount of deductions that have been allowed to a party to the employee share scheme or an associate in relation to the shares, related rights, or employee share scheme before the date that is 6 months after the date of Royal assent for the Taxation (Annual Rates for , Employment and Investment Income, and Remedial Matters) Act The words the shares, related rights, or employee share scheme should be amended to clarify that it is only the amount of any deductions in respect of costs attributable to the particular share scheme benefits which have given rise to taxable income to the employee in question which are to be taken into account. At present, in theory any costs attributable to the share scheme including in respect of benefits provided to other employees would be taken into account. That would likely then lead to a significant income amount under proposed section DV 27(9) The application of this rule should be clarified to ensure that it does not have retrospective application to prior year deductions where the rules at the time were clear that employers were entitled to a deduction. Consequently, the new rules should only apply to share benefits granted after enactment. 17

18 4. Denial of employer deductions for exempt share schemes should be reconsidered. 4.1 Proposed section DV 28 provides that an employer is disallowed a deduction for expenditure in relation to an exempt employee share purchase scheme, except to the extent that the expenditure or loss is for administrative or management services provided in relation to the scheme. 4.2 The decision to deny employers deductions for these costs should be reconsidered. The benefits of exempt employee share schemes are widely recognised including increased employee participation in capital markets resulting in increased financial literacy (as noted in the Commentary to the Bill on page 108) and retirement savings. These policy goals match other broad policy goals which have influenced the design of our tax system most obviously the portfolio investment entity and KiwiSaver regimes. 4.3 Denying employers deductions for costs (other than administrative and management costs) associated with exempt employee share schemes may lead to employers reconsidering making such schemes available. This would be contrary to the valid policy goals referred to above. 18

19 Appendix 4 Bank account requirements for IRD numbers 1. ANZ welcomes the repeal of section 24BA of the Tax Administration Act with replacement and update by way of new section 55B. ANZ recommends the IRD work with the banking industry to develop guidance when the Commissioner will apply her discretion under new section 55B. 1.1 ANZ welcomes the repeal of section 24BA of the Tax Administration Act 1994 with replacement and update by way of new section 55B. New section 55B provides the Commissioner with discretion to allocate a tax file number requested by an offshore person if she is: satisfied that the information available to the Commissioner relating to the offshore person provides the Commissioner with an assurance of the identity and background of the offshore person. 1.2 As previously submitted to the Committee, the administration required to open, maintain, monitor and close accounts for overseas persons is costly and resource intensive and creates operational, compliance and sanctions risk for banks. Introducing a discretion, which will ease this compliance burden and risk, is welcome. 1.3 To ensure certainty of application ANZ recommends the IRD work with the banking industry to develop guidance regarding when the Commissioner s discretion will be applied. Given the various amendments that have occurred to section 24BA since its initial introduction, it may be appropriate that any such guidance is provided in a schedular format which allows the ability to add scenarios to when the Commissioner applies her discretion as and when new such scenarios may arise. 19