15 Jun, 2020 | The Week in Tax
- This week a look at the new Wage Subsidy Extension scheme
- Capital gains tax is back on the agenda
- Time to top up your KiwiSaver contributions
Transcript
From last Tuesday, businesses and the self-employed can now apply for the Government’s Wage Subsidy Extension.
Eligible businesses can get a lump sum payment for a further eight weeks of $585.40 per week per full time employee. The criteria for this has changed from the original wage subsidy scheme. Now a business to qualify must have had a revenue loss of at least 40% for a 30 day period in the 40 days before they apply, compared with the previous closest period last year. So, for example, you’d look at your revenue in this month, June 2020, and compare it with the revenue for June 2019.
Applications for this are open until 1st of September. And as in the case of the existing wage subsidy scheme, it will be administered by the Ministry of Social Development who will be working closely with Inland Revenue on this matter. As I understand it, what happens is the application comes in and MSD will check and then if they’ve got any enquiries, they’ll give Inland Revenue a call.
The tax treatment of this subsidy amount remains the same as previously advised. That is, it is not subject to GST, is non assessable and non-deductible for the employer, although when the payments are made to the employees, they’re taxed as regular income through PAYE.
This does lead to a rather cumbersome tax and accounting treatment and some of us are looking at this and thinking for ease of accounting and to avoid slip ups, it may be better for the employer to treat it as all taxable and deductible. The net effect is the same anyway. We’re looking at the accounting treatment of this, which can get a little awkward because of this mismatch between the wage subsidy payment being non-deductible for the employer but remaining taxable for the employees.
Speaking of ongoing government support, last Friday after I recorded last week’s podcast, the Finance Minister announced that the Small Business Cashflow Scheme would now be extended until 24th of July. This has been an extremely successful initiative for small businesses. So far, $1.33 billion dollars has been lent to well over 70,000 businesses.
And as I discussed last week, it had taken the space that the Government’s Business Finance Guarantee Scheme had not filled. And the comparison between lending under both schemes is quite stark. As I mentioned, the Small Business Cashflow Scheme has been accessed by approximately 70,000 businesses and they’ve borrowed $1.33 billion dollars.
By comparison, lending under the Business Finance Guarantee Scheme has been $86 million to just 503 businesses, according to the latest business lending numbers from the Bankers Association.
Now, it’s not like the banks are not lending. In fact, according to the Bankers Association, business lending since March 26th has been quite extensive. They’ve lent over $10 billion dollars to over 16,000 customers, as well as the separately reducing the loan payments on another $12.5 billion for 13,000 customers. In addition, they’ve deferred all loan repayments on one billion dollars owed by 3,105 customers.
So, the banks have been working in the background. It’s just that the Business Finance Guarantee Scheme, which was quite a headline project at the time, isn’t designed to do the type of lending that businesses are looking for right now. That is short-term, immediately accessible and with an uncomplicated process.
Unfortunately, the Business Finance Guarantee Scheme ticks none of those boxes and that possibly is down to the design of it and the understandable wish of Treasury to protect the Government’s risk.
As I said last week, one of the things about the benefits of the Small Business Cashflow Scheme is it deals with a matter of resourcing for small businesses. The process to borrow under the scheme is very straightforward and money is delivered quickly.
And the process small businesses go through when applying for loans to the banks, they struggle with that. They have to get a lot of material together. It costs some money to get if they bring in their accountant to assist. And there’s no guarantee they’ll get the funds.
So as I said last week, I think once we’ve gone through everything, the Government should look very carefully at how a future scheme to help small businesses could be designed. Maybe we want to have a look at what the Small Business Administration in America does. How it guarantees loans and works together with banks on lending.
A simpler process for small businesses could be very helpful for the future growth of our country. Because it’s accepted by all that, we’re going to have to grow our way out of this recession if we are to get the massive amount of debt that the Government has rightly borrowed for this emergency under control again. [Update, it appears that preliminary discussions about a permanent iteration of the Small Business Cashflow Scheme have taken place.]
