IMF and Climate Change Commission suggest changes to the Emissions Trading Scheme are needed.
Like a never-ending Groundhog Day, every International Monetary Fund report on the New Zealand economy suggests tax reforms would promote efficiency. For example,
“There is a sense that the asset allocation in New Zealand households has a bit too much emphasis on housing versus other investments. We think a capital gains tax at the margin would help.”
That was IMF Mission Chief Thomas Helbling in 2017.
“…tax policy reforms are needed to promote investment and productivity and growth increase, increase the progressivity of income tax and mobilise additional revenue in response to long term fiscal challenges. To achieve these objectives, reforms should combine comprehensive capital gains tax, land value tax and changes to corporate income tax.”
And invariably the IMF’s conclusions are usually followed by a fairly dismissive response from the Minister of Finance of the day.
In 2002 it was the late Sir Michael Cullen responded to that year’s report: “The IMF’s credibility is not assisted by the fact that it tends to apply the same policy template regardless of the country’s circumstances”. This year Nicola Willis’s retort was “There are some things that are certain in life, death, taxes and the IMF recommending a capital gains tax.”
Associate Minister of Finance David Seymour also weighed in commenting. “I see the IMF again saying, oh, you need a capital gains tax. Every country has one. The only countries that don’t have one are New Zealand and Switzerland. But I say let’s be more like Switzerland.”
However, I’m not so sure that this was quite the zinger he hoped because as someone mischievously pointed out on Twitter, Switzerland has a wealth tax and a $59 per hour minimum wage in Geneva.
Deputy Prime Minister and former Treasurer Winston Peters was apparently not available for comment.
A de-facto capital gains tax – the bright-line test
Now, amidst all of the commentary about the IMF’s suggestions, one of the things that came up time and again is that in many ways, we do have a de-facto capital gains tax, except we don’t call it that. The bright-line test is an example of the approach that we’ve adopted, which has been ad hoc and responsive based on the government of the day’s policies at the time.
As you may recall the bright-line test was brought in with effect from 1st October 2015 by the National Government and it then applied to disposals within two years. In March 2018 the Labour Government introduced a five-year period and in 2021 it was increased a 10-year period. And so, a quite confusing scenario has developed as to which bright-line test applies because some of the exemptions have changed over time as well, particularly in relation to the main family home.
In one way, therefore, the reduction of the bright-line test back to two years again from 1st July is to be welcomed because it is clarifying and simplifying what has become an incredibly complicated area.
Tax Red Flags: More than just the bright-line test to be considered
The bright-line test and taxation of land has plenty of red flags when together with the excellent Shelley-ann Brinkley and Riaan Geldenhuys and moderator Tammy McLeod, I made a presentation about tax red flags on Tuesday to the Law Association. (Formerly the Auckland District Law Society). My thanks again for the invitation to present and to my excellent co-presenters, we had a very lively session talking around this.
In short when you drill into our current land taxation rules, they are very incoherent. The bright-line test is a backup test. It applies if none of the other land taxing provisions apply. And this is something that tripped up people before the bright-line test was introduced and will continue to do so even now it’s been reduced down to two years.
For many people, the particular issue to watch out for is the question of subdivision. If you own a property and undertake a subdivision within 10 years of acquisition it may still be caught under the existing rules, outside of the bright-line test. And in some cases, you may be caught by the combination of the provisions with the associated persons test which deem transactions to be taxable if at the time you acquired the land you were associated with the builder, dealer, or developer in land.
Sometimes the tax charge can be triggered way past the 10-year timetable since acquisition. That’s particularly the case in relation to a disposal of property where building improvements have been carried out. That particular provision, section CB 11 of the Income Tax Act, deems income to arise if a person disposes of land and
“within 10 years before the disposal”, the person or an associate of the person completed improvements to the land and at the time the improvements were begun, the person or an associated person carried on a business of erecting buildings. Note, the reference to “within 10 years before the disposal.” So, you may have owned that land for considerably longer than 10 years and yet still be subject to the provision.
Just a pro tip for anyone thinking ‘Great, with a two year bright-line test coming in, I can now sign a sale and purchase agreement, make sure settlement takes place after July 1st and it’s not going to be subject to the bright-line test.’ That’s not the case. The sale point for the bright-line test in that case is when the sale and purchase agreement is signed and not when settlement happens. I had at least one client get caught by that very provision because they went for a long settlement thinking that got past the two year period. It didn’t, and it is another case of always seek advice on transactions involving land, because as I’ve just outlined, the provisions are complicated.
Could a capital gains tax be ‘simpler?’
