Rachel Reeves, the first ever female Chancellor of the Exchequer delivers a UK Autumn Budget with potentially significant implications for many Kiwis and Britons who have migrated to New Zealand.
Meanwhile Inland Revenue’s crackdown on tax evasion continues.
The UK finance minister is officially called the Chancellor of the Exchequer, a post which is more than 800 years old, and until this year it had never been held by a woman. So, when Rachel Reeves, the Labour Chancellor of the Exchequer delivered her maiden budget speech last Wednesday night, she made history as the first woman Chancellor in British history.
There was quite a lot to consider in this UK Budget, as people were watching to see how the new government would respond to the challenges it inherited. British budgets, unlike ours, coincide with the release of a Finance Bill and tax measures there’s always a lot of tax matters to consider beyond the headline measures.
The headline measures
Most notably, there was an increase in Employer National Insurance Contributions (a Social Security tax) by 1.2 percentage points to 15% with immediate effect. There are also immediate tax rises for capital gains tax, but the top rate for capital gains tax still was capped at 24% for both property and non-property assets. Which as some commentators said is still lower than countries with which the UK compares itself. It’s quite interesting to see that comment about 24%, because one of the key points of our discussion around capital gains taxes here is what rate would apply? It’s therefore interesting to have an international comparison.
Beyond the headlines
It’s always interesting to dig around in other countries’ budgets and see what they do in certain areas. For example, the UK doesn’t have an imputation credit system, but there are lower rates of tax applied to dividends, even for those on the highest income. There’s also a savings allowance, which exempts certain amounts of investment income. It’s currently £1,000 for basic rate taxpayers (taxable income up to £37,700) and £500 for the higher rate taxpayers. The UK basic rate of tax is 20% and we have two rates lower than that so this savings allowance is not necessarily a measure we might want to copy here.
Twin cab utes and fringe benefits – an example to follow?
There’s apparently some uncertainty around the fringe benefit taxation treatment of twin cab utes which the Budget clarified. Where they have a payload of one tonne or more such vehicles are not there to be treated as cars for benefit in kind purposes unless they were acquired prior to 6th April 2025.
On Fringe Benefit Tax, the benefit value is calculated as a percentage of the vehicle’s list price when the car was first registered which is similar to our treatment. However, the percentage used is determined by the vehicle’s carbon dioxide emissions, or its range if it’s an electric vehicle. These percentages are set to increase steadily over the next three years as part of the range of tax increases announced. Inland Revenue is presently reviewing FBT and as is well known tax can act as a disincentive. If we want to incentivise a transition to a lower emissions economy, maybe we should be looking at how the UK applies FBT to vehicles.
UK pension tax free lump sum unchanged
There’s always lots of rumours before a Budget which I’ve seen sometimes used as a means to get people to buy new products or make tax driven decisions in fear of change. One of the rumours before this budget was that there were going to be changes to the taxation of pensions and in particular to the 25% tax free lump sum. That hasn’t happened, but remember, our rules are completely different. Just because 25% of the pension can be withdrawn tax free in the UK, that doesn’t mean the same rules apply here.
The big changes
But the main reason I was paying particular attention to this UK budget was because we finally got more detail around the two announcements made in the March Budget – the new foreign and income gains regime and the end of the non-domicile regime and the changes to inheritance tax. These are both measures which have significant impact for New Zealanders, who are either going to the UK or have returned to the UK, but also for UK expats who have migrated here.
New foreign income and gains regime
The foreign income gains (FIGS) regime is very similar to our transitional resident’s exemption in that a new tax resident’s foreign income and capital gains will be tax exempt for the first four UK tax years that they are resident in the UK. It’s not like our 48-month exemption period, it is tied to the UK tax year, which remember runs from 6th April to 5th April. (Perhaps reflecting that some of this stuff does date back 800 years or more, there’s no intention to change that tax year end).
What has also been clarified is that individuals who have previously elected to be taxed on the remittance basis, which meant their non-UK sourced income investment income was not taxable, can now be allowed to take advantage of a so-called temporary repatriation facility. This will last for three years, and they will be able to nominate and remit their non-UK income and gains from years when they were within the remittance basis and take advantage of lower tax rates. Initially 12% for the first two years ending 5th April 2026 and 2027, and then 15% for the year ended 5th April 2028.
As part of the FIGS regime there are also changes to what’s called the Overseas Workday Relief. This will allow UK tax resident employees who perform all or some of their duties outside of the UK to claim tax relief on the remuneration relating to their non-UK duties determined on “a just and reasonable basis”. This is quite a significant one for expats and for companies that have very highly paid and skilled employees and has been greeted with general enthusiasm by by those impacted.
Inheritance Tax
Potentially the biggest change though, is in relation to inheritance tax (IHT). This applies to all assets situated in the UK or all assets situated anywhere, if the person is domiciled within the UK. There’s a nil rate band of £325,000, above which 40% will apply (these rates and thresholds have been frozen until 2030). IHT has a potentially significant impact because under the present rules, someone tax resident outside the UK could still be within the IHT net because they are still deemed to be domiciled in the UK. I’ve had to deal with one or two of these instances.
There’s also a pretty nasty trap for someone like me who might have left the UK a long time ago and adopted a new domicile of choice outside the UK. At present if I ever became tax resident again in the UK, our domicile would immediately revert to the UK. Therefore, working or living for prolonged periods of time in the UK was actually potentially highly tax disadvantageous from an IHT perspective.
All this will be replaced now by a residence-based regime. The tests for whether non-UK assets are subject to IHT will now be whether the individual has been tax resident in the UK for at least 10 out of the last 20 tax years immediately preceding the tax year in which the chargeable event, most typically death, but can also be a lifetime transfer into a trust, happens.
There’s also a tail on how long a person is in scope if they’ve been non-resident during a period. For example, if someone had been UK tax resident for between 10 and 13 years, they remain in scope for IHT for three years post departure.