Still a live public policy debate
And as part of getting the Government’s debt to GDP ratio under control again, capital gains tax has popped up on the agenda again in a couple of instances this week. Firstly, James Shaw, the co-leader of the Green Party, talking to Jenée Tibshraeny raised it as something that we should be considering. Shaw’s view was that a capital gains tax made more sense now,
“It was our policy when we entered parliament in 1999; it remains our policy today. The extent to which we’ll lead with that or with something else [at the election] is yet to be revealed,”
But I don’t think anyone should be surprised a tax is going to be on the election agenda this year. We’ve had a huge shock to the economy. The Government’s books have been shot to bits. And at some stage, tax will be a feature of how those books are rebuilt.
And talking of rebuilding and still on the tax side, PricewaterhouseCoopers (PWC) issued a report called Rebuild New Zealand, which set out seven planks, as it called them, to rebuild New Zealand.
One of these is about addressing tax reforms. And what it says about that, to pick up a theme of last year’s Tax Working Group, is that tax reform must be considered to broaden the Government’s revenue base and remove investment bias. It refers to the elephant in the room being a capital gains tax. It’s probably no coincidence that Geof Nightingale, who’s a partner at PWC, was also a member of the Tax Working Group.
The report goes on,
“In our view, there is now a greater need than ever to broaden New Zealand’s tax base so it relies less on taxing income. So is it time to look again at a simple, broad based CGT?”
The report cites the example of the introduction of a broad-based GST over 30 years ago as a model for designing a future CGT, and goes on to say,
“The debate on CGT would be very different if New Zealanders had a better understanding of the extent to which it could actually impact them during their lives and also the trade-off that there might be an eventual trade-off between CGT and income tax.”
And this is something I think should be considered: by broadening the tax base to include capital gains tax the need to increase the top rate of income tax, for example, is minimised. There is a trade-off here and I agree with PWC we should be having that discussion. I don’t think we had a great discussion last year.
We’ll probably see more discussion about this during this election. And it will be interesting to see how the parties all fence around the issue. As I said, in April in this Top Five piece, COVID-19 means we are going to need to have a look at the tax system. Whether tax rates rise or CGT comes in are all on the table for discussion.
Getting the max KiwiSaver
And finally, you have until 30th of June to make sure you have contributed a minimum of $1,042 86 to your KiwiSaver scheme in order to qualify for the maximum government top of $521.43 cents. Now, the government contribution isn’t a lot, but it’s free money, so you should take advantage of it if you can.
Incidentally, PWC’s Rebuild New Zealand report suggested the question of boosting savings should be considered in order to help address the funding of New Zealand Superannuation. It noted “While there is much to be admired with Kiwisaver, it remains a lightweight compared to the compulsory savings regimes in other countries, notably Australia”.
The report doesn’t say so but we’re still paying for the decision in 1975 by Muldoon’s third National Government to scrap the compulsory superannuation savings scheme established by the third Labour Government. In my view that decision by the Muldoon Government probably ranks as the single most economically harmful act by any New Zealand government in the past 50 years.
As I said, we’ve been paying for it for the last 50 years, particularly since the Baby Boomer generation reached retirement. And the matter will not go away. The Tax Working Group noted that structural deficits would be increasingly likely by the latter part of this decade. So the issue of addressing the cost of superannuation – how it’s funded – isn’t going to go away.
And on that bombshell, that’s it for this week. I’m Terry Baucher. And you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening. Please send me your feedback and tell your friends and clients. Until next time, Kia Kaha, stay strong.
8 Jun, 2020 | The Week in Tax
- The Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill introduced covering purchase price allocation, taxation of land, feasibility expenditure and trusts
- Inland Revenue phone issues
- Last week for applications for the small business cashflow scheme
Transcript
After a frenetic period of activity with COVID-19 related measures coming out almost daily, it’s reassuring to see a normal tax bill turn up with the introduction into Parliament of The Taxation (Annual Rates for 2020-21, Feasibility Expenditure and Remedial Matters) Bill.
Now, this is a sort of standard type of tax bill we see twice a year. There’s usually one introduced in May and another in November. And typically, these bills will deal with some policy matters that have been on the table for some time, plus tidy up remedial issues. So, this Bill is a sign of nature healing and a return to normal.
This Bill has a number of measures which will be both welcomed and not welcomed across the board. Firstly, there’s a measure up to encourage investment by allowing businesses to take a deduction for feasibility expenditure incurred in investigating or developing a new asset, or process, even if that process is actually abandoned and never implemented. Until this bill there was some doubt that any of this expenditure would be deductible.