And this was the point we reinforced during our seminar. There is a lot of complexity already in our tax system around the taxation of land and in my view, in some ways a capital gains tax would actually clear away a lot of that uncertainty. It’ll become clearer that, broadly speaking, if you buy something, and you sell it subsequently, any gain will be taxable.
Now, how the gain is calculated and the rate at which it’s taxed are two different things. But often in the debate around the capital gains tax, those two things get conflated to run as an argument against the taxation of capital gains.
In my view, the point still remains that we have a confusing hotchpotch approach to taxing capital gains and at some point, grasping the nettle with a CGT as suggested by the IMF and also the OECD, would ultimately perhaps be a better approach.
Incidentally, doing so would be consistent with the well-established principle we have of the broad-based low-rate approach. There’s nothing to say that by broadening the tax base, we could not hold tax rates at current levels or even lower. Bear in mind that the when the last tax working group recommended the capital gains tax, it was intended to keep to help keep the top tax rate at 33%.
Watch out for trustees on the move across to Australia
One of the other issues that came up in our Tax Red Flag Seminar was the question of trustees, and beneficiaries and settlors moving cross-border, particularly to and from Australia. That is something all three of us are seeing quite a bit of and it is something to watch out for as a key red flag.
The IMF on how to tax wealth
If there is a certain repetitiveness to the IMF’s discourse about taxing capital, it’s part of a global discourse on the topic. Earlier this month the IMF released a How to Tax Wealth note. These how to notes are “intended to offer practical advice from IMF staff members to policy makers on important issues.” And this this was a very interesting read as you might expect.
The IMF’s How to Tax Wealth note neatly coincided with the release of the UBS/Credit Suisse, Global Wealth Report for 2023. According to the report, in 2022 New Zealand ranked sixth in the world with an average wealth of US$388,760 per adult. On the basis of median adult wealth per adult, again in U.S. dollars, we ranked 4th behind Belgium, Australia and Hong Kong, with a median wealth of US$193,060.
Incidentally, these rankings were after a very sharp fall from 2021 levels, where New Zealand was only behind Sweden in the biggest loss in wealth per adult.
I am genuinely very surprised to see New Zealand rating so highly for both average wealth and median wealth. On the other hand this Credit Swisse/UBS report is another example of why there’s a great debate going on around the taxation of wealth not just here, but globally.
And this IMF How to Tax Wealth note is instructive in its approach. It starts by making a very obvious point, how much to tax wealth is a distinct question from how to tax wealth. The note argues that:
“returns to capital generally should be taxed for equity and possibly efficiency reasons. and that in many countries, wealth inequality and better tax enforcement strengthen the case for higher effective taxation than in the past.”
Now the IMF doesn’t make any particular proposal about a specific level of tax, the note is basically about ‘here are things you should consider.’ But on the question of wealth taxes, it does come down pretty much against them noting,
“Improving capital income taxes tends to be both more equitable and more efficient compared with replacing them with net wealth taxes. Countries hence should prioritise improving capital income taxation over considering the introduction of wealth taxes”.
Then it talks about – in terms of strengthening capital taxes – addressing loopholes, notably the under taxation of capital gains in many countries. There’s a passing comment, that perhaps you can use a one-off net wealth tax or maybe apply it to very, very high wealth levels.
Time for inheritance tax?
But the Note also concludes “taxing capital transfers through gifts or inheritance provides another opportunity to address wealth inequality.” The IMF comments that the efficiency costs of such taxes are modest, and notes that “inheritance taxes are better aligned with redistribution than estate taxes, since exemptions and rate structures can account for the circumstances of the heirs.”
What really makes the New Zealand tax system unique is not the absence of a capital gains tax because, as David Seymour pointed out, other countries don’t have that, namely Switzerland. It’s the complete absence of taxes on the transfer of wealth, which has been the case now since 1992. That’s what makes New Zealand unique – we have no general capital gains tax together with no estate or gift or wealth taxes.
And this is an area where I think a lot more consideration needs to go into because as the IMF noted, we’ve got fiscal challenges ahead, and where might the revenue be raised from to meet those challenges.
The IMF and Climate Change Commission suggest changes to the ETS
And finally, back to the IMF again. It concluded its mission report by noting that “New Zealand’s ambitious climate goals call for major reforms,” and it referenced the Emissions Trading Scheme, having helped limit net emissions by encouraging robust reductions and removals, particularly from afforestation.
But the IMF then went on to say that “significant reforms” are going to be needed to meet domestic and international targets, and these include reducing the number of available units in the ETS, pricing agricultural emissions and strengthening the incentives for gross emissions reductions within the ETS. The IMF finally note that given the ambition of New Zealand’s first nationally determined contribution under the Paris Agreement, the use of international mitigation i.e.; buying credits from offshore, is likely to be required.
