An overview of the new Covid Resurgence Support Payment

  • An overview of the new Covid Resurgence Support Payment
  • What could be the implications of Facebook’s actions in Australia
  • Pre-31st March year end tax planning

Transcript

On Wednesday, the Government passed under urgency, the Resurgence Support Payments bill.

This was introduced in the wake of the move to level three and then level two lockdowns in the Auckland region. This had been in the works for some time, but then just got pushed through under urgency following what we might call the Valentine’s Day mini outbreak.

Resurgence supports payments may be applied for if there is an increase in the alert levels from Level 1 to Level 2 or higher and the alert level remains higher than Level 1 for seven days or more.

It’s going to be available to all businesses in New Zealand each time it activates. So even though Auckland went into a Level 3 Lockdown and then back down to Level 2, because a lot of tourism is currently dependent on tourists from Auckland, the resurgent supports payments will apply nationally.  This is a wise move, which cuts down a lot of administration, but also reflects the fact that Auckland is a prime source of tourism for the very weakened tourist industry.

Businesses are able to apply if they’ve experienced a revenue decrease or a decrease in capital raising ability of at least 30% due to the increase in the alert level. And they need to measure their revenue for that 30% fall over a continuous seven-day period where the first day is on or after the first day of the increased alert level. All seven days must be within the period of the increased alert level. The affected revenue period then needs to be compared against a regular seven-day revenue period that starts and ends in the six weeks prior to the increased alert level.

This scheme is going to be administered by Inland Revenue rather than the Ministry of Social Development as happened with the wage subsidies. Applications should be made through myIR and Inland Revenue is expecting that people receive the resurgence support payment within five working days of their application.

The payment must be used to cover business expenses such as wages and fixed costs. Note that this isn’t a wage subsidy per se, it’s a support payment. And that possibly explains the slightly unusual change from the previous wage subsidy in that this payment is subject to GST now.

Although no income tax deduction will be available for expenditure relating to use of the resurgence support payment, GST registered businesses will be able to claim input tax deductions for any expenditure funded by the resurgence support payment. In other words, if you pay the rent using the resurgence support payment, you won’t get an income tax deduction for it, but you will still be able to claim a GST input tax credit.

The payment consists of a base amount of $1,500 dollars per applicant, plus $400 per full time equivalent employee, up to a cap of 50 full time employees. Although payments are capped at 50 full time employees, businesses with more than 50 full time employees may still apply.

There is a further cap in that the amount an applicant may receive will be the lower of the base amount and four times the amount their revenue has declined, as declared by the applicant as part of the application. And I can see Inland Revenue having a bit of work going on in years for larger scale applications here.

Anyway, the measure is now in place and fortunately everyone within the Auckland region, because they are still in level two, will be able to apply for this because they have been at an Alert Level higher than Level 1 for the required seven-day period. I imagine there will be further tweaks to the scheme as we go forward in the event of further outbreaks.

Facebook gives Australia the fingers

Moving on, yesterday across the Ditch, Facebook announced that …

“due to new laws in Australia from today, we will reluctantly restrict publishers and people in Australia from sharing or viewing Australian and international news content on Facebook.”

And with that, it stopped any sharing of Australian news media sites and indirectly, some New Zealand sites could be affected as well.

Now, this stoush has been brewing for some time. The Australian Government is trying to force Google, Facebook and other tech giants to pay more for the media content. Google has played along with this proposal. Microsoft, which runs the Bing search software, is also playing along. But Facebook has pushed back very hard and decided to go very hardball with this move.

Now, barely two years ago, Facebook literally made blood money about live streaming the Christchurch massacre and then wrung its hand about the difficulties of taking down such abominations. But yesterday it basically was able to switch off all of Australia’s major media sites on Facebook just like that. And I’m sure there will be a few pointed comments made about that.

I can’t see how such outrageous behaviour will not draw a strong response. And this is where I think from a tax perspective, things may go. The Australian government has previously been lukewarm about a Digital Services Tax, but Facebook’s actions might prompt a rethink. The Australian Tax Office has done some work on this, and there might be a bill lying around which could be introduced at the drop of a hat in effect saying, “Here, stick this up you”.

Incidentally, during this whole run up to this stoush erupting, at least one tech commentator suggested that a DST would be a better approach instead of what the Australian government was trying to do. We’ll see how this all plays out and it’s going to be very interesting to watch. Facebook just lifted the stakes considerably.

