At last week’s International Fiscal Association’s Trans-Tasman conference, a lot of the discussion among New Zealand advisors outside of the seminar rooms was around the state of tax policy. There is a growing concern that a more active government with interventions and proposals such as the proposed zero rating of GST on fruit and frozen and fresh fruit and vegetables is undermining the Generic Tax Policy Process which has been in place for nearly 30 years.
Like many practitioners, I’ve been involved with the GTPP at various stages. It is well-regarded internationally and has operated since 1994. It is intended to ensure
“better, more effective tax policy development through early consideration of key policy elements and trade-offs of proposals, such as their revenue impact, compliance and administrative costs, and economic and social objectives. Another feature of the process is that it builds external consultation and feedback into the policy development process, providing opportunities for public comment at several stages.”
However, the concern is emerging that against this well-established background more recent measures such as the Tax Principles Bill, or the legislation that enabled Inland Revenue to carry out its high wealth individual research project, have happened outside the GTPP framework. The proposed GST zero rating of fresh and frozen fruit and vegetables could be another example. These developments are unsettling the previously predictable process for working through and discussing tax proposals.
I’m of the view that tax is fundamentally about politics and politicians will always make political calls. The GTPP is intended to minimise the effect of that and give more predictable tax policy outcomes. But you can’t eliminate it entirely and this dichotomy between efficient tax policy process and politics will always be there.
There is also the question raised in an interesting story this week by BusinessDesk (paywalled) in reference to the work of the Corporate Taxpayers Group (CTG) about when consultation ends and lobbying begins. The CTG includes the main corporate taxpayers such as Fonterra and the four big banks. The New Zealand Superannuation Fund, the largest single taxpayer in the country, is also a member.
The CTG meets regularly at the offices of Deloitte (more frequently than I had imagined) as the story outlines, and there is an annual membership fee which is to pay for the secretariat, which will make submissions to Parliament and to Inland Revenue.
But when does this move from consultation to lobbying. Very difficult to say. I don’t see it as lobbying although I do appreciate the risks that might be involved in that. But having been involved in the process and been in meetings with CTG representatives, Inland Revenue officials, I don’t believe that’s the case.
But as I said, I can understand why some might be concerned by this. It comes back to a key part of any democracy, and that’s transparency. But on the whole, as I said, I think New Zealand’s been very well-served by the GTPP. And I know that internationally it’s very well regarded because it has got a stability of process to it.
I think one of the issues that’s causing raising concern is because left wing governments are likely to more interventionist. But I do think this situation is exacerbated at the moment because the strain of the boundary between capital and revenue, and our general under taxation of capital, the lack of a capital gains tax, wealth, tax, death duties, are putting strains on the system. And so, politicians are trying to find shortcuts to try and deal with this issue and the need for more revenue. You can dispute how much is needed. But when I look at the state of roads and hospitals and you see the growing bill for climate change, my view is and it’s also the view of Treasury, as I pointed out a number of times, and its Long Term Insights Briefing He Tirohanga Mokopuna we need more revenue.
A whole lot of hissing
So, there are strains emerging and it’s impacting the GTPP, which makes tax advisers understandably a little unsettled about how well that process will continue. As Louis XIV’s finance minister Jean-Baptiste Colbert said in probably one of the most famous maxims about taxation: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” That was true in the 17th Century and remains true today. And there is quite a lot of hissing going on at the moment.
The GTPP in operation – consulting on trading stock
Moving on and still on to the topic of consultation and an example of the GDP in operation. Inland Revenue has released a paper for consultation on the treatment of trading stock disposed of below market value.
At present, whenever trading stock is given away, or disposed of for below market value it’s deemed to have been disposed of at market value. The reason for that rule is reasonably solid. It’s to counter potential tax avoidance where the stock is given away or may be used for private consumption by a business owner or sold at a deep discount to associated persons. In some cases, it could apply for a particular industry, exchanges of stock could take place at cost or less. All of those generate benefits in terms of the under taxation of revenue. So that’s why that rule exists.
But there have been instances where businesses have wanted to give away stock and make donations for charitable purposes, and that’s when this rule becomes problematic because they can’t effectively do so. Over time the practice has developed for granting temporary emergency relief in some situations as a work-around.
In 2004 a permanent override was put in place with donations to farming, agricultural and fishing businesses during what is termed an adverse event. And there have been a large number of those weather-related adverse events either for drought or like we’ve experienced this year, flooding.
Between 2010 and 2012, there was a temporary override for 18 months in response to the Canterbury earthquakes. And then again, starting in March 2020, a temporary override was put in place for four years in response to COVID 19.
That override will end on 31st March next year, and the object of this consultation paper, is to propose a more permanent solution rather than using ad hoc solutions whenever we encounter a particular scenario such as COVID or earthquakes.
The consultation paper runs to 29 pages and includes a useful appendix which summarises all the potential summary policy options and how they may play out. Overall, this is a good example of the Generic Tax Policy Process in operation. Consultation on the paper is now open and closes on 6th September.
Managing retreat & how to pay for it.
As just mentioned, temporary emergency relief from the usual stock donation rules has been granted for a number of reasons, including this year, the flooding in January and February and the impact of Cyclone Gabrielle. A constant theme of this podcast is the question of environmental taxation and the need to address the longer-term question of how we going to pay for these climate related events.
Earlier this week a Government expert working group released its report on the question of what’s termed managed retreat.
The report, which clocks in at 284 pages, is very comprehensive and raises a number of potential scenarios and alternative measures that could be needed. One of which, as the excellent Newsroom story covering the report notes, is conditional powers to basically force people to leave particular areas that are under threat.
Being a tax podcast the question we are most concerned about with environmental and climate change impacts is how we are going to pay for it. The report has two key proposals E65 and E66.
But consider this, we have currently 700 homes which have been rendered uninhabitable following the flooding in January and February. And there’s another 10,000 homes that require flood protection. The Government has said it will split the costs over the uninhabitable homes with local councils affected. But, as far as I can tell, neither the councils nor the Government have really fully funded for these costs of maybe a cool billion or so this year and maybe every year and rising. So, it is an issue that needs to be addressed.