(Courtesy Burges Salmon)
Implications for New Zealand residents
What this change means for a lot of British expats resident here is they’ve got to think again about what their IHT obligations could be. By the way, our double tax agreement with the UK does not cover IHT. The UK has the right to charge IHT on assets situated in the UK, that’s not surprising. However, it potentially also has got a long reach if HM Revenue & Customs determine someone resident here is subject to IHT.
IHT and trusts
One of the other IHT changes is to the taxation of trusts used to hold assets outside the scope of IHT, so-called excluded property trusts. If I understand it right, starting from 6th April 2025, if a settlor dies and they’re within the scope of IHT, assets settled by them into what was previously an excluded property trust are now within IHT. This is a major change and I’m investigating it further given we make very extensive use of trusts. I’ve been dealing with quite a few clients who have UK connections year and it’s been really revealing to see how complex the taxation of trusts is from the UK perspective. It’s good to see some clarity around the new rules, but as I say, it’s a significant budget in many ways, and there could be quite major consequences for more people based here than they might anticipate.
Meanwhile, Inland Revenue’s crackdown continues
Moving on, Inland Revenue continues its crackdown when it announced on Thursday that it’s making unannounced visits to hundreds of businesses who it believes are not meeting all their tax obligations as employers.
According to Inland Revenue, they receive about 7000 anonymous tip offs each year. It has said “the volume of tip offs has grown over previous years indicating an increased sense of frustration by the community in general, businesses who are not doing the right thing.”
Inland Revenue’s analysis shows that the tax risks overwhelmingly relate to taking cash for personal use without reporting sales and or paying employees in cash.
Based on this Inland Revenue is making unannounced visits to over 300 employers whose practices it will closely examine. I’ve seen this happen with a few clients under investigation. Inland Revenue staff will go to a café or business and just watch to see what’s happening. They may buy something, but they will certainly sit and observe and see who uses the till, how everything is recorded and from there they will draw the relevant conclusions.
The consequences of being investigated
As an example of what happens to taxpayers who have not been compliant, the director of an asbestos removal and labour hire company has been jailed for three years in what the judge called serious offending and the worst of its kind to come before the Christchurch District Court in the last 20 years. The director, Melanie Jill Tatana, also known as Melanie Jill Smith, was jailed for three years for what was described as wilful diversion of funds.
Her company employed around 60 people, and between April 2019 and September 2022 had been required to deduct PAYE on 63 occasions but failed to pay the full amounts totalling $1.6 million. Tatana was therefore charged with 63 counts of aiding and abetting to knowingly take PAYE from workers’ wages and not pay it on to Inland Revenue. Instead, more than $800,000 had been diverted for her personal use.
One of the more encouraging things from my perspective about this case is that this offending has all been pretty recent and Inland Revenue tracked it down within a couple of years. I’ve seen cases where the offending has been four or five years.
I still think 63 occasions of nonpayment is a little generous, but bear in mind that Inland Revenue did take the the foot off the throttle around pushing hard on on companies and businesses because of COVID. That amnesty or less stringent approach is now over and it’s back to business. And Tatana won’t be the first to find out about Inland Revenue’s hardline approach.
And on that note, 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.
the winners of this year’s Tax Policy Charitable Trust Scholarship are announced.
A preview of next week’s United Kingdom Budget.
Inland Revenue regularly releases Official Information Act requests that it has answered. One from last month was in relation to the amount of overseas income reported by individuals. My attention was first drawn to this OIA by Robyn Walker of Deloitte (thanks Robyn) who like me, and many other professionals were quite surprised when we saw the number of people reporting Foreign Investment Fund (FIF) income.
Is there under-reporting?
According to Inland Revenue, which only really started gathering exact data on this in the 2023 income year, 18,140 individuals reported a total of $190.9 million of FIF income for that year.
When you consider that based on the latest Census 28% of the population of New Zealand were born outside the country, it seems to me that the amount of overseas income being reported, and in particular in relation to FIF income, is probably below what we would expect to see. And that’s what caught Robyn’s eye. One or two other advisors have made the same comment.
It could be because we deal in this space, there’s a bit of an echo chamber effect because we will regularly advise on these matters. If we’re dealing with a fairly high proportion of overseas migrants, and our practise Baucher Consulting does, then it’s natural we might think there is a broader scale of overseas investments generally.
But the number seems incredibly low in relation to the FIF income being reported, and also generally speaking, when you think about the number of overseas persons declaring overseas income.
A question of non-compliance
The issue therefore arises as to whether in fact we have non-compliance happening. I raised my concerns about this with Jenny Ruth of Good Returns. In our practice we regularly encounter clients coming to us who have realised that they have not been compliant with the Foreign Investment Fund regime. In some cases, they’ve come to us on another matter and in the course of discussions, it’s emerged that they have not been compliant. At any one time we are usually filing disclosures and bringing tax returns up to date.
Complexity and non-compliance
In my view this possible level of non-compliance speaks to the complexity of the Foreign Investment Fund regime. It’s not a capital gains tax, it operates as a quasi-wealth tax. That’s how I describe it to taxpayers and whenever I’m speaking to overseas advisors on the matter.
Old habits die hard
The FIF regime is not intuitive and I’m often dealing with people who come from overseas jurisdictions which have capital gains tax. They’re aware that where there’s a disposal there is a tax point that’s triggered. This may seem strange to say, but I’ve found in my practise that people’s tax habits developed in their country of origin take long to die even after many years in New Zealand.
Now, coincidentally, just to give some idea of the complexities involved in the FIF regime, Inland Revenue has just released a draft interpretation statement for consultation on the income tax issues involved in using the cost method to determine FIF income.
The Cost Method and the FIF regime
Those who have investments within the regime will be familiar that a fair dividend rate of 5% will apply to the value of your Foreign Investment Fund interest as of the start of the tax year. The alternative is to look at the total realised and unrealised gains of your portfolio including dividends over the year and report that instead, if that’s the lower amount. Incidentally that option way is not available for KiwiSaver funds or for the New Zealand Super Fund which is why it’s regularly one of the largest taxpayers in the country.