There are, according to the OECD, about 40 countries either with an active DST or considering introducing one. Maybe Australia is about to become number 41.

KiwiSaver makeup

Now, briefly following up from last week’s podcast, Inland Revenue is to pay approximately $6.6 million to compensate over 640,000 KiwiSaver members whose employer contributions were delayed in getting to the providers. Now, this happened last April, when Inland Revenue moved KiwiSaver to its new Business Transformation START platform. And for some reason there was a delay in passing on employer contributions to people’s KiwiSaver accounts.

This story reports delays of as much as six months or more. So people lost out on investment performance over that time. And during that time, the use of money interest rate paid by Inland Revenue dropped to zero which would have been the usual way of compensating for the delay.

Instead, what’s going to happen is Inland Revenue has been given approval to make ex gratia payments of about $6.6 million in total. This is a slight bit of a disappointment for Inland Revenue because as I said, by and large, the Business Transformation programme, controversial as it is, has worked relatively smoothly and improved processes. It’s certainly not a Novopay scale disaster, but it’s just another sign that sometimes with IT projects things go wrong.

End of year planning

And finally, the 31st March tax year end is fast approaching. So it’s time to start thinking about what steps could be done in advance of that. Now, there’s a couple of things in particular people might pay attention to.

Firstly, you have until 16th March to make use of the $5,000 threshold for “low value assets”. Under this you get a full write off for assets up to the value of $5,000 acquired on or before 16th March.

This is an emergency measure introduced a year ago as part of the Government’s initial response to Covid-19. So now’s a good time to see if there’s equipment you want to replace or upgrade and take a full write off.

For assets purchased on or after 17th March, that threshold of $5,000 will be reduced to $1,000 going forward.

Now, the other thing to think about is tied in with the forthcoming increase in the personal tax rate to 39%. And the suggestion would be that companies might want to think about paying dividends out to use imputation credits prior to that date so that the shareholders are taxed at 33% rather than 39%.

Sometimes you might pay a year-end dividend anyway because that’s just part of the regular distribution pattern. But you might also do so because the shareholders might have an overdrawn current account which you want to get into credit.

The thing that complicates matters this year is whether such a move might represent tax avoidance. I don’t believe so. But one thing people must keep in mind is that as part of the increase in the tax rate to 39%, trusts have to provide more information about distributions they’ve made in prior years. So as the commentary on the tax bill said, “this is expected to assist in understanding and monitoring the changes in the use of structures and entities by trustees in response to new 39% rate.”

And that’s what gives me pause for concern about paying large dividends before 31st of March. If there isn’t a regular pattern of large dividends before the increase and then a large dividend isn’t repeated after the rate increase, Inland Revenue may look to argue tax avoidance and effectively tax retained earnings. So approach that one with caution.

I think this is a point where Inland Revenue really needs to come out and be very clear about what is going to happen with dividends paid by companies to trust shareholders, which aren’t then distributed.  I think you’ll have a problem if the pattern was previously such dividends were distributed by the trust, maybe less so if that wasn’t the case. Again it’s a question of watching this space. And we’ll bring you developments as and when they happen.

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

More on the state of Inland Revenue’s Business Transformation

  • This week more on the state of Inland Revenue’s Business Transformation programme
  • Grant Robertson’s warning to property speculators
  • Inland Revenue’s latest view on tax avoidance.

Transcript

Inland Revenue for the past five years has been involved in a huge upgrade of its capabilities, what it calls its Business Transformation project.  This has been described by Treasury as “complex, high risk and fiscally significant”. The budget for the project is $1.8 billion and it’s now into its final stages with the expectation that it will all be complete by early 2022.

Given the sheer scale of the project, Inland Revenue has been monitored very closely on its progress by Treasury and it also has to provide regular reports to Cabinet.

The transformation status update for October and November 2020 has been published, and it makes for interesting reading.

The status of the programme is said to be light amber overall, which means that there are minor issues in some areas that can be resolved at the programme level.

What would be encouraging to Cabinet is that the project as of 30 June 2020, is $120 million dollars under budget. The cumulative spend to 30 June 2020 is $1,122 million and Stage Four, which is expected to be completed next year, is expected to cost a further $296.5 million.

