Tax News

COVID-19 related measures for tax losses and AirBnBs

31 Aug, 2020 | The Week in Tax

  • COVID-19 related measures for tax losses and AirBnBs
  • National releases its small business policy
  • Is a capital gains tax back on the agenda?

Transcript

Friday was the due date for the first instalment of Provisional ax for the year ending 31st March 2021, Provisional tax is going to be payable by anyone whose net tax for this year will exceed $5,000.

Now in the past, we’ve covered the ability to use tax pooling to give more flexibility about payments of tax, and that’s going to be particularly important for the current tax year, given our ongoing uncertainties arising from the COVID-19 pandemic. My recommendation to clients at this moment is to adopt a conservative approach. Look at paying the first instalment of tax due today but keep watching your progress and how your turnover is going. And if matters move into a tax loss position as a downturn comes through soon, then we will take steps to mitigate or deal with the next two instalments of Provisional tax.

But what if you already know you’ve got losses this year and it’s not likely to get much better for the current year? Say you’re a restauranteur or you’re in the tourism business. These are two sectors which are very clearly hit hard by the pandemic and the various lockdown measures.

Well, one of the measures introduced as part of the government’s response to the pandemic was the ability to carry tax losses back. Under this measure, if you have a tax loss for the 2020 or 2021 income years, you can carry those losses back one year. And the idea is that if you carried back to a profitable year this will mean you have overpaid tax in the prior year, and that tax can be released to help smooth your time through this ongoing pandemic.

And for most larger companies the tax loss carry-back regime is pretty straightforward. Carry back the loss one year, get a tax refund at 28% percent, and then you’ve got funds, which you can either use to meet other bills you may be behind on, or bring it forward and apply it against your current tax year liabilities such as GST or PAYE, depending on how dire the situation might be.

But one of the problems that’s emerged with the tax loss carry back rules affects a lot of smaller companies where their shareholder is also an employee. And under the rules that apply to these companies, these companies can pay out their profits to a shareholder-employee who is then responsible for the tax.

For example, say a company makes a profit of $100,000.  Instead of paying tax at 28% it instead distributes it as a salary to a shareholder-employee and he or she is taxed on it at their relevant marginal rates. For someone on $100,000 with no other income, that roughly works out to about $24,000. So, there’s a tax benefit to shareholder-employees because of the gradual increase in tax rates for individuals.

But the problem that’s emerged wasn’t really addressed in the current legislation. What do you do if you carry a loss back for a company with a shareholder employee? The carried back loss is not much used to that particular company because they’ve already reduced their profit to nil by distributing it to the shareholder-employee.

And by the way, I note there was a Radio New Zealand report noting that about $2 billion dollars in wage subsidies has been paid to companies that do not appear to have paid any company income tax. It’s highly likely many of those companies have shareholder employees and it is the shareholder employee who has paid the tax using the mechanism I just explained where the whole or substantial amount of the company’s profit is paid out to the shareholder-employee.

So the tax loss carry back rules don’t work too well for small micro businesses that use a shareholder-employee mechanism. And it’s something we’ll need to be looked at if there is a permanent iteration of these rules, which I believe should happen.

But it’s also why the small business sector and accountants have not looked on this particular measure with a great deal of enthusiasm yet. Because of those complexities how do we deal with these tax losses that are brought back? Do you rewrite the whole position in the prior year? And then what does that do for other matters that are related to that person’s income, such as social assistance, ACC earner levies?  The amount of ACC you may claim if you have an accident is dependent on your salary as a shareholder-employee.

So, there’s a lot of complicated issues to work through. But the tax loss mechanism is there. It works very well for companies which don’t have shareholder-employees and individuals trading for themselves or trusts can use the loss carryback rules in either the 2020 or 2021 income years.

Converting from short-term to long-term rental accommodation.

Moving on, Airbnbs in the tourism sector will also have been hit very hard by the pandemic and the collapse in overseas tourism and the substantial decline in domestic tourism. So what has happened is some of these Airbnbs have reversed a trend that was developing, and have moved back into providing longer term residential accommodation.

As always, there’s a tax consequence to that and for GST purposes it means that if the GST activity is stopped, then the person is required to de-register for GST. Part of the de-registration process will mean a deemed supply of the goods that were brought into the business. You’re deemed to have sold them and pay GST output tax on the way out. And if you’ve claimed a big input tax credit for, say, a whole property, moving it over to Airbnb, that means that you could have a substantial output tax payable on de-registration, as it’s done at a market value.

Now, under the GST Act, there is a provision that where someone is no longer carrying on a taxable activity they are obliged to let the Commissioner of Inland Revenue know within 21 days of their taxable activity ceasing, and then that registration must be cancelled unless there are reasonable grounds to think the taxable activity will be carried on within 12 months. So, this could apply if you think that within 12 months-time, we could be back up and running again.

What Inland Revenue has done is extended this twelve-month period to 18 months through a special COVID-19 determination which has just been issued and this will apply until 30th September 2021. So you now have 18 months, a lot more flexibility about whether you’re going to resume your Airbnb activities or drop out of the picture completely.

Just a caveat though – if you are currently using a property for residential accommodation, but you anticipate going back to making taxable supplies in Airbnb, you have to do what’s called a change in use calculation.  This is basically an apportionment of the value of the property brought into the GST net over the expected time it’s being used for taxable activities. A little bit complicated, but you produce one of those calculations as part of your GST returns.

