tax agents seminar - fiji revenue & customs service...taxation of trustee (section 57) •...

TAX AGENTS SEMINAR

INCOME TAX ACT 2015 PROFESSOR LEE BURNS

• Tax Code – income tax, CGT and FBT • Harmonised Rules – particularly for assets • Clear separation of substantive and

procedural rules • Facilitated by TAD • Greater clarity under the substantive rules –

general rules first then specific rules • Greater reliance of financial accounting

rules

Design Features

Design Features • Greater clarity on areas not covered by the

current law, particularly partnerships, trusts and mining

• Simplification of the tax law – such as deductions and taxation of revenue gains

• Modernisation to facilitate economic development – amortisation of intangibles and tax-free re-organisations

Issues Discussed • Taxation of Dividends • Current payments system • Thin capitalisation rule • Taxation of trusts • Withholding on domestic service fees • Non-resident withholding tax • Taxation of purchased annuities • Income Tax Accounting • Open forum

Dividends • Net profit after tax for the 2014 and 2015 tax years

that has not been distributed as a dividend prior to 1 January 2015 is subject to tax at the rate of 1% – Not applicable to companies listed on SPSE – Net profit after tax = distributable profits – Tax payable in respect of 2014 tax year profits by 31 March

2016 – Tax payable in respect of 2015 tax year profits within 3

months after the end of the tax year or such further time allowed by the CEO

– Final tax and no taxation of actual dividends subsequently paid out of such profits

– Applies also to the PE profits of a non-resident company

Dividends • Old law continues (inclusive tax rate

applicable under the old laws) to apply to dividends paid out of pre-2014 profits

• Dividends paid out of profits for the 2016 and subsequent tax years – Resident shareholder - 3% – Non-resident shareholder – 9%

Current Payment System • Provisional tax and company advance tax payments systems

merged into a single current payments system (CPS) • Three instalments

– Companies - the last day of the sixth, ninth and twelfth months of the company’s tax year

– Others - 30 April , 31 August, and 30 November of each calendar year

• Single instalment on 30 September for taxpayer (other than a company) with a total CPS for a year of $120

• Amount of each instalment = 1/3 x assessed liability for the previous year – Includes self-assessed liability (income tax return due 3

months after the end of the tax year)

Current Payment System • Instalments based on estimated income tax liability in the

following cases – Taxpayer does not have an assessed liability for the previous

year by the due date of the first instalment • If no estimate lodged by first instalment date, income tax liability

estimated by CEO – Taxpayer commenced business during the year

• If no estimate lodged by first instalment date, income tax liability estimated by CEO

– Taxpayer reasonably believes that its income tax liability in the current year will be lower than in the previous year

• Penalty for under-estimates = 40% of the shortfall – Defence if shortfall due to circumstances beyond taxpayer’s

control and reasonable care taken in making the estimate

Thin Capitalisation • Incentive for MNEs to finance Fijian operations through

excessive debt capitalisation so as reduce the level of Fijian tax

• Effective rate of tax on equity financing is 27.2% as compared to rate of 10% for debt financing

• Thin capitalisation rule based on a 2:1 debt-to-equity ratio

• Applies to both Fiji subsidiaries and PEs • PEs not separate legal person so some part of the equity

of the non-resident company must be allocated to the PE to support its operations

Taxation of Trusts • Trust income is taxed either to the beneficiary

or trustee depending on income entitlements: – Beneficiary taxed if presently entitled to the

income – Trustee taxed if income accumulated in the trust

• Special cases – Settlor trusts – Absolute beneficiary trusts

Taxation of Beneficiary (Section 56) • Look through taxation • Beneficiary is taxed on presently entitled income and

entitled to a deduction for expenditures or losses incurred in deriving the income – Presently entitled – vested and indefeasible interest and an

immediate right to demand payment from the trustee • Beneficiary treated as having derived the income, and

incurred the expenditures and losses, at the time of derivation or incurrence by the trustee

• Income retains its character and geographic source in the hands of the beneficiary – Non-resident beneficiary taxed only presently entitled income

derived from sources in Fiji

Taxation of Distributions(Section 56) • Beneficiary taxed on trust distributions from non-

resident trusts but not including the following: – Distribution of presently entitled income previously

taxed to the beneficiary – Distribution of accumulated income previously taxed

to the trustee – Distribution of exempt income

• Basically, this applies to foreign source income accumulated in a non-resident trust – No current taxation of this income under section 57

Taxation of Trustee (Section 57) • Separate entity taxation • Trustee liable for tax on the chargeable trust income of the

trust at 20% rate (i.e. maximum marginal rate) • Scope of taxation depends on residence of the trust

