A look at the interest limitation rules and the proposed “new build” exemption

A look at the interest limitation rules and the proposed “new build” exemption

  • A look at the interest limitation rules and the proposed “new build” exemption
  • The OECD’s latest Fighting Tax Crime, how does Inland Revenue measure up
  • The new purchase price allocation rules

Transcript

The Government’s discussion document on the design of the interest limitation rules on the additional bright-line test was released a little bit over two weeks ago. Since then it’s been a hive of frantic activity amongst tax agents, accountants and lawyers as we try and digest the implications of what’s proposed and work out how we manage those changes.

As part of that, Inland Revenue has been running an external reference group made up of accountants, tax advisors, tax lawyers and industry specialists such as Fletcher Building. We’ve been going through parts of the proposals and giving Inland Revenue feedback on what we think of the proposals.

Yesterday we discussed the question of new builds. Now the new build definition is going to be incredibly important because the Government is proposing that owners of new builds will have a five year bright-line test exemption instead of the 10-year test which applies from 27th March. Also, and this is the bit that’s getting most people particularly interested, will be exempt from the proposed interest limitation rules.

The proposal is that a property should only qualify as a new built where residential housing supply has clearly increased. This, according to the discussion document,

“will occur when a self-contained dwelling with its own kitchen and bathroom has been added to residential land and the dwelling has received a Code Compliance Certificate.”

The discussion document then talks about three new build categories, simple new builds, complex new builds, and commercial residential conversions.

We were discussing these definitions with Inland Revenue as well as the question of how long should the exemption last; indefinitely or for a prescribed period of time? And if it is for a prescribed period of time, could a subsequent purchaser be able to make use of the balance of that period? A lot of details to consider there.

It’s of great interest, clearly, because late this past week, I made a presentation on the new rules to the Employers & Manufacturers Association and the New Zealand Chinese Building Industry Association. Some very interesting discussions came out of that – it’s apparent a lot of people clearly are focussing on what is a “new build” with many of the questions around the definition and what’s going to happen?  Clearly this is a very important part of the Government proposals.

Running through a little bit of the detail. Simple new builds involve adding one or more self-contained dwellings to bare residential land. So that would include adding a dwelling to buy land that is one of more dwellings is allotted to bare residential land. It doesn’t matter whether a new build is fully or partially constructed on site, so it will cover modular homes. It would include a dwelling that has been relocated onto the land.

It includes replacing an existing dwelling with one or more dwellings. This is where an existing dwelling is removed or demolished and then replaced with one or two or more dwellings. It’s proposed that even one for one replacement would qualify, even though strictly there’s been no increase in housing supply. But there’s been an improvement in the quality of the housing. And we’ll come back to that point in a minute.

Complex new builds involve adding one or more self-contained dwellings to residential land that already has a dwelling on it without a separate title being issued for the new build portion of the land. So that would include adding a standalone dwelling and that could be a sleep-out, for example.

Adding, or attaching a new dwelling to an existing dwelling, for example, where dwellings are added on top of or underneath or next to an existing dwelling on residential land. Splitting an existing dwelling into multiple dwellings. This is where residential land has an existing dwelling on it that is then converted into multiple self-contained dwellings, for example, where a six-bedroom house is converted into three two-bedroom units.

In our discussion with Inland Revenue, the question arose about what to do with renovations and remediation and that led into a very interesting discussion.  The same point came up at the afternoon’s seminar. What do we do, for example, where you have a house that’s previously been left as uninhabitable? Maybe, for example, it’s not up to building code or the healthy homes standard, but money is being spent to remediate these matters.

So we debated whether we think the interest portion on such work should be deductible. And the general view was broadly yes. You’ve obviously got some definitional issues about what is uninhabitable. But clearly, if the Government wants to increase the housing supply and the availability of accommodation, taking a house which was, say, previously had been left to rack and ruin and then bringing it up to healthy home standard, the view was the interest in that deduction probably should be allowable.

Of course, as a separate matter which we didn’t discuss, what about the deductibility of the actual expenditure on making a dwelling meet the healthy home standards? That’s less clear and arguably is non-deductible and that’s all part of the problem with the current tax system and how complex the whole matter has become. It’s pretty harsh on the capital treatment of buildings. Since 2011 we don’t have depreciation on residential accommodation. And I’m beginning to form the view that maybe we should restore that, because as this discussion on the question of renovation points out, buildings do fall into disrepair. There’s also the matter of leaky buildings and earthquake strengthening.

Finally, there’s commercial to residential conversions. This new-build category covers the conversion of commercial buildings into self-contained dwellings. For example, an office converted into apartments or a large commercial heritage building, such as a harbour warehouse that’s converted into townhouses. Such conversions are seen as new builds.

And the proposal is that the exemption goes to “an early owner” of new builds.  This is a person who:

  • acquires a new build off the plans before Code of Compliance Certificate is issued,
  • acquires an already constructed new build, no later than 12 months after the new build’s Code of Compliance Certificate is issued;
  • adds a new build to bare land;
  • adds a complex new built to land; or
  • completes a commercial residential conversion.

The other matter for debate on which no decision has yet been made, is how long should that exemption last? Inland Revenue have suggested this could be 20 years.

On this, an interesting point came up in yesterday’s seminar. People got up and said, “Wait a minute, you said five years there. And then you talked about 10 years and now you’ve mentioned 20 years. What’s this 20-year thing?”  But you can see that the overlapping five year bright-line test, 10 year bright-line test and possible 20-year new build exemption adds to confusion about the whole process.

And that’s something that when you’re making submissions on the matter, you should think carefully about the coherence of the tax system and how much complexity we are introducing. We’ve got another two weeks until submissions close on 12th July. And I’d urge people to do so.

Fighting tax crime

Earlier this week, the OECD released a report called Fighting Tax Crime – 10 Global Principles following a meeting of the heads of tax crime investigations from 44 countries. There are 10 principles which they describe as “essential legal, institutional, administrative and operational mechanisms necessary for putting in place an efficient system for fighting tax crimes and other crimes”.

There’s quite a lot of detail in this report to unpick. The report includes 33 country profiles detailing each country’s domestic tax crime enforcement frameworks and the progress each country has made in implementing the Ten Global Principles. Now, New Zealand is one of those countries, and its chapter makes for some very interesting reading.