The report has some interesting discussion around what happened in Canterbury in relation to the earthquakes and then the first and I emphasise, first, example of managed retreat, from the Bay of Plenty settlement of Matatā
The report says, however we decide to fund this, the funding should not be subject to the usual vicissitudes of the annual budget round because that would mean it would lead deferment and dangerous delay. When it comes to kicking a football down the road, the politicians, as we know, are better than the Football Ferns at kicking it a long way out of trouble. Or so they think, but the issue still remains. I totally agree, therefore, with the report’s recommendation that there has to be a permanent funding solution.
I maintain that if we are going to do something around the lines of environmental taxation, the funds that are allocated to it should be hypothecated, and certainly not form part of the consolidated fund because we’ll then have politicians tempted to raid those funds. We’ve seen this in the recent Auckland Budget Council, by the way, where reserves built up for environmental purposes were used for other purposes.
In terms of holding politicians to account, I think we need to be asking a lot more questions about them on this matter because this is going to affect us all. We’ve had a miserable winter with extensive flooding and the ground is sodden. What happens when the next big floods come along, who pays for the clean-up?
No longer friends with Russia…
At the International Fiscal Association Trans-Tasman conference last week, we spent a lot of time discussing double tax agreements. It so happens, Russia has decided to suspend its double tax agreements with 38 countries, which it considers are now ‘unfriendly’ in the wake of the invasion of Ukraine. New Zealand is on that list. So that probably means that for someone in Russia trying to claim tax relief from under the double taxation between New Zealand and Russia, they’re out of luck and they’re probably going to be facing higher tax bills as a consequence.
TikTok and GST fraud
And finally, just on the topic du jour this week of GST, there’s an absolutely extraordinary story coming out of Australia about how social media influencers on TikTok encouraged at least 56,000 people to take part in a A$1.6 billion tax fraud scheme. Apparently these TikTok influencers explained how to get fraudulent GST refunds. The scam involved obtaining an Australian Business Number, then filing Business Activity Statements (the equivalent of GST returns) and claiming false GST refunds. In some cases, there were attempts to claim refunds of up to A$100,000.
The Australian Tax Office apparently is still grappling with the sheer size of the scandal. There’s a story in the Australian Financial Review about a Victorian woman who managed to stay out of jail, after repeated attempts to try and get A$115,000 fake GST refunds for a dog grooming business that had been set up more than a decade ago but had been largely dormant until 2020 before she attempted to pull this scam.
Fascinating story which will be interesting to see how it plays out. To me it lends support to the suggestion that we should look seriously at zero rating transactions between GST registered businesses. It should be a means of stopping such attempted frauds. Obviously, if that proposal is taken forward, it should go through the proper Generic Tax Policy Process consultation.
Well, that’s all 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 time, kia pai to rā. Have a great day.
As previously leaked, on Sunday Labour announced that if re-elected, it would introduce legislation to zero rate GST on fresh and frozen fruit and vegetables, with effect from 1st April next year. This is a key plank of what it’s calling its ten-point plan to address the cost of living.
According to the fact sheet supplied at the time of the launch, based on the latest statistics from the New Zealand Household Economic Survey in 2019, the policy is estimated conservatively to save households about $18 to $20 per month. Now, one of the key criticisms of this policy is of course its complexity. But Labour is confident that in defining where the boundary will lie, it will be able to draw down on overseas experience in this area. “There are boundaries everywhere in the tax system and we are confident tax officials can make it work”.
The framework around the policy is whether the fruit or vegetable has been processed or not. And processed in this context means cooked or combined with other ingredients. This therefore rules out anything canned because of the heating process that is involved. Processed does not include being cut up and wrapped without additives, so that prepared vegetables such as fresh spinach in a bag, presumably salads, would be zero rated. Similarly, mixed vegetables frozen together would be zero rated for GST. But on the other hand, the release gives an example of potatoes mashed into chips, coated in canola oil and then frozen, would be excluded and therefore still attract GST.
There is a proposal to establish a consultative expert group immediately after the election to work through the final details of the policy. One of the criticisms of the policy is, and I’ve said so previously, whether the benefit of the GST reduction would be passed through to consumers. This is to be addressed by tasking the newly established Grocery Commissioner with ensuring that supermarkets and other grocery outlets are not profiting from this change. The Grocery Commissioner has powers under the new Grocery Industry Competition Act 2023 to require it to request information and reports from supermarkets on matters such as their prices and margins.
Depreciation on commercial property to be removed, again
Labour estimates the cost of this policy to be about $2 billion over a four-year forecast period to 30th June 2028. And the sting in the tail is that this is going to be paid for by commercial property landlords. Because Labour is proposing to remove what it has called in the fact sheets, “the last remaining large COVID 19 economic stimulus measure”, which was the introduction of depreciation for non-residential buildings.
According to Treasury’s costing of the COVID 19 Response and Recovery funding decisions, that particular decision back in March 2020 costs an estimated $545 million annually. it should be said that back in 2020 when depreciation was reintroduced, there was no indication that this was going to be a temporary measure. In fact, the accompanying commentary noted:
“New Zealand’s position of a zero-depreciation rate for almost all buildings is unusual internationally. International studies have generally found buildings do depreciate. The Tax Working Group reviewed and recommended changes to these tax settings. The Government has accepted the group’s recommendation to reinstate depreciation for industrial and commercial buildings.”
So the news that barely three years after it was brought back in, it’s to be removed again will be a big surprise for the commercial property sector. And you can expect very strong representations about that. Certainly, some projects in the pipeline may be delayed as companies and investors work out the impact of the withdrawal of depreciation.
There was some interesting stuff in the accompanying fact sheet about the proportion of weekly expenditure on fruit and vegetables by household income. And what might surprise people is that it’s the lower deciles, deciles one to four, who actually spend the greatest proportion of their budget on fresh fruit and vegetables. It works out nearly 2.5% for some of the deciles. So that’s greater in relative terms than what happens for decile ten households.