Now the IMF report was a week after the Climate Change Commission, and pretty much said the same thing, and advised the coalition government they should halve the number of ETS units on offer in each of the next six years. The last ETS auction did not go brilliantly. That has a flow on effect in that by reducing the amount of income from emission trading unit sales, it’s going to limit crown revenue for tax cuts.
Vale Rod Oram
It’s interesting to see a confluence of opinion happening here and an appropriate time to remember the late Rod Oram someone who was a very strong environmental journalist. I was fortunate enough to know him all too briefly after we met at a panel discussion. We’d planned on him appearing as a guest on the podcast. Sadly, with his passing that will never happen now, and our thoughts go out to his family and friends.
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.
Inland Revenue does not consider removal of commercial buildings depreciation “to be a fair and efficient way of raising revenue”.
New 12% online Gaming Duty still leaves $500 million gap in the Government’s tax package.
It’s been a busy week in tax, beginning on Sunday when the Associate Minister of Finance, David Seymour, announced that interest deductions for residential properties would be restored to 80% deductibility from 1st April.
There had been a proposal under the Coalition Agreement for the present 50% deductibility in in the current tax year to increase to 60% with backdated effect, but that has now been dropped. The Minister also confirmed interest on residential investment property will become fully deductible with effect from 1st April 2025, in line with the Coalition Agreement.
Interest deductibility “Yeah, Nah”
The announcement reignited a long running debate over the fairness of the measure restricting interest deductibility. The crux of the argument against it being that businesses are allowed to deduct their costs when deriving income, and the change made to restrict interest deductibility by the last government was contrary to standard business and tax practice.
But when you consider this point keep in mind that under the Income Tax Act, expenses are deductible to the extent to which they are incurred in deriving gross income or to the extent they’re incurred in the course of carrying on a business deriving accessible income.
“The extent to which” is the key phrase and the argument around non deductibility revolves around the fact that the economic return for landlords comprises of fully taxable rental income, and a capital gain which is largely tax free. But legislation generally has ignored this point of possible apportionment between what is taxable income and non-taxable capital income. This leads on to the never-ending debate as to whether we should tax capital gains. And so the argument of deductibility is just another continuation of this question.
It’s also worth noting that businesses with overseas owners are subject to the thin capitalisation regime. This also restricts interest deductions where the New Zealand company’s debt to asset ratio exceeds 60%. Now this measure also contradicts standard tax and business practice, but it’s part of many jurisdictions around the world as a means of countering the risk of excessive interest charges transfer pricing money out of the country. In other words, there are arguments for and against restricting interest deductibility.
Improving the position of renters
On Thursday, the Minister of Revenue released an Amendment Paper for the current tax bill along with five Regulatory Impact Statements two of which covered the restoration of interest deductibility and the reduction of the bright-line test period to two years. There was some interesting commentary by Treasury in both impact statements noting:
“Rental affordability is a significant issue in New Zealand. Based on Household Economic Survey data for the year ended June 2022, a quarter of renting households were spending over 40% of their disposable income on rent housing, and rents have risen faster than mortgage payments. Renters also have higher rates of reporting housing issues like dampness, mould and heating.”
Treasury, Inland Revenue and the Ministry of Housing and Urban Development all agreed that restoring interest deductibility should have a long-term effect of putting downward pressure on rents, but ‘should’ is doing a lot of work in this space. Other measures are going to be needed to improve rental affordability.
But restoring interest deductibility has the benefits of simplifying matters. Restricting deductibility was an imperfect measure, with a great deal of complexity and arguably went too far in the other direction of apportioning expenses relating to the split between taxable and non-taxable income.
Trustee tax rate increase to 39% confirmed subject to $10,000 exemption
The announcement on interest deductibility was followed on Monday by the Finance and Expenditure Committee (the FEC) reporting back on the Taxation (Annual Rates for 2023-24, Multinational Tax and Remedial Matters) Bill. There’s a great deal of interest around this Bill as it included the proposed increase in the trustee tax rate to 39%.
As had been hinted by Finance Minister Nicola Willis a couple of weeks back, there is going to be a de-minimis introduced for trusts with trustee income (undistributed income) of $10,000 or less. Such trusts will continue to have the 33% trustee rate apply to trustee income. However, for all trusts where the trustee income exceeds $10,000, a flat rate of 39% will apply. Therefore, if there’s $10,000 of trustee income the 33% rate applies but if it’s $10,001 the new 39% rate will apply on everything. It’s not the first $10,000 is taxed at 33% and the excess at 39%. It’s an all or nothing.