The first principle is that there is a criminalisation of tax offences and that countries have to have a legal framework put in place to ensure violations of tax law are categorised as a crime and penalised accordingly. Now, tax evasion is money laundering, and it should be well known that it was tax evasion which led to the notorious gangster Al Capone’s downfall, as he was jailed for tax evasion, a.k.a. money laundering. There are some interesting stats here, but they’re not quite as comprehensive as you might expect to see: the numbers in the report only go back to 2016.

But throughout the report, there’s some very interesting snippets. For example, the report mentions the tax gap, that is the difference between what tax should be expected to be collected and what actually is collected. The report notes that New Zealand does not calculate an overall tax gap. That’s actually not out of line with other countries. Some countries can report on what they think the GST or VAT gap is, but generally not every country can say “We’ve got a reasonable idea of what the tax gap is”.

The report then goes on to say that New Zealand has estimated that on average, the self-employed population under-report approximately 20% of their income. That’s quite a statement. You’d then be thinking “Well, what is Inland Revenue going to do about that and how much might that be?”  In Australia, for example, they estimate their tax gap is about AU$31 billion, or about 7% of the tax take. A similar number here in New Zealand would be over NZ$5 billion, however that’s thought to be unlikely because unlike Australia, we have a very comprehensive GST. But the Tax Working Group did take into consideration a number of around between $850 million and $1 billion dollars annually.

The country reports discuss various principles, like a strategy for addressing tax crimes, investigative powers, the ability to freeze and seize and confiscate assets, and it notes between 2015 and 2019 New Zealand authorities seized $90 million dollars of assets in connection with criminal tax matters. And in fact, one of the highlights for New Zealand in this report was we have a strong legal framework for recovery of assets related to tax crimes.

The questions in my mind start to arise, and I disagree with the report on this particular point, is around Principle Six – adequate resources. The report notes that Inland Revenue’s hidden economy work for the year to June 2019 raised $108.8 million of tax revenue. And it notes

“[Inland Revenue] has no staff dedicated entirely to tax crime investigations, but rather maintains an agile workforce of specialist accountants and lawyers who operate under broad rules, enabling them to investigate tax crime cases either referred to them a suspected tax offending or revealed a suspected tax offending in the course of standard audits.”

That is the process, but the statement is a little too pat for my liking. And the question that keeps coming up in my mind is, is Inland Revenue directing its resources appropriately? Because when it’s saying, “We think the self-employed are underreporting 20% of their income” my question is, “What are you going to do about that?” And if you follow the money in the budget appropriations and you see that the investigations budget has been cut by $10 million, a cynic might answer “Maybe not enough”.

One of the things that the report suggested New Zealand could do better would be using enhanced forms of cooperation such as secondments and colocation of staff and joint intelligence agencies and centres. That actually would be helpful in terms of also working with anti-money laundering. I have my reservations about that, but we shall see.

Valuing business assets

Finally this week, there’s a new set of tax rules coming into place on 1st July in relation to how business assets are valued when they’re sold. And these are what we call the purchase price allocation rules. These rules apply to the sale of assets such as commercial property, forestry, land or business.

What the new rules do is make it clear that both the buyer and seller have to make the same allocation, the rules set out a process that must be followed. And if they can’t balance an account, agree on an allocation, they will have to notify Inland Revenue who they then make the allocation for them.

The idea is to bring consistency to agreements for the disposal of acquisition of property in businesses. What was happening was buyers and sellers were adopting different allocations for assets that were sold. This process would mean then for a vendor, allocating as much to tax free capital gain, such as goodwill, was to be preferred. Whereas for the purchaser, they’d want to be allocating as much as possible to taxable and depreciable assets because then, for example, stock and fixed assets, they can then expense or depreciate.

There were various estimates about how much this might be costing the Government – up to $50 million dollars a year was one estimate. The result was these rules have been introduced and take effect from 1st of July.  They’re not terribly popular because they add a lot of detail and complexity to a process which is already quite stressful.

But the key thing is if you’re selling or purchasing a business you will need to pay more attention to what’s happening and how you’re allocating the costs between the various asset classes. The rules also apply to sales of residential land for $7.5 million or more, but only if neither buyer nor seller is an owner-occupier in relation to the land. As I said these rules are effective as of 1st July.

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


A look at the G7’s agreement for a minimum corporate tax rate of 15%

A look at the G7’s agreement for a minimum corporate tax rate of 15%

  • A look at the G7’s agreement for a minimum corporate tax rate of 15%,
  • The role of tax in the Climate Change Commission’s final advice to the Government
  • FBT and what is a work related vehicle?

Transcript

Last weekend in Cornwall, England, the G7 Leaders meeting confirmed what had been agreed by the G7’s Finance Ministers and Central Bank Governors over Queen’s Birthday weekend, that a minimum corporate tax rate of 15% would be introduced on a country-by-country basis.

What the Finance Ministers and Central Bank Governors have agreed to is what they describe as “an equitable solution on the allocation of taxing rights with market countries, a water taxing rights on at least 20 percent of a profit exceeding a 10 percent margin for the largest and most profitable multinational enterprises.”

Now, what’s also part of this deal and has been probably overlooked because of the commitment to the 15% rate, is that the G7 also agreed to “provide for appropriate coordination between the application of these new international tax rules and the removal of all Digital Services Taxes and other relevant similar measures on all companies.”

And that’s where it gets a little interesting, because when you look at the press conference held immediately afterwards by the US Secretary of the Treasury, Janet Yellen, it becomes apparent that this is a bit of a win for what we call the GAFA – Google, Apple, Facebook and Amazon.  When she was questioned about how, for example, the French are targeting Amazon and Facebook, Secretary Yellen replied as follows,

“It is intended to replace an approach that focused on just a few US digital giants, and the agreement is that this new approach will replace an approach that we found objectionable, that targeted large, successful US digital firms. But most of these firms are likely to be included in this new scheme the Pillar One scheme.”

Pillar One and Pillar Two are part of this international framework being built to set up how we tax digital economy in the 21st century.

And it’s quite interesting because it comes back to discussions, as we mentioned previously, about the impact of the digital economy and, for example, how much tax Google pays here relative to how much it’s actually taking out of the economy. On the basis that New Zealand gets to tax 20% of the residual profit above a 10% margin, it’s possible that Google’s tax bill may triple to maybe $9 or $10 million. And that would be based on the assumption that about $200 million or so of its estimated $800 million that it takes out in advertising becomes taxable. Is that a big win for New Zealand? I’m not so sure.