But what’s also notable here is that this survey apparently shows that the amount of fruit and vegetables being purchased as a proportion of all expenditure has been declining for some time, and it declined from just under 2% in 2013 to just over 1.7% in 2019.
What’s happening there would be interesting to know, but it could be that the cost pressures on fresh fruit and vegetables are actually more longstanding than just the post COVID 19/climate related events burst we are experiencing at the moment. The Grocery Commissioner will obviously be paying particular attention to that on a longer term.
Increasing Working for Families support
The announcement, or the focus on the GST policy, overshadowed the other big announcement made, which was a proposal to increase the Working for Families in-work tax credit by $25 a week from 1st of April next year. This is going to provide additional support to around 175,000 low- and middle-income working families. It’s the sort of measure which is supported by many, and I would be in that group, because it’s targeted and it gives to those most in need. Although I do note that Child Poverty Action Group are still disappointed that the criteria for this is still about being in work. Their long-standing position is that the in-work criteria should be removed because that would benefit all families and particularly children of those on the lowest incomes.
The other thing that Labour’s also planning to do is to lift the Working for Families abatement threshold from its current level of $42,700 to $50,000. But that’s not going to happen until 1st April 2026. That would be worth another $13 a week to eligible families.
I’ve spoken before about what goes on with the abatement levels, and it’s worth pointing out again that when Working for Families was first introduced in 2006, the abatement thresholds were adjusted annually. That was stopped by Bill English in the 2009 Budget, with the effect that if the then threshold of $36,827 had continued to be indexed to CPI, it would now be $51,702. In that context, Labour’s promise to raise to $50,000 in three years seems a little ungenerous.
Whether yesterday’s announcements are the sum of Labour’s tax policy for the election is not yet clear. Apparently, they are. But I note that they are still promising three more cost of living policy announcements to be made during the election. So, we’ll have to wait and see.
More GST – the importance of GST groups
Moving on, Inland Revenue is presently engaged in updating its various Interpretation Statements and other guidance, such as Questions We’ve Been Asked and in various statements of practice, to update various legislative updates that have happened over time. Some of this advice refers to the Income Tax Act 1994, whereas now we’re on the Income Tax Act 2007. So, Inland Revenue has been releasing a steady stream of updated guidance for consultation, and most of these updates confirm the existing position.
The latest released last week and also continuing this week’s GST theme, are two draft interpretation statements for consultation on the treatment of GST groups. One looks at when GST groups may be formed in general, and the second looks specifically at the rules around GST groups for companies
There has been a little bit of uncertainty around how the GST group rules interacted with other parts of the GST Act, and that was taken care of by an amendment included in the Taxation (Annual Rates for 2021-22, GST and other Remedial Matters) Act in 2022, which clarified the interaction of the GST group rules with the Income Tax Act. The position now is that the GST grouping rules are applied before the other provisions in the GST Act.
The idea behind the GST grouping rules is to eliminate the need to be charging and recovering GST on intra group sales. Think of a large group that’s supplying goods and services to another group member. If they are not within the same GST group, one party would charge GST and the other party would have to recover the GST. So, the idea of the grouping rules is to simplify administration.
How it’s done is that there is a representative group member chosen that carries on all the group members activities and that entity, whoever it is, is responsible for all the administration of GST. If a sale is made by someone outside the GST group, to a member of the group, it’s deemed to be made to the representative member as the registered person. Similarly, the various sales that might be made by group members to outside the GST group, are all treated as taxable supplies made by the representative member.
However, taxable supplies between group members are mainly disregarded with the idea of simplifying administration. One paper considers what happens with GST groups of companies. These can be formed where there is 66% commonality of shareholders, similar to the income tax rules for loss-offsets between group companies. In some cases, you can have non-registered entities as part of the GST group. The other paper covers the rules in general and where you can have groups of other entities such as trusts, for example, or maybe limited partnerships.
So, the two papers explore that and explain the background behind how the GST group rules operate. And as I say, these are part of a wider Inland Revenue project to update its material. These are very useful Interpretation Statements and consultation on these is open until 14th of September.
At the same time, I can’t help but think that Inland Revenue should be exploring the idea of introducing compulsory zero rating of GST between all GST registered entities. This would largely eliminate the need for rules around GST grouping. I think what it would also do is tackle an area of GST fraud which incurs relatively frequently where a fraudster might register for GST and then files a number of false GST returns, claiming input tax based on made up invoices.
Although Inland Revenue tracks down and catches these people, there is a time lag while the fraud is going on. I’m beginning to think if you want to try and tackle that, compulsory zero rating between GST registered businesses is perhaps a place to start. Giving Inland Revenue more resources to look into it, is another interim measure that could be done.
Trans-Tasman Tax issues
And finally on the Thursday and Friday just gone I was at the International Fiscal Association Australia-New Zealand Joint Conference in Queenstown. This is the first time in over 30 years the Australian and New Zealand branches have held a joint conference. It was highly successful. One reason IFA conferences are so attractive is because very senior Inland Revenue, and Treasury officials, and for this conference, Australian Tax Office and Australian Treasury officials, attend and share their views on insights on current tax topics. (Consequently, the conferences are held under Chatham House rules to enable officials to speak freely).
It’s always interesting to swap notes with other attendees and this conference was no exception, but it was particularly interesting because of the focus on Australasian issues. Both sides got to see differing perspectives on common topics, which included the question of tax treaty policy and updates from very senior people from both Australia and New Zealand on the OECD Pillar One and Pillar Two proposals. Australia and New Zealand are very well represented on the key working groups on this, we’ve got very good knowledge of how things are progressing. We also got a view on the latest environmental and tax developments, including a view from the IMF’s principal environmental fiscal policy expert.
“A hot steaming mess” – the perils of Australian taxation
A particularly interesting session was on the taxation of trusts in the trans-Tasman context. the current state of Australia’s trust tax law was described as a “steaming hot mess”. I regularly encounter scenarios where trustees have migrated to Australia without considering the tax ramifications, and a steaming hot mess is perhaps an understatement of the consequences. Overall a very useful session.