Political tax policy

Yesterday National released its small business tax policy.  In terms of tax rates it has come straight out and said it does not plan on increasing taxes or introducing any new taxes.

Other than tax rates, National’s tax policy has a number of other measures. Firstly, they’re going to lift the threshold for the purchase of new capital investment from $5,000 to $150,000 per asset. That is you can take a complete deduction for an asset costing up to $150,000. Now apparently this only applies to “productive assets” so there’s a question as to what that might mean.  It’s a temporary two-year change. Something similar has been done overseas.

And it’s a good idea although it is a question, of course, of what will and won’t meet the definition of ‘productive’. But you could see some fairly substantial plant and machinery being purchased and as a means of getting investment into productivity in the economy it’s a measure to be to be welcomed.

It would also have an impact on the Government’s cash flow, by the way, because it would drop quite a lot of people out of the provisional tax requirements. So the Government’s income, so to speak, was will be reduced temporarily before these payments will then come in at terminal tax time. I think $25,000 is too generous, $10,000 is probably manageable. Still it’s a measure in the right direction.

Next, they want to raise the GST threshold from $60,000 to $75,000. Big tick for that, the GST threshold hasn’t been increased since 1 April 2009. So it’s well overdue and on an inflation basis $75,000 is about right.

Businesses will be allowed to write off an asset once its depreciated value falls below $3,000 as opposed to continuing to depreciate it until its tax value reaches zero. Really good measure here. Should be done straightaway regardless of who’s in power.  Keeping a track of all these assets when they’ve fallen below that threshold is hard and causes needless complexity. So I like that a lot.

I also like this next one – change the timing of the second Provisional Tax payment for those with a 31 March balance date from 15th January to 28th February. That’s really quite sensible. It’s bizarre it’s in the middle of January when we’re all supposedly on holiday and it’s not a great time for cash flow. February makes a bit more sense.

Ensure the use of money interest rates charged by Inland Revenue more properly reflect appropriate credit rates. So right now, if you overpay your tax Inland Revenue will pay nothing. National are saying, well, we want something that’s a little bit more realistic than that. It’s not a bad move and it certainly would be popular with small businesses, but it’s rather based on an assumption that taxpayers would be using Inland Revenue as a bit of a bank. They won’t.  A better option in this case would be tax pooling which takes care of a lot of those issues.

Increase the threshold to obtain a GST tax invoice from $50 to $500. A very generous upper limit there. I’m not sure I’d go as high as that, but that $50 threshold below which you don’t need to have a full GST invoice with all the required details on it has not been changed since 28th September 1993. So an increase in the threshold is welcome. I’d say $150 might be a better option.

Implement a business continuity test rather than an ownership test for carry-forward of tax losses. Moves in this space are already happening but the measure is to be welcomed.

Next and also welcome, review depreciation rates for investments in energy efficiency and safety equipment. That’s not a bad idea. And then consolidate the number of depreciation rates to reduce  administration costs. That’s another big tick from me on that, because there are so many different rates and there’s options to probably get it wrong more often than right. And the level of micro detail required probably isn’t really appropriate for small businesses.

So those measures I think are mostly all welcome. And frankly, they’re sort of pretty much apolitical. Whoever is in power should be adopting almost all of those proposals.

Just a matter of time?

And finally, talking of parties’ tax policies, the Greens released as part of their tax policy, a proposal for a wealth tax to apply on net wealth over $1 million. Earlier this week, former legal practitioner, Human Rights Commissioner and retired Family Court Judge Graeme MacCormick picked up on the Green Party’s proposal when he wrote about the question of a wealth tax. He suggested a one percent levy on net assets of more than $10 million per person.

He also argued that it was time for the wealthy to step up and help out in this the crisis. He was sceptical of the idea of the trickle-down effect, that wealth trickles down and dissipates out through the country. He was of the view that basically we’ve got 30 years to show that hasn’t happened.

One of the interesting points he raised was that New Zealand not only doesn’t have a comprehensive capital gains tax, it also doesn’t have an estate tax or a gift tax nor a wealth tax. It’s highly unusual in the OECD for one jurisdiction to be not have at least one of those taxes applying on a comprehensive level. Some have capital gains tax and no wealth tax or estate tax. Others have a wealth tax, but no capital gains tax and some like the UK and the US, have capital gains taxes and estate and gift taxes.

The position varies across the OECD, but New Zealand is pretty unique in not having either a comprehensive capital gains tax, estate tax, gift duty or wealth tax.

Wealth taxes have fallen out of favour in the past few years, but they’re back on the agenda because, as I discussed with Radio New Zealand panel and Patrick Smellie of Business Desk, the pandemic and Thomas Piketty has opened the door on that.

And I was very interested to see this week that former Reserve Bank governor Dr Alan Bollard said in his presentation to the New Zealand CFO summit that, like it or not, given the scale of the borrowing the Government has had to engage in, capital gains tax may be an unpalatable option for governments to consider as they want to pay down the debt.

So this matter of capital taxation hasn’t gone away. We’ll hear more from other politicians no doubt, Labour and New Zealand First have still to release their tax policies. But we’ve still got another seven weeks to go to the election so there’s plenty of time for discussion on that.

Well, 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.