And there are two parts to this measure which are welcome. Firstly, for small and medium businesses, qualifying expenditure on feasibility expenditure, which is less than $10,000 a year, will be immediately deductible in the year of expenditure.
Where the expenditure is above that $10,000 threshold, then a business would be able to claim a deduction spread over five years for the expenditure it incurred on investigating this new asset, process or business model. And this deduction will be available even if the planned project is abandoned.
There are several other measures in the Bill. One which won’t be welcomed is in relation to what we call purchase price allocation. And this happens when parties to the sale and purchase of assets with differing tax treatments for the purchaser and vendor allocate the sale prices between assets to maximise the tax advantage.
This has been a running sore point for Inland Revenue because you could actually find that for the same asset, the purchaser and the vendor have adopted completely different tax treatments. This bill is designed to ensure the treatment for the asset is consistent across the board and it’s expected to raise $154 million dollars over four years.
There are more rules relating to the taxation of land, particularly in relation to investment property and speculators. What is particularly targeted here are attempts to get round the provisions which apply where someone has a “regular pattern of buying and selling of land”. In these circumstances the transactions are deemed to be taxable.
The Bill proposes to extend the regular pattern restrictions which apply for the main home, residential and business premises, to a group of persons undertaking, buying and selling activities together, rather than looking at the regular pattern of a single person.
So that will introduce more complexity into an area which is already very complex, because a lot of the matters relating to the taxation of land involve defining rather subjective terms such as “work of a minor nature” or “a regular pattern”. What is a “regular pattern”? What is “work of a minor nature”? These are issues that have dogged the taxation of land for some time. And dare I say it, a simpler answer would have been a comprehensive capital gains tax. Then everyone’s on the same treatment. But I guess it’s probably too soon to talk about that.
There is a measure to help dairy and beef cattle farmers who because they’re taxed under the rules for the herd scheme have unexpected taxable income because their herds have been culled as part of the attempt to eradicate Mycoplasma bovis over the past few years.
Now, what will happen instead is that income, which would normally be taxed in a single year, will now be able to be spread forward over six years. Farmers who have been affected by Mycoplasma bovis will be relieved that this measure will take some of the pressure off them.
Some of the Bill’s measures had already been in the public domain for consultation for some time, but others have not. There is some interesting legislation in relation to the taxation of trusts, which I had not expected to see. One of these to watch out for is if a beneficiary is owed more than $25,000 at the end of a tax year, then he or she will be deemed to be a settlor of the trust. And that has quite significant tax ramifications.
So there’s a lot in this bill, and over the coming weeks I’ll pick out particular aspects and discuss in a little bit more length.
Worsening client service
Moving on and another sign that we’re returning to normality, complaints about Inland Revenue not answering the phones are back
in the press.
Now, you may recall at this time last year, Inland Revenue was absolutely swamped with calls as it went through its automatic calculation process for the first time as it worked out what tax was due for two million taxpayers on PAYE. And so a similar process is happening this year. And once again, people are complaining that they can’t get through to Inland Revenue.
In part, Inland Revenue’s business model actually does not want to encourage phone calls. It rather would deal online with people. And in fact, to be fair to it, matters are being responded to very quickly through the Inland Revenue myIR online portal.
The call centres are under pressure as they always come under pressure this at time of year. But the pressure has been exacerbated by the fact that Inland Revenue have got to try and maintain social distancing and have a lot of staff working from home.
Unfortunately, it’s a fact of life that at this present time, Inland Revenue isn’t really in a position to answer phones as promptly as possible. It’s partly, as I said, the result of COVID-19 requiring some physical restrictions which has made it difficult for Inland Revenue to actually have everyone where they want them.
In addition, Inland Revenue has prioritised responding to matters COVID-19 related, that is, applications for debt remission, wage subsidy enquiries and the Small Business Cashflow Scheme. The pressure is such that Inland Revenue has basically turned off answering the phones on the dedicated tax agent line. We have a habit of ringing up and then asking about several clients at one time because it takes tax agents some time to get through even on a dedicated line. And that doesn’t really fit well with how Inland Revenue is operating at the moment.
The delays are frustrating, but it’s a fact of life. And I would expect this to be continuing for at least another six weeks or so, possibly longer.