But what happens if your FIF interest is unlisted? The cost method generally applies when an investor is holding shares in an unlisted overseas company. And so this interpretation statement explains when that cost method may be applied and how it operates. As is now common, there are lots of examples and flow charts which explain the process. But the fact that there’s an interpretation statement on this matter which has set out and explains when you can or cannot use it the methodology, speaks to the complexity of the regime, and also the compliance costs involved in this.
The cost regime is generally to be used when the values of shares are not readily available. As part of that it will require the taxpayers to find and obtain an initial market value of the overseas stock, so they have a base cost for the purposes of the FIF calculations. It’s possible in some circumstances to use the net asset value of the accounts, usually if those accounts are audited.
Practical problems with the FIF regime
But as can be seen when people are required to obtain independent valuations this means additional compliance costs in what is already quite an involved regime. The other reason why the FIF regime causes consternation amongst taxpayers is the tax liability is not based on cash flows. A tax liability arises under the FIF regime even if the company in question is a growth company and not paying any dividends. Earlier this year I discussed a reportThe place where talent does not want to live, about the issues the FIF regime creates for startup companies and New Zealand resident investors.
All of this just underlines the complexities of the FIF regime. As I told Jenny Ruth of Good Returns, whenever I hear someone arguing “Oh well, capital gains tax is very complicated” I immediately think, ‘Well, they’ve clearly never dealt with the Foreign Investment Fund or financial arrangements regimes.’
Complexity leads to non-compliance?
Anyway, the upshot of all of this is there’s probably a considerable amount of non-compliance happening in in relation to reporting of FIF income. And Inland Revenue are now cracking down on this by making use of the information now available to them under the Common Reporting Standards on the Automatic Exchange of Information.
Now this is an OECD information sharing initiative which started in 2017. Inland Revenue which started a compliance project in late 2019 using this data. But then Covid turned up so that project had to be parked but it has now been reinitiated. As a result, I’ve recently taken on clients contacted by Inland Revenue advising it has received information under the Common Reporting Standards. The clients have been asked for an explanation about their apparent non-disclosure of overseas income and ‘invited’ to make the relevant income disclosures.
Keep in mind also that in the May Budget Inland Revenue was given $116 million over the next four years for investigation activity. The upshot is we’re probably going to see a lot more disclosures about FIF income when we’re looking at the numbers for the 2025 year.
In the meantime, I urge readers and listeners to consider their position and check with their tax advisor if they think they may have investments within the Foreign Investment Fund regime and have not made the disclosures they should have.
And the winners are…
Now moving on, the winners of this year’s Tax Policy Charitable Scholarship were announced in Wellington on Tuesday night. The Tax Policy Charitable Trust was established by Tax Management New Zealand and its founder Ian Kuperus to encourage future tax policy leaders and support leading tax policy thinking in Aotearoa New Zealand. Three of this year’s finalists, Matthew Handford, Claudia Siriwardena and Matthew Seddon have appeared on the podcast over the past few months discussing their proposals.
The format for Tuesday night was that the four finalists, having already prepared a 4000-word final submission, would then present their proposals to a judging panel and the audience, as part of a Q&A.
The judging panel consisted of Joanne Hodge, who’s a former tax partner at Bell Gully and a member of the last Tax Working group. Professor Craig Elliffe Professor of Law at the University of Auckland and another member of the last Tax Working Group. Nick Clark, Senior Fellow of Economics and Advocacy at the New Zealand Initiative and Chris Cunniffe, Strategic Advisor of Tax Management New Zealand. A pretty daunting panel to be frank.
According to Chris Cunniffe “the quality of the presentations on Tuesday night was exceptionally good” and in the end the judges were unable to separate Matthew Seddon and Andrew Paynter.
Winners Andrew Paynter (left) and Matthew Seddon (right) with the judging panel
Matthew’s proposal, is to extend withholding taxes to payments received by independent contractors.
Andrew works as a policy adviser in Inland Revenue. His proposal is to increase the GST rate to 17.5% and introduce a GST refund tax credit for lower and middle income individuals. This would be a means tested individualised credit and would be paid at a flat rate to all qualifying tax resident individuals under a particular income threshold. It’s a fascinating proposal and I’ve reached out to Andrew about appearing on the podcast in the near future.
In the meantime, congratulations to the winners Andrew and Matthew and also to the runners up Claudia and Matthew Handford. Don’t be surprised if you see something popping up in legislation in the near future involving one or more of these proposals. They were all of a very high standard this year, so well done everyone.
UK Budget preview
And finally this week, a brief preview of next week’s UK budget. The new Labour government has been in office now for three months and it’s finally getting around to announcing its first budget. That is part of what they call the Autumn budget statement.
The UK has two budget statements a year, but this one is going to be quite significant because there’s a lot of noise and chatter around tax changes. A quite significant part of my practice at the moment is advising New Zealanders going to the UK, and migrants coming here, and the tax implications involved.
I’m therefore watching this budget with some interest because we know there are going to be two proposals, the final details of which will come out, which will have an impact for quite a number of people. Firstly the so-called foreign income and gains exemption, which is the UK equivalent of our transitional resident’s exemption. This was first announced by the Conservatives in their Spring budget in March this year, but then the General Election happened so full details of the proposals were not released.
Related to that, and this is surprisingly important for a large number of people, are changes to the domicile regime also announced by the Conservatives. At present domicile is incredibly important for determining a person’s liability for UK inheritance tax, which is payable at 40% above net assets over £325,000. It appears the UK will move to a more residence-based regime, but we don’t yet know the details.
I’m therefore watching this with great interest and there are bound to be other measures which are likely to affect New Zealanders going to the UK, or the UK migrants moving here. We’ll therefore keep you abreast of developments in next week’s podcast.
Until then, 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.
Last week I joined Gareth Vaughan of interest.co.nz for a joint podcast with Andrew Coleman. He’s a New Zealand economist who has worked in academia and for the government, including Reserve Bank, Treasury and the Productivity Commission. In the last few months, he’s written a 13 part series for Interest looking at how we currently fund New Zealand Superannuation and what alternatives we should be considering.
