Tax News

Highlights from the ATAINZ spring workshop including provisional tax payments holding up, home office expenditure allowances.

5 Oct, 2020 | The Week in Tax

  • Highlights from the ATAINZ spring workshop including provisional tax payments holding up, home office expenditure allowances.
  • Inland Revenue is chasing cryptoasset investors.
  • How to design and implement a wealth tax.

Transcript

Late last week, I was one of the presenters at the Accountants and Tax Agents Institute of New Zealand’s Spring Mini Conference. As you’d expect, the programme was dominated by the impact of Covid-19 and its implications for accountants and tax agents. It was an excellent mini conference and there were plenty of very useful insights from the presenters and also from the audience and participants. Here are a few of the highlights which stood out for me

From what Chris Cuniffe of Tax Management New Zealand is seeing, outside of the very obviously hard hit sectors such as tourism and hospitality, business seems to be holding up well, judging by the tax take. During the first lockdown, the final tax payments for the year ended 31 March 2020 year were due on the 7th of May. Now, by that stage, Inland Revenue had made it clear that it was using new provisions to enable it to waive the application of use of money interest if tax was paid late. So Chris Cunniffe thought there would be a huge take-up of that opportunity.

But in fact, what they saw was about $2.8 billion of provisional tax paid on the due date through the tax pools. According to Inland Revenue statistics, it has about $163 million of tax that would have been payable on the 7th of May under instalment. That is, the person contacted Inland Revenue saying “Hey, we’re not going to make this payment, can we arrange to pay it in instalments?”

That $163 million represents about five per cent of the total tax payable on the due date. And that’s actually really encouraging because it means businesses had the money, their profitability was relatively unaffected, and they were prepared to meet their liabilities. Given that the tax year end was 31st March, is what you would expect to see because the full impact of Covid-19 had not been felt by that date.

For most businesses the first instalment of provisional tax for the current year to March 2021 was due on 28th August. And there was only about a five per cent fall in the tax paid comparing what was paid on in August 2020 with what was paid in the previous year.

Remarkably, 55% of all depositors with TMNZ paid more tax this year, with only 42% paying less tax than the previous year. So that was actually really encouraging when you consider that the June quarter was when GDP fell 12.2%, the tax take holding up as well as it did seems to be an encouraging factor.

Generally speaking though, most people thought the real acid test for how businesses are tracking along will be the second instalment of provisional tax, which is due on the 15th of January. Which of course is terrible timing in the middle of a holiday period. So that will be interesting to see how well businesses have held up then.

Insolvency issues

Derek Ah Sam of insolvency practitioners Rogers Reidy thought the real wave of insolvencies hasn’t really got underway yet. But what was intriguing to hear was that despite Inland Revenue’s Business Transformation programme, it seems that a fair number of companies going into liquidation still owe several years of PAYE and GST. And this is surprising to me because Inland Revenue systems really ought to be picking this up much, much sooner. We used to see this quite a bit several years ago, but with Business Transformation, they’re supposed to be across this much sooner and taking action earlier. If that is not happening, then there’s something else going on at Inland Revenue that we don’t know which the Minister of Revenue should be perhaps asking a few questions about.

The other thing Derek noted is in relation to the question of commercial landlords who have not been required, as in Australia, to provide some form relief for their tenants. Actually, in Australia, I think there’s some provisions preventing eviction notices being issued. What Derek is seeing is that commercial landlords are taking much harder line on tenants in arrears. And they seem to be particularly targeting food outlets that have already been hit hard by Covid-19 and probably long term are not sustainable. So it appears some landlords are going to apply pressure now and get rid of them. That seems to be something that’s happening there. Again, we’ll see more as the year goes on.

Wage subsidy ethics

Tristan Dean of Hayes Knight, then ran us through the professional ethics issues to be addressed when a client takes up a wage subsidy which they’re either not entitled to or don’t apply it as prescribed. That was highly relevant given the issue popped up in the second leaders debate on Wednesday night. And it provoked an interesting discussion around that, which no doubt won’t be the last time we hear about that.

Home office safe haven

And finally, from the floor when we were discussing the question of home office allowances, the overwhelming reaction was that Inland Revenue safe haven of $15 per week was well short of the mark, with most people suggesting somewhere between $40 and $50 per week being much more realistic representation of the costs involved using the formulas available to people under the Income Tax Act.

That’s something that I’ve seen pop up in commentary or from some of the comments to articles when I’ve discussed this question. The present determination Inland Revenue issued was a temporary one. Maybe when a permanent one comes out we can get an increase of the available amount to say something closer to that $40 mark.

Moving on, a couple of weeks back, I mentioned that Inland Revenue has issued up updated guidance on the taxation of cryptoassets. It now seems that it’s decided to apply much more pressure on this industry and investors, because this week it emerged that it has been asking companies that deal with cryptoassets to hand over customer details.

Now, as people are probably quite aware, the cryptocurrency and cryptoassets world is quite libertarian in its philosophy. So this probably came as a huge shock to investors and the companies themselves – that Inland Revenue could not only demand the information, but there was nothing they could do to stop Inland Revenue’s action.

A couple of years back the information gathering powers of Inland Revenue contained in the Tax Administration Act 1994 were increased and new sections giving them wider powers of search and entry were given to them.

Inland Revenue’s extensive powers are well known within tax and professional community. And pretty much our response is when a client asks, “Can they really do this?” is “Yes, you’re just going to take your lumps on this”. And so, the cryptoassets community is not the first to find out just how extensive Inland Revenue powers are, and they won’t be the last. And if they’re feeling very unhappy about it, they’re not alone in that.

I would think that this could work out quite profitably for Inland Revenue. If taxpayers have been thinking “Well, the web servers are offshore, we don’t really need to comply with this as all takes place in the darker reaches of the Internet and outside the reach of Inland Revenue”. You’re not. And other tax jurisdictions are also taking a close look at a cryptoassets. So you’ve been warned. It will be interesting to see what comes of this and how much revenue Inland Revenue raise as a result of their actions.

A wealth tax template

And finally, the Green Party’s wealth tax has been in the news again as we get closer to the election date. There’s been a reigniting of the whole question of the taxation of capital.

Without getting into too much detail, one of the arguments advanced against a wealth tax is that it would be complicated to implement. And undoubtedly, there are quite a lot of complexities to be addressed, most notably around valuations, but it’s not impossible. In fact, we already have a de facto wealth tax in operation. And we’ve had it since April 2007 when the revamped Foreign Investor Fund regime with the fair dividend rate was introduced.

For those who are not familiar with the Foreign Investor Fund regime it applies to overseas stocks and shares (but not bonds because they are subject to a different regime).  Basically, taxpayers are assessed on the lesser of the notional gain over the tax year, together with the actual receipts from sales and dividends in that year, or the 5% fair dividend rate applied to the value of the investments at the start of the income year. For KiwiSaver funds and companies, the 5% fair dividend rate is automatically applied. They don’t have the alternative of the actual gains and losses during the year.

Now, as you might expect, I have to explain the foreign investment fund rules to overseas clients. And they’ve conceptually struggled with it, because it’s not a capital gains tax. But once it’s  reframed in the idea of a flat wealth tax, they get it very quickly. And that’s basically how I explain it to overseas investors. Effectively the 5% fair dividend rate is a wealth tax. And if your tax rate is 33%, you’re talking about a 1.67% effective wealth tax.

