Proposed changes to the late payment penalty regime for Child Support.

  • Proposed changes to the late payment penalty regime for Child Support.
  • Millionaires want tax increases but the EU’s bite of Apple goes sour.
  • And last days to organise a tax pooling payment for the 2019 tax year

Transcript

Longtime readers, listeners of this podcast, will know that I am a long-standing critic of the late payment penalty regime which currently applies across various taxes. I see it as inefficient and not actually achieving very much.

But the worst late payment penalty regime is that which applies to Child Support payments, which is rather odd because the Government in this particular case is acting as an intermediary.

At present, if you pay Child Support late, there’s an initial penalty of 2% of the late paid amount immediately and then a further 8% of the late paid amount still outstanding eight days after the due date. So that’s a 10% straight up penalty. By contrast, if you are late paying tax, the initial late payment penalty is 5% if you haven’t paid it within eight days.

In addition to this initial penalty, incremental penalties are then applied.  These are 2% of the outstanding amount, including penalties, from one month after the due date for the next twelve months, and then 1% of the outstanding amount, again including penalties, each month thereafter from 13 months after the due date.

Now, the issue of Child Support is enormously emotional and attracts quite a great deal of heat whenever I raise the topic as no one seems entirely happy with how the regime operates.  As taxpayers, we ought to be very interested in this, even when not directly affected, because the late payment penalty regime for Child Support is hopelessly inefficient and in fact ineffective.

For example, as of January 2019, the Child Support debt was $2.2 billion dollars. Now of that, only $558 million was unpaid Child Support.  The other $1.6 billion dollars being penalties. During the year ended 31 March 2019, Inland Revenue wrote off $244 million of Child Support penalties. That was actually down from $594 million written off in the previous year.  Currently, Inland Revenue writes down 97% of Child Support penalty debt at initial recognition because it doesn’t expect to collect the debt. So, a very good question is why has Inland Revenue persisted with a regime that doesn’t work?  There’s never been a really satisfactory answer to that.

But at least this week the Government announced some changes to the late payment penalty regime. The proposal is that from 1st April 2021, incremental penalties – that is the subsequent 2 % for the first month for the first 12 months and then 1 % per month thereafter – will be abolished. This measure has been brought in as part of a supplementary order paper to an existing tax bill. It’s a welcome move.

But as you can tell from the numbers I’ve just cited, will it actually really change anything? The late payment penalty regime doesn’t seem to work to encouraging people to pay on time. And there’s still this anomaly that somehow Inland Revenue acting as an agency is entitled to charge twice the amount for late payment penalties, than it charges for people paying taxes late. That conceptually doesn’t make much sense to me.

As I said, there’s a lot of emotion around the Child Support regime so there’s never going to be an entirely satisfactory answer to the issue. But it is actually good to see some movement on a sore point.

Taxing the rich

Sir Stephen Tindall was one of 83 millionaires who signed a letter to governments around the world which concluded,

So please. Tax us. Tax us.  Tax us. It is the right choice. It is the only choice. Humanity is more important than our money.

This is part of a large and growing debate around the role of taxation and how much tax governments here and around the world are going to need over coming years.

The Greens have rolled out a proposal for higher income tax rates and a wealth tax. Speaking to Wallace Chapman and Radio New Zealand panel on Tuesday, I raised the issue of perhaps a capital gains tax or a wealth tax being on offer.

And a land tax was one of the other proposals that former Act MP Heather Roy suggested was an option. It’s one I think is certainly worth looking at, although it comes with quite a number of hooks in it, like any tax does, leaving aside the whole politics of the matter.

But interestingly, this whole question of tax reform is going to be very difficult. Apart from the politics of it as I noted, but also because for some governments, it’s going to mean significant changes to their tax system.

EU judges this week ruled that, no, that ruling was wrong and in fact, Ireland had not acted inappropriately. The European Commission had not succeeded in “showing to the requisite legal standard” that Apple had received an illegal economic advantage in Ireland.

Now Ireland, even though it was going to receive €14.3 billion, actually backed Apple in this case because they have a very low tax regime for corporates. The Irish corporate tax rate is 12.5% and Ireland wanted to keep it that way as a means of driving economic growth, very important in this pandemic world.

And so the situation shows that although on one side you have people saying, ‘You know, we’re going to need tax and we’re happy to pay more tax’, governments might not necessarily be keen to follow that lead.  And by the by, it’s often said here that we want to tax the multinationals more, but this case also showed how difficult that would be.

One of the counter-arguments that was advanced by Apple, which appears to have been successful, is that the Irish subsidiaries of Apple are not involved in creating the intellectual property behind Apple’s products, because those are all developed in California.  Therefore, the economic rationale for taxing the Irish subsidiaries more heavily didn’t exist. And that same argument would apply very much more down here.

So, there’s a lot going on in the international tax space and the OECD will continue to try and get a global consensus on the matter. But the American Treasury Secretary has torpedoed that move. And the American tech giants are obviously quite happy that nothing happens because they would be the main targets of any major changes.

Last days

And finally, a reminder that if you want to organise a tax pooling payment in relation to your tax for the 2019 income year, you have until next Tuesday 21st July to put that in place.

As part of its response to the Covid-19 pandemic, Inland Revenue extended the deadline for using tax pooling payments, effectively giving a further twelve months to pay the terminal tax for the March 2019 year.

And if you listen to the excellent podcasts I’ve had with Josh Taylor of Tax Traders and Chris Cunniffe of Tax Management New Zealand, on the use of tax pooling, you’ll know what a useful tool it is.