Inland Revenue the banker
And finally, one of the additional things that Inland Revenue is currently dealing with is the
Small Business Cashflow Scheme. This is where businesses can borrow up to $10,000 plus $1,800 per full time employee from the Government at 3% but if the loan is repaid within a year, it would be interest free.So far, more than 69,000 small businesses have applied for almost $1.2 billion in lending under the scheme but note applications close next Friday. So, if you qualified for the wage subsidy and you believe your business is sustainable, you might want to check this out separately. It’s possible it could be extended.
Update: After this was recorded on Friday morning the Finance Minister
announced an extension of the scheme until 24th July.My view is the Government should look at introducing some form of permanent variation of the scheme when everything settles down.
Research that we on the Small Business Council received last year, indicated that access to finance for businesses with five or fewer employees was difficult. About 45% or about 31,000, of the 69,000 applications under the scheme have been made by businesses with five or fewer employees.It seems to me that the response to the Small Business Cashflow Scheme indicates that it is meeting an unfulfilled need. You may recall the Government agreed to underwrite 80% of the lending under the
Business Finance Guarantee Scheme administered by the banks. But the take up on that has been disappointing.
There’s a number of factors going on there. But it does seem that the banks were quite happy to socialise the risk and privatise the profit. And certainly, reports I’ve heard are that the application processes were very cumbersome and off-putting for small businesses. For example, I had one tax agent advise me that a bank had requested projected cashflow statements for two years going forward. Well, in this climate, three months is a long way off.
Anyway, a variation of the Small Business Cashflow Scheme is something that I think the Government should investigate. In the United States the Small Business Administration runs a variation of this scheme which could be of interest.
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. Please send me your feedback and tell your friends and clients. Thanks for listening. And until next time, Kia Kaha stay strong.
2 Jun, 2020 | The Week in Tax
- A controversial extra relief for the newly unemployed
- Are redundancy payments overtaxed; and
- Record numbers apply for instalment arrangements with Inland Revenue.
Transcript
According to a Statistics New Zealand report this week, job numbers dropped by a record 37,500 in April. This is the worst fall in employment on record. So naturally, the Government is still under pressure to ameliorate the impact of these job losses.
And its latest measure is a special relief payment beginning on 8th of June. From that date, anyone who has lost their job since March 1st because of the Covid-19 pandemic will be paid $490 a week for anyone who lost full time work and $250 per week for losing part time work. These payments will last for up to 12 weeks and will not be taxed.
Now, the scheme announced is similar to the Job Loss Cover payment introduced by the National Government in the wake of the Canterbury earthquakes in 2010 and 2011. It also has a number of similarities to the ReStart package for workers who lost their jobs in the Global Financial Crisis in 2008. So these are undoubtedly welcome measures for those affected.
The controversy has arisen because beneficiary advocates have pointed out it appears to discriminate against the existing unemployed people. Furthermore, the fact that the payment that is being received of $490 dollars per week is almost double the $250 a week (after tax) that someone on the current Job Seeker payment would receive, implicitly acknowledges that the current level of benefits being paid is too low. This is a point that was made by the Welfare Expert Advisory Group report last year, which actually recommended benefits be increased at a cost of over $5 billion.
One of the other features, which beneficiary advocates might question, is that people who qualify for this payment but have partners who are still working may still be eligible for the payment so long as their partner is earning under $2,000 per week. Anyone who’s been involved with the existing treatment of beneficiaries will know that there are often very harsh cases coming into play where a couple’s income is aggregated, and that benefits are often struck down because a person has formed a relationship or is deemed to have formed a relationship during the period.
So the gap between the generosity of this new measure and the existing rules is quite marked and has drawn criticism. How that will play out is largely a political matter. But it points to something that I’ve talked about previously – we do need to look at our welfare settings and particularly the interaction with the tax system.
Unusually, these payments are not being taxed, whereas benefits are actually taxed. Now, the net effect is intended to be the same, but still it’s an interesting distinction. So whether it points to – as has been hinted at – there’s going to be some further changes and significant changes at that, in the benefits and welfare system remains to be seen.
For the moment, the important thing is for those who are directly affected now, this new payment will come as a relief for them as it’s intended to do so. And leaving aside the politics of it all, we shouldn’t be scapegoating those who’ve been unfortunate enough to be affected by the scale of the pandemic. Let’s look to try and improve the system for everyone, but don’t blame those who are caught up in it right now.