Incidentally, Australia and New Zealand are currently renegotiating the double tax agreement between the two countries. And the point was made that although as tax professionals we tend to look at tax treaties solely tax related, one panelist reminded everyone that they’re actually often part of bigger trade negotiations.
For example, as part of its efforts to obtain a free trade agreement with the EU, Australia has opened negotiations with double tax agreements with several EU countries. Apparently one reason a UK a double tax agreement between the United States and the United Kingdom in the mid-1970s was so advantageous for the Americans was because at that time the UK was negotiating the purchase of upgraded missiles for its submarine fleet.
Well, that’s all 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 time, kia pai to rā. Have a great day.
New Zealand has undoubtedly entered a slowdown economically and that’s flowing through to lower tax receipts leading to claims this week of the Governments being in a big fiscal hole. According to the Companies Office’s latest statistics for the quarter ended 30th June 2023, there were 461 liquidator appointments in the quarter.
That’s 47.8% up on the 312 for the same quarter last year.
As Professor Lisa Marriott noted in an article late last week, the ripple effect of companies going into liquidation is considerable, particularly for unpaid suppliers and employees. Her research suggests that Inland Revenue could be doing a lot more to share information about businesses that are failing. According to Professor Marriott Inland Revenue is actually less proactive than some comparable overseas government agencies such as the Australian Tax Office.
Inland Revenue initiates more than 60% of liquidations in the average year, and that sometimes happens after quite a considerable period of non-payment of key taxes such as GST and PAYE. For example, $2.6 billion or over 54% of the $4.8 billion owed to Inland Revenue as of 30th June 2022 represented GST and what it terms “employment activities” (i.e. PAYE and KiwiSaver contributions).
(Inland Revenue June 2022 Annual Report)
Professor Marriott’s research points to non-payment of these particular taxes as being a very early warning sign of businesses running into trouble. Picking up overseas initiatives she suggests three particular responses could be adopted here to help businesses be aware that a particular business they may be dealing with may represent a credit risk.
For example, in Ireland, Revenue Ireland produces a quarterly list of tax defaulters which identifies the name, address, occupation and the amount of tax owed. This is triggered when the debts exceed €50,000 or approximately $90,000.
Another option would be as the Australian Tax Office does, to advise credit rating agencies that a business has tax debts. This happens if the amount owed exceeds A$100,000 and is more than 90 days overdue.
A third option and one the Tax Working Group looked at, is following another Australian initiative and making business directors personally accountable for unpaid tax through Director Penalty Notices. These are issued in relation to the Australian equivalent of PAYE, GST and KiwiSaver. Once a Director Penalty Notice has been issued, it can only be cancelled by full payment of the tax debt within 21 days or some other action such as commencing winding up proceedings. If no action is taken, then the director becomes personally liable, effectively sidestepping creditor protection and limited liability issues.
These are sensible suggestions, but in my view perhaps another thing Inland Revenue could do would be to be much more proactive in managing debt, particularly in relation to GST and PAYE. I occasionally get involved with helping taxpayers who have fallen behind with their tax payments. And there’s invariably a couple of common points in every case.
Common problems with tax debt
Firstly, Inland Revenue’s present policy of charging interest and late payment penalties doesn’t seem particularly effective to me. In fact, arguably, I’d say it counterproductive.
Debt builds up very quickly and consequently, at a remarkably low level somewhere between $10 and $20,000, the taxpayers often just feel defeated and basically give up. At this point they haven’t engaged with Inland Revenue and all they see is just the amount owed going up and up and up resulting in a sort of death spiral procrastination spiral.
The second common factor in dealing with clients in this scenario is that the situation has been allowed to carry on and develop over a long period of time. These businesses have been going through a slow decline before Inland Revenue finally steps in and decides either to liquidate it or impose some other form of action to recover the outstanding amounts.
One of those actions is the use of “Deduction Notices”. These enable Inland Revenue to go to a customer of a defaulting taxpayer and require them to withhold a certain percentage of any payment they may make to the defaulting taxpayer, and instead pay it over to Inland Revenue. Most often Deduction Notices are issued to employees and often in relation to unpaid child support. But they can be used in other circumstances. In one case I saw a Deduction Notice applied was 100%, although I’m not entirely certain what was meant to be achieved by issuing such a notice.
Adopting the measures suggested by Professor Marriott would take some time to go through the full consultation and legislative process. Although these are tools Inland Revenue perhaps could consider adopting, given the current rise in liquidations, I consider it needs to be taking action sooner rather than wait for these additional options.
Harden up Inland Revenue?
One of the things it ought to do is toughen up its own performance measures in relation to the management of debt. Each year in its annual report Inland Revenue will publish its performance measure results broken down by various sectors. For the year ended 30th June 2022, it achieved seven out of nine measures that it set in relation to the management of debt and on file returns.
But critically, one of the measures where it fell down was the percentage of collectable debt over two years old. The target for the year was 40% or less and in fact it achieved 40.5%, just above its target. That, by the way, was a considerable improvement on the 51.7% achieved for the year to June 2021.
But I would suggest that the 40% target is actually too generous. Inland Revenue really should be looking to drive that down to 20% or less. In fact, looking at this measure, it used to include student loan debt and Small Business Cashflow Scheme debt, but they were taken out and the debt target was then reduced from 50% to 40%.
(As an aside, student loan debt is a particular problem where I think Inland Revenue inaction has allowed very large sums of debt built up with people going overseas as the main issue here. But Inland Revenue, to my mind, has not been quick enough to develop the tools it needs to keep on top of that particular issue, which means often applying to overseas tax agencies for details of defaulting taxpayers.
I think it’s picking up its efforts in this space, but the scenario perhaps shouldn’t be allowed to develop to the extent it did. I’ve recently come across a case where the taxpayer left over 20 years ago but basically Inland Revenue has only now really started to take action to collect the outstanding debt.)
The other thing that’s also noticeable from Inland Revenue’s June 2022 annual report is that it did not actually spend the full amount allocated to it from the relevant budget appropriations.