– Resident trust – trustee liable for tax on the worldwide accumulated income of the trust

– Non-resident trust – trustee liable for tax only on Fiji-source accumulated income of the trust

• Resident trust: – Trust settled in Fiji – Estate of a deceased resident individual – A trustee is a resident person

• Other trusts are non-resident trusts

Settlor Trusts (Section 55) • Anti-avoidance measure to counter income splitting • Applies when a person (settlor) has transferred value

to the trust and has: – Retained power to revoke the trust – Retained power to alter the trust so as to acquire a

beneficial entitlement to the income or capital of the trust – A reversionary interest in the trust

• Settlor trust is ignored and ITA applies as if the trust income is derived, trust expenses are incurred, and trust assets are owned by the settlor

Absolute Beneficiary Trusts (Section 55) • Applies when a trust has a single beneficiary who has

an absolute entitlement to the assets of the trust • Absolute entitlement to assets exists if both the

following are satisfied: – Beneficiary has vested and indefeasible interest in the

assets of the trust – Beneficiary has right to call for transfer of the assets or

have the assets applied as directed • The trust is ignored and ITA applies as if the trust

income is derived, trust expenses are incurred, and trust assets are owned by the beneficiary

Withholding from Domestic Services Fees (Section 114)

• Resident person or Fiji PE of non-resident person making a payment under a services contract must withhold tax from the payment as prescribed in the Regulations

• Rate in the Regulations is 5% of the gross payment • Initially, Regulations will apply only when there is a written

services contract (not including a letter of engagement) – Simplify administration – Expected that most B2B services contracts would be written – Intended that Regulations will subsequently be extended to

unwritten services contracts

Non-resident Withholding Tax • Non-resident withholding tax rates

– Dividends – 9% – Interest – 10% – Royalties – 15% – Management fees – 15% – Service fees – 15% – Insurance premiums – 3%

• Lower rates (including 0%) may apply under a DTA

Purchased Annuities (Section 19) • Case law – whole of an annuity payment is income

according to ordinary principles – Principle of periodicity

• Cases are old and mainly based on annuities paid within families

• An annuity may be purchased from a life insurance company or financial institution – Each annuity payment will be part income and part return

of purchase price – Section 19 allocates part of the purchase price to each

annuity payment on a pro rata basis and reduces the taxable amount of the annuity by the allocated part of the price

Purchased Annuities – Capital Component • Computation of the capital component of each annuity

payment based on the formula - (A – B)/C – A is the undeducted purchase price of the annuity – B is the residual capital value of the annuity, i.e. the capital

amount payable on termination of the annuity – C is the relevant number, i.e. basically the term of the

annuity • If annuity payable for a fixed period, the relevant number is the

number of years in that period • If the annuity is payable for the life of a person, the relevant

number is the number of years in the life expectancy of the person • Any other case, the relevant number is the period that the annuity

can be reasonably expected to be paid

Purchased Annuities - Example • Sophie pays $100,000 to a life company for an

annuity of $15,000 per year for the rest of her life • On her death, the life company will pay her

nominated heir $10,000 • At the time that the annuity was purchased,

Sophie’s life expectancy is 15 years • Application of section 19:

– The capital component of each annuity payment is $6,000 (($100,000 - $10,000)/15)

– This means that only $9,000 of each annuity payment is included in Sophie’s property income.

Income Tax Accounting • Cash v Accrual basis accounting

– Accrual accounting - Companies, partnerships, and VAT registered persons accounting for VAT on an invoice basis

– Cash accounting – Other persons can choose cash or accruals accounting but must be consistent in the treatment of both income and expenditure

– CEO has discretion to specify the basis of tax accounting for particular classes of person

• Movement between tax accounting methods only with CEO’s permission

Finance Leases • Section 41 adopts the financial accounting treatment of a

finance lease as a sale of the asset on terms – Counters arrangements under which the tax benefits of

ownership may be transferred to a financier under a finance lease as compared to a loan

• The lessee is treated as the owner of the leased asset – Asset treated as acquired at the commencement of the lease – Lessee claims depreciation deductions

• The lessor is treated as having made a blended loan to the lessee at the commencement of the lease – Each lease payment is treated as part repayment of principal

and part payment of interest

Long-term Contracts • Percentage of completion method applies -

determined by reference to the actual costs incurred as a percentage of the estimated total contract costs

• Carry-back of final year loss – Departure from the usual tax rule of carrying losses

forward – Applies only if the loss is not able to be carried

forward – contractor ceased carrying on business in Fiji

– Carry back for 2 years

Thank You