News on the latest COVID-19 initiatives

24 Aug, 2020 | The Week in Tax

News on the latest COVID-19 initiatives including:

  • Updated Inland Revenue determination on working from home costs;
  • Resurgence wage subsidy eligibility
  • Updated Business Finance Guarantee Scheme conditions
  • Provisional tax due on 28th August

Transcript

In last week’s podcast I did a refresher on the payments to employees who were working from home and a reminder about Inland Revenue Determination EE002, which covered the payments from employers to employees. Now, I noted that that determination only covered the period up until 17th of September 2020, and I suggested that Inland Revenue probably needs to issue an extension to it.

Lo and behold, later that day, that’s what happened. Determination EE002A has now been issued. This is a variation to the previous determination and now applies to payments made by employers for the period 18th September 2020 through to 17th March 2021. So that’s great to see that come through from Inland Revenue.

The Determination includes a couple of interesting comments from Inland Revenue. Firstly,

The Commissioner is currently considering issuing a public statement dealing with the tax implications of having employees working from home as a “new way of working” rather than being limited to the enforced way of working occurs during the lockdown period of the COVID-19 pandemic.

Now, this public statement won’t be ready for publication before 17th September so Inland Revenue has decided to continue to allow employers and employees to use the approach set out in the previous determination.

Secondly, what Inland Revenue has also done is remove the requirement that the payment must relate to an expenditure or loss incurred by the employee as a result of the employee being required to work from home because of the COVID-19 pandemic. So I guess you could say it’s a relaxation of the rules, but it’s also about Inland Revenue recognising that work habits are changing. And the previous position with a flat out prohibition on employee deductions and the complications that this led to will need to be addressed. So there’s obviously something new in the pipeline, and I’ll bring it to you when that turns up.

Moving on, in other COVID-19 related news this week, we’ve got a two week Resurgence Wage Subsidy payment to be available nationally for employees and self-employed who are financially impacted because of the resurgence of COVID-19. To be eligible, your business must have experienced a minimum 40% decline in actual predicted revenue for a 14 day period between 12th August and 10th September compared to the previous similar period last year.

You can’t receive this Resurgent Wage Subsidy at the same time as other COVID-19 payments for the same employee. But once that those existing payments end you can apply for the Resurgent Wage Subsidy.  Applications are open from 1p.m. today, 21st August through to 3rd September 2020. So that’s very helpful.

The return of the virus in Auckland has had ripple effects as everyone is now well aware.

Tourism from around New Zealand is driven to some extent by Aucklanders travelling around the country. And therefore, it’s not unreasonable that not only those businesses affected in Auckland by the move to Level 3 should be supported, but also those outside Auckland.

In a related move, the Business Finance Guarantee Scheme has been reshaped.

Now, this was the first attempt by the government to give financial support during the pandemic but the take up of this has been very low. At the moment, I understand $150 million have been lent although the banks apparently had put aside something close to $6 billion.

The scheme continues to have the government underwriting the default risk up to 80% of the loan. Now, no personal guarantee is required for loans under the scheme which is obviously helpful.  All lending decisions, are made by the banks and are obviously subject to commercial rates of interest. In other words, loans under the scheme are pretty typical bank loans.

One of the drawbacks for small businesses that the Business Finance Guarantee Scheme had and probably still does to a large extent, is the amount of information that’s required to support the application for small businesses. That means pulling together a lot of information quickly and using accountants and other advisers to help them do so. That’s not always the most practical approach for smaller businesses.  That’s why the Small Business Cashflow Scheme had a huge take up because it was more easily accessible with fewer lending conditions. Yes, the lending limits were much lower. But the point was that it was very readily and quickly available.

And for those who are eligible to apply for the Small Business Cashflow Scheme applications are still available open right up until 31st December 2020. So just a quick recap on eligibility for the Small Business Cashflow Scheme.  You must have been eligible to apply for the original wage subsidy. That is you have to show at least a 30% percent drop in income or predicted income compared with the same period 12 months ago. The maximum size of the company organisation that can apply is 50 employees.

Under the scheme the maximum amount of the loan is $10,000, plus up to $1,800 per full time equivalent employee. And if you repay the loan within 12 months, it’s interest free, otherwise, a 3% interest rate applies.  I’m hearing from other colleagues and tax agents that smaller and micro businesses made extensive use of the scheme, which is hardly surprising. It is a fairly flexible regime designed to reach smaller businesses.

And finally, just like the seasons, Provisional Tax has rolled around. The first instalment of Provisional Tax for the year ended 31 March 2021 is due next Friday, 28th August.  A quick reminder that Provisional Tax is due if your residual income tax now exceeds $5,000. Otherwise, you can drop out of the regime.

But there’s a caveat to this. If it turns out that your residual income tax does exceed $5,000 in this year and you would have been liable to pay Provisional Tax under the previous $2,500 limit, then use of money interest at 7% will apply from 29th August.

The main thing here is to check how cash flows are going and probably err on the side of caution here.  And a good thing to do in these very uncertain times if you’re paying substantial amounts of provisional tax – I think that’s anyone paying more than $60,000 – you should really be making use of tax pooling. It gives you a lot more flexibility. You’ve also got to consider any tax losses which may be available. And, of course, the impact on your business of these moves to various Alert Levels.

The key thing, as always with Provisional Tax is if you think you’re going to struggle with this, get in front of Inland Revenue straight away and set up an arrangement plan.  At the moment, Inland Revenue is still being flexible and willing to cooperate in helping companies and businesses manage their cash flows and their tax payments. But sooner or later, their patience will wear thin. And at that point, you don’t want to be on the wrong side of the border with Inland Revenue, so to speak.