IT projects will always attract a fair amount of criticism because they can and do overrun on costs substantially. It’s perhaps an unfair comparison, but it was interesting to see this morning that the costs to date of the Covid-19 tracer app have been estimated to be $6.4 million so far. Now in fairness, the Covid-19 tracer app involves a significantly smaller scale of complexity than designing a system that’s going to manage the tax affairs of six, seven or eight million taxpayers and has $80 billion plus running through it each year.

But at this stage, it would be fair to say that Inland Revenue seems pleased with the project’s progress so far given its budget and expectations. Although the latest update does state, “The temptation to overstretch Inland Revenue capability should be resisted until Business Transformation is closed.” In other words, we can do a lot more now, but don’t be expecting us to do heaps more straight away.

But the more interesting document released at the same time was the Programme Business Case Addendum on Business Transformation.

What makes this particularly interesting is it gives more detail about what’s been happening and sets out more reasons why the project is needed and the economic benefits for the Government.

These programme business cases are prepared annually, the previous one was prepared in October 2019 and this one in October 2020.  The most significant update is to the economic case. The commercial and management cases have also been updated, but no changes have been made to either strategic or financial cases for the project.

Digging into the document, you get an idea of Inland Revenue’s improved capabilities. It talks, for example, at some length about how it responded to the implementation of the Small Business Cash-Flow scheme. The scheme went live at one minute after midnight on 12th May 2020. Now it was 39 working days after the initial decision to begin some work, and then was just 10 working days from when the Government confirmed its intention on April 25th to when the scheme was launched.

In its first five to 10 minutes, it received 43 applications and by 1.20 AM, i.e. just a little bit more than an hour or so after it was launched, it had already received 600 applications. As of 9th October 2020, Inland Revenue had received 104,000 applications and approved $1.6 billion in loans. As I’ve said before and am happy to say again, the Small Business Cash Flow Scheme is a very successful scheme and Inland Revenue do deserve a lot of credit for getting this up and running so quickly.

There’s a few wee snippets of things in the system that will need to be improved. The tax system overall. For example, you may remember that back in 2019 it emerged that a considerable number of people – 1.5 million in total – had the incorrect prescribed investor rate. Now, Inland Revenue got onto this and sent out 1.5 million letters saying, “Hey, you’ve got the wrong rate, either too low or too high so you need to contact your KiwiSaver provider to change it”, but only 15 per cent did so.

Fortunately, the law has been changed so that overpaid tax can now be credited, whereas previously if you’d overpaid under the prescribed investor rate regime, you lost it. So, that’s a good result.

But more importantly, and picking up a point I made last week, that the Inland Revenue tax policy work programme includes a look what is going on with charities –  the donations tax credits process has been revamped. For the year to 31 March 2020, Inland Revenue identified 31,000 claims worth $23 million that were either an error or fraud in its view. And of that, 3,000 claims totalling $4.1 million were referred to audit teams to investigate.

So Inland Revenue’s ability to pick up and identify errors earlier and respond more quickly has been enhanced as a result of Business Transformation. Again, what you would hope to see and so far, so good.

The document sets out what Inland Revenue sees as the main benefit areas for the Government and who it calls “customers.” (In this document, customers are referred to 32 times and taxpayers just once). The main benefits are that it’s going to be easier for taxpayers, and the revenue system is much more resilient. You do wonder what could have happened to the old system given its state if a determined hacker had had a go. The Government now has greater ability to implement policy and that’s very significant.

And then it gets into more nonmonetary and monetary benefits which is where it gets particularly interesting. It says the compliance effort has been reduced for small to medium sized businesses. Now, the methodology here is a little outdated. Inland Revenue hasn’t run an up to date survey, but it does estimate that the median time SMEs spent on meeting their tax obligations was 36 hours back in 2013. It’s expecting that Business Transformation will reduce that by 10 to 26 hours a year. And the cumulative value of the time saved will be over $1.3 billion dollars. It will run a new survey on this later this year.

The big expectation is that the amount of assessed crown revenue will increase $2.8 billion 30 June 2024. And that’s a result of the efficiencies brought into the system, allowing earlier identification of non-compliance as well as easier compliance.

So far, Inland Revenue estimates that to 30 June 2020 it has achieved $280 million of that $2.8 billion. This means over the next four financial years to 30 June 2024 it expects to achieve nearly $2.6 billion dollars of additional revenue.  In the year that ends on 30 June this year there will be another $290 million found. Then it substantially jumps up over the next three years with $600 million in the year to June 2022, $750 million in the year to June 2023 and almost one billion dollars in the year to June 2024. That’s a fairly significant amount of money coming in over the next three or four years, which Grant Robertson will be very grateful about. So Inland Revenue has made a rod for its own back, if you like, in terms of these ambitious additional tax revenue it expects.

