In September 2021, the Taxation (Annual Rates for 2021-22, GST, and Remedial Matters) Bill was introduced to Parliament. The Bill contains a number of income tax changes targeted at local authorities, and some changes to the GST regime. In addition, Inland Revenue has placed renewed focus on Tax Governance. In this article, Phil Fisher from PwC New Zealand summarises the proposed developments.
Proposed income tax changes
The Bill includes five proposed amendments to Income Tax legislation that are specifically targeted at local authorities. These are in relation to:
- Dividends: dividends derived by a local authority from a wholly-owned Council-controlled organisation (CCO), port company and energy company will be treated as exempt income.
- Donations: local authorities will no longer be allowed a deduction for charitable or other public benefits gifts made to donee organisations.
- Interest deductibility: a local authority’s ability to claim interest deductions will be limited to finance costs incurred in relation to council-controlled trading organisations.
- Imputation credits: local authorities will no longer be permitted to convert unused imputation credits to a tax loss.
- Consolidated tax groups and ICA accounts: a credit would no longer arise to a consolidated group’s imputation credit account (ICA) for imputation credits attached to a dividend derived by a local authority.
The changes will likely take effect from the 2022/2023 year.
PwC has met with the Inland Revenue Officials behind the proposals which helped clarify and confirm the drivers behind the proposed changes. PwC and Taituarā have also discussed the implications for the local government sector. Taituarā will be making a submission.
In the meantime, we recommend that each local authority considers the implications of the proposals. This would include, but is not limited to, considering:
- whether the proposals will increase the tax impost for the Council group
- the impact on Statements of Intent and the KPIs of subsidiary entities if there is an additional tax liability at the CCO level and whether current KPIs include reference to subvention payments and dividends
- whether the current structure remains appropriate
- whether activities that have been undertaken within a CCO continue to be optimal
- the current funding arrangements and whether the tax treatment of these is affected
- the provisional tax consequences for Council and its CCOs (including cash flow consequences)
- whether CCOs should take a more active role in supporting local organisations through donations
- the deferred tax implications for the financial statements.
Every local authority will have a slightly unique position, and understanding the impacts and planning around the changes being passed into law is prudent. It is also important to ensure that those responsible for tax governance are aware of the proposals.
Proposed GST changes
The Taxation Bill proposes a number of changes to the GST regime. These are generally welcomed, reflecting an acceptance that the ‘business’ environment has evolved since GST legislation was introduced. Some of the key proposals relate to modernising the invoicing requirements, as well as record-keeping requirements.
The proposed changes could impact existing systems. Planning is required to ensure there is no interruption to business.
Tax Governance
Inland Revenue has renewed its focus on tax governance. While many local authorities have proactively taken action in this area, it is important to maintain a level of focus to ensure that tax continues to be considered at a governance level.
Concluding comments
We recognise that local government is under significant pressure from proposed changes in a range of areas, and these tax proposals are another ‘headache’ to adapt and respond to. It’s important that local authorities plan now for these developments.
The impacts of proposed tax changes within the Bill are discussed in more detail in PwC’s webinar, which you can view for free on the PwC Academy live platform. For first time users of the PwC Academy, you will need to create a free profile to access.
If you would like to discuss this article further please get in touch.
Phil Fisher, Partner, PwC New Zealand, T: 0274 627 505
Michelle Macdonald, Director, PwC New Zealand, T: 0272 894 855