Now, the foreign investment fund regime is easy to apply where you have publicly listed securities, but the regime has a whole set of rules that people normally don’t see, which relate to unlisted securities. So much of the work that you’d expect to see when you’re addressing a wealth tax has actually already been done and is part of the Income Tax Act.

So if you were introducing a wealth tax your starting point would be to expand the Foreign Investment Fund rules across more asset classes and tweak the fair dividend rate to whatever rate of tax you wish to levy on the assets.

In short, it’s complicated, but not quite as insurmountable as people make out. And of course, when you hear people saying, “Oh, it’s too complicated”, a cynic like myself is always wondering just how much they’re arguing that out of self-interest.

And on that bombshell, that’s it for this week. I’m Terry Baucher. And you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening. And please send me your feedback and tell your friends and clients. Hei konei ra!

This week talking about UK pension transfers with Tony Chamberlain of GBPensions.

5 Oct, 2020 | The Week in Tax

The difference between the UK and NZ taxation treatment and how some pension schemes are now more valuable because of Covid-19

Transcript

My guest this week is Tony Chamberlain, director of GBPensions a firm specialising in U.K. pension transfers. Tony is an authorised financial advisor with over 30 years’ experience.

Morena, Tony, welcome to the podcast, great to have you on board. So how do pension transfers work? What sort of pensions are we talking about? Who are the people who are most likely to have these types of pensions?

Tony Chamberlain
Well, predominantly we deal with the transfer of U.K. pension schemes. We can assist in the transfer of pensions from other jurisdictions, but mainly the UK.   They fall into two main categories -defined benefit, where the benefit is known in advance, and defined contribution where only the contribution into the scheme is known.

New Zealand really only has defined contribution style schemes, but when we transfer from the UK both types of UK schemes can be treated in a similar manner and whether the defined benefit or defined contribution, they would end up in a New Zealand scheme that is a defined contribution scheme.

TB
And so, the distinction from a tax perspective is a vital one, because in Britain, the position was exempt, exempt tax. In other words, you got tax deductions for contributing to the schemes the schemes grew tax free. But then you got taxed on the way out, whereas New Zealand went the other way, tax, tax, exempt. In other words, we make our contributions after tax in this country. These schemes are subject to tax and the normal taxing rules. And then when you pull them out at the other end, it’s tax free. And I think it would be fair to say that when you marry those two together and it becomes exempt, exempt, exempt Inland Revenue saw that as quite a huge problem.

What was your experience of Inland Revenue when this issue started to emerge about 12/13 years ago?

Tony Chamberlain
I think really Inland Revenue didn’t have any respect or any patience for people bringing monies over from a UK scheme or schemes. The issue I have is that when you’ve lived and worked in the UK under the UK tax regime, you’ve never had to bother with declaring your pension scheme to the UK revenue. So when you come to New Zealand and find that that’s what you should be doing, it’s completely alien to some. Why would you go out of your way to find out if you need to pay this tax, if it’s something that you’ve never experienced in the past?

And Inland Revenue seemed to think that they were actually making sufficient efforts to alert people coming from the UK that they need to declare their pension schemes. They didn’t really. And it’s unfair that they didn’t make it clear or apparent to people coming to the country that this needs to be done.

And Inland Revenue could even have a little bit of patience with people. This insistence that the New Zealand tax that has accumulated and be paid when the money is brought into New Zealand, even before the individuals turn 55 and can access it, is unfair.  It’s wrong that the tax that is generated on an asset must be paid out of a person’s own pocket and the asset which generated the tax liability cannot be used to pay the liability. And to insist that the individual pay the tax out of their pocket because they can’t access the fund before the age of 55, I think is unfair.

It would be nice to see Inland Revenue make some allowance to allow individuals to defer their tax and have it deducted from their schemes at 55 when they can legally access the funds and pay the liability.

TB
Yes, I mean it’s counterintuitive to people that they are being taxed on something they can’t actually access, or the funds aren’t available.  Accrual taxation is conceptually, theoretically correct but it’s a mystery to the layman. This is one of those areas where there’s a massive assumption made around what people should know and what people actually did know.

I mean, there is now a clearer set of rules than when we first looked at this issue 12/13 years ago. But I still struggle with the economic concept that people are bringing money into the country and are being taxed on that. But it seems to me that’s economically idiotic, that we’re taxing capital coming into the country, whereas the same people, for example, if they borrowed from an offshore bank to buy a house here, no issues.

I just find the whole thing, the way we treated overseas pensions incorrect. And New Zealand’s an outlier in this.  My views on this are well known. Inland Revenue isn’t listening anymore because it’s a nice little earner for them. Eventually when you have to design a special scheme because the ordinary rules don’t work that, to me, is an example of a system where the fundamentals aren’t working in the first place. But anyway, this one’s been done to death, so moving on quickly.

Tony Chamberlain
Whether or not you disagree or agree with the tax itself, we could debate that all day.  But I think a concession could still be given by Inland Revenue, that if the tax has been generated and the individual is liable to it, let the individual defer that tax until they are able to access the money from the fund and pay the tax. After all, it is the fund that has generated the tax. But at least let the individual defer the tax until they’re able to withdraw the tax from the fund. That’s fair.

TB
I couldn’t agree more with you on that one. It’s a very harsh treatment. And I know there was one case with a couple of intensive care specialist nurses who got hit with one of these liabilities in a really odd set of circumstances that triggered the charge. And they were in Auckland, but they sold up and moved to Nelson so they could realise the funds to pay the tax. And that is economic idiocy all round. We want skilled migrants. What are we doing? We just tax them so they go to another part of the country. So Auckland, which short of these skilled migrants, loses out. I mean, that really is a stunning piece of poor planning.

And interestingly, just a quick aside, there’s a lot of talk about the Green Party’s poverty action plan, which has a wealth tax on this. One of the points that’s not discussed, but they do address, is this very issue of people being asset rich and cash poor, say elderly people who might be living in a house mortgage free. Under the Green’s proposal the tax liability can roll up and basically be payable when they pass. And so someone there has thought conceptually about this very issue of someone is going to be taxed on something but without the cash to meet it.

This is a distinction which could have been argued more I feel, when the current foreign superannuation scheme legislation was going through. That is has the person really triggered income here because they have no legal right to that pension until they reach the right age.  This is separate from the issue you know was happening way, way back prior to the introduction of the QROPS regime when there was some chicanery going on, where people from Britain were able to transfer to schemes here and access funds before age 55. That leads us onto the QROPS regime: what is a QROPS and how does that work? When do we use these?

Tony Chamberlain
So, in essence, the British government launched the QROPS regime, which is Qualifying Recognised Overseas Pension Scheme in 2006. It was an amalgamation of old pension rules in the UK, brought together to tidy up the pension regime, which was getting very messy with constant changes.

And QROPS is a regime where if a pension scheme is established in an overseas jurisdiction outside the UK and registered in its home jurisdiction, and it could satisfy certain requirements of the British authorities, the overseas scheme would qualify for QROPS status.