In order to qualify you have to have a tax pooling contract in place with a tax pooling intermediary such as Tax Management New Zealand or Tax Traders by 21st July. You must also show that in at least one month between January and July this year your business experienced or is expected to experience a significant decline (that is 30 % or more) in revenue as a result of COVID-19.

So, you’ve got a few days left to make use of tax pooling and set up a contract and payment schedule to pay your 2019 tax over time and by the extended terminal tax due date next April.

Well, that’s it for this week. I’m Terry Baucher, and you can find this podcast on www.baucher.tax or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. And until next time, thanks for listening. Ka kite anō.


T

The Government extends the Small Business Cashflow Loan Scheme;

  • The Government extends the Small Business Cashflow Loan Scheme
  • ACC levies are frozen until 2022; and
  • Inland Revenue explains the taxation of overseas investment properties.

Transcript

At the start of the week, the Government announced that it was extending the Small Business Cashflow Scheme until the end of the year. Under the scheme, small businesses can apply for a loan of up to $100,000 which is interest free if repaid within the first year and then subject to interest at 3% thereafter.

The scheme is targeted at small businesses and according to statistics, around 80% of the firms that have applied for it have between one and five employees with just over 90% of all applicants having 10 or fewer staff. In total, as of July 3rd , 90,485 businesses had applied for just over $1.51 billion of loans since 12th  May. The average value of those loans is about $16,700.

Extending the loan scheme is a very good move, in my opinion. It fills a hole that the Business Finance Guarantee Scheme seems unable to reach at this point. Small businesses need cash flow and have struggled with getting funding from banks, it appears. So,the Government enabling applications to continue to be made right up until 31st December is a good move.

As I’ve said previously, I think a permanent iteration of this scheme should be under consideration once we get through the pandemic. We’ll have plenty of data to examine as to who took up the loan and were able to comply with the repayment terms, and those that in fact shouldn’t have because the business was never going to pull through. We’ll then be able to factor in this data in designing a permanent successor.

The ACC levy freeze

Moving on, the Government has now announced it is going to freeze ACC levies at the current levels until 2022.

Normally these would be up for review in 2021. But instead, the Government has decided to defer any review of the levies until 2022. So that means that the levies for the employers and earners will stay the same until 31st March 2022, and motor vehicle levies will remain as they are until 30th June 2022.

For employees that means the ACC earners levy that they will be paying stays at $1.39 (including GST) per hundred dollars of liable earnings. For employers, the average levy rate is $0.67 (excluding GST) per hundred dollars of liable earning, up to the maximum threshold which is currently $130,911 per year.

And in the motor vehicle account, the average levy per vehicle will be frozen at $113.94 (excluding GST). So, all of that will come as a welcome relief for car owners, employees and employers alike.

Tax on foreign investment properties

Meanwhile, Inland Revenue has issued an Interpretation Statement on the tax issues arising from the ownership of foreign residential investment property.

And that’s been accompanied by an Interpretation Statement on how the financial arrangements rules would apply to foreign currency loans used to purchase foreign residential rental property.  It’s very good to finally see some official guidance in a single comprehensible document in relation to these two topics, particularly in the case of the application of the financial arrangements’ rules.

What the Interpretation Statement relating to ownership of foreign residential investment property does is set out all the basic rules as to what would be expected. It reminds every New Zealand tax resident that you are required to return income on a global basis.  This means even if you are returning income in relation to an investment property in the jurisdiction in which it’s situated, you still have to report it for New Zealand tax purposes, although you will be given a tax credit for any overseas tax credits paid in relation to that property.

It also has a reminder that the way New Zealand calculates rental investment income may not be the same as in the other jurisdiction. So you have to make sure that when calculating income for New Zealand tax purposes, you apply New Zealand rules. In other words, it’s not going to be sufficient to simply take what was been reported for, say, Australian or American purposes and convert that into New Zealand dollars and include that in your tax return. There may be one or two subtle distinctions in there, which you need to account for.

The other point it makes is one which is not terribly welcome, and that is if a New Zealand tax resident has an overseas investment property which has a mortgage in an overseas currency against it, then they are responsible for deducting non-resident withholding tax on the interest paid to the overseas lender.

Now, that is the law. But whether the law should actually be applied that way is a moot point, because my view is that when non-resident withholding tax rules were introduced way back in the 1980s, this was not the type of transaction they were meant to cover. And the result is there’s a fair amount of additional compliance for taxpayers in in managing and reporting their withholding tax obligations.

And it’s a question if Inland Revenue wants these rules to be applied, I think it should be looking at the limits for reporting and how frequently people should report.  Asking people to report monthly is a bit of a recipe for slip ups.

There is the alternative of using the Approved Issuer Levy, which is a flat 2% on interest payments. But again, the reporting limits around that should be considered. And you’re actually talking about relatively small amounts so again, you come back to the point, is the compliance burden imposed actually justifiable?  (These rules apply even if the interest is paid out of an offshore bank account.)

The second Interpretation Statement relates to the application of the financial arrangements’ rules to foreign currency loans, which may be used to purchase foreign residential rental property. This is a horrendously complicated issue which I’ve spoken about before. So it’s actually good to get the official word on the matter.

To give you an idea of just how complicated this topic is, the Interpretation Statement relating to financial arrangements runs to 19 pages. It includes a detailed example of how the rules apply to calculate the exchange rate movement in a year. The example also covers what happens when an overseas currency mortgage matures, and we have a ‘base price adjustment’ or wash up calculation. This example runs to five pages.