Speaking of redundancy, this week, I spoke to Madison Reidy of Newshub about the tax treatment of redundancy. Currently, redundancy is treated as a extra pay for tax purposes, subject to pay as you earn and taxed at normal rates. That is, it’s fully taxable to the recipient. The PAYE that’s applied is based on the combined total of the redundancy and the annualised value of the PAYE paid to an employee in the previous four weeks.
Now, as Madison and I discussed, the tax treatment of redundancy is pretty harsh. Actually it’s harsh in two ways. Firstly because it’s taxed at a time when you may have to be reliant on it for an unknown period of time. The second point is that for some people the lump sum may be taxed at a higher average tax rate than would normally apply to them. This would be particularly true of lower income earners, say, earning around the $48-50,000 mark, where most of their income is being taxed at 17.5%. They may receive a redundancy payment which would be taxed at 33 percent. And the current system makes no concession for that.
It hasn’t always been the case. But our tax rules have been pretty hard on redundancy since 1992 when the rules were changed and redundancy became fully taxable. There was a period between 2006 and 2011 when a credit was given up to a maximum $3,600. But that was withdrawn in April 2013. Ironically, it was going to be withdrawn from April 2011, but then got extended for a further period to 1st of October 2011 following the Canterbury earthquakes.
But the treatment of redundancy seems harsh compared with what happens across the ditch in Australia, where the first A$10,638 dollars is tax free. And then A$5,320 dollars per year of service is also treated as tax free. So substantial payments can be received and, depending on the length of service, may not be taxed in Australia at all. It does have to be redundancy. Accumulated leave and sick leave would be subject to tax in Australia. Over in Britain, the first £30,000 of redundancy is tax free.
It seems to me that we ought to be looking at this question of redundancy and whether, in fact, the rules are appropriate. There’s going to be a lot of redundancy paid out over the next few months. We haven’t seen the full impact of the pandemic on employment yet. And therefore more people, sadly, will be losing their jobs. And at the moment, they’re going to get hit very hard with the tax on their redundancy and that’s going to cause some grievances.
Yes, that new temporary relief payment that has just been announced will help. But I can’t help but wonder whether it would probably be easier for people if we weren’t so aggressively taxing redundancy in the first place. Unfortunately, rather cynically as I told Newshub, Governments have always said they’d look at this, but nothing ever changes.
As an aside, the treatment of lump sum payments under PAYE is a problem not just for redundancy. Retiring allowances are treated the same way. And most egregiously in my mind, are ACC payments. Sometimes people get in a dispute with ACC over the amount that’s due to them. When those disputes are resolved in their favour, then ACC may make several years of payments all at one go. These are just simply treated as an extra pay and taxed as if it is the recipient’s normal income income.
What that might mean is say, for example, four years arrears at $20,000 a year or $80,000 might be taxed all at once,. The average tax rate which would apply on this payment is therefore much higher than would have applied if the person had received the payments when they should have done. This is a running sore in ACC, which again, governments have talked about changing but not followed through.
And finally, Inland Revenue is reporting a massive jump in the number of people applying to pay their tax off in instalments.
According to Inland Revenue, in March 2020, there are 104,443 payment instalment arrangements in place, compared with 41,014 in March 2019. The amount of tax that’s under instalment has gone from $659 million to $1.167 billion. I suspect this number will rise again in April.
Now Inland Revenue has been very proactive in accepting instalment arrangements, but it is a sign of the scale of what’s going on at the moment that so many more taxpayers are now under an instalment plan. It has doubled in one year. And possibly we may see it may have tripled once we see the April figures.
I’ve talked about instalment arrangements previously and what you need to do is get in front of Inland Revenue as quickly as possible. Explain what’s happening and give them a plan as to how you’re going to deal with it. Don’t put your head in the sand.
Just bear in mind that although at the moment Inland Revenue is being fairly generous about what is COVID-19 related or not, it may well take a second look at this. And that may mean that some people who were trying to set up instalment arrangements prior to the arrival of the virus may still be stuck with having to pay use of interest at 7% on the unpaid debt because it was a pre COVID-19 debt.
Whatever the case, the key thing in dealing with Inland Revenue is communication. Don’t put your head in the sand. Deal with the matter. You’ll find that at this stage, they’re responsive to requests.
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. Please send me your feedback and tell your friends and clients. Until next time, Kia Kaha, stay safe.