Some questions for Inland Revenue
The amount allocated was just over $92 million, but in fact Inland Revenue underspent by $2.5 million for the year. A couple of questions I have about this are how did that happen and what’s being done to improve the performance and make sure that the funds allocated are effectively used? (I note that for the year to June 2023, there was an increase in the appropriations.)
It will be interesting to see how that’s played out when we see the annual report later this year. This debt management issue, by the way, points to something I’ve mentioned in previous podcasts – has Inland Revenue’s Business Transformation program deprived it of some capacity in key areas? Inland Revenue has reduced its staffing by more than 25% of your staff and not all of that might be dead wood no longer needed because of the upgrade. I think vitally important staff have gone from key areas such as investigations. And it may be that debt management is another area where key personnel have been allowed to go and the gap has been allowed to develop as a consequence.
As I said, it will be interesting to see the annual report later this year. But in summary, I’d have to agree with Professor Marriott, there’s plenty of room for improvement.
More interest rate rises…
Moving on, a key weapon for Inland Revenue in ensuring payment of tax debts is the ability to charge use of money interest on unpaid tax debt. The current rate is a fairly chunky 10.39%. But as of 29th August, the day after the next provisional tax payment date, the rate will increase to 10.91%. (Incidentally, the rate payable for overpaid tax will also rise, and that goes from 3.53% to 4.67%).
It is necessary for Inland Revenue to have a tool such as an interest charge for unpaid tax. Otherwise, people would just not take any action. But I think that is only one of the tools in its arsenal, as I just mentioned it really does need to back this up with greater enforcement and earlier interventions.
At the same time, Inland Revenue and tax advisers can all work together and let people know that when you take proactive steps on tax debt, you will find Inland Revenue is much more prepared to work with taxpayers in default than people might imagine. This has always been my experience. You front foot these issues with Inland Revenue, and you will find they will be prepared to work with you and your clients unless they are actually dealing with a serial defaulter.
For example, yesterday I was speaking with someone who’d run into some difficulties and had gone to Inland Revenue. They had been very pleasantly surprised by how proactive Inland Revenue had been in working with them on sorting out their unpaid tax. I could see clearly see that they felt a lot happier about the position. They still owed money, but they were in a position where they knew there was a way forward.
The key lesson is if you’re in trouble with Inland Revenue over unpaid debt, talk to it and your advisers and then you’ll hopefully get better results.
Incidentally, the rate of prescribed rate of interest for calculating fringe benefit tax on employer provided loans and some other measures is also being increased with effect from the quarter starting 1st October. From that date, the rate will rise from its current 7.89% to 8.41%.
Upstart Nation? Changing the tax system to boost startups
And finally this week, an interesting report called Upstart Nation from the government’s Start-Up Advisory Council.
This has been the business group looking at how to improve the rate of startups and develop more startups into major companies. On 1st August it released its report which included suggestions regarding changes to the tax system to help boost startups.
The report’s objective to “present a comprehensive strategy aimed at transforming New Zealand into a thriving hub for innovative UpStarts”. The Council identified four primary pillars as key: Capital Capability, Connectivity and Culture. Specific recommendations were made by the Council for each of those pillars to address identified gaps and leverage opportunities.
It had ten recommendations which it felt “will have the greatest impact on our ecosystem”.
Interestingly, three of those recommendations involve changes to the tax system. The first was wanting changes around the taxation treatment of share options and employee share option programs (ESOPs) in particular.
Generally, the current position is a taxable gain arises on the exercise of the options. The Council thinks it would be more appropriate to move that taxing point to when the underlying shares relating to those options are sold. ESOPs are intended to attract and retain investors and key employees as the business grows. Accordingly, hitting them with early tax charges ahead of when they actually can realise their position is a bit of an impediment. There are also questions around the compliance costs involved in getting accurate valuations in what is often an illiquid market. I hear this quite a bit.
Another was specific incentives to promote investment in UpStarts and venture funds in is some form of deduction for such investments. The Council recommends officials carefully review the Australian and UK tax concession schemes and develop something tailored to the New Zealand setting. In particular, they were looking at the Australian Early Stage Innovation Company scheme, which provides a deduction for an investment and a capital gains tax exemption.
The council suggests a deduction of maybe up to 30% of the capital invested directly in an UpStart or UpStart venture fund capped at $200,000 a year. That’s an interesting suggestion and one worth considering even though it probably won’t be accepted by fiscally prudent governments.
An urgent issue with the foreign investment fund regime
The third suggestion included in the top ten recommendations was to “Ensure international and returning Kiwi talent isn’t captured by double taxation under our foreign investment funds regime.” This issue almost exclusively affects American investors and employees with overseas investments. Once their four-year transitional residence exemption expires and the foreign investment fund (FIF) regime takes full effect, they are essentially taxed on an unrealised basis. At the same time, because America requires all its citizens to file tax returns, they are still subject to tax there and in particular capital gains tax.
This is something I’ve discussed with a number of clients. Although they can claim foreign tax credits in America in relation to the FIF tax payable, it often exceeds the equivalent amount of US tax payable on the realised gains. They are therefore accruing a tax liability, which in some cases they can never fully offset. In effect, they feel they are facing a double tax charge.
The Council recommended “this issue be investigated under urgency with a view to removing FDR on people caught under this double tax conundrum to ensure we can attract and retain them in New Zealand”.
I agree this needs reviewing. We hear frequently we are in the business of attracting talent here. In this particular case, we have an issue (somewhat ironically, a by-product of not having a comprehensive capital gains tax) which potentially hinders getting vitally important migrants.
You could argue that not this particular issue doesn’t just affect investors in the startup sector, but also any American citizen or returning New Zealanders who have acquired American citizenship or a Green Card and are among the groups of skilled migrants such as doctors or other specialist engineers, etc. This is a real impediment we need to consider.
Well, that’s all 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 time, kia pai to rā. Have a great day.
This week has been a very busy week politically in the tax world, starting with a Cabinet reshuffle after David Parker relinquished his role as Minister of Revenue. In his own words, he felt that his position had become untenable in the wake of the decision by Prime Minister Chris Hipkins to rule out a wealth tax and capital gains tax for the foreseeable future.