Why we’re talking about more tax – the rising cost of New Zealand Superannuation
As I’ve mentioned previously, part of what’s driving the debate around whether New Zealand should have a capital gains tax is when you consider the government’s long term fiscal position, the conclusion you reach is that something radical will have to happen: either benefits will have to be reduced significantly, or taxes will have to be increased. If we’re increasing taxes, how are we going to go about that? That, by the way, is the subject of Inland Revenue’s long-term insights briefing consultation on which is going on at the moment.
(He Tirohanga Mokopuna 2021, Treasury)
Coleman has written extensively about the issue of funding New Zealand Superannuation and in the podcast he went through the issues behind why he wrote the series and what alternatives he proposes. It was very informative, and I highly recommend listening to the full podcast. Here are a few key takeaways.
New Zealand’s unique approach to funding superannuation
Firstly, the way New Zealand currently funds New Zealand Superannuation is very unique in that it is entirely funded out of current taxation. That means the current cost of New Zealand Superannuation, over $20 billion a year before tax, is being paid out of current taxation. This is unusual by world standards, because most other countries in the OECD adopt some form of Social Security tax to pay for their public superannuation. In Britain they have National Insurance Contributions, in America, they have Social Security. Throughout most of the EU you will see Social Security taxes in place. Apart from us, only Denmark in the OECD has no Social Security taxes. Other countries use social security taxes to pre-fund superannuation; people pay social security taxes which are then drawn down when they reach retirement age. We fund everything out of current taxation.
Allied to that, and a matter that makes our tax system unique, is that most other jurisdictions operate what’s called an exempt, exempt tax (EET) approach to private retirement savings. That is a person gets some form of tax deduction for making a contribution to a private superannuation savings scheme. The superannuation schemes are not taxed, but when you withdraw funds on retirement age you pay tax at that point. On the other hand, since 1989 we have adopted the complete opposite approach (TTE). We don’t give a deduction for contributions to superannuation schemes such as Kiwisaver, which are subject to the ordinary rules. However, withdrawals are tax exempt.
Point of order Prime Minister…
Just as an aside, I note that one of the Prime Minister’s comebacks to questions around capital gains tax was that if introduced it would apply to KiwiSaver. (Actually, when the last Tax Working Group proposed a CGT, they didn’t actually seem to think to go there). The PM’s comment glossed over the fact that KiwiSaver funds are subject to tax. If they’ve invested in bonds, these are subject to the foreign financial arrangement regime. If they’ve invested in overseas stocks, those are taxed under the Foreign Investment Fund which because the 5% fair dividend rate automatically applies, is a quasi-wealth tax.
Time for social security taxes?
That point of order aside, Coleman’s key point remains that our treatment of private superannuation schemes and funding of public superannuation is quite unique by world standards. So how are we going to meet the growing cost of superannuation? He suggested that maybe we should look seriously at Social Security taxes.
A Capital Gains Tax won’t be enough
Gareth and I raised the question of alternative taxes, such as a capital gains tax and Coleman made the point that the likely cost of New Zealand Superannuation scheme is going to rise towards somewhere around 8-9% of GDP. Hence the need to be thinking about how to fund that cost. Capital gains taxes don’t generally raise that much, typically, somewhere between one and two percent of GDP. That still leaves a funding gap of between 6-8 percent of GDP. It’s very doubtful a wealth tax, by the way, would make that gap up. In his view, the inexorable conclusion is that Social Security taxes are going to be needed to fill the gap.
How the 1989 changes helped distort the housing market
We also had a very interesting discussion about how the changes in 1989, which by removing the incentives for private savings, drove investment into residential property. He published his research on the matter in 2017, just at the same time that myself and the Honourable Deborah Russell, published Tax and Fairness. Separately we had reached the same conclusion, that the 1989 changes to the savings regime had driven people to start over-investing in housing.
Time for KiwiSaver 2.1
Coleman calls his answer to funding New Zealand Superannuation KiwiSaver 2.1 It would be a compulsory savings regime, but it would be for younger taxpayers, basically those under the age of 40 who were not old enough to vote back in 1997, when a referendum on a question of a compulsory superannuation savings scheme was overwhelmingly rejected.
Coleman’s argument is that younger taxpayers are currently funding what they want and need, such as health, education and transport. But they’re also having to fund the superannuation of older taxpayers, who voted for the current system which benefits them. KiwiSaver 2.1 as a compulsory superannuation savings scheme would be a transition to a fairer system which would include some form of social security tax. The idea would be to be gradually building up savings in a similar way to Australia, which, although it doesn’t have significant social security taxes, does have a compulsory savings scheme. There would be this transitional period, as the older workforce aged out, but all new younger workers would be part of the new KiwiSaver 2.1.
Taxing older, wealthier superannuitants
As part of the transition Coleman sees it requiring more taxes from older persons, which is where our discussion got to talking about capital gains taxes and wealth taxes. He’s not a particularly big fan of wealth taxes. But he sees a capital gains tax having an efficiency aspect to it, which means it should be part of the tax system.
Incidentally, one suggestion I have seen about taxing superannuitants involves applying a separate tax rate to persons receiving New Zealand Superannuation. This would be a way of clawing back payments from those who have other means without going down the route of the deeply unpopular means testing that happened in the early 1990s.
I thoroughly recommend listening to the podcast. Coleman’s analysis highlights the need to keep in context why we’re having this discussion about capital gains and wealth taxes and that’s to do with everyone realising that we have to address the rising cost of funding New Zealand Superannuation and related healthcare costs for the elderly. These issues are not going to go away because the demographics are inexorable, contrary to what politicians might hope as they repeatedly kick the can down the road.
Tax deduction notices
Moving on, Inland Revenue makes great use of tax deduction notices as a debt collection tool. These enable it to require a third party to make deductions from payments due to a taxpayer with an outstanding tax liability. The power is contained in section 157 of the Tax Administration Act 1994, or related provisions of the Child Support and Student Loans Acts. I once saw a notice where a supplier to someone with tax debt was told to withhold 100% of any payment that was going to be made to the person in default.