Well, 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. Please send me your feedback and tell your friends and clients.  Until next week. Ka kite āno.

A refresher on the tax deduction rules for working from home

18 Aug, 2020 | The Week in Tax

  • A refresher on the tax deduction rules for working from home;
  • Inland Revenue guidance on the meaning of ‘minor’ for subdivisions; and
  • Are New Zealand’s tax policy settings correct?

Transcript

The big news this week, obviously, is the reintroduction of the Level 3 lockdown restrictions in Auckland and Level 2 around the country in general. Under Level 3 the requirement is people must work from home where possible unless they’re an essential worker. So of course, this comes back to something we looked at in some detail several months ago, which is what is the position for employees claiming a deduction for home office expenditure?

Now, this turned out to be a matter of great interest to a lot of people, understandably. And Inland Revenue came to the party with the Determination EE002 Payments to employees for working from home costs during the Covid-19 pandemic.

Now, the Determination laid out the rules that apply where employers have either made or intend to make payments to employees to reimburse costs incurred by employees as a result of having to work from home during the pandemic.

And a reminder is that only the employer can claim a deduction for such expenditure, but they can reimburse employees for the costs and such payments would be exempt income for the employee. The Determination is not binding on employers who can work out their own allocations within the rules.

Now remember, the Determination also sets out the amount of allowances that Inland Revenue thought to be acceptable. Under the Determination an employer paying an allowance covering general expenditure to an employee working from home during the pandemic can treat up to $15 per week as exempt income.  This applies in a pro-rata basis:  $30 per fortnight or $65 per month. Anything above that threshold, the excess would be taxable income and subject to PAYE, unless the employer can show that the costs are higher.

Additional payments can be made for the cost of furniture and equipment. And these are to recognise the fact that an employee would have suffered a depreciation loss on furniture and equipment used in a home office. But because of the employee limitation rule they can’t claim a deduction.  Instead, there’s a safe harbour option where the employer can pay up to $400 dollars to the employee and it would be treated as exempt income. Alternatively, the employer can reimburse employees for the actual cost of furniture and equipment purchased for use in a home office.

This is all great stuff with generally simple rules. The one caveat is this Determination was initially a temporary response, and it applied to payments made for the period from 17th of March to 17th of September. Now, 17th of September isn’t that far off. So I would hope we’d soon see Inland Revenue issuing an extension to this Determination if the lockdown is extended.

Regardless of that, this Determination is a useful set of rules for future lockdowns, if any, to cover the position for working from home. But just note the Determination is temporary and expires in just over five weeks’ time.

“Minor” development work

Moving on, as is well known New Zealand does not have a general capital gains tax, but – and it’s a very big but – there are a number of transactions which would normally be treated as capital gains that are taxed. And there’s a whole series of transactions in particular which relate to the taxation of land.

One of these provisions is Section CB 12 of the Income Tax Act 2007.  Under that provision an amount a person receives from the disposal of land is taxable if the development or division work carried out as part of the sale is “not minor”.

This provision highlights one of the key problems of our current taxation of capital, which is that many of the provisions which would tax capital are very subjective in their approach.  For example, the general provision in section CB 6 taxes the sale of land where the land was acquired with a purpose or intent of sale.

During last year’s debate over taxing capital gains, I was always frustrated to hear when people said capital gains taxes were complicated. There are definitely complexities in it, but at least the imposition of a general capital gains tax clarifies the position. We’re not then relying on matters of subjectivity as to intent or in this particular section CB 12 what is the meaning of the word “minor”.

Now, in this context, Inland Revenue has just released an Interpretation Statement, IS 20/08, which sets out when development work or division work is “minor”. This Interpretation Statement is an update and replaces a previous Interpretation Guideline, IG0010 “Work of a minor nature” which was issued in February 2005.

The main conclusions in the 2020 Interpretation Statement are unchanged from that previous Interpretation Guideline. But some parts have been updated for clarity and, extremely importantly, also identified safe harbour figures for absolute cost and relative cost to assist with compliance.

And this is a big, big step forward because the previous Interpretation Guideline wasn’t very specific as to what would represent work of a minor nature.  Under that guideline, work of a minor nature was very relative and the cases, some of which went back to the 1970s before the massive inflation in property prices took off, involved what seem relatively small sums being deemed to be not of a minor nature.

So to just quickly recap the provision here. Section CB 12 deems an amount from the disposal of land to be income when the person carries on an undertaking or scheme (that doesn’t necessarily mean in the nature of a business), and this undertaking or scheme involves the development of the land or the division of the land into lots; the development of division work is carried on by the person or another person for them, this work is not minor, and the undertaking or scheme was begun within 10 years of the date on which the person acquired the land.

So the 10 year time limit is the often critical part of this provision.  People are probably well aware of the bright-line test, which now applies for five years from the date of acquisition. However, people are less aware that these set of rules in section CB 12 have a ten-year clock on them. And by the way, just a reminder that the bright-line test in section CB 6A only applies if any other taxing provision doesn’t apply. Remember it’s a fallback provision.

So as I said, these these rules are complex. They provide plenty of work for tax advisors let’s put it like that. And the key takeaway I want to bring out today is about the safe harbour figures that have been introduced into this Interpretation Statement.