For example, a QROPS can be a New Zealand registered pension scheme which satisfies various HM Revenue & Customs (HMRC) requirements in the UK that stipulate what can be withdrawn, when it can be withdrawn and has certain constraints on the scope of investments. And if the New Zealand scheme can satisfy HMRC’s requirements, it gets certification as a QROPS. It goes on the HMRC website and then you can effectively receive monies from UK pension schemes without any UK tax deductions being made. So it can be a straightforward transfer.

TB
Critically KiwiSaver schemes can’t be QROPS. They were specifically taken out of the regime, weren’t they, because they didn’t actually ever meet the requirements to be a QROPS.

Tony Chamberlain
That’s right. What happened was that as the KiwiSaver regime was getting  some weight behind it in 2010, 2011 and 2012, some of the KiwiSaver providers thought, well, it’s a good idea to try to get schemes into the QROPS regime, and that way we can receive funds from UK schemes.

Now we actually advised one company at the time that KiwiSaver rules could physically not satisfy the QROPS rules even though they were they were given QROPS status by HMRC. The KiwiSaver rules breached the QROPS rules. What was happening was HMRC were being sent information scheme documents and trust deeds from New Zealand KiwiSaver funds and just basically gave them a very quick glance and going “Yes you’re a bona fide overseas registered scheme so we can give you QROPS status.”  HMRC was looking no further into the actual trust deeds and the rules around KiwiSaver.

It took them a couple of years and then they suddenly realised that, “Oh, hang on, the KiwiSaver rules –  because they allow withdrawal of funds before retirement age under hardship or to purchase a house – can’t comply with the QROPS rules because the QROPS rules do not allow funds to be paid out before retirement.” So there was a cull when the British Government removed the list of approved QROPS for a month and when it reappeared again, every KiwiSaver had been removed.

So KiwiSaver funds never really satisfied the QROPS rules. There were some that were initially given the QROPS status and some transfers were made, but within a year or two once the HMRC realised what had happened, it cancelled or removed every KiwiSaver from the QROPS approval. So those people in KiwiSaver who transferred are in the middle of quite a big bunfight because they really have got some issues.

TB
I mean, this actually happened just as the legislation introducing the current taxing regime for foreign superannuation schemes, UK pension schemes, was going through in 2013.  https://www.ird.govt.nz/income-tax/income-tax-for-individuals/types-of-individual-income/foreign-superannuation

And Inland Revenue here were very naive thinking HMRC would just bend the rules to suit it. I think serious questions could be asked about how Inland Revenue handled the whole thing. I think they saw it as a huge tax grab and weren’t too worried about if people had put it into KiwiSaver. And I know several people raised this issue at the time asking “You know, KiwiSaver funds may well not comply. Have you got UK sign off on it?”

Incidentally, that whole experience was something I’ve seen again recently where policy, which affects individuals and small businesses, doesn’t actually have an effective force in consultation because the big boys, the big end of town, as it’s called, the large law and accounting firms, they don’t realise how significant the issue is. I had one lawyer in a large law firm tell me we didn’t pay enough attention to this issue at the time. And since then, they’ve been scrambling to try and work something out with Inland Revenue and HMRC.

Anyway, we are where we are. And I mean, as you say, those people who did transfer into a KiwiSaver QROPS are really stuck because they can’t move. They can’t take out anything and have to sit it out until age 65. That was the other thing that slipped by. You know, you’ve transferred to a QROPS and you can withdraw it at age 55. But if it’s in a KiwiSaver fund, you have to wait an extra 10 years. So I’d say there may be a few financial advisors that should be looking at their Professional Indemnity cover on the matter.

Tony Chamberlain
Well, I actually put a portion of blame to the insurance companies and their lawyers. They should have read the KiwiSaver legislation. They should have then read the QROPS legislation and seen that never the twain shall meet. They were just completely opposing pieces of legislation.

And HMRC were at fault in granting the QROPS status. This all happened after they had lost a big court case where they’d be made to look very silly. HMRC took a Singaporean QROPS to court – Panthera – about its incorrect status.  When HMRC tried to impose an unauthorised withdrawal charge on the Panthera, QROPS clients complained that they would not have made the transfer if HMRC had not granted QROPS status.  At the time of transfer they thought it was a QROPS. Eventually HMRC was forced to back down.

TB
Oh no, not good. Another acronym which comes up in this area is SIPP. What does SIPP stand for and how do you use them?

Tony Chamberlain
So, a SIPP is a Self-Invested Personal Pension and they came around in about 1993/1994 in the UK. Basically it’s a personal pension similar to what most people in the UK have, but it has wider investment scope. And what happened in 2015 is HMRC introduced a flexibility rule, which meant that instead of splitting the contributions between a 25% lump sum and a 75% portion which must be applied to purchase an annuity, from 2016, a SIPP could actually pay the remaining 75% portion as a lump sum as well.

And so, a SIPP effectively is a glorified pension scheme that now does not require the client to have to retain 75% of the fund to provide an income. They can now access the entire fund as a lump sum.

And there are some tax planning opportunities by using SIPPs for New Zealand individuals. If we come back to the New Zealand tax for example, where an individual is looking at transferring their UK scheme into a QROPS and they have already accumulated a New Zealand tax liability and they are younger than 55, they’ve got to pay that New Zealand tax liability out of their own pocket, as we’ve already discussed. But if the individual transfers to a SIPP, the tax ability does not become payable on demand in New Zealand because it’s gone from one existing UK scheme to a SIPP which is also a UK scheme.

And so if the individual can transfer to a SIPP, they can benefit from some of the very high transfer values, specifically from defined benefit schemes which we are seeing and keep the funds in a defined contribution scheme, which is a SIPP. So that when the individual turns 55, they can access the proceeds in New Zealand. They can then deal with that New Zealand tax liability that they would have otherwise had to pay out of their pocket if they transferred their scheme to a New Zealand QROPS when they were, say, 50. So it’s a case of the ability to defer the tax to a time when you actually have the funds to pay it.

The other thing is that some individuals don’t know if they are going to retire in New Zealand. And so, if they have a SIPP they can go back to the UK without ever having to pay the New Zealand tax on transfer in the first place. So, a SIPP has got some tax planning angles – it gives probably as many options as a QROPS. But it depends on the age of the individual, the size of the fund, what they want to do, and what their future thoughts are going to be, where they going to retire.

TB
You mentioned the rising value of defined benefit scheme. What’s driving those values up, because you were talking pre-podcast about an example where the value went up £100,000 in 90 days.

Tony Chamberlain
As I said before, defined benefit schemes don’t have a value until it comes to be calculated.  The actuary, when he comes to calculate a transfer value has to use annuity rates given to him by GAD the UK Government Actuary’s Department. And annuity rates are based predominantly around Gilt yields in the UK plus some other factors.

TB
Gilts being bonds, the equivalent of New Zealand Treasury bonds.

Tony Chamberlain
Yes. They actually started off as a piece of paper with a gilt edge, and that’s how they got their name.

And so the actuary has to determine, based on the pension that the individual was given under the defined benefit scheme, what pot of money is a fair and reasonable amount for the individual to go and provide themselves with that amount of income based on gilt yields, bond yields.