The other point that I’ve noted about Secretary Yellen’s comments, is that the 15% rate is in the US view, a minimum, with 21% as the target. Questioned, “Well, how are you going to make this work?” Yellen also pointed out that the agreement under Pillar Two contains an enforcement mechanism that would come into play and apply to jurisdictions that decide, “No, we’re happy to be tax havens and we don’t want to sign up to this agreement”. This so-called “under tax payment rule” would essentially put pressure on those countries to abide by the corporate minimum tax, whatever is eventually agreed.

And so that’s basically calling time, as the G7 communique refers to it on this race to the bottom on corporate tax rates which has been going on for about 40 years now.

The next stage is that the agreement will be worked out through the G20/OECD inclusive framework. There is a July meeting of G20 Finance Ministers and Central Bank Governors, which is hoped will get final agreement on this 15% minimum corporate tax rate and on the agreement on the Pillar One taxing rights.

I suspect as usual, politics will come into play here. And I do wonder how India is going to react to this, because it has made significant use of digital services taxes. But we’ll have to wait and see. It’s certainly a step forward in the right direction. And it is another step on the road towards ending tax havens, whose days, in my view, are numbered.

What was also interesting about the G7 Finance Ministers and Central Bank Governors communique announcing the global minimum corporate tax rate, is that that particular announcement was just one paragraph of 20. It was actually number 16 because the first focus was on “building a strong, sustainable, balanced and inclusive global economy”. And then the G7 Finance Ministers went on to talk about the transformative effort to tackle climate change and biodiversity loss. And they spent a bit of time on this, as did the G7 leaders when they released their communique.

And of course, coincidentally, in the same week as the G7 Finance Ministers made their announcements, we had the Climate Change Commission releasing its final advice to the Government on how to move forward on climate change.

Climate change and tax

Now, the Climate Change Commission actually had little to say about specific tax measures. It did note, for example, that reducing oil and gas production in New Zealand would reduce the Government’s tax revenue. As is well known, the Emissions Trading Scheme would remain the main pricing tool.

The Commission did note that tax could be used to incentivise investments and choices, although it didn’t say much specifically on this. It talks about maybe using taxes for R&D incentives. We have an R&D tax credit incentive scheme. And you may recall that last year I spoke with John Lohrentz about an interesting idea using R&D tax incentives to reduce methane emissions.

The Commission did suggest that the tax system should be examined for ways to discourage the adoption of internal combustion engine vehicles and encourage low emission options. It noted that some submitters, and I was one of them, raised concerns about how fringe benefit tax is calculated for light vehicles and in particular the question of emissions from utes and trucks.

Most of that went by the by. But then last Sunday the Government announced its feebate proposal for electric vehicles and a debate kicked off on social media, over this question of twin cab utes and their “exemption” from FBT. So I thought today I would have a look at this widely held belief that utes are exempt from FBT under the work-related vehicle exemption

To go back to basics under Section CB 6 of the Income Tax Act 2007, a fringe benefit arises when a motor vehicle is made available to an employee for their private use. However, that provision does not apply when the vehicle is a work-related vehicle.

Now, Inland Revenue’s summary of this is that FBT will not apply to a vehicle if it meets all of the following conditions:

  • it is drawn or propelled by mechanical power (this includes trailers);
  • it has a gross laden weight of 3,500 kg or less;
  • the vehicle is mainly designed to carry goods or goods and passengers equally;
  • it has prominent company branding that cannot easily be removed;
  • you tell your employees in writing that the vehicle is not available for private use; except for travel between home and work, and for travel related to the business, such as stopping at the bank on the way home from work.

And then Inland Revenue say as part of this, you must give employees a separate letter explaining this restriction rather than mentioning it in their employment agreement.

Now the statutory definition of work-related vehicle is set out in Section CX 38 of the Income Tax Act. And as just recited, there’s restriction around the display of branding, for example. And on this, sticking the branding on say the spare tyre, which is on the back of the vehicle, is insufficient because that’s fairly easily removable. The sign writing has to be prominent.

The definition of a work-related vehicle in section CX 38 does not include a car. And then there is the bit that I think is causing all the issues around fringe benefit tax. Under section CX 38(3), the motor vehicle is not a work-related vehicle on any day on which the vehicle is available for the employee’s private use, except for private use, that is travel to and from their home, that is necessary in, and a condition of their employment or other travel in the course of their employment, during which the travel arises, incidentally, to the business use.

There are a couple things to note here, for example, that it is NOT a work-related vehicle on ANY day when it’s used privately. Then on the question of private use travel to and from their home is ok if “it is necessary in, and a condition of their employment.”

Now, in my view all of those conditions are where the gap, in FBT compliance, is happening. The home to work restriction is not being followed through. I would also question, in fact, whether as many companies have the separate letters in place that Inland Revenue expects.

This home office base of business is something Inland Revenue has looked at. Increasing numbers of businesses are working from home digitally whether it’s a trade or digital business.  So it’s reasonably clear that home is a place of work and therefore travel from there which is for business purposes is covered by the exemption.

But as I’ve noted beforehand, FBT does seem to be tracking behind in payments[1]. And there are perhaps apocryphal stories of Ministers of Revenue turning up to meetings in the South Island and being greeted “Welcome to the South Island where we don’t pay FBT.”

To get across this Inland Revenue will need to devote some resources to finding out exactly what is going on in this space, because as came out through the feebate debate, the twin cab ute has become one of the most popular and best-selling vehicles in New Zealand. And the question arises particularly when you see them in an urban environment, are these really work-related vehicles and what is Inland Revenue going to do about it?

And this comes on to my final point this week as to whether Inland Revenue, in fact, has the capability to investigate the issue. It should have. It has very extensive information gathering powers. I would have thought it was a straightforward matter to obtain details of all companies which own twin cab utes or similar vehicles and then cross-reference that information with FBT returns.

Maybe that is going on, and if so it would mean Inland Revenue has decided to keep quiet that it is actually working on such a project. Although Inland Revenue has a policy of proactive enforcement on issues by announcing “We are about to look at these areas”. It’s just done so about real estate agents. So saying it’s looking at FBT would actually be conducive for getting people to look and see if they’re actually compliant.

However, I have reservations about whether that’s happening and whether, in fact, Inland Revenue does have the capability to do so. I’ve just been informed that in another round of restructuring, 77 of 138 team leaders are to be made redundant. These are the exact people who have the experience and skills to lead such investigations. Now, that doesn’t make a lot of sense to me laying off such a high proportion of your skilled labour.

Unexpected tax bills

And then there was a story this week about pensioners receiving large tax bills. Now, Inland Revenue subsequently issued a press release on this. But a common theme when I spoke to journalists about the story itself was that pensioners had tried to contact Inland Revenue to confirm what PAYE tax code they should be on.