Now, under the case law relating to this provision, and there’s plenty of it, there are four factors that have to be considered when you’re trying to assess whether work is minor. Firstly, what is the total cost of the work done in both absolute and relative terms? What are the natures of the professional services used, the extent of the physical work undertaken and the significance of the changes to the physical nature and character of the land and so forth.

So these are now the safe harbours. They would be considered in conjunction with the other three factors I mentioned: the nature of services used, the nature of the extent physical work required, and the significance of the changes to the physical character and nature of the land. But right now, the good thing about this Interpretation Statement is we have some form of baseline. And that actually would clear up quite a lot of these issues I encounter straight away. People know above those thresholds they’ve got to think very hard that they’re looking at a potential tax bill, and they have to consider the tax consequences.

So this is a good move by Inland Revenue. It clarifies the position and sorts out quite a bit of the wheat from the chaff on this matter. Also it gives a realistic number to people who think that subdivision work is pretty easy, just take a slice off the excess land at the back of a house and there you go. It’s not as simple as that. And the fact that Inland Revenue considers $50,000 of costs to be relatively low in absolute terms should make people thinking of subdivisions as simple, quick and easy projects pause for thought.

But no doubt, as always, people will charge ahead and then they’ll come to advisors like myself looking to see, well, “where we go with this and what are the tax consequences?” I’m sure other advisors will say the same – that it’s remarkable the number of times people go a long way down a project before they start thinking about the tax implications of it. By which time, more often than not, it’s too late.

What’s the rush?

Moving on, as you might expect I was very interested to read John Cantin of KPMG’s piece asking whether or not we have our tax settings right.

There was a lot of good stuff to consider in John’s article, which I thoroughly recommend.

In particular I think the two considerations around which he framed his discussion were very important.  Firstly, we have time. That is, we are likely to be cushioning the economic impact of Covid-19 for some time. And his second point was and Covid-19 relies on availability and how that might apply to tax policy. I thought those were two really salient points, which you have to keep in mind.

Clearly, we are going to be stuck with the consequences of this virus for quite some time. So rushing ahead into tax changes and other changes is not necessarily what we need to do at this stage. It’s perhaps a softly, softly approach as we work out where the changes can be made without damaging a recovery, and also what fits with the longer-term shape of the economy post the pandemic.

So his first conclusion is we don’t really need to charge in and make changes right away now. But you can expect that sooner or later the question of how we’re going to pay for all this debt the government has incurred will arise. And you can imagine how much more difficult those conversations are going to be in other countries which do not have the margin for lending that New Zealand currently does.

John’s commentary around tax policy was quite interesting as he noted tax policy has tended to be done on a “in time basis”. That is when a decision is made to proceed on topic that’s when the thinking about what is required is done.  His view here is that we should think about investing in tax policy so we can consider different options sooner. That does increase the cost of running the tax system but means we’re better able to respond.

That said, and it needs repeating, Inland Revenue has responded extremely quickly to the demands of this pandemic. It would be very churlish to be critical of its response.  But its responses have highlighted a thought I’ve had for some time – that we need to beef up the tax policy staffing and resources because we are going to have ongoing issues with this pandemic and we have to really think about them.

In addition and I raised it at the beginning of April, at some stage we are going to have to pay for this. So how is the tax system going to need to adapt to meet those demands? John’s article is really worthwhile with a lot of very interesting commentary in it. Well worth a read.

Reminder

Finally, talking about having to pay for the bill, just a quick reminder that the first instalment of Provisional tax for the year ended 31st March 2021 is due in two weeks time on 28th August. I imagine clients will be starting to get letters and reminders about this from their accountants.

Remember, one of the options we’ve talked about before is tax pooling. If you think you may be struggling to make those payments,get in front of your advisor and Inland Revenue straight away. Don’t leave it to the last minute because although Inland Revenue has a lot of discretion, one senses that sooner or later its patience may run out.

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

Fringe benefit tax

10 Aug, 2020 | The Week in Tax

  • Fringe benefit tax
  • How workable is the Greens Party’s wealth tax?
  • Is unemployment insurance on the cards?

Transcript

The new car sales results in July turned out to be something of a surprise, with 8,400 new passenger vehicles sold, which was more than 3½% higher than the corresponding July last year.  However, overall passenger new car sales are down 23% over the first seven months of July of this year, which makes July’s results seem very strong.

What caught my eye about these results was that SUVs represented 77% of the new cars sold in a month. That’s the highest ever. Sales of SUVs have been growing in popularity for a variety of reasons. And one particular subgroup which has had strong growth in sales is the twin cab ute.

This brings us back to the question of the fringe benefit treatment of twin cab utes. This is a topic which we’re going to hear plenty more about as Inland Revenue gets round to thinking ‘You know, maybe we might need to collect some tax to pay for all this support we’re providing to the economy’.

Fringe benefit tax (FBT) is calculated in one of two ways. You can either take 20% of the GST inclusive cost price and apply that to the vehicle, or you can take the motor vehicles tax value, which is the original cost less the total accumulated depreciation of the vehicle as at the start of the relevant FBT period. That latter option, the cost price, comes down to a minimum FBT value of $8,333.  You then tax the resulting value at the FBT rate, which generally speaking is 49%.