We saw falling gilt yields just prior to Brexit, so that meant the transfer values were going up prior to Brexit quite steadily. Of course, we’ve then had the Covid-19 crisis and that has further reduced gilt yields, which means the cost to the scheme actuary in providing a guaranteed pension that’s prescribed under a defined benefits scheme has gone up, because they now need to buy more gilts to provide the same amount of income, which a defined benefit provides and has guaranteed. So transfer values have risen significantly.

And you’re right, we had a case that just immediately prior to lockdown the guy obtained a transfer value of just over £300,000. But the client thought gilt yields were going to fall further because of the Covid-19 crisis. So he waited and requested another valuation three months later, and that’s gone from £302,000 to £420,000. So in the space of about three months, he’s made 33 percent profit. And the transfer values we’re seeing are phenomenally high compared to what they would have been a year ago.

TB
So, these falling gilt yields are the main reason why defined benefit schemes are basically being phased out all across the UK. And aren’t some of the state schemes such as the NHS and Teachers schemes – there are now some restrictions on transfers?

Tony Chamberlain
Yes, the statutory unfunded schemes, which are basically the defined benefit schemes of British government run departments such as the armed forces, the police force, the National Health Service, and civil service are defined benefits schemes. And clearly with gilt yields falling, the cost of providing those defined benefits has gone through the roof. And because they are statutory unfunded schemes, that means that there is no pot of money accumulating to provide those benefits. The pension benefits to individuals within these schemes are paid out of the tax revenues collected by HMRC so that’s why they are called the statutory unfunded schemes. And so the UK Government is seeing millions and millions of pounds going out of the door with people transferring their pension schemes. And they stopped it because it was just going to cost too much.

TB
Moving on, how has Lockdown been for you? I’ve heard one or two interesting experiences from business owners.

Tony Chamberlain
Values went up, service levels went down. But I think unlike many businesses and I keep count our blessings, really, we were lucky.  I think people were sitting at home twiddling their thumbs and got round to doing things they couldn’t do during their normal working life, including going through their paperwork and realising that they had pension schemes from 10, 20 years ago.

So we were actually inundated with enquiries, and one week was the busiest in terms of enquiries for at least five or six years. And it’s been really eye-opening to see what people have got which they’d overlooked.

TB
And that touches on a point I was going to raise, and we talked a little bit at the top of the podcast, how well aware are people of their New Zealand tax obligations in relation to these schemes?

Tony Chamberlain
Well, that comes back to the start of our conversation. They’re not. Although I think the longer they’re here the more they hear from other people who have got an inkling that there is an issue and tell them, ‘You know you’ve got tax to pay on your pension scheme? How long have you been here?”

But generally, people are completely ignorant to the fact that there’s a New Zealand liability. They may have some recollection when they took their pensions out in the UK, that when they got to retirement, they might have to pay some UK tax on the pension. But about 90% of clients have no comprehension that they’re going to have to pay New Zealand tax on their pension schemes.

TB
Wow. Final question on something coming up. If the current government is re-elected, there’s a proposal to increase the top tax rate to 39 percent on incomes over $180,000. Pension schemes when they come in, are taxed as a single lump sum.  So, I guess the opportunity is for people to perhaps think about getting their money in now because they could face a significantly higher tax liability. Roughly how long does it take to transfer schemes?

Tony Chamberlain
Certainly defined benefit schemes are increasing in value and we’ve seen very few under £100,000, which is $200,000 more or less, which automatically breaks the new potential threshold. But there’s a bit of a double edged sword. Covid-19 has caused defined benefit scheme values to rise. Unfortunately, it’s also caused the UK pensions industry to virtually grind to a halt.

So whereas we were saying to clients at the start of the year that the process to transfer a scheme from the UK will take six months or more, we can’t really say that with any certainty now. So really, we’ve got to tell people it could take 9-12 months to get the money out.

So if you want to try and make that 31st March 2021 deadline – that we don’t even know if it’s actually going to come in – people are really up against getting transfers completed before that legislation ever happens. It will take at least six months to complete a transfer and probably longer.

TB
Well, on that bombshell, I think we’ll leave it there. Thank you very much, Tony Chamberlain of GBPensions. It’s been fascinating to hear the tale of what happens in the pension industry. Really, really helpful.

That’s it for this week. I’m Terry Baucher. And you can find this podcast on my website www.baucher.tax or wherever you get your podcasts.  Thank you for listening and please send me your feedback and tell your friends and clients.  Until next week, Ka kite āno.

How a common GST mistake cost a client $450,000

21 Sep, 2020 | The Week in Tax

  • How a common GST mistake cost a client $450,000
  • NZ tax residents must report income on worldwide basis
  • Labour’s tax policy announcement does nothing for inequality or the inequities in the tax system

Transcript

GST is frequently touted as a simple tax, and I think that’s partly because there’s only one rate and it applies across the board on almost all goods and services consumed in New Zealand. But like any taxes, it has a number of hooks in it which frequently trip people up.

Some of these hooks shouldn’t be tripping people up because they’ve been known about for some period of time. But surprisingly, I still come across this particular issue time and again. And it’s really quite concerning that it still does happen.

The issue will almost invariably involve land. It’s where someone has purchased land from an individual and then decides that it’s perfect for a development activity or whatever, and then sells that across to a company or sometimes a trust which is registered for GST which then claims an input tax credit.

This is where things go off the rails.  The issue is that the supply from the individual/another company who initially purchased the property to another party which is “associated” with it means that for GST purposes, the GST input tax claim that can be made is limited to the amount of GST paid by the first person.

Now, this provision, section 3A of the GST Act, has been in place since October 2000. It applies to transactions between “associated persons” which given the wide definition in the associated persons rules is very likely applicable when there are common shareholders/trustees/settlors.

What section 3A is designed to do is to stop someone buying a property then on selling it at an inflated price to an associated GST registered entity, which then picks up an increased input tax credit. And the rule basically says that the GST input tax is limited to the amount paid by the original purchaser. And since that purchaser often purchases it off a non-GST registered person, that amount is nil.

And I see this quite a bit. I’m surprised some lawyers and accountants haven’t really got across a measure which is now 20 years old.

The latest example I’m trying to describe is that the individual purchased the property, and then after advice from a lawyer – that for asset protection and business purposes – it would probably be better that the land be sold to a company to carry out the proposed development. That itself is not unreasonable advice. Problem was the lawyer overlooked the impact of GST and the client who is new to New Zealand didn’t get tax advice at the right time, which is another common mistake.

The company actually did get an input tax credit and refund of $450,000. You might well ask why did the Inland Revenue let a GST input tax claim of that amount go through? Fair question but it’s a complicated story.

Anyway, Inland Revenue then took a further look at it and then said, “Oh, no, you’re not entitled to that refund”. So now the client has to find $450,000 dollars and pay it back. They’re not best pleased which is understandable. And I think that is something that should provoke some fairly sharp questions between the client and their lawyer. But it is a common issue I keep seeing.

So, the golden advice here is get advice from your accountant and other advisors before you make the acquisition or get into the project. If you don’t, because you’re trying to save on professional fees, you might well find that trying to save two or three thousand dollars in advice has, like this particular client, just cost you $450,000. Get advice on any GST related transaction because GST has a lot more hooks to it than people realise.