25 May, 2020 | The Week in Tax
- The Small Business Cash Flow Scheme
- Inland Revenue’s guidance on the sharing economy
- Employees claiming home office expenditure
Transcript
With the move to Alert Level Two, there’s some level of normality being restored, and most businesses are now able to operate. But for many, the COVID-19 pandemic represents a major hit to their business and cash flow.
So, one of the measures that they probably welcome is the most recent one announced by the Government, the Small Business Cash Flow scheme (which wasn’t actually included in the Budget estimates and hasn’t yet been costed formally).
Now, this scheme had a rather chequered start when the legislation enabling it was accidentally released and then passed by Parliament ahead of time. But now the details have been fleshed out and it has been up and running since May 12th. For one month until June 12th businesses with 50 or fewer full-time equivalent employees can apply for a loan.
Eligible businesses and organisations can then get a one-off loan with the maximum amount being $10,000 plus $1,800 per full-time equivalent employee. There’s an annual interest rate of 3%, but no interest will be charged if the loan is fully repaid within one year.
Now, the scheme is being administered by Inland Revenue, which seems odd because it’s not its core business. But if you think that it already administers the student loan scheme, then giving it the responsibility to manage the Small Business Cash Flow is not unreasonable.
The scheme was put together very quickly when it became apparent that the business finance guarantee scheme arranged with the banks under which the Government underwrote 80% of the risk was not delivering funding to small businesses quickly enough.
It is already – in terms of demand – a huge success. By Friday of the first week of its launch more than 33,000 business had applied for a loan, and 31,000 loans had been approved. So far, just under $600 million dollars has been approved for lending. There are about 400,000 businesses in New Zealand with 50 or fewer full-time equivalent staff who are eligible. So the Government is looking at a potentially horrendous amount of borrowing.
If you work through the Inland Revenue website, you’ll see the calculation of the loan is tied to the wage subsidy scheme. In fact, you can apply for the loan, even if you haven’t applied for a wage subsidy. The reference to the wage subsidy scheme is there just simply to provide a rough and ready calculator of the amount that’s available.
Under the terms and conditions, the loan must be repaid within five years and the interest rate is 3%. But if you are late with an agreed repayment, use of money interest, which is now 7%, will apply in addition. So effectively there’s a 10% rate for late payments.
As I said, the scheme is open until 12th of June. It’s looks like it’s going to have a huge take up.
And it does raise an interesting point that given the difficulties small businesses have had accessing financing from banks – despite the Government agreeing to underwrite 80% of the risk – this scheme was still needed. And the question arises that once everything settles down and we return to business as normal, whenever that is, whether there is a role for a similar type of scheme to exist for small businesses in the future. In America, the Small Business Administration runs a hugely successful small business loan scheme. Something I think the policy advisers at MBIE should be considering is maybe a permanent iteration of this scheme.
How Inland Revenue is coping
Moving on, Inland Revenue has continued to operate as best as possible through the pandemic. Its call centres have been very hard hit with having to deal with the effects of social distancing. Quite apart from that, Inland Revenue has found itself with additional responsibilities in the aforementioned Small Business Cash Flow Scheme and also assisting the Ministry of Social Development in administering the wage subsidy scheme. What happens is the MSD calls Inland Revenue to confirm details regarding the applying business’s tax affairs. And once those are confirmed, the wage subsidy is then approved or declined as appropriate.
As a result, Inland Revenue has stopped answering the phones on its dedicated line for tax agents and its call centres have, as I mentioned, reduced staffing because of social distancing measures. But it has been responding very, very quickly using its online features and particularly its myIR feature.
Inland Revenue’s recommendation is if you want to make contact, the best way is through the online myIR service. And furthermore, if you get a response from Inland Revenue, you can actually reply to that response. Previously, replying to IR used to trigger a new response and a new inquiry. So there’s a lot of favourable stuff happening in the background with Inland Revenue.
Inland Revenue has also been upgrading its website as part of its Business Transformation programme. It is splitting off the technical matters such as tax policy and legislation, Tax Information Bulletins, the various formal determinations, interpretation, statements and other technical documents that it issues.
Inland Revenue’s main website actually makes really clear reading, and it’s been adding explanations of various areas of interest where it will be focusing its attention.
Tax and the sharing economy
One of the features it has recently added is a section on the sharing economy. The sharing economy is described “as any economic activity through a digital platform such as a website or an app where people share assets or services for a fee.”