These rules are essentially incomprehensible to a layperson. They’re not even well-known among tax agents and advisers. So although it is fantastic to get very clear guidance on how the rules would apply, together with a really clear example of the exact operation, the bigger issue is whether it is reasonable to impose such complicated rules on what is for a layperson a very simple transaction as they see it.

The financial arrangements rules have been around since the mid-1980s. They were never designed to deal with the lay person but were really targeted at companies and financial institutions holding significant amounts of financial instruments such as bonds, overseas currency and swap-arrangements. Applying the rules to a lay person is technically correct, but the practicalities have yet to be worked out.

Of course, one of the effects of the financial arrangements rules is this peculiar position that the exchange gain on the repayment of the mortgage will be taxable. But for New Zealand tax purposes, the sale of the property to which it relates may not be taxable because for example it’s outside the bright line test, or it’s deemed to be an investment property and therefore held on capital account.

The thing to keep in mind is in many of the jurisdictions that these investment properties are situated, such as America, Australia and the United Kingdom there is a capital gains tax and it applies to non-residents. That’s a point that I think is often overlooked by investors looking to hold properties in those countries.

One other point comes up here which isn’t exactly clear, and that is if you have an exchange rate movement in a year, which results in a loss that is deductible for the purposes of the rental income calculation, assuming that you have rental income. However, the loss is not separately deductible, although the financial arrangements regime is a separate regime within the Income Tax Act, the Interpretation Statement does seem to imply that assuming the loss meets the deductibility criteria it is also subject to the loss ring-fencing rules. So that’s something to keep in mind and I’ll try and clarify that point with Inland Revenue.

Well, that’s it for this week. I’m Terry Baucher, and you can find this podcast on www.baucher.tax or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. And until next time, thanks for listening. Ka kite anō.

This week I spoke with Josh Taylor, director and co-founder of tax pooling company Tax Traders.

Josh co-founded Tax Traders with Nicola Taylor eight years ago aiming to bring the benefits of tax pooling to all taxpayers. It’s been hugely successful since then growing year on year at around 40%.  Currently Tax Traders is working with over 400 accountancy firms around the country including the preferred provider for Deloitte and the tax pooling business partner of Chartered Accountants Australia and New Zealand.

Transcript

Morena Josh, welcome to the podcast, thanks for joining us.

Josh Taylor
Thanks, Terry. Great to be here.

Terry Baucher
Our lives have been dominated by Covid-19 over the past few months.  When did you realise that this was going to be much bigger than anyone was thinking at the time?

Josh Taylor
It’s a good question. I don’t know if it’s bigger than anyone was expecting. I think it got really big, really fast about the middle of March. That’s when it really started to bite for us after the OCR drop on 16th March to 0.25%

The financial markets reacted almost instantly. And that’s when it gets interesting for us as we sit between a lot of fund managers. They are a source of funding for people who can’t pay their tax on time or who are looking for additional time to pay. And what we saw as the money supply and that side of the market really started to shrink, people got very nervous. “What don’t we know? What does the government know that we don’t know?” Because an OCR drop of that magnitude, we haven’t seen that before. Where are things going?

So that’s when it probably started for us. And the intensity stayed pretty high for two to three months. I think we’re starting to see that ease off now.

TB
I mean, so you’re working fairly long hours then.

Josh Taylor
Yep. Through the lockdown from 16th March it was regular 80-90 hours a week. What it did was it threw up a whole lot more work for us. And it’s interesting looking through the emails the other day and a couple days after the OCR announcement, we had Inland Revenue call the various tax pooling companies and say, “Look, we want to get you on a phone call as an industry just to talk about what what’s happening, where we see things going. We’re mindful that some people may struggle to make payments that are due on 31st March.  We want to be mindful of that and see what we can do to help.”

This was four days later over a weekend, by which time we’d already drafted two submissions to Inland Revenue about how they could respond and what options they might be able to take through this Covid period. So, we were already churning out material for them before there was any legislation on the table or any announcement.

We were contacting politicians, multiple points within Inland Revenue and engaging with other government departments like MBIE.  So, there’s been a huge additional workload and a lot of that’s been driven around wanting to get greater certainty for our clients on the options they have.

We’ve had a situation where the money markets didn’t quite stop functioning, but it really did slow down. People are thinking “How do we manage our way through this?  On paper we know that we’ve still got good businesses, but we need to keep the cash going so that we can get through this year and out the other side.”

And so at least from a tax perspective, which is where we operate, we’ve been doing what we can. There’s been a very high workload to get that which we’ve managed now but it has been a bit of a trying time.

TB
Bit of an understatement there. I’m interested in what you’re saying about Inland Revenue and that during this time you have worked very closely alongside them to an extent you wouldn’t normally do.  It’s also interesting to hear that they were on the phone to you as an industry saying, “Hey, we can see something’s happening here how are we going to react to that?” How was it working with Inland Revenue? Because I imagine there were frequent contacts at various levels throughout the period.

Josh Taylor
You know, look, it’s been interesting with a couple of caveats. An organisation the size of Inland Revenue certainly isn’t going to speak with one voice and you’re going to have different pockets within it. So dealing with it did pose some challenges.

The front-line people we’ve been engaging with from the tax pooling side, were very responsive, very helpful, very open to ideas. We had people from Inland Revenue contacting us saying “We’d like to hear your thoughts on what we can do. We’d like to get all the ideas into the mix so we can consider what can happen.”

So, I think a lot of what we saw with the front-line staff was the best of Inland Revenue.  In talking with accountants as we do every day, their feedback was the same.  Inland Revenue got a lot of respect in terms of their willingness to remit use of money interest and provide quite favourable terms to taxpayers.