I have a couple of other GST cases going on at the moment where people who said they were GST registered turned out to be not registered, or vice-versa and that has got lawyers at ten paces throwing writs at each other over whose client picks up the GST warranty.

NZ residents must report global tax income

Moving on, another common error I come across is people misunderstanding their income tax obligations where they have assets in more than one jurisdiction. I frequently encounter a position where a New Zealand tax resident also has property or other income source in the United Kingdom, Australia, wherever, and has been complying with that jurisdiction’s requirements to file a tax return.

This often happens involving assets in the UK. A person might have to file UK a tax return because they’ve got a rental property over there. But although they’ve complied with their UK obligations, they overlook the fact that as tax residents of New Zealand, their income is reportable taxable on a global basis. So they should be reporting the UK income here as well.

And that’s the bit that often gets forgotten about. Most people seem to be aware there’s a rule against double tax. And they seem to think that by filing a tax return in the country in which the property is situated, they have met their obligations and it’s only taxable in the country in which it’s situated. It’s not, it’s taxable worldwide.

Inland Revenue issued in July a very good Interpretation Statement 20/06 which sets out all the rules overseas rental properties. But I daresay this particular case won’t be the last time I’ll come encounter a situation where someone has reported income overseas, but not in New Zealand.

And it’s a good insight into always try and catch up regularly with your clients and take the opportunity to ask questions, because more often than not, if you don’t ask, you don’t find out. And then something happens after which everyone is going “Oops!” and no one is terribly happy about how that plays out.

Labour’s tax policies

And finally, last week, Labour announced their proposed income tax policy, increasing the top income tax rate to 39% for income in excess of $180,000. This has not been terribly well received, partly and very obviously from those who are likely to be affected. They’re not going to be happy about that. And that’s understandable. Who likes paying more tax? Let’s be frank about it.

But also, more importantly, leaving aside partisan issues such as Labour activists saying it’s too timid, the interesting issue to me is how other people have come out and said it really doesn’t do anything to address the issues of inequality and distortions in the tax system. It’s also been dismissed as just a drop in the ocean in terms of addressing deficits.

There’ve been two such articles in the past week that raised these issues. The first was from Jonathan Barratt a senior lecturer in taxation at Te Herenga Waka — Victoria University of Wellington. And he basically said that both Labour and National are really not doing anything to address questions of inequality. The tax base is too narrow, it benefits the wealthy and punishes the poor. And his key point was that neither major party seems to want to do anything about it.

I do have a view that the “Four legs good, two legs bad approach” to discussing taxation over the last 30 odd years hasn’t helped any constructive conversation in this matter. Also, property has become such an important asset for so many people where sometimes the untaxed growth in the value of the asset exceeds a person’s annual earnings, it’s therefore understandable people are reluctant to have that precious nest egg taxed.

Also coming out and having some fairly harsh, but fair, commentary on Labour’s tax policy was Geof Nightingale, of PWC, who’s been a previous guest of the podcast, but more importantly was a member of the last two tax working groups.

And he begins his article by calling it “Brief and predictable, but disappointing”. And he goes on to point out the 39% rate turns us back to the tax settings at the end of the 20th century when we last increased the top tax rate to 39% rate. The policy “makes the existing equity and efficiency distortions in our tax system worse and will have no significant impact on income or wealth inequality”.

Now, Geof was one of those who backed the introduction of comprehensive capital gains tax. What he’s pointed out here is that the increase in the tax rate to 39% is a progressive move but only in relation to employment and personal services income. It’s quite possible if you’ve got investment income, which is in a portfolio investment entity it’s taxed at 28% and it’s held in a trust it’s going be taxed at 33%.

I really do struggle to understand why Labour is not looking closely at the trust tax rate. It was known to be an issue the last time the top tax rate was 39%. But I suspect they may well come back to that if they get re-elected. There are anti avoidance measures in place, as Geof has said. But the whole point is that the zero percent rate on capital gains still applies and investment returns and capital gains because of the amount of money sloshing through the system now are likely to increase.

So, as he said, one solution is of course, a capital gains tax, which in his view and mine spreads the tax burden more equitably across the economy. And it could also allow lower personal tax rates. What’s often forgotten in the wake of what happened at the end of the Tax Working Group, was that lower tax rates were part of the whole package including capital gains tax. National of course will not do anything in that space. It’s saying it’s sticking to opposing capital gains tax and ruling out tax increases.

So Geof’s article was really quite swingeing in its criticism and fair enough in that regard. He concludes

“Here we are then, a government that wants a second term faced with a major fiscal crisis but backed into the dead end of a 20th century tax policy. Predictable but disappointing.”

Well, that’s it for this week. I’m Terry Baucher. And you can find his podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening. And please send me your feedback and tell your friends and clients. Hei konei ra!

Inland Revenue wins Frucor tax avoidance case in Court of Appeal

16 Sep, 2020 | The Week in Tax

  • Inland Revenue wins Frucor tax avoidance case in Court of Appeal
  • New Inland Revenue guidance on taxation of crypto assets
  • Labour’s tax and small business election policies announced

Transcript

Late last week Inland Revenue won a tax avoidance case in the Court of Appeal against Frucor Suntory New Zealand Limited.

The background facts are complicated, but basically the case involved an advance of $204 million dollars to Frucor in exchange for a fee and some convertible notes issued by Frucor to Deutsche Bank. There was a related party payment from Frucor’s then Singapore based parent for the purchase of the shares from Deutsche Bank.

Over a five year period Frucor paid Deutsche Bank $66 million dollars on an interest only basis. Inland Revenue argued to this was a tax avoidance arrangement and for the 2006 and 2007 income years disallowed deductions to the extent of $10.8 million and $11.6 million respectively.

Frucor won this case in the High Court in 2018, a decision which actually raised a few eyebrows in the tax advisor industry because it seemed similar to the arrangement struck down involving the big Australian banks about 10 years ago.

Unsurprisingly, Inland Revenue appealed and have now won in the Court of Appeal. Under the arrangement, Frucor had apparently achieved interest deductions totalling $66 million. But in the court’s view, it had not incurred a corresponding economic cost for which Parliament intended deductions would be available. $55 million as a matter of commercial and economic reality of the claimed interest was in fact a repayment of principal borrowed and not an interest cost. The Court concluded that the funding arrangement had tax avoidance as one of its purposes or effects and was this was not merely incidental to some other purpose. The overall purpose of the funding was provision of tax efficient funding to Frucor.

The only bright spot in this decision for Frucor is that the Court of Appeal agreed the High Court was reasonable to find that the shortfall penalties for a tax avoidance arrangement (which can be up to 100% of the tax avoided) should not have been imposed by Inland Revenue.

The key lesson here – and it’s going to be of importance looking forward if Labour forms the next government, given its announcement for a higher personal tax rate – is that the courts are still very much onside with striking down tax avoidance cases where they consider the arrangements are not seen to be in line with Parliament’s intention. And Inland Revenue has made aggressive use of tax avoidance provisions in section BG 1 of the Income Tax Act, and until Frucor’s High Court victory, it had not lost a case involving a tax avoidance matter for something like 10 years.