Inland Revenue typically issues thousands of deduction notices each year.
Deduction Notice issued to:
FYE 30 June 2020
FYE 30 June 2021
Total
Bank
5,222
7,388
12,610
Employer
21,333
43,535
64,868
Total
26,555
50,923
77,479
(Figures obtained under the Official Information Act)
I think it’s appropriate Inland Revenue has the power to issue deduction notices. My concern, however, is I’ve seen them issued for under $1,000 of tax debt which in my view is an inappropriate use for what is a fairly small sum of tax debt under $1,000. When a deduction notice is issued to an employer in such circumstances this essentially notifies the employer that the relevant employee is behind on their taxes.
Are these notices breaches of privacy?
In my view, a deduction notice in this situation represents a breach of privacy and employers really do not need to know about relatively small sums of tax debt owed by an employee. Instead, and I will propose this in my submission on the draft, I believe Inland Revenue should make greater use of tailored tax codes to collect the unpaid tax from an employee. The employer still has the responsibility for deducting the tax through PAYE but now all they know is the tax code has changed. They don’t know the reasons why. This preserves the privacy of the person who has been the subject of the tax deduction.
I think this is important. I discussed this issue with a previous Privacy Commissioner, and he was of the view that, yes, it seemed like a breach of privacy. But as he noted, he couldn’t really do much about it because Inland Revenue had the legislative power to issue the notices. Still just because Inland Revenue can doesn’t mean it should, and I think there are opportunities for improving matters. Looking at the UK, it’s common practice for HM Revenue & Customs to use adjusted PAYE codes to collect arrears of tax. Submissions are open until 15th November.
How many anonymous tip-offs does Inland Revenue typically receive each year?
Across the ditch the Australian Tax Office (ATO) revealed this week that in the past five years it has received over 250,000 tip offs about potential tax evasion. According to ATO assistant commissioner Tony Golding “We get on average over 3500 tip-offs a month from people who know or suspect tax evasion or shadow economy behaviour.” The ATO believes there is about A$16 billion in stolen, unpaid tax each year.
By comparison, according to Inland Revenue it receives about 7,000 anonymous tip-offs each year. These are important sources of information even if sometimes the tip-offs are malicious and stem from toxic relationship or business breakdowns or partnership breakdowns. Regardless of this issue Inland Revenue will follow up (the ATO says 90% of tip-offs lead to further investigation.
How many audits is Inland Revenue undertaking?
On the issue of audits and my thanks to regular listener and reader, Robyn Walker of Deloitte for reminding me, Inland Revenue publishes Official Information Act responses and there are often some very interesting releases. One of the latest OIAs relates to the number of audit cases carried out on businesses between 2019 and 2023.
It’s interesting to see the impact of Covid and the quite marked drop-off in audits for those employing fewer than 50 employees.
There’s also data on the number of shortfall penalties applied as a result of audit. Now shortfall penalties enable Inland Revenue to impose penalties of up to 150% of the tax involved where tax evasion has happened although the more common range of penalties is 20%. Again, the somewhat sparse data makes for interesting reading.
That’s all for this week. Next week, we’ll be taking a deep dive into Inland Revenue with a look at its annual report.
Until then, 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 the ninth edition of the OECD’s Tax Policy Reforms was released. This is an annual publication that provides comparative information on tax reforms across countries and tracks policy developments over time. This edition covers tax reforms in 2023 for the 90 member jurisdictions of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting.
Reversing the trend
It’s a fascinating document which tracks trends of what’s happening around the tax world at both a macro and micro level. The report has three parts: a macroeconomic background, then a tax revenue context, and then part three is the guts of the report with details of tax policy reforms around the world.
There is an enormous amount in here to consider and the executive summary lays out the ‘balancing act’ issues pretty clearly.
“Policymakers are tasked with raising additional domestic resources while simultaneously extending or enhancing tax relief to alleviate the cost-of-living crisis… On the one hand, governments further protected and broadened their domestic tax bases, increased rates, or phased out existing tax relief. On the other hand, reforms also kept or expanded personal income tax relief to households, temporary VAT [GST] reductions, or cuts to environmentally related excise taxes.”
A key observation for 2023 was a trend towards reversing the responses to the COVID-19 pandemic. Instead, as the report notes “2023 has seen a relative decrease in rate cuts and base narrowing measures in in favour of rate increases and base broadening initiatives across most tax types.”
“A notable shift”
This includes “A notable shift occurred in the taxation of business, where the trend in corporate income tax rate cuts seems to have halted with far more jurisdictions implementing rate increases than decreases for the first time since the first edition of the Tax Policy Reforms report in 2015.”
This is a pretty significant change. I think actually when you consider last week’s speech by Dominick Stephens of Treasury, it was setting out the context for why having got over the crisis of responding to the pandemic, countries are realising they’ve got to deal with the demographic issues of ageing populations and funding superannuation.
Climate considerations
Beyond these concerns, there is the immediate impact of climate change and its growing effects. The executive summary picks up on this issue:
“Climate considerations are also increasingly influencing the design and use of tax incentives, with more jurisdictions implementing generous base narrowing measures to promote clean investments and facilitate the transition towards less carbon intensive capital.”
And on that point, I hope all the listeners and readers down in Dunedin and Otago are safe and well at the moment.
Paying for superannuation
The other thing picked up is that in referencing that point I made a few minutes ago about population ageing. There has been a growing trend amongst countries to increase Social Security contribution taxes. Alongside Australia, and to a lesser extent Denmark, we are unique in that we don’t have social security contributions. However, elsewhere in the OECD social security contributions raise increasingly significant amounts of revenue.
The report begins with a macroeconomic background. It notes that for the OECD as a whole in 2023 government debt rose by about nine percentage points, reaching 113% of GDP. For context, New Zealand’s debt-to-GDP ratio is just over 50%.