Now, just as an aside, the SUVs represent very good value for money, particularly twin cab utes. For $30,000 you can get a reasonably well spec’d vehicle. And this is one of the problems with electric vehicles – which represent an insignificant amount of new car sales – is they’re expensive. Consequently, because they’re expensive and FBT is driven off the vehicle value, it means that unless a company has made a very big commitment to the use of electric or hybrid motor vehicles and imposes some fairly stringent rules around their private use, hefty FBT bills will ensue. So, this is a major disincentive for their purchase.

Coming back to twin cab utes, the myth has been around for quite some time that if properly sign-painted, they represent work related vehicles and are therefore exempt from FBT. There’s plenty of anecdotal evidence I’ve discussed before about widespread non-compliance or non application with the rules around work related vehicles.

Inland Revenue hasn’t said anything publicly about this although we understand in the background an initiative was under consideration, before COVID-19 rather took its eye off the ball.

But a key point, which people must understand, that if a vehicle is available for private use other than travel from home to work or incidental travel, then it is not a work related vehicle, even if it is sign-painted.  It is therefore subject to FBT. This is the bit which I think is going to potentially trip up a lot of tradies and other users of twin cab utes. You have to make sure you are compliant with the FBT rules around private use, which are pretty stringent.

As I said, this is a matter that I have talked about beforehand. Inland Revenue’s tools for dealing with this are much stronger now because it actively searches social media. At one tax conference an Inland Revenue representative said that if it saw someone put a photo on Facebook about going fishing and showing the ute towing a boat, it would happily drop a quick message through the myIR system to the effect of ‘Hey, we see you’re enjoying your fishing. Did you make sure you complied with the FBT rules?’ That’s very Big Brotherish, but it’s what it can do.

And so, you can’t say you’ve not been warned. I expect that we will start to see a significant increase in Inland Revenue investigations of FBT for the work-related vehicle exemption and twin cab utes.

The Green Party wealth tax plan

Moving on now into the election season. And some of the parties have released their tax policies. Others will either not do so or have already made it clear, as National has, that they don’t propose tax cuts or tax increases.

But the Green Party came out and announced as part of their Poverty Action Plan, a proposed wealth tax of 1% on net worth above $1 million and 2% above $2 million dollars net worth. (This is per person, by the way.)

Writing this week in the Herald, former member of the Tax Working Group, Professor Craig Elliffe, took a look at the Greens policy.

He noted that when things settle down, there’s quite likely going to be a requirement for more taxes to pay down some of the government indebtedness. And noting that the Tax Working Group itself had suggested that the tax system needed to look at the taxation of wealth and capital, Professor Elliffe then looked into the Greens’ proposals and raised the question whether a wealth tax was the best form to deal with these issues. And his short answer was no.

The whole article is well worth reading. Professor Elliffe pointed out that wealth taxes have declined in use: 12 OECD countries had a wealth tax in 1990, but only three -Norway, Spain and Switzerland retain them now.  Add in Argentina and we’re talking about only four countries of any substantial size having a net wealth tax. You do however, find plenty of transfer taxes, such as inheritance tax gift duties.

And most of the OECD members also have a capital gains tax, although Professor Elliffe, for fairly obvious reasons, shied away from mentioning that.

Wealth taxes don’t raise much revenue was another of his arguments. And then there’s the whole question about tax integrity. What would happen in terms of tax planning, if attempts were made to introduce a wealth tax? I think that’s a very valid concern.

He also raised the question of jurisdictional flight. People may move out of New Zealand and move assets into and out of New Zealand and try and attempt to limit the wealth tax. All that is perfectly valid. But I can’t help but wonder whether the days of  tax havens sheltering vast amounts of wealth, trillions of dollars in fact, are actually numbered.

And that won’t happen overnight because obviously there will be very significant interests pushing back against that. But governments will probably look at the issue and conclude we cannot have trillions of dollars of assets stashed away where we can’t tax it at a time of such severe strain on our finances.

Now, Craig Elliffe finishes his article by noting

In summary, there is likely to be a strong need for tax revenue and standing back from the New Zealand tax system the under-taxation of capital is an issue for the variety of reasons set out in the Tax Working Group’s interim and final reports. Is a wealth tax the answer? I don’t believe so when there are other alternatives.

Coincidentally, the same week – the same day – the Financial Times published an article which basically said higher taxes are coming.

The article argues the paradigm that we’ve operated under for the last 40 years since 1980 of relatively low taxes and smaller government has been broken.

Since March, governments have rightly embraced enormous deficits to limit the collapse in economic activity, protect incomes and sustain employer-employee relationships. As a result, public debt burdens are rising everywhere to levels not seen for many decades, or even ever before. According to the OECD, many of its member governments could add debt worth 20 to 30 percentage points of gross domestic product this year and next.

This is going to force a simple choice on just about every government. They can tolerate the high debt burdens indefinitely, rather than try to bring them back down to moderate levels. Alternatively, they can permanently increase the state’s tax take to balance the books and start whittling down the debt. Either way, combining “responsible” policies on both debt and tax burdens is no longer an option…We may have to jettison both and learn to live with permanently higher public debt and permanently higher taxes.

The article goes on to cite the example of Japan which in 2000 had a tax to GDP ratio of 25.8% which was then well below the OECD average. This has now risen to 31.4%, which is still below the OECD average of about 34%.

And the article notes, “if Japan is a harbinger of the future for all rich economies, then expect public debt to stay high and taxes to move higher”. So that’s going to be a reassuring thought to be considering when we listen to what the politicians talk about tax going forward.