And so the question arose as to whether, in fact, they had got the correct advice from the Inland Revenue call centre. And that leads back to what we discussed a couple of weeks ago about what’s going on with Inland Revenue’s use of contractors. Because if the contractors aren’t being trained properly, then Inland Revenue is giving incorrect advice and pensioners are left cleaning up the mess, owing tax bills of up to $2,000.

And that is not good for the tax system. Because the fear I have, if I and other tax agents are saying to our clients, “These are the rules, you must comply with them”, but clients have the sense that other people are not complying with the rules and Inland Revenue is not catching those other people, then the whole basis of voluntary compliance on which our tax system is built around is undermined. And that is something that I think we should all be concerned about.

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 āno.

An overview of the Government’s discussion document on the design of the interest limitation

An overview of the Government’s discussion document on the design of the interest limitation

  • An overview of the Government’s discussion document on the design of the interest limitation
  • Additional bright-line rules

Transcript

It has been a massive week in tax beginning with the G7’s announcement that it had agreed a minimum corporate tax rate of 15% (more here), we had the Climate Change Commission’s release of its final advice to the Government, Propublica releasing Internal Revenue Service data about the tax affairs of the 25 richest Americans, the same day as Revenue Minister David Parker raised the same topic in his appearance before Parliament’s Finance and Expenditure Committee.

But the biggest news, and our topic today, is the release of the Government’s long-awaited discussion document on the design of the interest limitation rule and additional bright-line rules.

You will recall that on March 23rd the Government dropped a huge bombshell by announcing that it was proposing to limit interest deductions for residential rental investment properties starting October 1st.

Now, there’s been a flurry of activity since then with Inland Revenue consulting with an External Reference Group discussing the issues that came out of the Government’s announcements as part of preparing the discussion document which was released yesterday.

At 143 pages it’s a big document and it’s one of the largest such discussion documents issued in recent years. Just for comparison, the issues paper on loss ring-fencing released in 2018 was a mere 20 pages, and that for the introduction of the bright-line test back in 2015 just 36.

I was part of the External Reference Group, and it became very apparent very quickly that we were dealing with considerably complex issues, and we would be looking at quite a lot of very detailed legislation. So, there’s a massive amount of detail to consider here.

I don’t propose to go through everything in detail today because we’re still working our way through the document and considering the implications. Instead, what I’m going to do today is give an overview of the key points in the discussion document points, and then in the coming weeks, focus on specific issues of interest.

Now, the discussion document starts with an overview of the proposals and then works its way through another 13 chapters so there are 14 chapters, including the introductory chapter, in all.  And one of the things that I think we might well appreciate is the document has been drafted so that it is not necessary for everyone to read the entire document unless you’re a tax adviser like me. But if you have a particular interest, you can go to the chapter that is relevant to you. And each chapter also contains specific questions that Inland Revenue and the Government are looking for responses about.

To summarise, the restriction will happen from 1st October 2021. The amount of the restriction will depend on whether the interest is “grandparented”, and that’s going to be one of the first points of interest. This is interest on debt drawn down before 27th March 2021 relating to residential investment property acquired before that. The deductions will be gradually phased ou between 1st of October 2021 and 31 March 2025. For grandparented interest, deductions will be gradually phased out between 1 October 2021 and 31 March 2025 as follows:

Date interest incurred Percent of interest you can claim
1 April 2020–31 March 2021 100%
1 April 2021–31 March 2022
(transitional year)
1 April 2021 to 30 September 2021 – 100%
1 October 2021 to 31 March 2022 – 75%
1 April 2022–31 March 2023 75%
1 April 2023–31 March 2024 50%
1 April 2024–31 March 2025 25%
From 1 April 2025 onwards 0%

Chapter 2 looks at what residential property is subject to the interest limitation. Now, there’s a good part here is that there are some exclusions.

  • Land outside New Zealand
  • Employee accommodation
  • Farmland
  • Care facilities such as hospitals, convalescent homes, nursing homes, and hospices
  • Commercial accommodation such as hotels, motels, and boarding houses
  • Retirement villages and rest homes; and
  • Main home – the interest limitation proposal would not apply to interest related to any income-earning use of an owner-occupier’s main home such as a flatting situation.

Chapter 3 then looks at the entities affected by interest limitation, such as companies, Kāinga Ora and other organisations,

What interest expense is going to be non-deductible?

Then Chapter 4 – one of the ones going to get into quite a bit of detail – involved interest in allocation, which is how do you identify which interest expenses are going to be subject to the limitation?

And the proposal here is to follow the long-established practice that where a loan has been used for a mixture of taxable and non-taxable purposes, we trace the funding through to each purpose to determine the deductibility. The Government’s proposal is to use this existing approach for loans used to fund residential investment property. Now, the discussion document also covers refinancing, existing loans and some transitional issues around debt which existed prior to 27th March.

One of the issues considered in the paper is the question of what to do about loans that can’t actually be traced. In other words, because previously this wasn’t a requirement for many investors, and they don’t have the records to be able to trace. What do you do where you want to show that a loan that was taken out prior to 27th March was applied to, say, business use rather than residential property investment? A mixed-use loan, if you like.

There are two proposals to deal with this issue. One is to take an apportionment based on the value of the loans across the assets, based on the original acquisition costs and the cost of any improvements.  The other option is what they call ‘debt stacking’, which is where taxpayers would allocate their pre-27th March loans firstly to assets that are not residential investment properties but qualify for interest deductions.

This is actually quite generous, by the way. The rationale for this is that well advised taxpayers would be able to restructure to achieve the same tax outcome under the tracing approach anyway. This is actually an acknowledgement of the disparity of investors we’re dealing with here. Some are quite sophisticated and would be across all the detail. Others, less so, perhaps because they may not have many properties and have not really been as diligent as perhaps they should have been in keeping records. So that’s a little bit of a generous exemption there. But the point is you’re still dealing with a great deal of complexity in approaches and the Government is asking us to say, well, which one would you prefer to use?

A particular point here to note is that with pre-27th March loans, while interest on those loans will be deductible, subject to phasing out, and any borrowing subsequent to that date will be completely limited. What’s proposed to help calculate this proportion is determining a “high watermark”, which is the amount of funding allocated to residential rental property as of 26th March 2021. And then from that point, variations above that are the ones that are going to be most closely subject to interest limitation. As you can see, we’re already into quite a lot of detail and we are just getting started.