As the macroeconomic summary notes after generally decreasing in 2022 Government deficits increased again in 2023 following the energy crisis triggered by the war in Ukraine. Consequently,
“As debts and interest rates increased, interest payments have started to rise as a share of GDP. Even so, in 2023 they mostly remained below the average over 2010 to 2019, except notably for Australia, Hungary, New Zealand, the United Kingdom, and the United States.”
In short, we definitely have issues to deal with in terms of debt management and rising costs.
Responding to growing deficits
The report then notes that responses to growing deficits have been to start at increasing taxes. In general tax revenue terms,
“From 2020 to 2021, the tax-to-GDP ratio rose in 85 economies with available data for 2021, fell in 38, and stayed the same in one. In more than half of these economies, the change in the tax-to-GDP ratio was under one percentage point, whereas 22 economies saw shifts greater than two percentage points in their tax-to-GDP ratio.”
Denmark saw the most significant drop of 5.5 percentage points, with New Zealand’s tax-to-GDP ratio falling by three-quarters of a percentage point, well above the OECD average fall of .147 percentage points. (Norway’s dramatic corporate income tax take increase of 8.775% is the result of “extraordinary profits in the energy sector”.)
Composition of tax base
With regards to the composition of tax, 18 OECD countries (including New Zealand) primarily generate their revenues from income taxes, including both corporate and personal taxes. Ten OECD countries relied most heavily on Social Security contributions, and another 10 derived the majority of the revenues from consumption taxes, including VAT, (GST). Notably, taxes on property and payroll taxes contributed less significantly to the overall tax revenue mix in OECD countries during 2021.
Drilling into the detail
Part 3, of the report looks at the detail of the tax policy reforms adopted during 2023. This part has an introduction, then looks at five separate categories of taxes beginning with personal income tax and Social Security contributions, followed by corporate income tax and other corporate taxes, taxes on goods and services, environmentally related taxes and finally taxes on property.
As I mentioned previously, there was “a marked increase in the number of jurisdictions that broadened their Social Security contribution bases and raised rates”. Generally speaking, for high income countries personal income tax and social security contributions represent 49% of total tax revenue. Across the OECD personal income tax represented 24% and social security contributions 26% on average.
Here about 40% of all tax revenue comes from personal income tax. That’s one of the higher proportions around. Around the globe there was a bit of tinkering around personal income tax reforms mainly targeting lower income earners. This is an area where I think we need to focus any future reforms.
We have just (partly) adjusted thresholds for inflation and interestingly, I see that during 2023 quite a few jurisdictions did increase thresholds for inflation. For example, Austria updated its automatic inflation adjustment mechanism to counteract inflation, pushing workers into higher brackets. Meanwhile Australia increased its threshold for its Medicare levy to ensure low income households continue to be exempt, given that inflation has led to higher normal wages.
Corporate income tax rates are on the rise
Substantially more corporate income tax rate increases and decreases were announced or legislated by jurisdictions in 2023. Six jurisdictions increased their corporate tax,four of those did so by at least two percentage points. Türkiye increased all its corporate tax rates by five percentage points.
Whenever there are discussions about reforming our tax system, the issue of reducing our corporate tax rates will come up. With a 28% rate we are at the higher end of the corporate tax rate scale. There is potentially some scope, but as economist Cameron Bagrie has noted any such decrease needs to be part of a broader range of changes.
An example of such a change was the introduction of a general capital gains tax by Malaysia for all companies, limited liability partnerships, cooperatives and trusts from 2024.
Picking out of the details something which I know businesses here would look at with a certain amount of envy is more generous depreciation allowances. The UK, for example, has permanent full expensing for main rate capital assets as it’s called and a 50% first year allowance for special rate assets. Australia has also increased its thresholds for effectively fully expensing items for small businesses. Around the world there’s a whole range of incentives for R&D and environmental initiatives.
We have just limited the limits for residential interest deductions but it’s interesting to see that Italy abolished its allowance for corporate equity provision. Meantime Canada has new restrictions on net interest and financing expenditure claimed by companies and trusts.
Taxes on goods and services (VAT/GST)
In the VAT/GST space, in terms of revenue from taxes on goods, although we have one of the most comprehensive GST systems in the world, New Zealand was only twelfth in the OECD for the percentage of tax revenue from goods and services as a percentage of total tax revenues. GST raises just over 30% of total tax revenue here, whereas Chile raises over 50%. This is quite interesting given how comprehensive our GST system is. It might mean that there is scope to expand the the rates of GST further. (Six countries including Estonia, Switzerland and Türkiye did so in 2023). But any government doing so should do so as part of a total tax switch package.
We discussed GST registration thresholds a couple of weeks back. During 2023 seven countries increased or planned to increase their VAT registration threshold. I was very interested to discover that Ireland has a split VAT registration threshold treatment: the registration threshold for the sale of goods is €80,000. But for the provision of services, it’s €40,000. I’ve not seen this split before. Meanwhile Brazil is undertaking the introduction of VAT/GST, which is a huge step forward.
A stable tax policy or just less tax activism?
There’s a lot to consider in this report more than can be easily covered here. Overall, it’s incredibly interesting to see what’s going on around the world. Many of the reforms discussed here involve threshold adjustments but there are plenty of new exemptions and incentives introduced. We generally don’t get into this space, that’s possibly a reflection of a very stable tax policy environment, but also perhaps a less activist philosophy by New Zealand governments which hope market incentives will work. Whatever, the approaches it’s interesting to see what’s going on around the world and I recommend having a look at this very interesting report.
ACC crackdown
Moving on, ACC has been in the news when it emerged that it has been chasing thousands of New Zealanders for levies on income they earned while working overseas.
According to the RNZ report, ACC sent 4,300 Levy invoices for the 2023 tax year to New Zealand tax residents who had declared foreign employment or service income in their tax return. The issue is that the person was often overseas at the time the income was earned and in some cases the the person has probably incorrectly reported the income in their return.