It goes on to explain that such activities are obviously still subject to income tax and GST and you need to consider the implications of that.
The various sharing-apps it discusses are obviously the ride sharing or sometimes called ride sourcing, such as Uber, Zoomy or Ola.
Then there’s short stay accommodation, including renting a room or a whole house unit. So that’s Airbnb, Bookabach or Holiday Houses. Then there’s sharing assets, for example cars, caravans or motor homes. And those who come through platforms such as Yourdrive, Mighway, Parkable, MyCarYourRental and Sharedspace.
Finally there’s people who in the gig economy are using platforms such as Pocket Jobs, Fiverr, Air Tasker, WeDo, Askatasker, Deliveroo and Mad Paws. Very creative names there.
All these platforms are covered by the sharing economy and they’re all subject to income tax, and GST if the value of your services exceeds $60,000 in any 12-month period.
Inland Revenue’s website sets out what is fairly standard guidance as to how it expects the rules to apply.
What it also sets out is what are not considered part of the sharing economy, and that includes online selling or classifieds such as Trade Me or eBay, cryptocurrency exchanges which are dealt with completely separately, and peer to peer financing or crowdfunding. Now these still have income tax and GST obligations, but slightly different rules apply.
As I said, this guidance from Inland Revenue is really clear in setting out the rules. There should be no reason for people not complying.
As Inland Revenue gets back to a normal, what I expect will happen is that its investigators and staff will basically be told to kick over every rock around to see what’s under there. So you can expect a tightening of the rules and increased examination of the cash economy, using cash to avoid tax.
Ride-sharing apps, by their nature are outside the cash economy. But I think one of the things Inland Revenue will be doing is sending requests to the ride sharing app platforms asking for details of who in New Zealand is using the respective platform.
In summary, the rules are set out there very clearly. And behind them is the unspoken threat that Inland Revenue will be looking at this sector as things return to normality.
More on home office expense claims
And finally, we recently discussed the treatment of Home Office expenditure.
It so happened I was interviewed for the Cooking the Books podcast of the New Zealand Herald about this matter this week. There was an unfortunate misstatement in the article, which initially suggested that people would be entitled to a $15 per week tax refund.
That is not correct. An employee can’t claim a deduction for home office expenditure, but they can apply to their employer for reimbursement. And Inland Revenue has issued a temporary determination valid until September, under which payments of up to $15 per week can be made to an employee and they will be treated as exempt income for the employee. If you have any questions, as always, you know where we are.
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. Please send me your feedback and tell your friends and clients. Until next time, Kia Kaha, stay strong.
18 May, 2020 | The Week in Tax
- A look at Budget 2020 and the surprising lack of additional funding for Inland Revenue and Ministry of Social Development.
- How bad will the loss of tax revenue be?
Transcript
Budget 2020 contained no new tax measures beyond those already announced as part of the COVID-19 response: the loss carry back scheme, depreciation on buildings, the increase in the low value asset write off to $5,000 and increasing the provisional tax threshold to $5,000.
That’s not entirely unsurprising. And I did actually suggest in a Budget preview for the Spinoff website that there would be little more for businesses.
What is surprising is that there is nothing in the form of additional resources for Inland Revenue either to help it manage the Small Business Cashflow Scheme, which on its first day alone received applications for $377 million of loans and approved $280 million worth of loans. Nor did it receive funds to help it look closely into the cash economy and other areas where suspected non-compliance/tax evasion is taking place such as the fringe benefit tax exemption for work related vehicles.
Usually Governments do slide some extra funds to agencies when they’re expecting more of them. So it was a surprise that that didn’t happen, although I wonder if in the background Inland Revenue said, “Well, we have gained such greater efficiencies from our Business Transformation programme that we don’t actually need those additional funds.” Or maybe everyone was told the money is being redeployed to help the COVID-19 response and outside those areas that are receiving funds you’re just going to have to make do with what you’ve got.
I was also surprised there were no adjustments to abatement thresholds and the actual abatement rates that apply. These apply when income rises above a certain level. At this point social assistance measures such as working for families are subject to abatement at quite severe rates. This also applies to people who may be receiving the Jobseeker benefit. If they earn above a certain threshold, they lose 70% of their Jobseeker benefit above that threshold. Adjusting thresholds could help cushion the impact of unemployment or lower earnings.