Non-deductible interest and bright-line test sales

Chapter 5 looks at the proposals for the disposal of property subject to the interest limitation rule. This was the subject of a lot of discussion during the External Reference Group consultation. Because the issue here is if interest has been limited, but the property has been sold and the gain on the disposal is treated as taxable, what are we going to do with the interest that was treated as non-deductible? Can this now be allowed as a deduction on sale? This is targeting people caught under the bright-line test, and remember we are also talking about an extended 10-year period for the bright-line test.

There are several options under consideration. One is that deductions are denied in full stop. Secondly, the deductions are allowed at the point of sale. Thirdly, deductions are allowed at the point of sale to the extent they do not create a loss. And finally, there’s an anti-arbitrage rule to counter attempts to arbitrage the interest deductions available because some people might know they’ve got a taxable transaction coming up.

The Government’s looking for feedback on people’s preferred approach. My impression is that they will be allowing a deferred deduction of previously denied interest at the point of sale. But exactly how those rules will operate is what the Government wants to hear more about.

Chapter 6 considers the treatment of property development and related activities. The Government has determined that property developers should be exempt from the proposed rules. So that chapter looks at what is the definition of development and how far should this development exemption go. It also looks at what do we do in applying that exemption to one-off developments as well as professional developers?

A particular point of interest, because we’ve got ongoing issues around leaky homes and earthquakes strengthening, is remediation work. Will that qualify for the development exemption? So there’s a lot to consider in this chapter.

What is a new build?

Chapter 7 is one which also generate a lot of discussion – what is the definition of a “new build”?  Under the proposals, new build residential properties are exempted from the proposed interest limitation rules, and they’re subject to a five year bright-line test rather than the 10-year test.

The chapter suggests the following could be considered a new build:

  • a dwelling is added to vacant land,
  • an additional dwelling is added to a property, whether stand-alone or attached,
  • a dwelling (or multiple dwellings) replaces an existing dwelling,
  • renovating an existing dwelling to create two or more dwellings,
  • a dwelling converted from commercial premises such as an office block converted into apartments.  This is one which I think is of particular interest. Following the announcement in March we heard one or two of these developments were put on hold so clarity around this is needed.

Chapter 8 then deals with the new build exemption from interest limitation and how long that exemption should apply to new owners? It’s also proposing that early owners, those who acquire a new build no later than 12 months after its Code Compliance Certificate is issued or add a new build to the land, would be eligible for the new build exemption. It then looks at what about subsequent purchases? Maybe the exemption is available for those who acquire a new build more than 12 months after the new build’s Code Compliance Certificate is issued and within a fixed period such as, say, 10 or 20 years. There’s a lot to consider in this issue.

Chapter 9 then discussed how the five-year bright-line test will apply for new builds.

A pleasant surprise

Chapter 10 is where we have a pleasant surprise. It deals with what we call rollover relief when the application of the bright-line test and interest limitation is “rolled over”. This is where the property is transferred between two parties and that transfer, which is a disposal for tax purposes, does not trigger an immediate tax charge under the bright-line test provisions.

The lack of a comprehensive rollover test was something that has been an issue before this interest and limitation issue arose. What’s proposed in here is some limited relief from the interest limitation and bright-line test in relation to transfers to trusts and transfers where there is, quote, “no significant change of ownership.”

What this means is in those circumstances, the taxing point will be deferred until there is a future disposal of the property that does not qualify for rollover relief. So, if the transfer qualifies for rollover relief, then the disposal of the residential land would be at cost to the transferral or original owner rather than market value, which is the current rules. The recipient would then be deemed to have the same acquisition date and cost base as the transferor.

Now, the critical thing is disposals where there is non-zero consideration, either at market value or not, will not be eligible for rollover relief. That means if you are transferring property into a trust you must gift it in. If there’s any consideration received for the transfer you won’t qualify for rollover relief. (That may also mean the bright-line test applies and a tax charge on transfer arises).

There’s also a clarification here that rollover relief will apply where property is transferred between company or partnership and its owners so long as the property continues to be owned in the same proportion.

Now, all this is, as I said, is actually a pleasant surprise. It may be limited, but it does deal with an issue that had been of some concern previously. So it’s welcome to see the matter being addressed.

Chapter 11 then looks at the question of what to do with interposed entities. This is a quite technical point as they’re proposing new rules to ensure that taxpayers can’t claim interest deductions for borrowings used to acquire residential property investment property indirectly through a company or other interposed entity.

As I said it’s quite technical and as part of it involves one of the new definitions we’re going to see appearing in the Income Tax Act, what’s called the “affected assets percentage” as part of defining the terminology of a residential interposed entity. Basically, the idea is to stop people claiming a deduction for borrowing to buy shares in a company which then buys residential investment property.  This is unsurprising, but just adds more complexity to the matter.

How does this fit with loss ring-fencing rules?

Chapter 12 deals with a particularly interesting issue which has cropped up about the implications for the rental loss ring-fencing rules. The chapter looks at the overlap between the ring-fencing rules and the proposed interest limitation rules. What it’s saying is the interest limitation rules should apply first to determine whether interest is potentially deductible in income year and then the ring-fencing rules will apply on the balance.

Now, if you’ve been working in this space, you’ll be aware that the loss ring-fencing rules can be applied on either a portfolio basis, that is across the entire portfolio, or on a property-by-property basis. Now, that’s not such an easy fit when you consider that the rules about tracing the purpose of loans really work on a property-by-property basis. So that chapter confirms that is the intention, that the interest limitation rules must be applied on a property-by-property basis.

Chapter 13 looks at the question of property, subject to an existing set of interest and deduction restriction rules called the mixed asset rules. When we started talking about this in the External Reference Group, quite a few brains, including my own, went clunk because we really are into very great technical detail.

And then finally, Chapter 14 looks at compliance administration and how are we going to manage this? What information is going to be required by Inland Revenue in order to enforce these rules? Does Inland Revenue need more powers?  The likelihood is that the amount of detail to be included in a tax return will increase. That seems inevitable.

So that’s a brief overview of a highly complex position. I’m particularly concerned about how this is going to impact small investors with one or two properties.  Unless they happen to be debt free, they face significantly increased compliance costs relative to the size of their portfolio.

It’s not just taxpayers who face an increased risk. Tax agents and advisers face greater risks because there’s so much more detail to get across. If we get the deductibility issue wrong, we could be liable. So one of the things that the Government’s saying is we do want to try and minimise compliance as much as possible.