It’s an interesting issue and coincidentally, it so happens that I’ve just come across a couple of similar instances. My initial view is there seems to a bit of a mismatch between the relevant income tax legislation and the legislation within the Accident Compensation Act 2001. Watch this space on this one because I’m not sure the matter is entirely as cut and dried as ACC considers.
Inland Revenue responds to social media criticisms
A couple of weeks back, we covered criticism of Inland Revenue for providing the details of hundreds and thousands of taxpayers to social media platforms. It had done so as part of various marketing campaigns targeting people who owed taxes and Student Loan debt in particular.
Inland Revenue has now responded by putting up a dedicated page on its website, referring to customer audience lists.
In its words “social media is just one channel we use to reach customers. It is very effective at reaching people where they are.” As I said in the podcast Inland Revenue’s dilemma is it has to go to where the people are which is on the social media websites. In order to reach out to them it’s going to have to provide certain data. To reassure people the new page explains how it uses custom audience lists and what data is provided.
They do upload a list of identifiers such as name and e-mail addresses, which is then ‘hashed’ within Inland Revenue’s browser before being uploaded to the social media platform. This is where I think the tech specialists have raised concerns that the hash technique is not as secure as Inland Revenue thinks.
Australia – the Lucky Country again
And finally, an interesting story from Australia about tax refunds. A research team at the Australian National University’s Tax and Transfer Policy Institute discovered a “striking” number of returns generating round number refunds (basically any digit ending in zero). The unit examined 27 years of de-identified individual tax files and found far more refunds of exactly $1,000 than of $999 or $995.
The unit concluded these returns are more likely to be driven by efforts to evade and minimise tax and are costly for the Australian Tax Office to audit such as work related expense deductions. Unlike New Zealanders, Australians can claim deductions on their tax returns. Somewhat concerning to me as a professional is that zeros in tax returns prepared by agents were twice as common as those prepared by taxpayers.
What this article is driving at is that some of the complexity of the Australian system results in the system getting gamed. Back in February you may recall Tracey Lloyd, Service Leader, Compliance Strategy and Innovation at Inland Revenue was a guest on the podcast. Based on our discussion and my own observation I would have confidence that Inland Revenue would not get caught out the same way thanks to the Business Transformation programme. As Tracy recounted, Inland Revenue can track live changes and they can see people just trying to square the return off to what they regard as an acceptable number.
Anyway, it’s an interesting story. It shows the differences between our tax system and that of Australia, but it does seem a little rich that not only can you earn more in Australia, but you get bigger refunds.
And on that note, 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.
In the same week as Public Service Minister Nicola Willis directed department bosses to tighten up on working from home arrangements, it’s a little ironic to see Inland Revenue release a draft consultation on the topics of deductions for expenditure and travel by motor vehicle between home and work and when an employer provided motor vehicle is subject to fringe benefit tax (FBT) for travel between home and work.
These were released alongside some interesting commentary from Inland Revenue that it is currently reviewing FBT, so what is set out in the draft consultations may change, but as Inland Revenue note, it gets a lot of questions on the topic. With regard to this FBT review my understanding is we may see something relatively soon. I think given the outcome of the Inland Revenue’s regulatory stewardship review of FBT and what the Minister of Revenue has said previously, it’s likely this review with look at simplification measures.
There are actually two consultations which will replace the previous interpretation statement IS3448. The topic is quite involved, because the two draft consultations run to 111 pages of commentary and examples. Fortunately, as is now the common practise, each draft consultation is accompanied by fact sheets, each containing a very useful flow chart to help people work their way through the maze.
The deductibility of motor-vehicle travel between home and work
The first draft interpretation statement deals with the question of deductibility of travel by motor vehicle between home and work which is set out in Subpart DE of the Income Tax Act 2007. What that subpart does is limit deductions for motor vehicle expenditure to the business proportion of the expenditure. It generally applies to self-employed taxpayers and partners in partnerships, but it can also apply in some circumstances to close companies and look through companies.
The basic position is that a journey is deductible if it’s a business journey, but to be a business journey and deductible, the whole journey must be undertaken for the purpose of deriving income. This is actually slightly different from the general deductibility provision for tax, which allow deductions quote to the extent to which they are incurred in deriving gross income. By contrast, this the provisions in Subpart DE are very specific it’s got to be a business journey if it is to be deductible.
Four exceptions
Generally speaking, and it’s probably no surprise here, travel between home and work is viewed as private. But there are four exceptions as a result of case law. Firstly, where the vehicle is necessary for the taxpayer to transport goods and equipment that are essential for their work between their home and workplace and for use both at home and in their workplace.
Now secondly, the taxpayers work is itinerant, which means that the taxpayer works at different locations during the workday and the sequence of where they work and how much time they spend is unpredictable and varies. It’s therefore not practicable for them to carry out their work without the use of a vehicle.
The third case is where a taxpayer is responding to emergency call outs and does so from home. And finally, and this is increasingly relevant, the taxpayer’s home is a workplace or base of operations for the purposes of travel to and from work.
This latter point is where we’ll probably see a lot of discussions and arguments. In order for a home to be treated as a workplace or base of operations the role requires a significant proportion of a person’s work to be spent working at home. I think it’s most likely to apply to owners of businesses who may be working between two places, but senior employees who might be required to make international calls in the evening, they may will be covered.
What’s a business journey?
A business journey is one primarily carried out for business purposes. Case law allows an overall journey to be treated as two journeys if there is a stop in between. It’s possible that one part represents a business journey, and the other part is private.
Furthermore, case law also said that some incidental private use does not mean a journey is prevented from being a business journey. Under the draft Inland Revenue consider that insignificant private use can’t exceed either approximately 5% of the total journey and approximately two kilometres.
The consultation also deals with the issue of what if vehicles are taken home for security purposes or, as is now more common, it’s an electric vehicle taken home to be recharged. Either of those circumstances are not sufficient in themselves to make the relevant journey between home and work a business journey. There have to be other factors at play, such as the exceptions we’ve previously mentioned or that home represents a workplace.
When does a fringe benefit arise?