So aggressive tax planning is very much still under the gun for Inland Revenue and the courts are supportive of that approach, even though it might look as if all the necessary legal form has been satisfactorily met. So that’s just a warning for the times ahead. I think we’re going to see Inland Revenue make more use of anti-avoidance provisions in other areas as it returns to normal after its attention was diverted responding to the COVID-19 pandemic in the early part of this year.

Taxing crypto assets

Moving on, Inland Revenue has issued some updated guidance on the tax treatment of crypto assets. There’s nothing especially new here. It is confirming that crypto assets are to be treated as a form of property and that in each case it will look carefully at what are the circumstances behind the acquisition and disposal of the relevant crypto asset.

The guidance does expand a little bit more on what we’ve seen previously in this area.

Inland Revenue has said very clearly that it will look at the purpose for acquiring the crypto assets. And it is pretty straightforward in saying that if your purpose when acquiring crypto assets was to sell or exchange them, you will need to pay tax when you do so.

Inland Revenue will look very carefully at your purpose at the time you acquire crypto assets. The guidance repeats the key point, which is often overlooked, that it is the purpose at the time of acquisition that matters. If that purpose changes later on, that is not relevant. If you plan on selling or exchanging your crypto assets at some time in the future, then you have a purpose of disposal. It doesn’t matter how long you plan to hold onto them before doing so. Your main purpose can be to sell or exchange them even if it takes a few years. Then, of course, you’ve got to have supporting evidence of what your intention was at the time of acquisition.

And one of the things the guidance points out is the nature of the crypto assets being acquired. And in particular, does it provide an income stream or any other benefits while being held? (By the way, benefits isn’t clearly defined). Now, Inland Revenue’s view is that if you have crypto assets that do not provide an income stream or any other benefits, this strongly suggests you acquired them for the purpose of selling or exchanging them. This is because the only benefit you get is when you sell or exchange those crypto assets. And that, by the way, is similar to Inland Revenue’s position on gold bullion.

But just because you’ve got crypto assets that do provide an income stream or other benefits, for example, staking, that doesn’t mean that you didn’t acquire them for the main purpose or sending of sale or exchange. Somewhat helpfully, there are a number of examples of how the Inland Revenue sees these rules working.

So the position to be mindful of if you’re involved in holding crypto assets, is that the default position is almost that any funds realised on a sale or exchange are going to be taxable. To counter that, you’re going to need to show good records at the time of acquisition of what your intention was and what type of assets you acquired.

But this is the current position and we have to work with it. And so my advice is be very clear in recording what your intention is when you acquire crypto assets. And if you haven’t done that, it’s too late. Inland Revenue’s default position with crypto assets is that any sort of exchange is going to be taxable.

Election 2020 tax policies

And finally, Labour has now come out and announced its tax policy, the centrepiece of which is a new top income tax rate of 39% applying to income above $180,000. It’s also said that there will be a freeze on fuel tax increases, no new taxes and no further income tax increases for the entire next term of government.

The other point it’s raised is, is it going to continue to work with the OECD to find a solution on the taxation of multinationals? It’s prepared to go ahead with the implementation of a digital services tax, which present projections estimate would raise between $30 and $80 million yearly.

As can be seen there’s not a lot of tax involved with multinational taxation, but it’ll be a popular measure because it’s something that keeps coming up in conversations I have with people on the issue of taxation. People are always saying multinationals should pay more. But they’re not a bottomless well, and opportunities to tax them are limited.

The digital tax space is where there could be some movement. But that’s very much dependent on how the OECD goes. And as I’ve mentioned in the past, the Americans have pretty much brought that particular pathway to stop earlier this year by basically saying they weren’t going to cooperate or be involved

With the proposed income tax rate increase to 39%, we’ve been there before. I thought if Labour was going to raise the top tax rate, it would be to 39% percent. Crossing the 40% threshold would be a psychological barrier too far. We haven’t had an individual tax rate of more than 39% for over 30 years. 1988 was the last time the tax rate was above 40% when it was 48% as I recall. It’s expected to raise 550 million dollars.

There’s already a lot of talk going around about making use of trusts and companies to get around the increase. My understanding is they’re going to look at trusts and the trust tax rate. Conceptually, the trust tax rate should really rise to be equal to the top personal tax rate. And that’s the story in Australia, the UK and the US as well. But my understanding is trusts will be looked at to find out exactly how many trusts really would be caught by that, because there are trusts settled for minors and orphans and other charitable or semi charitable purposes.

But even if nothing happens in that space, I’ll just remind you about the first item this week, the Frucor case and the Inland Revenue’s approach to tax avoidance. Last time we had tax rates at 39% we ended up with the Penny-Hooper decision. That’s the case involving dentists who used a company to trap income at the company tax rate, which was then 33% and then then lowered to 30% instead of the personal 39% rate was struck down as tax avoidance. You can see that happening again.

So, yes, Labour seems to have opened an opportunity for tax planning. But my answer to that would be ‘Proceed with great caution’, because Inland Revenue has a big stick in the form of an anti-avoidance provision.

The other thing of note from Labour is that it’s campaigning on extending applications to the Small Business Cashflow Scheme to 31st December 2023 for ‘viable’ businesses.  And it’s also promising to extend the interest free period of loans under the scheme from one year to two years, which would be very welcome for small businesses. Labour will also look at a permanent iteration of the scheme, which is something I would support.

That’s it for this week. Thank you for listening. I’m Terry Baucher and this has been The Week in Tax. Please send me your feedback and tell your friends and clients until next week. Ka kite āno.

How to make better choices managing money and reaching financial goals

7 Sep, 2020 | The Week in Tax

This week, I’m joined by Lynda Moore, The Money Mentalist. Lynda’s background is in accounting, so she understands numbers. She also studied under Professor David Krueger in the USA to focus on money psychology. She now combines two skill sets as money mentor/coach, working with business owners, couples and individuals to get an understanding of how they think, feel and behave with their money, how they can make better choices to reach their financial goals. Mōrena, Lynda, welcome to the podcast.

Transcript

Lynda Moore
Good morning. It’s lovely to be here.

TB
So, Lynda, how do people’s attitude towards money change when it comes to tax?

Lynda Moore
There’s a bit of a spectrum to it. At one end of the spectrum, you have people who are kind of terrified of the tax department and will do anything to make sure that they make those commitments to the IRD. Whether or not they can afford to do that in terms of cash flow and other things going on.

And at the other end of the spectrum, there are those who kind of go, “It’s just the tax department. I’ve got other things to do” whether it’s right or wrong and what I think they should be doing with their money. And then somewhere in the middle there, you’ve got, I guess, what you call good compliant tax people who know what’s coming up, and plan for it, and they manage their tax really well. I tend to work with people who are kind of at either end of that spectrum.

TB
So is there any particular type of business or person who consistently gets into trouble with tax in your experience?

Lynda Moore
It’s not a particular industry or anything like that. It’s more about the business owner and it’s more about the money, personality, the mindset and their style. For example, if you have a business owner who has the money personality of being a spender, then it will be much, much harder for them to save for tax, in fact it might not be on their radar.

Whereas if you have the polar opposite, which we call the ‘Hoarder Personality’, they are really good money managers. They are likely to be the ones who will have their tax saved. So, when their accountant sends out a tax letter, there is no stress, the money’s there, they’re sorted.