At the same time we saw some kind of challenging behaviours where very early on, Inland Revenue signaled to us there would be the ability for the deadlines to pay 2019 tax to be extended. They were aware that people had terminal tax to pay for 2019, but the legislation that was on the table wasn’t going to be sufficient to enable taxpayers who had missed provisional payments for the 2019 year to tidy that up and get a reduction in the use of money interest costs. The use of money remission legislation only applied to payments made after the 14th of February this year, so it wasn’t going to help provisional payments for the 2019 year that were otherwise not paid.

So Inland Revenue said, “Look, we think the best way for us to resolve that is by expanding the remit of the tax pools for this period”. And we had that signal to us that’s where they were heading towards the end of March, early April. But they caveated it by saying, look, we need enabling legislation to make it happen.

Now, the legislation to make that happen was passed at the end of April, but it then needed an Order in Council. It took them until the end of the start of the second week of June to get that Order in Council in place. And without that Order in Council, we were within a week of running out of time for the 2019 year.

So, although the change was signalled pretty early,  to actually get it wrapped up and tidied up, took them right to the eleventh hour, which probably created a bit more stress and pressure than was needed. I mean, we got there in the end. So that’s a big tick. But could we have got there a bit easier? I would like to think so and I think there are people within Inland Revenue who would like to think the same as well. Some things just take a bit longer. But there are probably some lessons learned there.

TB
Absolutely. Now there was a story that the tax pooling team within Inland Revenue is relatively small. What size is it now? It must have been extended to cope with the strain. It could not be doing what they did with the resources they had if the story I heard that were only two or three in that team was correct.

Josh Taylor
Yeah, so there’s a couple of teams that manage tax pooling. There’s a core team of two or three people in Upper Hutt which does the processing. And historically, it’s been that size but it’s important, I guess, to highlight the improvements from the START system that we’ve seen rolled out aggressively over the last couple of years. It’s automated a number of processes that under the old computer system were a manual process.

So in past times we’ve seen transfer backlogs because of the sheer volume of work and it’s taken maybe three to five weeks to process transactions.Now those are happening overnight, in fact, instantaneously, really as soon as we schedule a transfer, no matter how many thousands of transfers, it all happens instantly.

So Inland Revenue has really scaled up its capacity. And so, for that for that 95, 98 percent of transactions that are straight down the middle, they go through very quickly now. So, it is efficient from Inland Revenue’s perspective.

There’s a support team at Manukau which handles the exception queries. I don’t know how many people are in that team, maybe two or three people seem to be in there. Things can get a bit bogged down there depending on the complexity of the transaction. So, you could see another week or two to work things through. But Inland Revenue have been investing in their capacity in this space, which is a good news story.

TB
That’s great to hear. Now, you touched on 2019 and the data suggests there’s still a lot of people who have outstanding obligations for the 2019 tax year. So how is Inland Revenue providing assistance for those people to pay through tax pooling? What’s the story there after these eleventh-hour changes finally came through?

Josh Taylor
There’s actually some commentary on Inland Revenue’s website released on 14th April with about eight different case studies around the 2019 year.

But as I mentioned before, because of the way the legislation’s been drafted it applies for payments that are due after 14th February 2020. Now, Inland Revenue has the discretion to remit use of money interest. What that means is that if you’ve got a payment that was actually due on the 7th April, Inland Revenue can remit that use of money interest if they think you meet the criteria. So that’s classically that’s the case for a taxpayer whose provisional tax is under $60,000 and has paid their uplift on time.

Inland Revenue have been very clear though, that this exemption won’t cover a taxpayer who hasn’t paid their provisional tax uplift on time so is incurring use of money interest from the first provisional tax payment date   which was before 14th February.  It also can’t help the situation where you’re a taxpayer whose residual income tax is over $60,000 and all tax is due by that third provisional tax date.  This is either 7th May 2019 (31st March balance dates) or 28th July 2019 (30th June balance dates) and again, because those two dates are before 14th February 2020, such taxpayers are not eligible for the use of money remission.

And again, the challenge here is that for all of those taxpayers, 2019 was a profitable year unaffected by Covid. But now they’re trying to pay it in a period that’s affected by Covid. And IRD, acknowledge that they are aware of the realities of business. You know, you’re paying for last year’s tax with this year’s income which is getting squeezed.

Inland Revenue needed to do something. And so, they’ve looked at it and decided the easiest way to manage is to expand the scope of our tax pooling rules and provide a different window of time for 2019 payments.  So, you’ve now got until 21st July to apply to a tax pooling company to square up any outstanding 2019 tax.

All that information’s on our website if you’re in that position.

The numbers we’re seeing suggest there is quite a substantial portion of 2019 tax outstanding. But what IRD has done here around the tax pools gives another nine months or so to pay. That’s going to be your best bet to tidy it up without incurring other interest and penalty costs.

TB
And this payment would involve your tax pooling rates of interest which are substantially lower than Inland Revenue’s 7% rate.

Josh Taylor
Absolutely, depending on how we structure it and there’s a couple of ways we can do that.  You’re looking at interest rates probably somewhere between 3 to 4 1/2%. And no [late payment] penalties added in. Again, the contrast to these rates being that if you don’t use a tax pool, you can be liable for that 7% use of money percent interest all the way back to 7th May 2019 which is obviously going to cost more.

TB
That leads nicely on to my next question.  I often tell clients about tax pooling and one of its big advantages is how it can assist with short term cash flow issues, just like we’re talking about. So how are clients using tax pooling? What happened once the impact of the pandemic became very clear? What do people do in that situation?