The second interpretation statement and supporting fact sheet considers the question of when a fringe benefit arises when an employer provided motor vehicle is used for travel between home and work. The position is pretty straightforward: if a vehicle has been provided for private use, FBT will apply. In this context private use would include the use of the vehicle for travel between work and home and work. If a employee has a employer provided vehicle and travels to between home and work in that, then fringe benefit will apply.
There are three statutory exclusions from FBT which would cover travel between home would work. These exclusions apply to work related vehicles (a topic the subject of a whole another interpretation statement;
Emergency calls affecting health, life or the operation of essential machinery and services; and
business trips of more than 24 hours.
If any of these exclusions apply the whole day is excluded from the calculation of FBT.
As noted above Inland Revenue is in the course of reviewing FBT, so maybe some of this might change within the next couple of years or so. In the meantime, it’s good to have this draft guidance. Consultation on this is open until 6th November.
Meanwhile progress on the international tax deal continues
Moving on, we’ve talked regularly about the G20/OECD international tax agreements on base erosion and profit sharing. This week, several jurisdictions signed a multilateral treaty which will to help the Pillar Two subject to tax rule. But the other thing that’s important which was concluded in the last few days, was a Model Competent Authority Agreement on the Application of the Simplified and Streamlined Approach to Amount B of Pillar One. This agreement will provide a framework to enable jurisdictions to comply with what’s expected to be the final format of the rule of the Pillar One and Pillar Two agreements.
However, progress has slowed right down since October 2021 when 135 jurisdictions announced that they were accepting the two-pillar solution. With tax, the devil is in the detail and there is a lot of detail and devil to work through.
I think the other thing that should be kept in mind is that the US Presidential and Congressional elections happening in November will determine how much further progress will happen. As previously noted, the likes of Meta and Alphabet are none too keen on what’s proposed here and their lobbyists have the ears of plenty within Congress. We’ll just have to wait and see. But in the meantime, the deal seems to be inching forward.
“The time has arrived for a capital gains tax”
Last week I covered the report from Victoria University of Wellington about comparing tax rates between New Zealanders and taxpayers in nine other jurisdictions. This week things got spicier than I would expect in this sort of debate after the CEO of ANZ Bank Antonia Watson said in the course of her RNZ interview with Guyon Espiner “the time has arrived for a capital gains tax.” This in turn provoked a strong response from both the Prime Minister and the Minister of Finance. I found this a little surprising. I would have thought they’d just let Ms Watson make her comments and move on, but it certainly adds to the headlines.
CGT the most likely option
Following on from Antonia Watson’s remarks, I spoke to RNZ’s The Panel on Wednesday evening about the question of a capital gains tax. Put on the spot I said I could see it happening. To expand on my answer, it seems to me that a CGT is the most likely option if we do expand the tax base, because CGTs are common in other jurisdictions and the concepts are broadly well understood. And as Antonia Watson also noted, wealth taxes on unrealised gains are deeply unpopular with those that would be affected.
The interview with Antonia Watson is well worth listening to. One of the things I found quite interesting was that a couple of times she mentioned the impact of adverse weather effects. This wasn’t anything to do with tax, but she was explaining that our vulnerability to such events was a factor in why we have higher interest rates than Australia.
This circles back to the point that I made last week and again on The Panel, that the discussion around the question of capital gains tax or expanding the taxation of capital base is really around the question of how do we pay for the forthcoming costs of climate change and an ageing population? Are we raising enough tax revenue right now? If not, what are the options on the table?
What does Inland Revenue think?
Inland Revenue currently have their proposed long-term insights briefing for next year out for consultation. Susan Edmunds of RNZ picked up on this in a story on Thursday. The consultation finishes Friday 4th October, and I really do recommend reading and submitting on it.
On the question of the forthcoming actual fiscal pressures, Dominick Stephens, the chief economic adviser for the New Zealand Treasury (and former chief economist for Westpac), delivered a speech on Wednesday titled Longevity and the Public Purse, which I’d recommend reading. It includes plenty of graphs illustrating the difficulty that we are facing. Our population is ageing, which is well known and the median old age dependency ratio is rising, although as the speech notes thanks to strong population growth it’s not as bad as other jurisdictions which means we are at the lower end of that range.
There’s a particularly telling graph about the average government tax and transfer by age group in New Zealand, for the year ended 31 March 2019
As can be seen above for the 65 and over age groups the transfers from Government rise significantly. These are the age groups which is where the debate about sustainability arise, as Dominick Stephens comments:
“Since 2006, the Treasury’s Long-term Fiscal Statements have repeated the message that our fiscal settings are not sustainable over the long run given the impact of population ageing.”
Over the period since 2006 some interesting developments have somewhat ameliorated the potential impact. Interest rates, for example, have been lower than were predicted in 2006, while population growth has been higher.
One of the more extraordinary developments since 2006 is labour force participation for 65 plus age groups has dramatically increased. Consequently, we’ve gone from being amongst the lower labour force participation rates to one of the highest.
All things being considered, there are difficult choices to be made and the question of whether more revenue is necessary is a question which isn’t going to go away.
“There is no silver bullet: none of the policy options we modelled in 2021 was large enough to stabilise debt on its own. This means that governments will need to likely draw on multiple expenditure and revenue changes to close the fiscal gap.
Some savings can be made from a greater preventative focus and reducing inefficiencies but making substantive savings is likely to require some tough choices around entitlements. This would have come with trade-offs, particularly for groups of the population who already face challenges accessing health services.”
Governments could also choose to raise additional revenue, in fact as Dominick remarked “successive increases in taxes over time would be required unless actions were also taken to manage demographic expenditure pressures.”
So tough fiscal choices ahead. I note in the comments on last week’s transcript some noted ‘well, wait a minute, why don’t we try and reduce expenditure?’ That’s certainly a driver for the current Government. But I think what Dominick Stephens and Treasury are saying, addressing the fiscal pressures will be a two-part process. We will need to both reduce costs and raise revenue. So, this debate over capital taxation isn’t going to go away soon and will continue. I expect I’ll be asked plenty more times to comment.
And on that note, 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.