So, the problem clients seem to be more sort at ‘The Spender’ end of the spectrum. If you use me as an example, which I’m quite happy to do, my money personality is an ‘Amasser/Spender’.

Business owners need to have some ‘Amasser/Spender’ in them because you need that to grow a business. So, if I’m talking to someone who is a business owner and I see an Amasser personality, I’m kind of like ‘Why are you in business?’

With a Spender, we find it a little harder to put that money away for tax because they will spend in other areas in our business to grow it. Whereas an ‘Amasser/Hoarder’ will make sure they’ve got their tax money tucked away and then they’ll start to grow the business.

So, we kind of look at it from slightly different aspects. And please bear in mind these are kind of generalisations. They are a little different.

TB
So what stage do you get involved? Are you lucky enough to get in at the beginning or is it “Help Lynda, we’re in trouble!”

Lynda Moore
It can actually be a bit of both, because generally clients will come to me when they’re looking and they’re saying “So, my accountant has just told me I’ve made all of this profit. I don’t know where it is. So, my neighbour down the road, he’s just bought a boat and I can’t afford one. But my business is making lots of money. What’s going on?”

So I see that disconnect between where they’re told they made a profit and got a big tax bill, but they haven’t got the cash either in the business or in life. And then it’s finding the overall picture of what’s going on in your business and what’s going in your life that’s lead you to that.

Or I also come across the client who’s going “I’ve just started a business. I want to make sure”. And sometimes it will be “I’m going to leave my job and start a business, but my partner is really worried how are we going to live.”  In which case we start with that process first and we make sure that a new business owner understands the ‘tax holiday’, and you need to save because in year two you’ve got a double whammy. So again, I get both ends. I get experienced business owners and I get newbies asking questions.

TB
You touched on the ‘tax holiday’ there, the first-year issue. This is something I see quite a bit of, and I think every accountant experiences quite a bit. That first year of business when provisional tax isn’t payable and you just have to wait till terminal tax, which is a year down the track. And lo and behold, what comes around you’re into provisional tax for that year as well. So essentially, you’re paying two years at once.

That’s a very hard thing to manage with new businesses. And I imagine for the spender type client, that’s a horrendous problem. And that’s when they immediately run into quicksands. How do you address that?

Lynda Moore
Well, I think it’s an understanding from the business owner. I think quite often they don’t go to an accountant or get advice when they start the business. It’s like, “Oh, we’re going into business”. And because as an employee, you don’t physically pay the tax they don’t have that mindset and that attachment of “I have to physically pay tax”. You kind of do with GST, but not so much income tax.

So unless they get advice early and are told how to structure the business and put away money for tax, it’s not going to happen until year two. And that’s when they’re going to get a horrendous shock when their income suddenly drops significantly because they can’t find that tax.

TB
Saving for taxes isn’t easy. So, what’s your tips to for in that regard? What do you tell your clients that this is what’s going to happen and how to organise themselves?

Lynda Moore
It comes down to “You’ve got to know your numbers”. So whether you can do that yourself through your accounting system and once you pull out your profit and loss. Alternatively, you ask your accountant “I just need to have a very simple profit and loss once a month”.

For the clients I work with, I start out with the basic company tax rate of 28%. So whatever system you’re using even if it’s not 100% accurate just put 28% of the profit away into a separate bank account.

If you are a spender use a different bank so you can’t transfer from one to the other. And give that account a nickname. Call it the ‘My tax savings account’. Because then your brain looks at that and goes, “Oh, that’s for tax. That’s not my holiday in Fiji account. It’s the IRD account”. And by naming this account for tax, you associate it with that.

So it doesn’t matter what you want to save. If you want to save for a holiday in Fiji, have a Fiji savings account. But if you give it a nickname that associates with what you’re saving towards, you are more likely to do it and you are less likely to dip into it.

TB
Wow, that’s quite interesting. I’ll just pick up a point you mentioned there. People probably get the hang of GST quite quickly. What’s your recommendation around paying GST? My preference is to go two-monthly because you get used to saving for and getting ready for it. Six-monthly returns you get a shock, as you’ve suddenly got to find $30-40,000 which is often gone because. GST is more often than not used as working capital in a small business.

Lynda Moore
If I see very few people putting away GST money versus putting away [income] tax money. And again, if you have that right attitude you are that hoarder sort of personality you can save up to six months GST. But more often than not, it doesn’t work.

For me, what I do, because I run my business through Xero, when I’m doing my admin, I just look to see  how’s my GST accumulating and whether I need to pull a little bit of money out of my working account into my GST savings account. And then when I come to month-end and my monthly report, the first thing I do is pay myself first. I put away 10% of my profit into a separate account which is my “Building up profit for business development.”  Then my tax money goes into the tax savings account. And it’s just part of what I do when I do month-end reporting.

Now, if you’re a business owner, you need to ask your accountant to send you a profit and loss report or three little lines to say this is what it looks like. Bear in mind, I’m an accountant and I love my industry, but I don’t understand why some accountants don’t simply send a little email. If you’re doing the client’s GST, why can’t they just add three lines that says, ‘Hey, you made this much profit, put away this much tax.’  You know, they’re sending a GST report so why just add that in? Because it’s an important piece of information.

TB
That’s a really, really good point. It touches on an issue I think the industry is struggling a little bit with, that there’s resistance around costs. So accounting is basically seen as a cost so everyone’s driving it down and there’s offshoring going on as well.

So the mentality I think that is needed for business advisers, accountants and tax consultants is to flip that round and be proactive and say “Here, this is what we are seeing”. I mean, the GST returns are a really good example, as you just pointed out. Every two months, an accountant who’s working alongside a client can say, “Hey, this is what we’re seeing. Where are you at? And you need to be doing X, Y and Z.”

But there seems to be resistance both in the industry to take those steps forward and from clients to want that sort of advice. Until then, suddenly everything blows up and fingers are being pointed everywhere. How do you address that?

Lynda Moore
I think for some reason, there seems to be a bit of fear about going to talk to the accountant. One, because you think you’re going to get billed for it. And secondly, the feedback that I sometimes get, particularly when I was an accountant in practice as well, from women in business, is they don’t understand what they’re being told, and you know they feel like they are being talked down to a little bit.

It’s not every accountant. There are some amazing accountants out there, and I know a number of them. And I think it’s a matter sometimes, that once you have that business relationship, you had those for life.  Whereas sometimes your business changes, the practice changes, you know. And maybe sometimes you don’t suit that type of accountant for whatever reason. And it’s time to go and find someone who else does suit where you are. It’s not like we now have a fear of changing banks. And finally, the client feels “I don’t know what to ask”.

TB

That’s a really good point about communication because it leads on to something that’s we’re seeing more of now and I’m sure you might have seen it as well. Inland Revenue’s Business Transformation has been built around directly interacting with taxpayers or ‘customers’ in its jargon.

Are you seeing that as well? And how do you deal with that from your end? Is it a case of over-communication?  Now we’re going from one side – where you talked about accountants don’t communicate as well as they should – to Inland Revenue’s telling you everything every day.  It’s a bit much, isn’t it? How do you address that?

Lynda Moore
It’s really interesting because as you said it’s gone from one extreme to the other. I did have one client who’s in this “I’m terrified of the IRD” category who thought they had to pay this huge sum of money. But it was actually one of those little letters that said “It’s due over the next six months” and they paid it all at once. And I’m like “You can’t get that back.”