The FEC justified introducing the de-minimis exemption on the basis that the information it had received was that the compliance costs for many trusts were in the region of between $750 and $1,000 per annum. Therefore, the potential $600 benefit of a $10,000 threshold would be swallowed up by compliance costs, which is a fair point. But the reaction among my colleagues and myself is that the $10,000 threshold, although welcome is too low because, by the FEC’s own logic, something closer to $25,000 could easily have been justified.
It’s worth noting that the compliance costs for trusts have increased substantially in the last couple of years. Firstly, following the Trusts Act 2019 coming into force. And then secondly, Inland Revenue’s greater disclosure requirement for the March 2022 year onwards. By the way, we have seen nothing about those greater disclosure requirements being dialled back by Inland Revenue now there is the 39% tax rate in place. Back in 2021 part of the argument for not increasing the trustee rate to 39% at the same time as the individual tax rate went to 39% was to allow Inland Revenue to gather data on whether there was substantial amount of potential income sheltering through trusts. That theory seems to have been ditched for the moment.
Energy Consumer and deceased estates remain at 33%
Separately the FEC confirmed that the trustee rate for energy consumer trusts would remain at 33%. It also made changes to the treatment of deceased estates following submissions. A flat rate of 33%, will apply to all deceased estates rather than the deceased persons personal tax rate as originally proposed. More importantly, the trustee rate of 33% will now apply for the year of the person’s death and three subsequent income years. That was in the in the wake of many submissions pointing out that deceased estates typically don’t get wound up inside 12 months. These changes are welcome.
The Bill also covered off a number of amendments to other key topics, including the introduction of the global anti base erosion rules, the taxation of backdated lump sum payments for ACC and social welfare, rollover relief in respect of bright-line property disposals and relief under the bright-line tests for people affected by the Nelson floods.
Those global anti avoidance rules will take effect in two parts, the so-called income inclusion rule with effect from 1st January 2025 and then the ‘domestic income inclusion rule from 1st January 2026. This is a little later than the rest of the OECD and the intention is to give the affected multinational enterprise entities (those with consolidated revenue above €750 million per annum) time to get ready.
Inland Revenue recommended against removing building depreciation
On Thursday the Minister of Revenue published an Amendment Paper containing details of the proposals regarding the restoration of interest deductibility for residential investment properties, replacing the current five and ten year bright-line tests with a two year bright-line test period, removing the ability to depreciate commercial buildings and introducing a new Casino Gaming Duty. The Amendment Paper was accompanied by a detailed commentary . and, as I mentioned earlier, the relevant Regulatory Impact Statements. Now as usual, these Regulatory Impact Statements (RIS) contain some interesting reading.
The ability to depreciate commercial buildings is being removed in order to help pay for the Coalition Government’s tax package. However, in the relevant RIS Inland Revenue recommended recommends retaining the status quo and that “the Government reconsider introducing commercial and industrial building depreciation when fiscal conditions allow.”
Citing its last Long-Term Insights Briefing Inland Revenue noted that in paragraphs 19 and 20 of the RIS, that under some assumptions made by the OECD:
“…New Zealand was likely to have had the highest hurdle rate of return for investment in and industrial buildings for the 38 countries in the OECD. This was when New Zealand allowed 2% depreciation on these buildings. Denying depreciation deductions will drive up these hurdle rates of returns even higher and make New Zealand a less attractive location for investment.
This tax distortion does not only impact building owners. To the extent the additional cost is passed on and there is less investment, it also impacts any business that needs to use a building and the customers of such a business. It thereby negatively impacts productivity more generally.”
Inland Revenue conclude in paragraph 32 of the RIS:
“We do not consider the removal of building depreciation to be a fair and efficient way of raising revenue. We are particularly concerned about the efficiency impacts which will make New Zealand even more of an outlier in pushing up cost of capital for commercial and industrial buildings. We therefore recommend retention of the status quo. We note this RIS is not evaluating the merits of the Government’s tax package as a whole.”
So, why is the Coalition Government withdrawing building depreciation? Because doing so is worth $2.31 billion over four years which was understood before the election. Even so it’s fairly interesting and unusual to see such a blunt assessment.
A new Gaming Duty
National’s Election policy included a new online gaming duty which was expected to raise something like $700 million over a four-year period. I was one of the those who was a bit sceptical about the revenue forecast. And it transpires that the numbers were indeed a bit optimistic.
What is now being proposed is a new 12% gaming duty for online offshore casino websites and this is in addition to GST, which is already payable when gambling on offshore sites. This new duty would be in line with how some other countries tax offshore casino websites. It’s estimated to collect $35 million of additional tax revenue in the forthcoming year ended 30th June 2025 and expected to grow by 5% each subsequent year. This still leaves a gap of about $500 million over four-years in the original revenue forecasts.