Josh Taylor
So we’ve seen three pretty clear examples of how they’ve used it specifically in relation to the pandemic. We’ve got a couple of examples that might be helpful and give that some context.

The first one was a large client in the forestry sector. And come the middle of March, as the financial markets started to get very constrained forestry was one of the areas, along with tourism, that felt the impact of Covid very quickly. And so for this client they had had a very profitable 2020 financial year but then coming into April forestry has stopped working.  But their mills and everything else they’ve still got going, incurring substantial overheads on a weekly basis running into hundreds of thousands of dollars.  And it wasn’t clear what their traditional bank funding could do for the sort of cash crunch that they and everyone else was experiencing.

What they were able to do is say, “Look, we’ve got about $8 million of tax that we’ve paid which is sitting in a tax pool. With the benefit of hindsight, we wouldn’t actually have paid that tax because we kind of need the money in our business now and IRD doesn’t require us to file our return until March 2021. So we’ve got a window of time where we can actually pull that money out of the tax pool and use it in our business just to keep working capital going. And we’ll repay it back into the tax pool before we file our 2020 tax return in March 2021.”

So, they contacted us. We were able to help them using what we call our Deposit Plus facility. You’ve made a deposit, but you need the money back. We were able to fund it back to them at a cost of around 3%. And they’ll repay that once they’re through this period before they file their return.  So it’s a little bit like the loss carry back the IRD introduced, except in this case, they didn’t even need to have a loss to get the money back into their business.

The next example was a commercial landlord with four shopping centres. They had a 7th May provisional tax payment. But through that period, we were locked down so the cash flow just stopped as the tenants aren’t paying them. So if the tenants aren’t paying, it’s very hard for them to pay their bills. So again, they were saying, “Look, we know we’re going to be taxable for the March 2020 year, but we don’t actually have the cash flow to make that 7th May tax payment.” And because they’ve been profitable, they didn’t meet the definition for the use of money interest remission as they were outside that criteria.

Again they contacted us and said: “Give us five months, we think by October 2020, things will be back up and running so we can pay it off then”. So, we funded this debt payment for them again at an interest rate of under 3%. The nice thing about finance, though, is that it does mean that if they get to October and things haven’t quite come right, we can easily extend for another couple of months. So, they do still have some extra flexibility there.

In the final example we saw was with self-employed and smaller tax payers who maybe only have $10,000 of provisional tax to pay. We saw a lot of them financing their 7th May provisional tax payments as well. This gave them certainty, it allowed them to say “We’ve dealt with the tax. We’ve bought ourselves some time to get through this cash flow crunch that we went through during lockdown once we’re through that period.” And you know, for some people it’s three, or six months and for  others it’s a bit longer. But it helps them get through this period and then they can deal with the tax once the cash flow starts to move again. So these are the sort of examples of what we’re seeing going on.

TB
Fantastic. That really demonstrates the flexibility of tax pooling.  Now you touched on the tax loss carry back scheme which has been brought in.

For some of us it didn’t seem immediately clear how it might help clients with 31 March balance dates.  In fact, tax pooling could probably come through and help out in those cases. Would you like to clarify how that could work out?

Josh Taylor
Sure. There’s a couple of areas where the overlay of tax pooling, really helps make the loss carryback regime work better. The first is obviously if you’re not already paying your tax into a tax pool, it’s a great idea to start doing that because everything about loss carry back regime is going to become easier if you’ve got your money in a tax pool as it provides you more flexibility.

The reason that flexibility is important is because if you’re paying tax directly to Inland Revenue and you estimate a loss under the loss carryback, it actually takes you out of the concessionary uplift regime. You are then into the estimation regime and you are going to be liable for full use of money interest across all your provisional tax payment dates.

Now, if you’ve made those payments into a tax pool, all that you’re doing when claiming the loss carryback is pulling your money back out of a tax pool. You don’t need to advise Inland Revenue to do that, so you can actually preserve your uplift status and still have access to your credits without losing the ability to remain in the uplift regime. So that’s the first important point.

The second one is that through tax pooling, you’re able to reinstate any overclaimed tax credits at a much lower cost. So, we would be able to talk about interest rates around 3 or 4% versus Inland Revenue’s 7% interest rate. When you’re estimating the loss to carry back, there’s obviously a little bit of guesswork. It’s not going to be an exact science. You could easily end up claiming too much and then needing to repay it. So obviously, repaying at a lower cost is better.

And finally, even if you’re not in a loss or you don’t nicely make the definition of a tax loss, you can still actually pull your money out regardless, like that forestry client I mentioned.  Looping back to your start point, Terry, because of the way these balance dates fall like you said, for most of the 31 March 2020 balance date taxpayers Covid was a significant hit for maybe a week or two of that year. So I wouldn’t expect too many people to be in a loss for the March 2020 year or if in the worst case of it would be a very small loss.

Now, the temporary loss carry back lets you offset a loss in one period against the profit in the prior period. If you’ve got a small loss in the March 2020, you can claim that against 2019. But a small loss isn’t really helpful for you right now because a small loss is only going to mean a small amount of money back in your business. What you need is a big amount of money back in your business right now. So that’s not going to be that useful.

If you had a profitable 2020 and then you’ve been looking at 2021 in estimating the loss, it’s hard to know exactly what 2021 is going to look like. Now we’re talking to a lot of people. One retail client did three months’ worth of business in the last month.  So, you know there’s some interesting dynamics in the market at the moment. Could be a loss, might not be a loss. You know, again, if you end up claiming too much, you’re then going to have to pay it back anyway. So although it’s a good idea having the loss carry back, I just don’t think it’s going to be a silver bullet.