Parker has been replaced by Barbara Edmonds, who has an interesting background in that she worked in Inland Revenue for some time prior to becoming an MP in 2020. In 2016 she was seconded from Inland Revenue to work as private Secretary to the then Ministers of Revenue, first Michael Woodhouse and then Judith Collins. (This is actually something that happens quite commonly with Inland Revenue officials working closely alongside other ministerial officials). In 2017, she then became a political adviser to Stuart Nash after he became Minister of Revenue. So, she’s got a very good background on the portfolio.
One of the things I think she might read with some amusement is what’s called a Briefing to Incoming Minister. Whenever there’s a change of minister the relevant department prepares a briefing to that minister, setting out their role and the key challenges ahead for as the particular ministry. I suspect Edmonds has been involved in preparing several of those. But this time she will be receiving one as recipient. The change is probably what you might call unforced, but it’s part of the fallout of the decision to not continue with the down the path of imposing a wealth or capital gains tax.
Signs of strain in the construction industry?
Moving on Inland Revenue has started a pilot programme to provide some support for those construction industry, or customers in the misguided terminology, in my view, of Inland Revenue. It’s intended to provide “tailored assistance” to help those in the industry through various stages of business. The intention is to have “meaningful discussions” with taxpayers in that industry about the business, how they’re doing, offering guidance and support about tax and entitlements. These will also involve “promoting the benefits of having a tax agent or bookkeeper”.
Long-time listeners of the podcast will know that when Inland Revenue was in the early stages of its Business Transformation program, tax agents felt, with some justification, that they’d been shut out of the process. It’s now interesting to see that Inland Revenue has realised that tax agents actually have a key role to play in the system and are encouraging their use. Good to see.
This is an interesting initiative by Inland Revenue. It probably speaks to strains that they are seeing within the construction sector, slow payments, people getting behind in tax debt, tax returns, etc.. This pilot program is an initiative to front foot those issues. I’m all in favour of Inland Revenue taking steps like this and moving forward I think it would be wrong to ever adopt the idea that any call from Inland Revenue is a bad call, that you’re in trouble. Sometimes they come in and they may have some suggestions about what to do and how to manage scenarios which can be very constructive.
In every case I’ve ever dealt with, if you front foot issues around slow payment, failure to file returns, whatever with Inland Revenue, you will find that they are receptive to those advances. A key part of their job is to promote voluntary compliance and help the smooth running of the system. As part of this it does matter if people can build trust that the Inland Revenue is actually, if not entirely on your side, a rather fairer referee than people might expect.
Te Pāti Māori go big on tax reform
Moving on, as I said, it’s been a busy week politically. We’ve had the effective resignation of David Parker as Minister of Revenue, and then yesterday Te Pāti Māori released their tax policy. Firstly you could not accuse them of being very limited in their ambition. In fact it’s a very ambitious policy.
The executive summary begins “We have a broken tax system in this country which has fuelled extreme wealth inequality that is only getting worse.” So, that’s the starting base point. In my view there are definite strains in the tax system, and we are seeing more and more of those emerge.
The key proposals are for GST to be removed from “kai”, lower income tax for those low incomes which is to be paid for by increasing income tax on those earning more than $200,000 and raising the company tax rate from 28% to 33% (also a Green Party proposal).
The key revenue raising measure, which is probably no surprise, is a wealth tax. As you know the Green Party also proposed a wealth tax on net wealth over $2 million. Under Te Pāti Māori’s proposals a 2% wealth tax on net wealth over $2 million is the starting point. However, if your net wealth is over $5 million, the rate is 4% and then if it’s over $10 million the rate rises to 8%.
From the work done for Treasury and Inland Revenue on the Government’s abortive wealth tax we have some idea of how many people might be affected by a wealth tax. An entry threshold of $3 million would have affected 99,000. The final design modelled for the Government was based on a $5 million threshold which would have affected 46,000 people. The report estimated the number of taxpayers who would have had net wealth in excess of $10 million as 16,000. So, it’s a pretty targeted group.
Te Pāti Māori have some fairly ambitious numbers on this. They believe that they their wealth tax would raise $23 billion per annum, which is a pretty significant amount of tax, in fact just a bit over 20% of the current tax take.
The wealth tax would be used to set income tax thresholds as follows:
Te Pāti Māori estimate 3.8 million people would benefit from their proposed tax cut package. They’re also, as I said, removing GST from “kai”. How that gets defined is going to be interesting and we’ll talk more about that in a minute.
There are several other new tax proposals. A proposed Overseas Financial Transfer Tax of 2%. This is to apply to overseas companies operating in New Zealand and will be additional to the company tax rate, which by the way, they propose increasing to 33%. This seems to represent some form of withholding tax. I imagine there might be quite a few double tax agreement issues involved in this.
A Land Banking Tax will be payable on all land that has not begun to be developed within four years of purchase. In addition, there will be a Vacant House Tax which would be payable on all properties that do not have a tenant after a six-month period.
Tackling tax evasion
One other interesting proposal is to tackle tax evasion which they say is “approximately $7 billion” annually. I think this number might also include tax avoidance which has an important distinction from tax evasion. Te Pāti Māori propose to invest $500 million into adequately resourcing the Serious Fraud Office and Inland Revenue to investigate and address these issues. This would be a colossal funding boost to both organisations. In the case of Inland Revenue, it would more than double its capacity and it would be a massive lift also for the Serious Fraud Office. So that’s an interesting one proposal, which is probably off the radar, but might be one of those things that actually gets pushed through when parties sit down to negotiate after the Election.
A Government leek?
Te Pāti Māori proposals got overshadowed by an apparent leak from within the Labour Party, immediately denied, that they were considering removing GST from food.
I’m often asked about the question of removing GST from food because on the face of it, it seems a fairly obvious thing to do. This happens in Australia and in many other GST/Value Added Tax (VAT) jurisdictions around the world food is zero rated to use the correct terminology. So if it can be done elsewhere, why can’t we do it here?