Now, the other big benefit, and this is a source of some controversy when I spoke about before Christmas, is the cumulative administrative savings Inland Revenue expects to deliver. By June 2024 these are supposed to amount to $495 million.

Now, as of the date of this report, it’s ahead of target, having achieved savings of $118 million compared to the target of $95 million. But it fell short by some $23 million of its target of $80 million for the year to June 2020. Inland Revenue is therefore hoping to save a further $370 million in the next four financial years, so the pressure will be on in that regard. So again, you can expect the Government and ourselves to be paying particular attention to how that is progressing.

But there’s one controversy about Business Transformation that I think’s important. The whole project cost has been enormous. And one of the concerns I would have about this is that New Zealand businesses – that is New Zealand owned businesses – have by and large not had a great deal of input into this.  According to this report, about where it is spent between July 2014 and 2020 and where Inland Revenue spent more than $500,000 on contractors and consultants providing services across Business Transformation the total percentage spend on New Zealand companies was 36%.

Now, if you include companies/contractors resident for tax purposes in New Zealand, then the total New Zealand percentage spend rises to 73%. In other words, although the Government has passed money through Inland Revenue to a business which is overseas owned, that income, by and large, will be taxed in New Zealand. To give you some idea of just how much might be involved according to Inland Revenue’s June 2020 annual report the total spend for contractors and consultants was just under $183 million.

That’s down, by the way, from $206 million dollars in the June 2019 year.

Now just picking up a point from my time on the Small Business Council, this is an area where we saw a lot of frustration from small businesses. They felt they could not get through to deliver services to the Government because of what they saw as excessive gatekeeping and bureaucracy involved in the industry.

New Zealand has a great IT industry just picking up and getting that point about the Covid-19 app that cost $6.4 million which is absolute peanuts. Apparently in Britain, they’ve spent £10 million on one app which was abandoned and do not appear to have anything that works as efficiently as our app. So, the capability is here.

And I feel that there was a great missed opportunity with Business Transformation. Hopefully going forward the percentage of New Zealand businesses that do get involved with the tail end of this work or new work as it arises, will be increased.

But the overall state you can take from this report is Inland Revenue considers Business Transformation is moving in the right direction. We’ll need to pay attention to whether it will achieve its ambitious goals. But certainly, it feels it has the tools available to achieve what the Government will want, that is additional tax revenue to pay down the massive debt that’s been run up because of Covid-19 and no doubt the huge spend going forward for maintaining our infrastructure and health services, as well as regular costs such as superannuation and education.

Robertson on property speculation

Moving on, the Finance Minister Grant Robertson made a speech to the BNZ on Tuesday, about the forthcoming Budget Policy Statement. In the course of his speech he said,

But we can do more or more to manage demand, particularly from those who are speculating New Zealanders are seeing family members being crowded out of the opportunity to purchase a home of their own by speculators and investors.

The housing boom and the resulting pressure on the rental market and vastly increased prices is a concern to the Government as it is getting shot at from all sides. So clearly, this statement from Grant Robertson was a reminder that Inland Revenue does have the tools, which I’ve just explained, it feels it can do a lot more to look into the speculators.

And that leads on to the inevitable discussion of the bright-line test, which to quickly recap applies when any residential property is sold within five years of acquisition. The sale will be taxed unless an exemption applies.

Now, the bright-line test is one of a number of other property taxation clauses within the Income Tax Act. There is Section CB 6 which taxes property bought with an intention or purpose of sale.  The problem with the tax laws around the taxation of property is the absence of a comprehensive capital gains tax. There’s a lot of subjective clauses involved. The bright line test is very largely unique in that it very specifically says if this happens, then it’s taxable subject to exemptions.

On the other hand, section CB 6, which I just mentioned, talks about purpose or intent. There’s also section CB 12 which taxes a subdivision which involves work not of a minor nature.

And so, of course, you’ve got these subjective phrases.  And just to compound those issues is that when you drill into these sections, sometimes they will apply if that particular activity happens within 10 years of acquisition, but maybe within 10 years of a building being completed, the timeline isn’t always the same.

And the exemptions that may be available because it’s a residence or business premises for example, vary as to who can use them. For example, there are four possible exemptions available to someone who’s taxable under section CB 12, which is a subdivision which is not of a minor nature. But two of those exemptions don’t apply if the person involved is a trust.