The Budget in May is becoming more and more interesting for finding out how the Government will follow through on its commitment to increase personal income tax thresholds. Even though they won’t compensate for the effect of inflation since 2010 those threshold adjustments come at a substantial cost. I could see that further cost reductions may be imposed further down the track. Those are political matters which we’ll have to wait and see how they work out.
Foreshadowing a capital gains tax?
Some commentary in the bright-line RIS raised the prospect of a capital gains tax. Treasury, for example, proposed a 20-year bright-line test or longer as it
“…would capture more capital gains, thereby improving the fairness of the tax system and supporting more sustainable house prices.”
Inland Revenue meantime felt the 10-year bright-line test was not an efficient way of taxing capital income before adding “If the government wanted to tax the income, it would be preferable to have a tax on these gains, irrespective of when the assets were sold.” It’s interesting to see Treasury and Inland Revenue raising the bogeyman of a capital gains tax to address funding and fairness issues within the tax system.
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.
“As-salamu alaykum. Peace be upon you and peace be upon all of us.”
More on UK trust filings, and why are there so many trusts in New Zealand?
Financing local government, time for change?
I’ll be honest, even after 30 years in New Zealand, I miss British budgets. There’s a building sense of anticipation beforehand, as rumours circulate about bold tax plans and the abolition/introduction of new measures. Then on the day itself, we have to deal with the myriad of tax measures introduced, usually always without any warning beforehand, other than leaks to selected media. Being perfectly cynical, they are handy work-creation events, much more so than their New Zealand counterparts. (That said this year’s May Budget here is looking like it will be the exception, which proves the rule).
This year’s UK Spring Budget, which was released on Wednesday night, did not disappoint. There were a whole raft of measures, some of which, to borrow the phrase the 1974 Lions adopted in South Africa against the Springboks involved “Getting your retaliation in first”. These measures were done simply to hamper what’s expected to be the next Labour government after Britain has its General Election sometime this year.
Ending the Remittance Basis of taxation
So, there’s a lot to consider, but there were two that are of particular interest to New Zealanders, and these are to do with the so-called non-dom rules. The UK has a special set of rules called The Remittance Basis of Taxation for non-domiciled persons. That is people, generally speaking, born outside the UK, and they are able to basically exempt their non-UK sourced income from UK taxation, if they don’t remit it to the UK.
These rules have been around for a long time and there has been a lot of amendments in recent years. And I suspect there is a fair bit of non-compliance going on from people here in New Zealand, who’ve not kept up with those changes.
The UK Labour Party had indicated it would remove the regime as a fundraising measure. Instead, the Conservative Chancellor of the Exchequer, (Finance Minister), Jeremy Hunt, has gone ahead and decided to pre-empt that by abolishing the regime with effect from 6th April 2025. It will be replaced by a regime which looks very similar to the transitional residence exemption we have here. That is, individuals will not pay UK tax on foreign income and capital gains for the first four years of UK tax residence.
There will be some transitional rules which will apply to existing individuals who are claiming the remittance basis. You can claim remittance basis for up to 15 years, but after a period of ten years you have to start paying a Remittance Basis Charge of £50,000. And then after 15 years of tax residency in the UK, you’re deemed to be domiciled in the UK and the exemption no longer applies. It’s long been a very controversial measure. The wife of the present Prime Minister, Rishi Sunak, is apparently a non-dom and questions have always been asked about whether she made use of that exemption as she comes from an incredibly wealthy family.
I’ve got a number of clients moving across to the UK, or who are all already there, and we’re looking at the question of how to manage the implications of becoming UK tax residents. So, this proposal is interesting to see. More details will emerge, obviously over time, but it is significant in that it will perhaps make it a little easier for people to migrate to the UK without triggering huge tax liabilities or having to manage them extremely carefully under the remittance basis regime.
Domicile and Inheritance Tax – good news for Kiwis & UK migrants?
Related to the end of the remittance basis regime and arguably even more important, are changes to the UK’s Inheritance Tax (IHT) regime. IHT is a unified estate and gift duties, and probably should be still what it was originally called Capital Transfer Tax. At present, IHT applies to all assets situated in the UK or all assets worldwide if the person is domiciled in the UK.
The proposal is that those current rules will also be replaced from 6th April 2025 with a residency-based set of rules which will probably involve a ten-year exemption period for new arrivals and then a ten-year tail provision for those who leave the UK and become non-resident. What that tail provision may mean is that someone who’s been resident or domiciled meets the test for IHT, may have to be non-resident for ten years to escape the full effect of it.