So I think sometimes what happens is “Oh it’s from the IRD, I’ve got to do something about it”, or “I’m just going to ignore it”. And again, I see that sort of polar response. It’s almost like when you get on someone’s mailing list and they email you newsletters too frequently, and you just shut down.

So I think there’s certainly some clients who’ve done that, which is also dangerous because they could miss something that’s important that they need to deal with. But they’ve gone into that mode “It’s just the IRD sending me more stuff that I don’t need to worry about or deal with”.

TB
Talking about anxiety, right now, how are people feeling out there?

Lynda Moore
All over the place I guess is the best way to describe it because, and I don’t know about you, but when I set my goals for 2020, there was not a pandemic in my planning whatsoever. You know, everyone was kind of going, “Oh, 2019 wasn’t that great but 2020 is going to be absolutely amazing.” So, we were in that kind of head space looking at it really positively. It was going to be a great year.

Then we had this pandemic and we hit lockdown. So, with financial anxiety you go into the state of Flight, Fight or Freeze.

Now, what a Freeze person does is they basically go “Life’s just too hard. And I’m just going to be an ostrich.”  And they will just put their head in the sand and it’s all just too hard. They don’t know what to do, how to respond, how to react. When you go into that flight mode, you just want to hide from things. You’re not quite sure where to take advice. You might find yourself going all over the place and going on this roller coaster of emotions where you think things are okay, “I’ll start doing this” and then “Oh hang on, I’ll go down this path”. So you’re a bit like scrambled eggs and you just don’t quite know what to do.

And then you get the ones who go into Fight mode. Now, these are the ones who will ring the bank, the accountant, and they’ll be angry. That’s the usual kind of fight response, you get into the space of feeling angry and frustrated. When you’re in that mode you can make some really bad decisions because your view is really narrow, and you can’t see a lot of options and you will take an option that’s in front of you. And it may not be your best option. So, there’s potentially a few really bad decisions being made at the moment.

And also because there’s so much coming through from the media. We’ve got the Reserve Bank going “We want you to do this to keep the economy going”. We’ve got banks going “We’ve got lots of cheap money, but we’ve got responsible lending to think about”.   And then you come down to your own business and your own household, and you’ve got to look at what is best for you. So it’s very confusing, all these layers of information.

So you are going to go through all these emotions and what you want to do is get into the action space. This is where you take a deep breath, sit down, do some planning and bring it back to you, your business, your household and what you need to do for you.

And it does sound a little bit harsh, but it is about looking after everyone else’s business as well. Put yourself first, because if your business falls over, you can’t help another business. You can’t help your family. You can’t pay your mortgage. So you do need to put yourself first. Make sure you’re secure, and you’ve got all the support you need.

And I guess that’s the other flip-side. Right now, there’s a lot of support out there. You’ve just got to go and look for it.

So that’s my best advice right now to business owners. Put yourself first. Your numbers are your best friend, your accountant, your bank manager, your support network of experts – not your mate down at the pub. Your experts are your best friends right now. Use them. Use them.

TB
Inland Revenue has a role right now because they’re administering the Small Business Cashflow Loan Scheme, which I am a big fan of, as I think for a lot of small businesses, it’s a very vital tool.  But it’s not a grant, you know, they’ve got to commit to repay it. And then we’ve got these wage subsidies as well going around.

We talked a few minutes ago about some of the confusing messages we get from Inland Revenue. But how have you found it and the Ministry of Social Development in that space with the loan schemes and wage subsidies? It’s probably been very helpful for one or two of your clients I would think.

Lynda Moore
Oh, definitely. It has been very, very helpful. And certainly, the clients that have had to go to IRD for support have got that support. They’ve been able to put some arrangements in place and things like that. But bear in mind, I’m an atypical accountant as I’m not dealing with hundreds of clients, I deal with those who come to me who are looking for a mentor and coach.

But certainly, I am finding it seems to be a lot of help and support and it is giving a little bit of peace of mind to some clients. I’ve also had a client come to me and go “I actually think I do qualify for the wage subsidy, but I’m actually not going to claim it because I’ve got other resources and let someone else have it.”  She looked at it very much from a values-based decision rather than “I just need the money, I’m going to take it”. I think it’s really great that there are people out there who are looking at it like that.

TB
Just thinking we’ve got an election coming up and all that hoopla going on. Last week I talked about National’s small business policy. https://www.interest.co.nz/business/106800/week-tax%C2%A0covid-19-related-measures-tax-losses-and-airbnbs%C2%A0national-releases-its

What would you like to see from the parties in terms of tax or small business policies coming forward for the election?

Lynda Moore
Yes, interesting question. I’m just starting to think elections and what’s happening now.

To me, that whole thing of the tax holiday is something that needs to be addressed.  Whether it’s “you have to pay it to the tax department now” I don’t know, because what I see coming through to me as being the biggest issue is this year two in business and suddenly finding that tax. So, if there’s a solution for that. I know businesses in the first year tend to need that cash flow. But if there was something that at least encourages paying something towards that first year’s tax bill, I think that would actually help a lot of businesses because it would force them to think about tax.

TB
There’s a couple of things that Inland Revenue does have now which would help, the Accounting Income Method, AIM, https://www.ird.govt.nz/income-tax/provisional-tax/provisional-tax-options/accounting-income-method-aim

and the GST ratio method. https://www.ird.govt.nz/income-tax/provisional-tax/provisional-tax-options/ratio-option   But the take up of those has been very, very low because they’ve been so circumscribed by Inland Revenue. I think it’s been more concerned about the system being rorted rather than this. Those two options get clients into the groove very quickly of making regular payments of income tax and GST. I agree with you on that.

So smoothing out the transition into business and regularly paying tax would be good. One thing I recommend to some clients where we know the cashflow is predictable enough, is to actually put them on Pay As You Earn. So their personal tax is dealt with. You do lose some of the flexibility around the shareholder employee regime. But you deal with that paying tax matter.

Lynda Moore
I was going to say, if I have clients who are absolutely hopeless with money, PAYE is what I would suggest for them as well for that very reason. I just know they’re not going to be able to cope with provisional tax.

TB
Yeah. Provisional tax requires a lot of discipline. Any final tips for business owners?  What’s Money Mentalist’s favourite tip?

Lynda Moore
My favourite tip is whatever you do, understand your money personality and your money behaviour and then surround yourself with people that complement it.

So go back to my Amasser/Spender personality and wanting to spend my way to growth. My lovely partner Simon, is the Amasser/Hoarder. He is the one who goes “Honey, are you really sure this is a good idea? Why don’t we do it this way?”

So it’s a balancing act of me wanting to put my ears back like a racehorse and go and “Hey, let’s explore other options.” So know your money style and know your numbers. Just know your numbers. How much income are you replacing? How much do you need to sell/earn to replace that income? Don’t go into it blind.

TB
“Know your numbers.”  That’s very good advice. Couldn’t agree more.

Well, thank you very much Lynda Moore. That’s been fantastic.

That’s it for this week. Thank you for listening. I’m Terry Baucher and this has been The Week in Tax. Please send me your feedback and tell your friends and clients until next week. Ka kite āno.