And so these inconsistencies and details around the varying times of which rules may apply and when give plenty work for people like myself. But notwithstanding that, they also point to the need for a complete rethink of those rules to bring clarification and some form of internal consistency. Why should one exemption apply to a property owned by a trust, but another exemption not? You would expect it to be consistent across the board. Now that it so happens that Inland Revenue does have such a project on its on its policy work programme. So, we can expect to see something maybe later this year or early next year.

Updating Inland Revenue’s view on what is tax avoidance

And finally, with the increase in the tax rate to 39% coming up, it’s timely to consider the implications of trying to take steps to mitigate that. The Income Tax Act has a number of tax avoidance provisions which Inland Revenue can apply.  Sections BG 1 is the general anti avoidance provision and for those with very long memories who may recall the Penny Hooper case, involving a couple of surgeons, this was the provision applied.

Inland Revenue has got an Interpretation Statement on anti-avoidance but it was issued in 2005. It has now released an updated version for consultation.

And that update came with a five page information sheet, which when something like this comes with an information sheet, you know you’re in for some particularly dense reading.

There’s too much to cover right now so I’ll pick it up at a later podcast when we have had a chance to consider it closely. But this is a reminder that the temptation will be to start making plans to mitigate the impact of the 39% rate. But you need to be aware of Inland Revenue’s possible response.  I’d therefore recommend every tax advisor has a close look at what this new draft interpretation statement is saying.

Well, on that happy note, that’s it for this week. Thank you for listening. I’m Terry Baucher 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 week, ka kite āno.

The potential tax implications of the Climate Change Commission’s draft advice.

  • A look at the potential tax implications of the Climate Change Commission’s first draft advice to the Government
  • The latest from the OECD on international tax
  • A look at what a recent slew of reports and documents say about the state of Inland Revenue and its priorities

Transcript

Last Sunday, the Climate Change Commission released its draft advice for consultation. The draft advice has already stirred up a great deal of controversy and discussion about the suggested objectives for the country and how they are to be met.

On tax, the Commission’s Necessary Action 3 recommended accelerating light electric vehicle (EV) uptake.  As part of this it suggested the Government –

“Evaluate how to use the tax system to incentivise EV uptake and discourage the purchase and continued operation of internal combustion engine vehicles.”

I’ve covered this elsewhere and my suggestion is that Inland Revenue needs to look at greater enforcement of the fringe benefit tax rules, maybe including an exemption for electric vehicles and looking also at the application of FBT to parking.

What else did the Commission discuss on the taxation side? Well, it noted that the climate transition will impact government taxation and spending and that the Government needs to plan for this. It noted that fuel excise duties, the revenue comes from that which is spent on land transport, will change and probably decline. It also noted that reducing oil and gas production will result in less tax revenue and also affect the balance of exports because of the reduction in oil exports.

On the other hand, the emissions trading scheme will generate income from the sale of emissions units. Obviously the amount raised will depend on the volume of units and the market price for years, but at current estimates are that it could equate to about $3.1 billion over the next five years.

Now, what the Commission has suggested is that maybe these funds could be recycled back into climate change projects. And that’s something I would agree with. In my piece on the Commission’s draft report I suggested that increased FBT take should be recycled into funding a vehicle purchase scheme.

So I think one of the things that comes out of the Commission’s draft report is that its recommended changes are  going to affect the country and the community greatly, and we need to mitigate for that. And if funds are being raised from environmental taxation, my view is they need to be recycled into the economy to mitigate the impact of change.

That, by the way, was also the view of Sir Michael Cullen when he presented the Tax Working Group’s report, which covered environmental taxation, but its interesting observations on that were completely lost in all the hoo-ha over capital gains tax. As the Commission notes, one of the key objectives going forward is a

“process for factoring distributional impacts into climate policy and designing social, economic and tax policy in a way that minimises or mitigates the negative impacts.”

There’s going to be a very interesting debate on this issue which will continue for quite some time. But we are at a point where we’re going to need to take quick action, I believe, which come with consequences. We need to mitigate those consequences as far as possible.

Late last week, the OECD held its 11th meeting of the OECD/2020 inclusive framework on base erosion and profit shifting (BEPS). This is the international project on reforming international taxation.