Now, in my experience, the impact of IHT on Kiwis who’ve been over in the UK or have assets in the UK, and then Brits like myself, who’ve migrated here, is not very well understood. But as the Baby Boomer and older generations are starting to pass away now, there’s a great transfer of wealth going on. The amount of IHT that the UK government is collecting is steadily rising. It’s now up to over £7 billion a year (0.3% of GDP, about $1.2 billion in New Zealand terms), steadily heading towards 0.5% of GDP. So, it’s starting to become a more significant part of the tax take.
These new rules may mean that people who have previously been caught in the regime will be out of it, but it may also mean that people who thought they were outside the regime may be caught. There’s no indication here that the rates that apply – 40% on estates worth more than £325,000 pounds or $650,000 thereabouts – have been changed. It’s a tax that people feel needs reform in that there is plenty of scope for mitigating it. It falls very heavily on relatively smaller states rather than the larger estates where they have the wealth to do some more estate planning.
More tax breaks for the film industry – a lesson for the Government?
And incidentally, just before moving on, I notice this budget also contains a number of measures to promote the UK film industry and theatre as well as the arts. These will provide over £1 billion in additional tax relief over the next five years. One of the things that’s common amongst tax systems around the world is support for the film industry, and the film industry as a whole is pretty cynical about going to where the best incentives are.
I think it’d be interesting to see just how the Coalition Government responds in the May budget about pressures mounting on the Screen Production Rebate, whether that’s going to continue in its present form. The industry here will be lobbying for it to continue because although we can’t compete with more generous exemptions that may be provided elsewhere, the rebate still provides the skills that have been built up here thanks to the likes of Weta Workshop and others which makes New Zealand skills still highly sought after. The Screen Production Rebate is the little kicker which helps get the deals across the line.
More on UK trust statistics and a warning about the perils of overseas trustees
Larger estates in the UK will undertake a fair amount of mitigation to minimise the impact of Inheritance Tax, and that invariably tends to involve the use of offshore trusts. I mentioned in last week’s podcast the extraordinary fact that in absolute terms more tax returns are filed in New Zealand for trusts than in the UK.
This provoked a lively debate in the comments section with some pointing out the UK numbers don’t really reflect trusts that have been set up to go offshore into tax havens such as the Caymans and the Isle of Man. Well yes, that’s right, the UK numbers don’t reflect this because trusts’ tax returns, for UK purposes are generally required to file tax returns based on the residency of the trustees.
That by the way, is a matter people here need to pay more attention to. If a beneficiary or trustee migrates to the UK, this may inadvertently make a New Zealand trust with New Zealand assets subject to UK taxation. Again, this is another matter which isn’t well understood, and I suspect there’s a fair bit of noncompliance going on.
The UK also has a Trusts Registration Service. This was in response to the EU’s Fifth Anti-Money Laundering Directive from 2017, which the UK went ahead and implemented despite Brexit. The UK actually went in for a tighter regime than the EU had proposed. According to the same statistics that the HMRC held about trust tax return filings in the UK, the Trust Registration Service had 633,000 trusts and estates registered as of 31st March 2023 and which remain open as of 31st August 2023. This includes 462,000 new registrations in the 12-months to 31st March.
This surge in registrations is the result of a compliance effort by HMRC to remind people around the world that if any trust has a property in the UK, or even has made loans to beneficiaries in the UK, it may have a UK tax liability, and therefore should register under the Tax Trust Registration Service. This is regardless of where the trustees are tax resident. And again, I suspect there is a fair bit of non-compliance here.
Why are there so many trusts in New Zealand?
But even if you take these greater numbers, we’re still left with the rather astonishing fact that per capita large number of trusts in New Zealand relative to the population. How did that evolve was one of the questions asked in the comments. The short answer would be that the effective abolition of Estate Duty in late 1992 removed the impediments to setting up trusts. What we saw in response was something quite unusual in trust law, where it was now quite possible for a single person to be the settlor (or the person who settles property on the trust), a trustee responsible for managing the property, and a beneficiary. This is very unusual in trust law terms around the world.
I think it has to be said that some lawyers and other practitioners took advantage of that opportunity to market themselves and trusts extremely well. Back in the early 1990s, by putting assets in trusts it was possible to mitigate against the impact of rest home charges. The income of trusts was not then taken into account when determining eligibility for the likes of Working for Families or student allowances.
All that has changed over time and my view is that a substantial number of the estimated 500,000 trusts that we have in New Zealand are no longer necessary. That’s also the view of many other practitioners in this space. So it will be interesting to see what happens over time as people realise the complexities of using trusts and the inadvertent tax issues that are created when trustees, beneficiaries or settlors move to another jurisdiction.