So, I would urge people to submit.  In doing so I think you should focus on what making the proposals as workable as possible. So be constructive. I know a lot of people are very unhappy about these rules. The Government knows you’re unhappy, I’ve discussed it with the Parliamentary Under-Secretary to the Minister of Revenue, Deborah Russell. The Government knows that people are unhappy about it but telling them that and railing against the proposals is just not going to make any difference.

So be constructive in your approach. Submissions have now opened, and they close on 12th July, because the whole thing has to come into force by 1st October. Now, we’ll be tracking this and as I say, we’re going to come back and pick up particular points of interest. And I’m very, very interested in hearing your feedback on this.

Well that’s it for today. Next week, barring any more tax bombshells, we’ll take a closer look at the G7 tax announcements and what the Climate Change Commission had to say about tax.

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

An Employment Court case reveals Inland Revenue’s extensive use of contractors

An Employment Court case reveals Inland Revenue’s extensive use of contractors

  • An Employment Court case reveals Inland Revenue’s extensive use of contractors
  • Is Google taking the Government for a ride?
  • A warning about the new bright-line test

Transcript

The chances are that if you ring Inland Revenue, your call will be answered by a contractor. Inland Revenue, as part of its Business Transformation programme, has been making increasing use of contractors and its use of contractors has led to a recently decided case in the Employment Court.

The Public Service Association took the case against Inland Revenue asking for more than 1,000 labour hire workers to be reclassified as direct employees of Inland Revenue. It took the case in the name of eight workers engaged by a labour hire company, Madison. And these people were mostly engaged to work as call centre staff at Inland Revenue.

Now, the case was decided by a full bench of the Employment Court, and it will be a very significant Employment Court decision. The decision itself, as published, runs to 82 pages. But what caught my eye about it was how much it revealed about the extent to which Inland Revenue is using contractors. As it transpired, Inland Revenue won the case. The court unanimously held that the labour hire workers were indeed employees of Madison and not of Inland Revenue.

But I doubt whether that’s going to be the last we hear of it, given the scale of what’s going on and the involvement of the Public Service Association. And I suspect this case will be appealed up through, the Court of Appeal and maybe ultimately to the Supreme Court. Hence probably why there was a full bench put on it of judges in the first place and the extremely extensive, and if you’re an employment lawyer, no doubt very interesting legal arguments engaged.

But the reason why the PSA took the case was, as the National Secretary of the PSA, Kerry Davies, pointed out, the scale of contractors being used was new. Inland Revenue, like many government agencies, if not all of them, I would expect, does use temporary staff from time to time. And you can look back and you can see that there’s been the use of contractors. For example, if I look back for the year ended 30 June 2015, contractors engaged by Inland Revenue cost a total of $45.3 million in that year.

But what’s been going on with this one hire company, Madison, is quite extraordinary. The eight plaintiffs who were supported in the case by the PSA, had worked in various Inland Revenue offices for periods between seven and 15 months, and they were amongst a total of 1,233 workers hired out to Inland Revenue by Madison starting in 2018. Now, to put that number in context, at 30 June 2017, Inland Revenue’s headcount was 5,519. As of 30 June 2020, its headcount is 4,831. So 1,233 temporary employees represents a very significant number of staff, getting on for almost a quarter.

Not all were engaged the same time. But we do know that under one of the agreements (what they call work orders) In October 2018, Madison agreed to provide 382 client service officers, as well as another 83 client service assistants.

Now the obvious attraction for Inland Revenue in this was some cost reductions. For example, a contractor supplied by Madison would be paid $20.00 an hour compared with an Inland Revenue employee of $23.94. If the Madison worker gained competency, that’s after a test which was taken usually after 12 weeks or so, they could go up to $22.50. Just for the record, Madison billed Inland Revenue over $40 million over two years. And it paid on average $29.25 per hour for a Madison worker who had gained competency and $26.00 per hour, exclusive of GST, if they hadn’t.

All this is of great interest to me and my other tax agents because we have been experiencing a great deal of difficulty getting through to Inland Revenue and working with them under the new system. I’m also very curious as to where the benefits are flowing through on Business Transformation.

To give you an example, a lot of systems have been automated, but there’s a great deal of inflexibility built into the system. Every tax agent I know, like myself, has encountered an issue where we directed a client to make a payment for a specific tax year, say, the 2019 income tax year, only to find Inland Revenue’s system had redirected that to another period. That then means that we have to pick up the phone, try and get through on a dedicated agent line – which has been cut back – and sort out the mess. Every tax agent I’ve spoken to has reported the same issue.

Therefore, the competency with which Inland Revenue approaches of its staff and the level of training they used is of great import to us as tax agents. We handle the more complex clients who also happen to bring in some significant amounts of tax revenue. So that’s why I’ve looked very closely at this case and am very interested to see how it played out.

And I was very surprised by the numbers I encountered. I then decided to take a closer look at exactly what Inland Revenue has been doing in terms of its personnel costs. Looking at its annual reports covering the six-year period ending 30 June 2020 – that is the year ended 30 June 2015, just before Business Transformation started – through to 30 June 2020.

The numbers are revealing about what has been going on in terms of Inland Revenue staff levels and its personnel costs. On 30 June 2015, Inland Revenue had 5,820 employees, 98% of which were permanent. As of 30 June 2020, the headcount was now 4,831, a reduction of nearly a thousand. But the number of permanent employees had fallen to 84%, indicating quite a marked degree of temporary contracting going on.

Now total personnel costs for Inland Revenue, including contractors, for June 2015 were $463.7 million. In the year to June 2020 that had gone up to $547.8 million. Now, that is a surprise, given that over the same period, as I’ve just pointed out, the headcount at Inland Revenue has fallen by a thousand. And by the way, these numbers do not include the contractors engaged in relation to the Business Transformation project, which is about another $70 million annually.

in June 2015 year, the contractors and consultants cost Inland Revenue $45.3 million. In the year to June 2020 that had risen to $111.5 million. That was actually down from the peak year of June 2019 when it was $136.8 million. Interestingly, Inland Revenue personnel costs for June 2020 at $436.3 million are little changed from June 2015, when they were $418.4 million.  But what’s important is if you look at the total personnel contracting costs. In June 2020 year, more than 20% of those costs represent contractors.