I’m in the group of tax policy advisers who are pretty much unanimous in thinking that after establishing a comprehensive GST, which included everything, we shouldn’t be tinkering too much around the edges and introducing exemptions, particularly ones such as food, which will turn out to be pretty costly. Te Pāti Māori estimates the cost of GST free kai to be between $3 and $5 billion.
Marshmallows and Max Jaffa
Our objections are firstly around the principle of not upsetting the purity of GST (and it’s one for which we get a fair bit of flak). There are actually really practical reasons around this matter. Like it or not, there are definitional issues around here and listeners to the podcast will recall when I discussed a recent UK VAT case involving marshmallows which because of their unusual size they qualified to be zero rated. There’s also the famous Max Jaffa VAT case which I explained on TVNZ on Friday.
Over in Australia they’ve had zero rating issues boundary issues around bread. In every jurisdiction around the world with GST/VAT these issues all arise. So, thinking because this is such a good thing to do, doesn’t bypass those problems.
Secondly, as I mentioned, it’s expensive. What do you do elsewhere? You’re giving away revenue as a tax cut so that’s got to be funded. In Britain, for example, the standard rate of VAT is 20%, and across Europe you will see rates of 20-25% and more as common. This trade off has to be taken into consideration, which is not considered too much by proponents.
And then finally, there is a very flawed assumptions that the full benefit of a cut will flow through to the customers. There is little evidence of that actually happening. The Tax Working Group looked at this issue and was not a fan.
Interestingly, the evidence it gathered from Europe was that whilst the majority of any general rate in cut in VAT (for example reducing the rate to 12.5%) did flow through to benefit consumers, in relation to specific incentives the estimate was that only 30% passed through.
Podcast listeners will know that I’ve cited Dan Neidle and Tax Policy Associates in the UK’s review of a couple of initiatives where VAT was reduced to zero. In one case the reduction in e-books, they saw no benefit passing through to consumers.
Well meant but poorly targeted policy?
Removing GST from fresh fruit and vegetables is a good example which VAT/GST specialist Professor Rita de la Feria of the University of Leeds has pointed out is a well-meant but ultimately poor policy.
Ultimately in my view the question about wanting to do something about cutting GST comes back to giving people some more money. Now we can do that through income tax cuts or with properly targeted payments to assist the low-income groups that are hardest hit.
This is something for our politicians to actually front up and address, because when you read the officials’ analysis (and it was in the papers relating to a tax-free allowance), they usually suggest it’s better to give more targeted reliefs in the form of direct benefits rather than widespread initiatives. And every time the politicians shy away from such proposals for whatever reason, maybe they think there’s no votes in it or whatever, but the principle still stands.
So, it will be interesting to see what Labour’s actual tax policies will be, whether they will run with removing GST on fresh fruit and vegetables. The proposal certainly seems popular.
But I’m actually quite glad to see political parties thinking big about tax and saying we need to do something radical in the area. Te Pāti Māori is the latest alongside Act, the Greens and TOP. All have made serious suggestions about significant changes to our tax system, whereas the two main parties seem to be just offering little more than fiddling around the margins. Anyway, we’ll no doubt see more in the coming weeks. And as always, we will bring you the news as it develops.
That’s all 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 time, kia pai to rā. Have a great day.
Inland Revenue has released a draft interpretation statement on the research and developments loss tax credits regime. This is a refundable tax credit available to eligible companies when they have a loss which has arisen from their eligible research and development expenditure.
The regime was introduced in 2016 to encourage business innovation and also to address New Zealand’s poor record of R&D expenditure. According to OECD data, in 2019 New Zealand’s spending on R&D was just 1.4% of GDP, well below the OECD average of 2.56% of GDP. Over the past 20 years research and development in spending in New Zealand has been a full percentage point of GDP below the OECD average.
So given that we also have a poor record of productivity, increasing R&D expenditure is seen as critical in improving productivity and ultimately the strength of the economy.
That’s the background behind the introduction of the loss tax credits regime. It’s intended to assist the cash flow of those companies carrying out research and development. Often in the early years, these companies are running at a loss. Hopefully once the R&D matures and bears fruit, they will then have profits resulting from the expenditure.
But funding cash flow in those early years is pretty difficult. So instead of the tax losses to be used against future profits, under the regime, companies can instead receive a payment. Note, only companies can receive this R&D tax loss credit payment. That’s because losses incurred by partnerships, limited partnerships, look-through companies and sole traders can already pass those losses through to the underlying owners anyway, who will often be able to offset them against their other income. Essentially, they are already able to benefit from the ability to cash-up losses. But companies can’t do that, hence the introduction of the regime.
The Inland Revenue draft interpretation statement looks at the background to scheme, summarises the rationale for scheme and how it operates. A couple of key points about the regime: you can drop in and out of it, you can opt to choose a payment in one year but not in another year. Once you have claimed a refund by cashing up your losses, the regime operates rather like an interest free loan. You’re essentially required to repay it and it’s generally treated as being repaid when the company starts paying tax, the R&D having borne fruit.
However, there are other circumstances where the credit may have to be repaid earlier when there is, in the terminology of the regime, a loss recovery event. Now, that typically will happen if there’s a disposal or transfer of the intangible property, core technology, intellectual property, etc., which is done for either less than market value or the amount sold is a non-assessable capital gain.
Another situation, and this is actually one where I’ve been involved, is where the company is no longer tax resident in New Zealand. Some very interesting issues arise in that case. Then there’s the worst-case scenario, where a company goes into liquidation although what exactly can be recovered at that point is a moot point. But that’s still a loss recovery event.
And then finally, and similar to our other rules around the carry forward of losses and imputation credits, a loss recovery may occur if there is a loss of the required shareholder continuity. In the case of the tax loss credit regime, the relevant shareholding percentage is 10%. In other words, there’s no breach if at least 10% of the voting interests of the company are held by the same group of persons throughout the relevant period.
In my view this is a very important regime for improving the future productivity of the country. The scale of the spending is going on is quite interesting to see. We can get an idea of this because the Inland Revenue as part of the budget produces what is called a tax expenditure statement.