An unemployment insurance scheme coming?

And finally this week, something interesting popped up, which was also slightly related to a Green Party policy in relation to ACC. Grant Robertson, the Minister of Finance, raised the idea of a permanent unemployment insurance scheme.

Now, this is something that the ACT party has also advocated. As the Productivity Commission noted most OECD countries have some form of employment and unemployment insurance, which people can draw down for a set period of time if they lose their job. This tends to help people in employment on middle and higher incomes,

We don’t have unemployment insurance at the moment. Instead we have Jobseeker Support, which at $250 a week is substantially well below what the people who’ve just lost their jobs were earning. And that is why the Government introduced a special package for people who have become unemployed as a result of Covid-19 since February. Basically paying them close to double what’s available under Jobseeker Support.

Another option might be to significantly increase benefits, which is what the Welfare Expect Advisory Group recommended. But that, of course, means putting more strain on the government’s finances which leads us back to the question of whether higher taxes are needed.

And on that bombshell that’s it for this week. Thank you for listening. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you find your podcasts. Please send me your feedback and tell your friends and clients. Until next time, ka kite anō.

 

What’s the tax treatment of gold?

3 Aug, 2020 | The Week in Tax

  • What’s the tax treatment of gold?
  • What deductions are available for residential property investors in respect of expenditure to meet Healthy Homes standards
  • Big changes to Trust law coming – are you ready?
  • Tax avoidance and Eric Watson and Kidicorp

Transcript

Unsurprisingly, the price of gold has been on a rise throughout the year in the wake of the pandemic and its current price of USD 1,953 per ounce is close to its all-time high.  But what are the tax implications of holding gold?

As it transpires Inland Revenue looked at this matter in a Question We’ve Been Asked (QWBA) released in September 2017. Inland Revenue’s conclusion was that a disposal of gold would be taxable under Section CB 4 of the Income Tax Act 2007 if the gold was acquired for the dominant purpose of disposal.

Actually, that was a little bit of a walk back from the draft position that was put out by Inland Revenue, which was categoric that any disposal of gold would be taxable. In the wake of submissions on its draft position, Inland Revenue walked back the position. But in general, the position remains that if the gold was acquired for dominant purpose of disposal, it will be taxable.

Now, what led Inland Revenue to conclude initially that any disposal of gold bullion would be taxable was its nature. Bullion does not provide any annual returns and it doesn’t confer any other benefits. So therefore the Commissioner of Inland Revenue’s view is that the nature of the asset is a factor that strongly indicates that generally speaking, you’re acquiring gold for a dominant purpose of ultimately disposing of it. How else are you going to realise any value from it?

However, the QWBA does recognise that in some cases people might hold bullion not so much as a means of realising funds by disposal, but perhaps as a hedge against inflation or, as we are right now, in highly uncertain times.  Also, in any diversified investment portfolio perhaps there’s a role for something like bullion. So that’s why the final QWBA issued in September 2017 walked back the initial draft position.

Now, one of the problems with our lack of a formal capital gains tax regime is that section CB 4 is very subjective. What is dominant purpose? So, this is an area where people need to be very fact specific about why they’ve acquired the gold and keep records of their intentions. I would say that even though Inland Revenue have taken a view where dominant position is to be required to establish taxability, its default position will be that anyone who’s bought gold recently only did so as a means of making a quick gain.

It’s also worth noting that this bullion QWBA is actually quite an important factor in the cryptocurrency determinations that Inland Revenue subsequently released. https://www.ird.govt.nz/cryptocurrency/taxing-cryptocurrency/public-rulings-on-crypto-assets  And, of course, for real tax nerds anything looking at bullion brings us back to one of my favourite tax cases, the British case of Norman Wisdom versus Chamberlain, H.M. Inspector of Taxes from the 1960s. Wisdom, was a comic, but a very shrewd investor and made a substantial gain on holding silver bullion as a hedge against devaluation which was ultimately found to be taxable. So anyway, there’s opportunities obviously with gold bullion investing, but be prepared to be taxed on your gains.

No longer deductable

Moving on. Inland Revenue has recently issued another Question We’ve Been Asked, QB 20/01, which covers the issue of whether owners of existing residential rental properties can claim deductions for costs incurred to meet healthy home standards.

So, this is very important Inland Revenue guidance. What it does is going back to basics, costs of a revenue nature are generally deductible when they’re incurred.  That could include, for example, repairing items that would otherwise meet the healthy home standards if they were in a reasonable condition.  It also could include minor additions or alterations which do not change the character of the building, for example, meeting the draught stopping standards and those blocking unused chimneys or fireplaces, and making various ventilation systems compliant. And some, that’s the key word there, costs of meeting moisture and ingress and drainage standards around ground moisture barriers. Finally, replacing items on a like for like basis where they’ve already been treated as part of the building.

And this is the key part, which I think owners need to be very careful about – determining what is part of the building. And there are one or two surprises in here. Inland Revenue says that smoke alarms are part of the building now, even though often they’re physically separately attached and are generally of relatively low-cost.  Insulation very obviously. Ducted or multi-unit heat pumps, new or replacement openable windows, new exterior doors, extractor fans and drainage systems. These items Inland Revenue view as all part of the building, which means that they would not be deductible. So, I think people need to be very careful about that.

Then there are items which Inland Revenue considers would be separately depreciable. For example, that includes electric panel heaters, some single-split heat pumps, through window extractor fans, various door opens and stops, external door draught extruders and some other devices for blocking fireplaces.