The (virtual) meeting included a last address from the outgoing Secretary-General of the OECD, Angel Gurría. He talked about what has happened over his 15-year term as Secretary-General. As he said when he took the helm in 2006 –

“tax avoidance and evasion were running rampant. Urgent action was needed, and the aftermath of the global financial crisis presented the opportunity to crack down on these nefarious practices backed by the newly established G20.”

The Secretary-General then ran through the latest developments noting that 107 billion euros of additional tax revenue has been identified as a result of the initiatives such as the Common Reporting Standard and the Automatic Exchange of Information. There have been over 36,000 exchanges of tax rulings between jurisdictions and over 84 million financial accounts have been identified and exchanged in 2019, with a total value of around 10 trillion euros.

He also made a very important point that in a globalised world, tax cooperation is the only way to protect tax sovereignty. That was true at the start of his term in 2006 and remains the case now.  Without such cooperation each country’s domestic tax policies are at risk. The latest state of play is a reflection of this where if an international solution is not found by the middle of the year, over 40 countries, including New Zealand, are considering or will move ahead with a unilateral digital services tax.

The solution to this is the so-called Pillar One and Pillar Two proposals. Now, these are progressing, and an encouraging fact is that the new United States Secretary of the Treasury, Janet Yellen, as part of her confirmation hearings stated the United States is –

“committed to the cooperative multilateral effort to address base erosion and profit shifting through the OECD/G20 process, and to working to resolve the digital taxation disputes in that context.”

So that’s extremely encouraging.

The Secretary-General also picked up the Climate Change Commission’s draft report, that carbon pricing is an issue that needs to be addressed. As Mr Gurría noted across the OECD 70% of energy related CO2 emissions from advanced and emerging economies are entirely untaxed. And so, as he put it, “putting a big fat price on carbon is one of the most effective ways to tackle climate change by creating incentives to reduce emissions.”

Now, the Climate Change Commission’s recommendations and the ongoing OECD BEPS Initiative are just two of the major policy issues on which Inland Revenue will be needing to provide policy advice and ultimately implementation. Although the Treasury provides advice to the Ministers of Finance and Revenue on tax policy, Inland Revenue is the main tax policy adviser to the Government. That’s actually quite unusual by world standards, where more often it is the Treasury Department that drives tax policy advice.

So where is Inland Revenue at in terms of where it thinks tax policy is going? Well, as part of its general processes it prepares a briefing to each incoming Minister of Revenue. And the briefing Inland Revenue provided to the new Minister of Revenue, David Parker has now been released.

Inland Revenue, in conjunction with Treasury, will develop a tax policy work programme, which is then signed off by the Ministers of Finance and Revenue.  These programmes will show what the priorities are and the expected policy focus over the next 18 months.

Now, obviously, Covid-19 will have some impact on the programme. The five top policy issues that Inland Revenue have identified as key priorities are rebuilding the economy, issues related to misalignment of the top personal tax rate, the role of environmental taxes and what an environmental tax framework should look like, improving data analytics, and international tax settings.

And the briefing then goes on to set out significant current policy issues, most of which reflect these policy priorities.  There is a specific item on taxing the digital economy which notes –

“Ministers will need to make a decision about the suitability of any OECD multilateral solution for New Zealand and whether to progress a unilateral digital services tax.”

But as often is the way it’s what’s not actually said in a document that makes it interesting. Briefings to Incoming Ministers are usually frank in giving an overview of where the department is at, what the main policy issues are as it sees it, and how it proposes that it should deal with the issues. But not everything is revealed.

And there are one or two interesting redactions in here, one of which appears to relate to some form of investigation into taxation of wealth.  At a guess this is identifying the wealthy in the group, usually defined as those with more than $50 million dollars in assets, their tax behaviours, how much tax they pay and what are they doing to mitigate tax.

Interestingly, by the way, the tax concessions charities and not for profits get is going to be reviewed to “ensure they operate coherently and fairly and to ensure the integrity of the tax system is protected.”  As the Tax Working Group noted, it received a number of submissions complaining about tax preference treatment of charities.

The Briefing also talks about Inland Revenue’s Business Transformation project, described as “complex, high-risk and fiscally significant (costing $1.8 billion)” in the separate briefing provided by the Treasury to the Minister of Revenue.

And there are some more very interesting redactions in here relating to funding of the Inland Revenue including references to other reports which have not been provided and which I have therefore requested under the Official Information Act.