Tax expenditure statements are a summary of the cost of a particular tax preferred regime, which, like, for example, this regime, has been introduced for specific policy reasons. The OECD collects data on tax expenditures to get a global picture of what spending is going on in tax preferred regimes.
In the case of the R&D loss tax credit, the estimated value of the expenditure for the year to 30th June 2023 is $362 million, a little bit below 1% of GDP. The estimated expenditure for the year to June 2022 was $473 million. And you can see a steady rise since the regime was introduced in 2016.
Of course, the real importance of this regime is whether it has produced a boost in total R&D spending within the economy. And then ultimately, does that lead to increased productivity. It’ll be interesting to measure these once the data flows through in due course.
So, an interesting regime and good to see Inland Revenue give some guidance on this. It contains a few hooks but it’s well worth looking at if you’re thinking about trying to make use of the scheme. And as I said, we will watch with interest to see how it bears fruit.
Shuffling forward on internationalPillar One and Pillar Two proposals.
Moving on, we’ve talked fairly regularly about the OECD’s global minimum tax deal and Pillar One and Pillar Two. Last week the G20 met in India and the Secretary General of the OECD reported to the meeting that, “A historic milestone was reached at the 15th Plenary Meeting of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (Inclusive Framework) on 11 July 2023, as 138 members of the Inclusive Framework approved an Outcome Statement on the Two-Pillar Solution.”
In summary, what’s happened is that they’ve developed a text to a multilateral convention which will allow jurisdictions to exercise a domestic taxing right over the residual profits of the largest, most profitable multinationals. That’s what they call Amount A of Pillar One, and that will apply to multinationals with revenues in excess of €20 billion and profitability above 10%. What will happen is the scope of that taxing right will be 25% of the profit in excess of 10% of revenues. This €20 billion revenue threshold will gradually be lowered to €10 billion after seven years, conditional on the successful implementation of Amount A.
There’s a proposed framework for the simplified reporting application of arm’s length principle, which is key to transfer pricing and for baseline marketing and distribution activities. That’s what referred to as Amount B of Pillar One.
There’s a Subject to Tax Rule, again with an implementation framework, and this is really for developing countries to update their bilateral tax treaties to tax intra group income. This is where such income is subject to lower tax in another jurisdiction, in other words say one country has a 20% corporation tax rate. But that multinational shifts charges to another part of the multinational group in a jurisdiction where those charges are only taxed at a lower rate. This Subject to Tax Rule gives the first country more taxing rights in that income. Developing countries are very keen on this particular point because they feel that this is where the current tax regime has been almost predatory on their tax base.
There will be a comprehensive action plan developed by the OECD to “Support the swift and coordinated implementation of the Two Pillar Solution, coordinating with regional and international organisations”
On the face of it, all pretty much good news. But it’s interesting to read the views of those people who specialise in this field and there still seems to be quite a bit of uncertainty about whether in fact this whole thing will come to fruit.
In the meantime, for example, you’ve got lobbying going on in the United States. And it appears now that the US has managed to secure a further delay in the implementation of the Pillar Two global minimum tax 15% until 2026, according to a report coming out of the United States.
Pillar Two is the key proposal, because it applies to companies with annual revenues in excess of €750 million. Apparently, the US Treasury Department has managed to negotiate a delay in the implementation of this. It has got people watching all around the world as to what’s going on. It also means that the in the background, digital services taxes, for example, could still be ready to be deployed or introduced by jurisdictions if they feel that Pillar Two isn’t making enough progress and they want to secure their revenues. [Under the agreement just announced countries have agreed to hold off imposing “newly enacted” digital services taxes until after 31st December 2024.]
Overall, it’s a bit of a shuffling: one step forward, maybe half a step sideways and a quarter of a step back. In other words, progress is slow, but it’s still inching the way forward. Ultimately, it comes down to watching what happens in the United States and the lobbying goes on. If there’s a change of President next year all bets will be off at that point, I would say.
Smith, banged to rights, again. But should Companies Office be in the gun?
And finally, this week, the murderer and escapee, Philip John Smith, who’s been in jail since 1995 apart from the brief time he escaped to Brazil has now been sentenced to further two years imprisonment on tax fraud charges.
He was convicted for dishonestly using documents intending to gain pecuniary advantage, firstly, a application under the Small Business Cashflow Scheme and then for filing 17 false GST returns and a false income tax return. in total the attempted fraud was just over $66,000 of which was actually paid $53,593. He’s also been ordered to pay full reparations on that amount.
What he did was between October 2019 and March 2020, he registered five companies with the Companies Office with shareholders and directors, who were friends, associates or third parties unknown to him. He then he set up and activated myIR accounts for each company.
But Inland Revenue was quite quickly onto him, it seems, because it apparently detected the fraud involving the Small Business Cashflow Scheme in June 2020 only a few months after it started operating in April. So good quick work by Inland Revenue.
But the case also raises the point which an associate I bumped into this week mentioned, and that’s the actions (or inaction) of the Companies Office in allowing those five companies to get set up. New Zealand scores highly for ease of business in establishing companies. Many times, whenever I’m talking to overseas people, they are remarkably impressed about how quick it is to set up a company in New Zealand.
The question arises if people setting up companies by going directly through the Companies Office website, is it a little bit too easy? Was an opportunity to pick up Smith’s attempted fraud missed at that point by Companies Office? We don’t know. Accountants and lawyers are subject to the current anti-money laundering legislation, so we need to pay attention to what’s going on with company registrations and we have to obtain proof of ID. But my understanding is this process is a little less rigorous when you go directly through the Companies Office.
So good work by Inland Revenue picking it up quickly and catching Smith, again. But maybe some questions should be asked as to whether he should ever have been able to get that far along the line and that Companies Office should have picked it up sooner.
And finally, congratulations to the Football Ferns for their magnificent win last night at the start of the FIFA Women’s World Cup. I was lucky enough to be at Eden Park, which is why I might sound a little hoarse today! It was fantastic to experience such a great occasion even if the final nine minutes seemed like an hour. Congratulations again to everyone involved. Football definitely was the winner on the night!
That’s all 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 time, kia pai to rā. Have a great day.