TB
Yeah, that’s my thoughts on it. I think it’s something we do need in the system, but right now it’s a bit of a head scratcher as to exactly how it will work.

So, what are you seeing now? I mean, there the 28th June provisional tax payments have just gone through.  What are they like compared to previous years?

Josh Taylor
I was just looking at those numbers. And what we’re seeing are two stories going on. If we look at some of our clients, the payments they’re making this year are almost unchanged from what they were making twelve months ago. So that’s their part of the economy sailing through relatively untouched by Covid.

Then we’ve got the other half of it who are taxpayers who are very much impacted. And the ones we’ve seen, particularly around the construction sector where they were paying provisional tax last year, they’re not paying tax this year.

So, there are these two stories going on. And I think what we don’t know yet is just what the overall weighting of the economy is. Are we seeing half the economy going the same as it always has, and half the economy is very much impacted?  Or is 70% of the economy is going along fine and is it 30% that’s impacted?

From what we can see, we don’t have enough data to be able to make a judgement call on that. But the pleasing thing to see is there is a reasonable portion of the economy which does seem to be continuing on relatively unaffected by Covid. So hopefully that can help provide a carry through momentum.

TB
Let’s hope so. Well, I think we’ll leave it there. Thank you very much, Josh, for coming on. So that’s it for this week. Thank you again to my guest Josh Taylor of tax pooling company Tax Traders.

I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. Until next time have a great week. Ka kite āno.

A tax law change could be of major benefit to Kiwis with Australian superannuation funds

  • A tax law change could be of major benefit to Kiwis with Australian superannuation funds
  • Rethinking the taxation of redundancy
  • Google’s 2019 results highlight the difficulties of taxing the digital giants

Transcript

This week, a seemingly arcane tax change could be of major benefit to Kiwis who have Australian superannuation funds, rethinking the taxation of redundancy and Google’s 2019 results highlight the difficulties of taxing the digital giants.

Right now, New Zealand citizens or New Zealand permanent residents are the only people who can get into the country. And as the news headlines over the past couple of weeks have shown, testing at the border has become incredibly important in ensuring that COVID-19 does not gain another foothold in the country.

What you are also seeing is a significant rise in the number of Kiwis wanting to return to New Zealand. There are approximately one million Kiwis around the world, including nearly 600,000 in Australia. And the way the pandemic has been handled so far has made many expatriate Kiwis look at returning to New Zealand.

And a significant number of those may come from Australia. Now Australia has compulsory superannuation under which you and your employer are required to make contributions to a superannuation scheme.  Unlike KiwiSaver, where you can only ever have one KiwiSaver scheme, it’s quite possible to have a number of Australian superannuation schemes. And what sometimes happens is that people lose contact with their superannuation schemes or vice versa.

Under Australian law, after a while unclaimed superannuation money is required to be repaid to the Australian Tax Office. This could affect Kiwis who have returned to New Zealand but have lost their records relating to an Australian superannuation scheme. After a while the Australian scheme must pay the funds in that scheme to the Australian Tax Office as unclaimed superannuation money.

All this sounds a little arcane, but there are absolutely billions and billions of dollars invested in these schemes (A$2.7 trillion as of the end of the March 2020 quarter), and the amount of unclaimed superannuation money can be quite significant.

Since 2013, New Zealand and Australia have had a Trans-Tasman Savings Portability Agreement in place to mainly encourage or rather remove barriers to workers freely moving across the Tasman.

So the potentially significant amounts involved and the Trans-Tasman superannuation agreement are the reasoning behind a measure in the recent the introduced The Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill introduced a few weeks back.

The bill has a provision which is to allow the direct transfer of New Zealanders’ Australian unclaimed superannuation money from the Australian Tax Office into a KiwiSaver scheme.

This is a measure to get around the issue that once the Australian superannuation scheme deems the funds lost, it’s impossible under Australian legislation for Kiwis to get their money out.

Another handy thing to keep in mind, is that unlike the tax treatment of other foreign superannuation schemes, if you have an Australian superannuation scheme and you transfer it into a KiwiSaver scheme, you will not be taxed, even if that transfer happens more than four years after your return to New Zealand.

So, this is a measure which is favourable for those who have Australian superannuation schemes and may have forgotten what they’ve got and now want to bring the funds across. They can do so tax free into a KiwiSaver scheme. As I said this seems a little bit arcane, but it occurs to me given the numbers of returning New Zealanders we’re likely to see, this could become quite important over the next few years.

Taxing redundancy payments

Moving on, a few weeks back, I was talking to Newshub’s Madison Reidy about the taxation of redundancy payments.  At present, redundancy payments are simply treated as ordinary pay and taxed at the normal rates, which means that for someone receiving a substantial redundancy payment much of it will be taxed at the top rate of 33%. I suggested this was something that needed to be looked at.

Based on an article in the Herald this week it seems that the Minister of Revenue, Stuart Nash, has received correspondence on the matter and is asking officials to look into it, which is encouraging to see.

The problem is given the circumstances we’re in right, now this sort of thing ought to be dealt with quite urgently. Maybe if we’re going to move forward with changes, it would be opportune to include some form of measure in the tax bill I mentioned earlier, which is going through Parliament right now.

One thing to think about regarding redundancy payments, is because they’re treated as ordinary pay, that means if you have a student loan 12% of the payment will be deducted. If you’re in a KiwiSaver scheme, then a further 3% at a minimum will be deducted and to your KiwiSaver scheme, fortunately, ACC does not apply.