What some of these redactions to an issue that in my view the Minister of Revenue and the Commissioner of Inland Revenue, Naomi Ferguson, need to address,  is the poor state of morale.

Inland Revenue’s 2020 Annual Report, released just before Christmas, at the same time as the Briefing to Incoming Minister, puts its staff engagement at a shocking 25%. And it has been bumping around at the 25 to 29% for several years now. And that’s an impact of Business Transformation, which has shaken up the workforce in Inland Revenue quite substantially. In the year to June 2016, the headcount of Inland Revenue was 5,789. As of 30 June 2020, that has fallen to 4,831.

So a substantial amount of change has gone on in the department which doesn’t appear to have been welcomed or met with enthusiasm.  It has certainly had a dramatic impact on the Inland Revenue staff engagement and morale. Whatever you might think about Inland Revenue and its activities, poor staff engagement is not good for tax payers at large.

It should be said that remarkably and consistently Inland Revenue staff in their direct interactions with tax agents like myself and the general public continue to be highly professional, well-mannered and and responsive to our needs. But clearly behind the scenes, there is stuff going on that needs to be fixed and that should be a priority for the Minister of Revenue and the Commissioner of Inland Revenue.

There’s also ongoing controversy around exactly what savings are going to be achieved from Business Transformation. The scale of the Business Transformation project means the Cabinet gets regular updates on progress. So next week I’m going to take a closer look at a couple of the documents that have also been released in relation to Business Transformation.  These report on how it’s progressing relative to what was expected and what changes and additional funding, if any, may be required.

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

Climate Change Commission’s draft report

Climate Change Commission’s draft report

Terry Baucher looks at some of the taxation ramifications from the Climate Change Commission’s draft report

The Climate Change Commission released its draft advice for consultation on 31st January. What of note did it have to say about the role of taxation?

The Commission’s Necessary Action 3 recommended accelerating light electric vehicle (EV) uptake.  As part of this it suggested the Government:

Evaluate how to use the tax system to incentivise EV uptake and discourage the purchase and continued operation of ICE [internal combustion engine] vehicles.

As the Commission is no doubt aware taxes can have significant behavioural changes very quickly as the following example of the changes in the United Kingdom’s Landfill Tax illustrates.

Between its introduction in 1996 and 2016 the rate of Landfill Tax was increased from just under £10 a tonne in 1996 to nearly £90 a tonne by 2016. Over that 20-year period the annual amount of waste landfill fell from 50 million tonnes to 10 million tonnes.

So what tax changes could be used to incentivise change?

The available evidence indicates that the present fringe benefit tax (FBT) rules are unintentionally environmentally harmful. A NZ Transport Agency report in 2012 examining the impact of company cars found they were heavier with higher engine ratings than cars registered privately. The availability of employer-provided parking encouraged longer commutes from more dispersed, automobile-dependent locations than would otherwise occur.  Under present rules employer-provided parking is largely exempt from FBT.

The trend for larger, heavier vehicles has accelerated since 2012 with a greater preference for vehicles such as SUVs and utes. Last year 77% of all new passenger vehicle registrations were SUVs and utes.

A by-product of the trend for purchasing of twin-cab utes appears to be widespread non-compliance with the existing FBT rules. This is in part because of an incorrect perception that such vehicles automatically qualify for the “work-related vehicle” exemption from FBT. The combination of greater numbers of such vehicles and apparent under-enforcement of the FBT regime[1] exacerbates the trend for indirectly environmentally harmful practices identified by the NZTA in 2012.

Inland Revenue should therefore immediately increase its enforcement of the FBT rules relating to twin-cab utes. These changes should be allied with the adoption of the approach in Ireland and the United Kingdom where FBT is greater on higher emission vehicles. I consider these emission-based FBT rules can be adopted relatively quickly, and it ought to be possible to have these in place by 31st March 2023.

As an interim measure to encourage greater take up of EVs the Government could consider exempting EVs from FBT until the new emission-based FBT rules are in place.  In Ireland, EVs with an original market value below €50,000 are presently exempt from FBT. The threshold here could be $50,000.

Additional FBT related measures include increasing the application of FBT on the provision of carparks to employees and not taxing the provision of public transport to employees. This reverses the present treatment and fits better with a policy of decarbonisation without impacting an employer’s ability to provide such benefits.

Taxing the provision of employer-provided carparks could raise significant funds. The 2012 NZTA report estimated the annual value of free parking in Auckland to be $2,725. With at least 24,000 employer owned car parks in the city this amounted to a tax-free benefit of $65 million per annum. FBT is generally charged at 49% of the value of the benefit so the potential FBT payable could be between $75 and $100 million per annum.