Again, given that the Ministry of Social Development is going to be much busier over the next few months, if not years, I’m surprised there was no additional funding granted to help it manage what is going to be undoubtedly a hugely increased workload.
The fiscal figures produced for the Budget are, frankly, as you would expect, horrendous reading.
Treasury expects tax revenues to fall from $86.5 billion for the year to June 2019, to $80.1 billion dollars for the year to June 2021. In fact, over the period to June 2024, tax revenue is expected to be more than $15 billion lower net of the effect of the reduced GDP over the period. (That is if the expected crunch in the economy happens, then obviously the fall in GDP will be reflected by a fall in tax revenue).
So all of this makes the corresponding lack of any measures – or even indications – of how the Government expects to fill the gap or attempt to fill the gap in its tax base puzzling.
The Government’s official Budget document Wellbeing Budget 2020, Rebuilding Together does talk about a fair, balanced and progressive tax system which will promote the long term productivity and sustainability of the economy. And it sets out how tax policy is meant to work in support of the Government’s objectives.
What’s actually said in the Budget 2020 document is pretty much a cut and paste from what was said in Budget 2019. But there’s one noticeable exception from Budget 2019. In 2019 the Government noted that it was “working with the OECD to find an internationally agreed solution for taxing the digital economy”, before going on to say:
However, we may need to move ahead with our own work so we can proceed with our own form of digital services tax as an interim measure, until the OECD reaches agreement.
There’s nothing about that in the Budget 2020 documentation. Instead, the Budget policy statement simply notes “the Government will continue to participate in multilateral negotiations convened by the OECD on the future of the international tax framework”
The Wellbeing Budget 2020 goes on to say that the key priority tax policy at present is to support the COVID-19 response.
In the short run, the tax system must help cushion the impact of COVID-19 on the economy. It is critical to ensure that the tax and welfare systems work together appropriately to deliver income support to affected businesses and workers.
And that’s all perfectly reasonable, understandable and logical. It does surprise me, though, that there is nothing about taking up some of the recommendations of the Tax Working Group and the Welfare Expert Advisory Group about looking at the interaction between tax and welfare. Because as I said a few minutes ago, above certain thresholds, there are rather penal adjustments coming into play.
The OECD itself has just released a
document on tax and fiscal policy in response to the Coronavirus crisis.
The report says that the tax policy can contribute to covering costs of the crisis and policy responses to it. Going on to say “efforts to restore public finances should not come too early, but when they come, tax will have a key role to play”.
So the Government’s is following the OECD playbook on that regard. But you would have thought that it might have indicated or allocated additional resources to both the MSD and Inland Revenue to look at some of these issues that had already been highlighted by working groups and will remain even throughout this crisis. So I do find that lack of specific direction surprising.
Obviously, there’s the politics of the election. And as I said on Radio New Zealand, nobody wants to scare the horses before the election. So everyone’s circumscribed. I expect tax will be a big part of the debate in the election, because both major parties are going to have to explain how they propose to pay for the response to the COVID-19 crisis.
What is interesting is what the OECD has pointed out about tax policy. Firstly, whether there is going to be a need as they put it “to explore and assess new ideas as well as revisit existing ones, e.g. solidarity levies, carbon taxes.”
And secondly, the OECD also picks up the question of maybe this is a time when everyone is under the crunch, for tax revenue to provide new impetus to efforts to reach an international agreement on how the digital economy is going to be taxed.
As I said, the Government’s tax policy statement – such as it is – in the Budget documents, alludes to that, but says very little more. And I do find it surprising the Government hasn’t given more priority to that matter.
One thing I think which will be greeted with a welcome relief by those greatly affected, is the extension of the wage subsidy scheme. Although the criteria for eligibility has changed, understandably there was some criticism that the initial scheme was perhaps too generous. Certainly, the ongoing ability to use the wage subsidy scheme is going to be helpful for those businesses, particularly those in tourism that are really being hit hard by the COVID-19 pandemic.
And hopefully we will also see more guidance from Inland Revenue and the Ministry of Social Development as to which businesses may qualify for the wage subsidy. I’m thinking in particular of the matter I discussed in last week’s podcast – whether or not a commercial landlord or a residential landlord with several properties effectively running a business is eligible for the wage subsidy. No doubt we will find out in due course.
Well, that’s it for this special Budget edition. 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, Kia Kaha stay strong.