Summary contracting & personnel costs six years ended 30 June 2020

2015 2016 2017 2018 2019 2020
$ mln $ mln $ mln $ mln $ mln $ mln
Contractors & consultants 45.3 77.2 106.5 124.2 136.8 111.5
Salaries & wages 388.3 399.8 399.0 391.0 389.8 384.9
Other personnel costs 30.1 26.8 19.3 29.9 33.3 51.4
——————————– ——– ——– ——– ——– ——– ——–
Total personnel costs $463.7 $503.8 $524.8 $545.1 $559.9 $547.8
Percentage costs contracting 9.8% 15.3% 20.3% 22.8% 24.4% 20.4%
Percentage of staff permanent 98% 97% 95% 89% 87% 84%
Headcount 5,820 5,789 5,519 5,250 5,009 4,831

(Source Inland Revenue Annual Reports)

And by the way, over this six-year period, Inland Revenue has paid out more than $47 million in termination benefits. In the year to June 2020, it was $19.3 million and the year to June 2018 it was another $21 million.

There are a number of things that really concern me about what’s gone on here. Inland Revenue does not seem to be showing significant improvements in cost efficiencies. It has a great reliance on temporary contractors beyond what you might expect for a short period. As I said at the beginning, use of contractors by Inland Revenue is not unusual. But here it seems to have become very, very significant.

And so that raises for me questions about whether, in fact, the Business Transformation programme is delivering what it should be or was intended to. And then there is the question that despite engaging all these temporary contractors in the call centres, Inland Revenue has been diverting resources from other parts to handle calls.

You will recall when I spoke with Andrea Black last year we talked about how the funding of investigations had fallen, the hours spent on investigations had fallen, and we knew that many investigation staff, who are very, very experienced, had been diverted to handle calls on the main call lines.

Now, interestingly, in the recently announced Budget Appropriations for 2021/22, the funding for investigations and management of debt and unfiled tax returns collectively were cut by $15.9 million going forward. However, the appropriation for processing costs has gone up by $10.4 million or 8% to $138 million. Now, again, this is a question which Andrea raised during our podcast. ‘Wait a minute, with this new system, should we not be seeing reduction in processing costs?’ But instead, we’re seeing increasing processing costs.

So overall, although Inland Revenue won this case in the Employment Court, I think it has opened a can of potentially very interesting issues as to its use of contractors, and whether Business Transformation is delivering what it says it’s supposed to be delivering.

So, I think we’ll hear more on that in the coming weeks. I have no doubt that some questions will be raised around this at various levels. Certainly, the PSA will continue to pursue the case now.

Act now or wait for the OECD?

Moving on, last week I talked about how the Minister of Revenue David Parker had climbed into Google in particular over its tax practices. Now, it so happens this week, Google New Zealand’s results for the year ended 31 December 2020 were released.

The data contained in there prompted one accountancy expert, Dr Victoria Plekhanova, to say that she considered that the government at present may be giving to big tech companies like Google and Facebook, a free ride on tax while it’s waiting to see whether a coordinated OECD process we mentioned before, will bring a new order into the tax international tax regime.

Dr Plekhanova noted that the service fee paid by Google New Zealand to related parties offshore had increased from $511.4 million in 2019 to $517.1 million in 2020. Google reported revenue in New Zealand of $43.8 million, which was up from $36.2 million in 2019, and that its net profit for the year was $7.8 million, slightly down on last year’s $8.12 million. In the end, it would be paying about $3.3 million in taxes, which was roughly the same as in 2019.

But as Dr Plekhanova pointed out, there’s this significant amount of service fees going offshore, which is one of the matters that I’m sure Minister Parker is well aware of.

The other thing that caught my eye as well in this is that there’s an amount due to related parties, which as of 31 December 2020, amounted to just over $78 million. And curiously, it’s not like Google doesn’t pay income tax it also pays a fairly significant amount of GST it appears. There’s GST payable as of December of $8.5 million. Assuming it files GST returns monthly, which it should do, based on its turnover, that would point to maybe a total of $100 million of GST being payable annually, which is good. But that’s probably being paid by businesses who will be claiming an input tax credit, so maybe there’s no net revenue gain there.

Whatever it is, Dr Plekhanova made the argument that this is why digital services tax has become more attractive to various countries. India, for example, has a 6% equalisation levy and has recently imposed a further digital services tax, which drew the ire of the United States. Although India’s response has pretty much been well, if you want to get access to 1.4 billion customers, this is how it’s going to be. India is big enough to be able to tell the tech companies you play by our rules or else, but New Zealand can’t.

So, the issue for us is whether the government is going to wait on the OECD rules coming in on a global minimum tax, which we talked about before, and agreeing a new basis for taxation or it decides to push forward with a digital services tax. I imagine that seeing Google’s latest results may well prompt Mr Parker to move up the progress of a digital services tax.

Bright-line fish hook

And finally this week, there’s a warning from the Chartered Accountants Australia and New Zealand’s head of tax, John Cuthbertson, about an issue with the revised bright-line test.

What he’s pointing out is that the changes are not just in the extension of the period to 10 years, but the revised rules will now explain how long homeowners can stay away from the main home before the bright-line test kicks in.

Under the new rules, as proposed, they are able to be away from the family home for a continuous period of up to a year. However, for some people, if they’re seconded overseas or have a longer secondment down country, that might not be long enough. It may mean that if they sell within the 10-year period, they could find that some part of any capital gain could be taxed.

We’re expecting a discussion document on these property tax changes very shortly. But as I’ve said beforehand, and this is another example, we know these rules are going to be complex. And this is why I’ve raised the argument that maybe we should be starting to think differently, adopting a completely different approach to the taxation of investment property. Anyway, when the new discussion document on these property tax changes emerges, we’ll look at it in detail.

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 āno.

This week the Minister of Revenue is not happy with Google

This week the Minister of Revenue is not happy with Google

  • This week the Minister of Revenue is not happy with Google
  • How many ACC lump sums may be over-taxed
  • Inland Revenue updates the square metre rate for home offices

Transcript

Last week, on the same day as the Budget, Newsroom carried a story about Google and its taxation practises and the Minister of Revenue, David Parker’s views on that. And it was surprisingly blunt. He was, as the article put it, somewhat scathing of Google’s reticence to pay more tax.

The head of Google in New Zealand, Caroline Rainsford, had given an interview to Newsroom, which coincided with the Budget, and it outlined how Google has been pushing back against the nascent plans by the government to set in place its own digital services tax. This is conditional on whether the OECD cannot reach agreement on a unified approach to taxation.

Anyway, Rainsford said that basically, although Google is for the OECD development of a simpler and unified tax system, it’s not encouraging a unilateral approach here. In other words, please don’t tax us more, but we’ll be happy to look to see about what’s happening with this international tax initiative.