The QWBA it sets out the reasoning for why it considers items are non-deductible/capital or capital and depreciable or maybe a flat-out repair. So it’s a very important guidance for residential property investors. It won’t be welcome everywhere.

And it does touch on an issue which is probably in some ways hindering getting homes up to standard. That is if the expenditure is deemed to be part of the building, it’s not depreciable. Remember depreciation was only reintroduced for commercial buildings, not residential buildings.

This is an issue that I think isn’t going to go away. There was always something a little odd about the decision to remove depreciation on buildings back in 2010. It looked at the time to me and still does as it very much a matter of ‘We’re putting these tax cuts through and we have to balance the books somewhere and therefore we’ll remove depreciation.’ There was also an argument, by the way, that maybe these buildings weren’t actually depreciating, and this is a pretty micro detailed economic argument, that perhaps the rate of depreciation was excessive. Anyway, the guidance is there. And people will need pay attention to it. I think the smoke alarms one is one which will raise a few eyebrows. But that’s the way it plays at the moment.

The tax implications of the new Trusts Act

In six months’ time, the Trusts Act 2019 comes into force.

If you have any involvement with a trust, you may well have been recently contacted by your lawyer about how the new Trusts Act is going to significantly change the dynamic about how trusts operate. In particular, what information trustees should be disclosing to beneficiaries. It’s now clearly set out that beneficiaries will be entitled to receive some of the financial information of the trust, as well as knowledge that they are a beneficiary. That is something that has been a matter of debate and various court cases for the past 20 years or more. So, it’s very important to finally get some statutory guidance and clear rules on the matter.

Anyway, if you’re involved with a trust you should either have been contacted or shortly will be contacted by your lawyer to discuss these changes. “Do we actually need this trust anymore?” is a question I’m going through with clients and obviously the tax consequences of winding it up. And if the purposes for holding assets in trust are still valid, what needs to change?

There’s a lot of work going to be needed to be done on this. And probably in many cases a lot of trusts will be quietly wound up and the assets distributed because they really don’t serve any purpose any longer.

Potpourri

Finally, because I wasn’t able to record last week’s episode, here’s a couple of items from the last few weeks I thought I’d mention in passing.

There will be no tears shed at the news that Eric Watson’s Cullen group has abandoned its appeal against Inland Revenue assessment for $112 million of non-resident withholding tax and interest on the basis the arrangement under which the Watson structured his exit from New Zealand to be tax avoidance.

The only thing that we should perhaps be concerned about is the timeline involved. The original transaction happened in 2003. The assessment, which led to the just abandoned case, was made in 2010 when Inland Revenue assessed Cullen Group Ltd was due to pay non-resident withholding tax at 15% instead of the 2% Approved Issuer Levy.  After taking into consideration the Approved Issuer Levy paid the resulting liability was $51.5 million. The actual amount now due is $112 million. And the sixty-odd million dollars difference represents use of money interest charged on the original debt.

Now I’ve not heard many good words about Eric Watson. But I think we should be concerned that this case took so long to work its way through the system when interest is running all the time. So that basically weights everything in favour of Inland Revenue. And I think we should be asking questions to whether the processes are fair enough, whether or not you like what he did. That is a matter we should be concerned about because as the old saying goes ‘Justice delayed is justice denied”.

Another interesting case which also involves tax planning and touches on a topic which attracted a lot of commentary for the Tax Working Group, was the issue of the charitable exemption from income tax for charities with trading income.

And this point has come up in relation to Kidicorp. The redoubtable Matt Nippert of the New Zealand Herald has picked up on the fact that following a quite complex restructure in 2015, Kidicorp’s childcare centres are now owned by a charity Best Start Educare.

What happened was Kidicorp sold its whole business to a charitable foundation Best Start Educare for $332 million.  The purchase was settled by way of a no-interest related party loan which is being repaid at about $20 million a year.  This pretty much uses up most of the childcare operation’s surplus cashflow from its untaxed earnings.

This has raised a few eyebrows. What caught my eye about this story is that two people who were involved with the Tax Working Group, have come out and said that this is one of the matters where the group was concerned at what was going on. The Tax Working Group received a lot of submissions around the issue of the charitable exemption.  Professor Craig Elliffe, who was on the Tax Working Group, commented about the Kidicorp transaction

“This is the very thing we were looking at and we were worried about. The bigger policy question is whether this is an appropriate use of charitable structures.”

Furthermore, Andrea Black, who was the independent tax adviser to the Tax Working Group, also commented that what was concerning about Best Start Educare was the small amount of donations it’s making and the fact that the business was sold rather than gifted with a loan back and therefore otherwise taxable profit is being used to pay back some of the loan. She concluded “It’s hard to see the benefit to the New Zealand community”.

We might see more on this although Inland Revenue might have already run its eyes over this and given it the tick. But this was the sort of structure the Tax Working Group was concerned about. There was a lot of public interest in the matter and a lot of the criticism involved Sanitarium and what the public saw as sometimes unfair benefits between it and its competitors who had to pay tax. The Tax Working Group took the view that if the profits in the charity were being distributed, then that was fine. However, if they weren’t or something odd was happening, then that was an issue.

Well, that’s it for this week. Thank you for listening. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you find your podcasts. Please send me your feedback and tell your friends and clients. Until next time, ka kite anō.