There’s an additional bite to this for those who might receive a payment of over $30,000 before tax.  This group of people are not eligible for the COVID-19 income relief payment. This is the special relief benefit for anyone who’s lost a job because of COVID-19 between 1 March and 30 October 2020.  Such persons are entitled to a weekly benefit payment of $490 if they were working for more than 30 hours.  The payment is untaxed and is nearly double the payment someone would normally receive who is unemployed.  Fortunately, MSD has lifted its requirement for someone to spend all their redundancy before they can apply for the job seeker payment of $250 a week.

Nevertheless, the current tax treatment of redundancy needs to change urgently. But it can only be done by a statutory amendment. So, it would be good to see Inland Revenue and the Minister of Revenue moving quickly on this to make a change to help those who are going to lose their jobs or have lost their jobs in the past few months.

Taxing Google

Google New Zealand not so long ago released its financial statements for the year ended 31 December 2019. These show that its income tax bill has risen to $2.4 million.

Now, Google’s 2019 accounts were the first ones prepared as part of its more transparent country by country reporting. The accounts showed that its New Zealand revenue had increased significantly since previous years to $36 million with a pre-tax profit of just over $10.6 million.

What the accounts also show is the difficulty of taxing the digital giants and how little revenue will come through for income tax purposes. According to the accounts the pre-tax profit of $10.6 million represents the value of sales less the direct costs of sales for its advertisements and cloud services. And tucked away in the financial statements, was a note that well over $500 million was paid in service fees to related offshore parties.

And this shows the problem with the digital economy.  Because so much is now driven off intellectual property, and New Zealand is at the tail end of the world in Google’s case we don’t create much intellectual property. Our right to tax is therefore quite limited.

This is not a problem unique to New Zealand. All around the globe countries are grappling with this question that Google and Facebook are piling up billions of dollars in earnings, but not much income tax is being paid in the relevant jurisdiction.

To deal with this matter the OECD has been working on a coordinated approach. The problem is, in the last week or so, that it’s hit a big hurdle with the US Treasury Secretary, Steve Mnuchin, withdrawing the US from the negotiations.  Presently the United States and Europe are at pistols drawn stage, arguing over the question of digital taxation, and Mnuchin and the US pulled out of talks in the last week. This is not good for the whole global economy, and it’s not good for moves to try and get a fairer share of the enormous revenues Google and other digital companies generate.

The Tax Working Group recommended going along with the OECD approach. But it also said that we should have a digital services tax ready to go if negotiations do not go well. We’ve also been watching what the Australians are doing and for the moment they have backed off a digital services tax. But over in Europe, then Britain, which needs a trade deal with the United States, has actually introduced a digital services tax. The French have got one up and running and the Germans are talking about one, too.

So international tensions are building on this and it’ll be interesting to see what the Government decides to do over the next few months as this plays out. But as part of the general upheaval in the tax world going forward we’re going to be seeing this development with the US pulling out of the talks with Europe is not a good one. We’ll monitor developments as they happen, but for the moment it looks like tensions will continue to escalate.

Well, that’s it for this week.  Next week, I’ll be joined by Josh Taylor of tax pooling company Tax Traders. We’ll be discussing how tax pooling was able to help businesses’ cash flows in the past few months.

Until then, I’m Terry Baucher, and you can find this podcast on www.baucher.tax or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. And until next time, thanks for listening. Ka kite anō.

Inland Revenue has released five COVID-19 related variation determinations including ones covering look-through companies, bad debt write-offs and tax pooling

  • Inland Revenue has released five COVID-19 related variation determinations including ones covering look-through companies, bad debt write-offs and tax pooling
  • The tax problem of appointing an Australian resident executor
  • A temporary increase to the write-off threshold for tax to pay

Transcript

This week, a roundup of several useful COVID-19 related variation Determinations released by Inland Revenue, a reminder to be careful about who you choose to be an executor of your will, and a temporary increase in the write off threshold for tax to pay for PAYE earners.

As part of the response to the COVID-19 pandemic, a specific discretion was introduced into the Tax Administration Act to make clear Inland Revenue’s ability to issue variations to requirements under the various Inland Revenue Acts. Basically, the conclusion was that Inland Revenue needed more discretion to be able to extend the filing date, due dates for tax returns and various other filing requirements.

This was part of one of the first earliest pieces of legislation enacted in April. Following that, Inland Revenue has now used this discretion to issue five Variation, Determinations, setting out the requirements for when it would apply its discretion in certain situations.

The first one deals with a variation to extend the time to file a look-through company election. Now normally, that must be done by the start of the relevant income tax year i.e. 31st March.   This variation now extends the deadline to June 30th  2020, which is a welcome little addition.

Look-through companies are tricky elections at times. I’ve been involved in several cases where elections have gone missing or somehow weren’t filed at the right time. And that ends up with a lot of finger pointing everywhere. So under the added stress of a COVID-19 pandemic, this added flexibility from Inland Revenue is good to see.

Another variation varies the time to make an election, to spread back forestry income, and a third extends the time to make an application to change the GST taxable period. For example, you might want to switch to filing monthly GST returns from previously filing six-monthly or bi-monthly GST returns.

But the next two variations are probably of most relevance in these interesting times. The first one is variation COV 20/04, which extends the time for writing off bad debts. Now, basically under Section DBI 31 of the Income Tax Act, a debt must be written off as bad in that income year. So normally for the year ended 31st March 2020, if you’ve got a bad debt, you must have written it off by 31st March 2020. What this determination does is extend that write off period to 30th June. It’s a useful concession, although as always, there’s a couple of caveats here.