Google’s parent company Alphabet reported new net profit of equivalent of US$48 bln for the year ended 31 December 2020. And that makes it the eighth most profitable company in the world.

But the Minister of Revenue, David Parker, returned fire on this. And he noted that Google New Zealand paid $3.6 million in income tax in the year to December 2019, based on a profit of $10.6 million and revenues of $36.2 million. Apparently, similar numbers can be expected for the year ended 31 December 2020, when they’re reported shortly.

The thing which appears to have got Mr Parker’s goat is that Google’s estimated ad revenue in the country is close to $800 million, he told Newsroom;

They could voluntarily pay some tax on the profits taken out of New Zealand already, but they’ve obviously not done that. That revenue used to be earned by media companies. Media companies would have paid tax on it. And other media companies suffer competitive disadvantage competing against Google when Google does not pay a fair amount of tax. It’s not fair and something has to change. And Google is the biggest.

He points out the ad revenue which are being delivered in New Zealand are not being reported within the New Zealand tax net.

This is an issue we’ve talked about beforehand all around the world. And one solution that governments have put forward, pending some form of international agreement on, it is a digital services tax. That is rumoured to be in the order of maybe three percent is one number that’s been outlined. And estimates of how much it might raise, maybe between $30 and $50 million.

But I think the Minister’s point about the amount of revenue that Google is taking out the country and how that might have played in the New Zealand media companies that earned it, is a valid one. Even if it were the DST of $30 to $50 mlnn, that’s still nowhere near what would be the income tax on $800 million of revenue. So this issue is clearly one that Mr. Parker is paying particular attention to. And obviously, given Caroline Rainsford’s comments on that, Google is slightly concerned about the matter.

We don’t know how much other digital companies such as Facebook, LinkedIn and Twitter take out of New Zealand through digital advertising. Google is clearly the biggest. It’s thought overall including Google’s $800 million there could be as much as one billion dollars of ad revenue going offshore. So the government will be looking at that.

It will be encouraged, no doubt, by the announcement from the US Department of Treasury this week that it is in favour of a global minimum tax rate, and it has suggested that it should be at least 15%. The US Treasury has said that 15% is a floor and discussions should be continued to be ambitious and push that rate higher – 21% is a number that’s been raised previously. But the US Treasury’s view is

a global minimum corporate tax rate would ensure the global economy thrives based on a more level playing field in the taxation of multinational corporations and would spur innovation, growth and prosperity while improving fairness for middle class and working people”.

And no doubt Minister Parker will say amen to that.

On the other side though, the UK is the only country in the G7 which hasn’t signed up to this multilateral deal that’s being put together by the OECD. And Boris Johnson’s Government has been described as “lukewarm and evasive” on the matter. I think lukewarm and evasive is something that plenty of people have said about Boris Johnson, the latest of which being his former special adviser, Dominic Cummings, last night. But the UK also has long standing cultural or actual colonial links to many of the tax havens which are at the heart of the whole issue.

So we’ve got an interesting combination of factors going on here. Minister Parker is clearly looking at the whole Google and digital taxation matter and is obviously happy to push ahead by applying pressure and maybe push ahead with the implementation of a digital services tax. Which, by the way, the Tax Working Group said might be something to have in place if an international agreement could not be made.

On the other hand, there’s some progress on this by the US Treasury throwing its weight behind a global minimum tax. But then we have the pushback from the UK, or rather, we should say the UK not making a decision. And then there’s been pushback, as I mentioned earlier, from the likes of Ireland with its 12.5% corporate income tax. So it’s internationally the biggest thing that’s going on in tax right now. And it’s a question of just watch this space and see what develops.

Heads the IRD wins, tails the taxpayer loses

Now, moving on, a few weeks back, I discussed a case brought in the Taxation Review Authority against the Commissioner of Inland Revenue contesting the tax treatment of a lump sum paid to a claimant by ACC.

The payment was for weekly compensation for the period from the date she was injured on 22 April 2014 to 17 September 2017. And the taxpayer contended that the payment should be treated for tax purposes as having been derived on an accruals basis and spread over the income years to which the payment related, rather than being taxed in the year in which it was received. As is the current practice.

And this, as I mentioned at the time, is a longstanding issue I have been aware of. And it can mean for claimants that they receive a lump sum, and instead of being taxed at an average rate of 17.5%, they find the lump sum taxed at 33% or even potentially now at 39%. So, it’s an issue I think needs looking at.

I subsequently made an Official Information Act request to ACC about the number of such payments for backdated weekly compensation. ACC replied this week, and it made for some interesting reading. In the year to June 2017, the number of such claimants was 1,187. They received on average $42,482. The median amount, by the way, was $21,643. The maximum was $650,000.

And for 2018 similar sort of numbers – 1,172 claimants, 2019 saw 1,283, and in the year to June 2020 it was 1,466, who received on average $42,505. The median there was $21,146, but the maximum was an eye watering $1,180,000.

There’s a consistent trend there, and enough people in the system and big enough numbers for Inland Revenue Policy and the Minister of Revenue to have a look at that. We do some averaging, for example, it has been pointed out to me, in farming cases we average some of the income because of droughts. So, spreading income over several years in which it relates is not unknown to the tax system and our financial arrangements regime actually operates on that principle.

I propose to send these numbers off to Inland Revenue Policy and to the Minister of Revenue’s office. I’ll keep you posted as to how things develop from there.

Square metre rate up +4.7%

And finally this week, the square metre rate for the year ended 31 March 2021 has been set by Inland Revenue at $44.75 per square metre. That’s up from $42.75 per square metre for the year ended 31 March 2020.

Now, although this sounds quite a technical thing, it relates to the calculation of home office expenses and Inland Revenue’s square metre rate option provides a simplified process. Which means that taxpayers don’t have to keep detailed records of utility costs, contents, insurance, Internet on their private residence, and then have to apportion these costs between business and private use. Instead, they simply apply the rate to the area of the house that is used for business purposes.

It’s a nice, simplified process, something I think we should see more of in the system to try and simplify the process for clients. I think Inland Revenue would have the information or would be able to dig out some of the information for this expense, maybe by an analysis of GST returns. By the way, premises costs such as mortgage interest rates and rent, still have to be claimed based on the business proportion of the actual expenditure incurred by the taxpayer.

This is a sort of throw away measure it seems, but one that actually affects quite a lot of people. And as I said, I think we should see more of this setting rates, giving maybe a standard deduction for people, just to simplify the system.

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 āno.