The suggested FBT changes should change behaviour, but as the Commission also pointed out we need to reduce emissions. We have one of the oldest vehicle fleets in the OECD and it is getting older. The average age of light vehicles in Aotearoa New Zealand increased from 11.8 years to 14.4 years between 2000 and 2017.[2] Compounding this issue, the turnover of the vehicle fleet is slow, on average vehicles are scrapped after 19 years (compared with about 14 years in the United Kingdom). 

Furthermore, we are one of only three countries in the OECD without fuel efficiency standards. As a result the light vehicles entering Aotearoa New Zealand are more emissions-intensive than in most other developed countries. For example, across the top-selling 17 new light vehicle models, the most efficient variants available here have, on average, 21% higher emissions than their comparable variants in the United Kingdom. They are also less fuel efficient, burning more fuel and therefore generating higher emissions. The Ministry of Transport estimated if cars entering Aotearoa New Zealand were as fuel efficient as those entering the European Union, drivers would pay on average $794 less per year at the pump.

The Commission is concerned about the impact of its proposals on low-income families, who could be asked to bear a disproportionate part of the costs of change. For this reason, I suggest the funds raised from the FBT changes should be first applied to a vehicle exchange programme. This would remove older higher-emitting vehicles (say ten or more years old) by subsidising purchase of newer vehicles (maybe from car rental companies with excess stock).

If it seems counter-intuitive to subsidise “old carbon” technologies there are three short-term benefits to consider: newer cars generally have lower emissions, are more fuel efficient and are safer, indirectly helping reduce the road toll. This scheme also supports the most vulnerable families who cannot rely on public transport and are most likely have older, less fuel-efficient vehicles. Furthermore, funds involved would go further than if applied in directly subsidising the purchase of electric vehicles.

I also suggest the buy-back scheme is targeted at lower-income families and should therefore be means-tested.  A starting threshold might be the Working for Families tax credits threshold of $42,700 above which abatement applies. This threshold could be increased if the vehicle is more than, say, 15 years old with accelerated rates applying if the car is more than 19 years old (i.e. older than the life expectancy of the average car in Aotearoa New Zealand).

The Commission has opened the debate on our transition to a greener, low-emissions economy. Tax will have a major role in that as Pascal Saint-Amans, the Director of the OECD’s Centre for Tax Policy and Administration acknowledged last year when he suggested that when responding to the impact of Covid-19.

Governments should seize the opportunity to build a greener, more inclusive and more resilient economy. Rather than simply returning to business as usual, the goal should be to “build back better” and address some of the structural weaknesses that the crisis has laid bare.

A central priority should be to accelerate environmental tax reform. Today, taxes on polluting fuels are nowhere near the levels needed to encourage a shift towards clean energy. Seventy percent of energy-related CO2 emissions from advanced and emerging economies are entirely untaxed and some of the most polluting fuels remain among the least taxed (OECD, 2019). Adjusting taxes, along with state subsidies and investment, will be unavoidable to curb carbon emissions.

The 2019 Tax Working Group (the TWG) chaired by Sir Michael Cullen undertook a review of environmental taxation and made several significant recommendations in its final report.

Unfortunately, the backlash against the TWG’s proposed capital gains tax meant that its commentary and proposals on environmental taxation were overlooked.

Nevertheless, the TWG’s groundwork in this area now needs to be built on. It’s therefore interesting to note that in its briefing to the new Minister of Revenue David Parker Inland Revenue noted one of its top tax policy priorities was “the role of environmental taxes and what an environmental tax framework should look like.”

Given that David Parker is also the Minister for the Environment I suggest Inland Revenue might be accelerating its work in this field, if the goals suggested by the Climate Change Commission are to be met. Watch this space.


[1] FBT is tied to employment. Over the 10 years to 30th June 2020 the amount of PAYE collected by Inland Revenue rose by almost 66% from $20.5 billion to $34 billion. However, over the same period the amount of FBT paid rose 28% from $462 million to $593 million. This gap suggests some level of under-reporting and enforcement.

[2] By comparison in the United States in 2016 it was 11.6 years for cars and light trucks and 10.1 years for all vehicles in Australia for the same year and 7.4 years for passenger cars in Europe in 2014 (Ministry of Transport data)