Since the start of the year, I’ve seen an upsurge in requests for advice in relation to trustees, beneficiaries or settlers moving to the UK or making distributions to the UK.
I don’t expect that to slow down, and I think it’s actually the tip of the iceberg.
Beware the information exchanges
I would also add that probably because of the common reporting standards and the automatic exchange of information as various tax authorities work their way through all that information that’s being accumulated and distributed around the world, they will be realising that they many trusts are non-compliant, accidentally or not, and they’ll be starting to crack down on it.
Local government finances, time for reform?
Finally this week, local governments are now looking to set their rates for the forthcoming 2024-25 year. The fact that no replacement for Three Waters has been found and the substantial infrastructure deficit we as a country have allowed to develop, means that rates are likely to be rising quite significantly for many of us. That’s obviously going to generate some pushback.
Writing on this topic Dan Brunskill noted the quite astonishing stat that local government rates have basically not increased as a percentage of the economy in the past hundred years.
Basically, local rates have stuck around about 2% of GDP overall across the country about $8 billion in rates are paid. (Not all that you pay to a Council is actually rates based on property values, there’s also the Uniform Annual General Charge together with the various services such as consent fees that councils charge).
As the graph illustrates, apart from the spike around the Great Depression period, when councils and central governments all did more to try and help alleviate the impact of that, rates as a percentage of GDP have been stable for well-nigh 90 years. I think the present rating present funding of councils is unsustainable, because, as the article notes, central governments keep giving local governments more and more to do, but restrict them in the level of income that they can raise. That’s both good and bad. We don’t want what happened with Kaipara District Council, which essentially went bankrupt because it could not fund a wastewater system in Mangawhai.
There’s scope for reform in this space. I think the crunch points around finance are arriving now and local and central government will need to think harder about how local government can be funded and what funding mechanisms are appropriate. For small councils such as Kaipara or, Waiora over near Tairawhiti East Coast, the funding issues and scope for raising funds are not the same as for Auckland a council with a rating base of over a trillion dollars. The laws need to change in my view, but we’ll have to wait and see developments.
As always, we will bring those to you when they happen. 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.
What connects Pillar One and Pillar Two with the collapse of Newshub?
New draft Inland Revenue guidance on employee share schemes.
Today (Monday) I was (virtually) at the Accountants and Tax Agents Institute of New Zealand (ATAINZ) annual conference which, like last week’s International Fiscal Association, (IFA) Conference, was opened by the Minister of Revenue, the Honourable Simon Watts. The Minister repeated much of what he had said to the IFA conference about supporting the Generic Tax Policy Process, his wish for simplification in the tax system and improving compliance being a main driver. As the focus at the IFA conference is very much on tax policy his comments were very welcome.
By contrast, at the ATAINZ conference, the focus is slightly different because the audience there was comprised of tax agents, and we’re more focused on operational matters. So, when it came to Question Time, there were quite a number of questions around operational aspects of Inland Revenue. One of the first questions that was asked was what was going to happen with the trustee tax rate, which you may recall is proposed to rise to 39% under a bill presently before the Finance and Expenditure Committee.
Now we’re expecting to hear back from that fairly soon, but during the week the Minister of Finance, Nicola Willis, hinted that some form of carve-out might be happening, in that the 39% trustee tax rate might not apply to all trusts. So naturally, some questions were directed at the Minister seeking clarification on this point.
He wasn’t able to give more guidance, simply saying that we will have to wait until the Finance and Expenditure Committee reports back, which is expected next week. The Minister got told it is a rather frustrating scenario because we’ve got the run up to the end of the tax year on 31st March, and we will be wanting to plan payments for dividends and other distributions in before then. Unfortunately, the issue remains a bit of a grey area for the moment.
More trusts file tax returns in New Zealand than in the United Kingdom
There’s a couple of statistics that highlight the scale of this issue.According to Inland Revenue for the 2022 income year (typically the year ended 31st March 2022), the number of trusts and estates which filed a tax return totalled 237,226. That’s actually a decrease of more than 19,000 from the prior year.
It so happens that I came across statistics from the UK’s HM Revenue and Customs about the number of trust tax returns that are filed there. And according to the equivalent tax year to 5th April 2022, HMRC received 141,500 returns.
Just pause and think about that. In absolute terms, more trust and estate tax returns are filed in New Zealand than in the UK, despite the UK, with its population of some 67,000,000 being almost 13 times greater than here. So actually, on a per capita basis, it would point to the fact, for every trust tax return that’s filed in the UK, there would appear to be close to 21 filed here. The tax rate for trusts is therefore a big issue in relative and absolute terms and that’s why the tax community and trust community are really keen to get this matter resolved as quickly as possible.