Firstly, that the person did not write the debt off by 31st March 2020 because of the COVID-19 impact.  In other words, the disruption to their processes meant they weren’t able to process bad debt write offs as they would normally have done so. And the second one is one I think is going to cause a few headaches, because it gets down to significant interpretation.  In writing off the debt, the person can only take into account information that was relevant as at the end of the 2020 income year. I’m not sure exactly what was meant by “relevant” here? You might be aware that a business was struggling but hadn’t decided to take action. Would that count? We don’t know. I suspect this is one of those caveats that’s been put in more as a protection. But we could see in a few years a significant tax case on the issue.

And the final variation, which is going to be helpful, is one that extends the time for using tax pooling transfers. Now, regular listeners will recall that I had a podcast session with Chris Cunniffe of Tax Management New Zealand late last year. Using tax pooling companies like TMNZ extends the time through which you can make payments of provisional and terminal tax, yet be deemed to have made the payment on time. So they’re a very useful mechanism for managing cash flow and minimising the impact of use of money interest.

Now, what this determination does is it extends the time for which a person can put in place a contract with a tax pooling company in order to meet the tax due for the 2019 tax year. And that time would normally have expired by now. But this variation gives an extension until July 21st 2020.

The caveat in this instance is that between January 2020 and July 2020, the business must have experienced, or for June and July 2020, be expected to experience a significant decline in actual predicted revenue. As a result, they were either unable to satisfy their existing contract for 2019 tax or they weren’t able to set up/enter into a tax pooling arrangement with a tax pooling company.

The “significant decline” in actual revenue has got to be at least 30% and must be COVID-19 related.  So that last criteria is a little bit vague because it doesn’t address a position where the company was struggling to make the payment before COVID-19 turned up anyway.

The variation gives an extra month until July 21st to put a contract in place to make a tax pooling payment. And the advantages of using tax pooling are saving use of money interest and late payment penalties because the tax is deemed to have been paid when it was due. And the rate of use of money interest charged by tax pooling companies is lower than that charged by Inland Revenue.

Instalment arrangements and use of money interest

The rate of use of money interest popped up in a story on Thursday.  It talked about the arrangements Inland Revenue is putting in place with taxpayers who have been struggling to meet their liabilities. And some of the taxpayers putting arrangements in place have also experienced the impact of use of money interest and late payment penalties.

Interestingly, Inland Revenue is waiving much of these interest and penalties if the delay is down to COVID-19. But again, as a caveat, only if it’s down to COVID-19.  I think at some stage we may find is a hardening in the approach of Inland Revenue here.

Now Inland Revenue has lowered its use of money interest rate to 7% but it’s significantly higher than the 0.25% Official Cash Rate. I suggested in the article that it was well past the time late payment penalties were abolished.  These apply in addition to use of money interest and add another 1% immediately, then a further 4% if it’s not paid within seven days, and then continue at a further 1% per month thereafter. There’s no evidence late payment penalties encourage any prompter payment when compared to other jurisdictions that don’t have them.

Currently about 87% of taxes are paid on time under the current regime.  There’s little evidence late payment penalties make any discernable difference to prompter payment.  They just cause resentment and a 7% use of money interest rate is a very substantial deterrent in these low interest times.  We’ll see when things settle down a bit if there’s finally some movement made in this area.

Beware your choice of executor

Moving on, one thing about tax that keeps me busy is the accidental tax impacts of sometimes quite apparently innocuous decisions. And one such example that I’ve come across recently is appointing an executor who is resident in Australia.

This seems fairly straightforward. You may have a parent here in New Zealand with three children, one of whom lives in Australia and the other two here. Under the will the parent appoints all three as executors. This is not an uncommon scenario.

Problem is that the Australians view a trust as being tax resident in Australia if any trustee is resident in Australia.  And as I discovered recently, this also applies to personal representatives or executors of the states. You have a deceased estate of a person who died here in New Zealand. All the assets are here in New Zealand. But in the scenario I outlined earlier, one of the children who is an executor lives in Australia.  This is currently sufficient for the Australians to consider the estate to be an Australian estate and therefore taxable. How exactly that is enforced is not clear, but this position is a very real risk.

So, here’s a reminder for people who may be considering wills in these uncertain times. Just be sure to cover off the tax consequences if it so happens you have someone such as a child you want to either appoint as an executor or make a beneficiary, who is living overseas.

Increase in tax write-off threshold

And finally, back to a COVID-19 related matter. The Government has temporarily increased the write off limit for unpaid tax for people on PAYE from $50 to $200. Right now, Inland Revenue is going through approximately two million people who are on PAYE and doing the automatic calculation of their liabilities for the year ended 31 March 2020.

The general rule was if they owed $50 or less, it would be written off. But above that amount, they’d have to pay. And what’s happened is they’ve decided as an interim measure to help people through this pandemic is to immediately increase the $50 threshold to $200. It only will apply for the year ended 31 March 2020.

This is only available for individuals whose year-end tax liability is calculated automatically.  If you are required to file a tax return, because, for example, you’ve got a rental property, you’re not covered by this change.

And by the way, just on the automatic calculation there’s an interesting thing to note here that any amount of tax to pay for someone who is paid fortnightly and had twenty seven fortnightly pay periods during the year ended 31 March 2020 is automatically written off. (The same applies to anyone paid weekly who had 53 pay periods in the year, or someone paid four weekly who had 14 pay periods).

Well, that’s it for this week. Thank you for listening I’m Terry Baucher, and you can find this podcast on www.baucher.tax or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. And until next time, Kia Kaha stay strong.