What evidence is available points to the fact that for most trusts – once you include the associated families and beneficiaries that are in there – their income would not exceed $180,000, the threshold at which the 39% top tax rate kicks in. But there is a small and significant group, about 11% according to Inland Revenue, that do receive a very large amount of income. So that’s something we’d like to see resolved soon and hope it’s in time for us to get clients advised and ready for the new tax year changes.
Interestingly, on the other comments the minister made to both the IFA and the ATAINZ conferences about Inland Revenues regulatory stewardship review of fringe Benefit Tax which it did in 2022, it’s clear that there is likely to be a focus on this issue from Inland Revenue on greater audit activity. This is something promoted under the Coalition agreement. What extra resources Inland Revenue is going to have and the full direction that it’s going to take going forward are probably only going to become clearer after the Budget on 30th May. Which, as the Minister pointed out, was not that far off in reality.
How the end of Newshub and the OCED international tax deal are connected
The news that Newshub’s operations will end with effect from 30th June was a big shock to the media community. As someone who has occasionally appeared on various Newshub programmes, my sympathies go out to all those affected. And I do hope that some means is found to keep the operation going, although it has to be said, it’s very doubtful at this point. I’ve always found in all my dealings with journalists of whichever organisation, they have always been incredibly professional, and I’ve appreciated that. And so, as I said, this is not a great day for journalism, and has also been pointed out, it’s not actually a great day for democracy as a whole.
Now one of the many excellent sessions at last week’s IFA Conference was an American perspective on Pillar One digital services tax and Pillar Two, the proposed international tax agreements, which have been under negotiation for some time. The taxation of the tech giants such as Facebook and Google is a key part of Pillar One and Pillar Two, and that’s the connection with the collapse of Newshub.
Newshub is no longer financially viable according to its owners, Warner Brothers, because of collapsing advertising revenues. A couple of days after the Newshub announcement, its competitor TVNZ reported an operating loss of $4.6 million for the six months to 31st December 2023. TVNZ noted that its advertising revenue fell from $171.3 million in the six months to December 2022 to $146.8 million in the six months to December 2023, against a background of rising costs.
So where is that advertising going? Well, most of it is going offshore. From what we can pick out from the financial statements of Google and Facebook New Zealand for the year ended 31 December 2022, it would appear that close to $1.1 billion during those years was paid to offshore affiliates in so-called service fees. Now that’s a substantial amount of money, and those transactions are entirely legitimate under the present tax rules. But it has to be said, even if 10% of that $1.1 billion were to stay in New Zealand, it would be a significant boost to the industry. And arguably the difference between Newshub’s operations continuing and being closed.
The offshore advertising and the service fees and the whole issue around the taxation of tech companies, point to the pressure building on the tech companies because New Zealand is not alone on this. Over in Australia Meta, the owner of Facebook, has said it’s no longer going to go through with the deal to pay news companies who were providing content on its websites.
The presentation at the IFA Conference kept coming back to a key point that I’ve always believed, which is tax is inherently political. The French were one of the first drivers of change in this space but obviously the American companies, which would be the most affected, pushed back by putting pressure on the American government to respond. And so even though the Generic Tax Policy Process tries to depoliticise tax policy as much as possible, ultimately governments are elected with certain political objectives, and those will often trump best tax policy, and that’s just a fact of life.
A digital services tax to help media?
The whole question of the impact on democracy and journalism of Newshub’s closure is beyond this podcast. But the pressure will now mount on the Coalition Government to consider what steps it can do to help the media. On the other hand, the Public Interest Journalism Fund was highly controversial.
Does that mean that there may need to be a change in tax policy to perhaps try and claw back some of the revenues going offshore through, for example, a digital services tax which is controversial and hated by the tech companies? Does the Government press hard for a resolution to Pillar One and Pillar Two? Or does Newshub just get shut down and we have to live with the consequences of that? Whatever, pressure will be building for the Government to take some form of action. Watch this space to see whether any such action results in amended tax policy.
Inland Revenue consultation on employee share schemes
Moving on to more routine matters, Inland Revenue has released several draft consultations on employee share schemes. The taxation of employee share schemes underwent major reforms in 2018. Subsequently, there’s been a number of questions to Inland Revenue about how the law applies in certain scenarios and how it interacts with other regimes such as PAYE and FBT.
Inland Revenue has therefore released six items – five draft interpretation statements and one draft Questions We’ve Been Asked, each focusing on a specific aspect of employee share schemes. This has been done rather than producing one single interpretation statement, so that people can more easily focus on the topic of particular interest to them. Alongside this, Inland Revenue has produced a four-page reading guide briefly summarising what each interpretation statement/QWBA addresses.
This is slightly unusual but it’s an indication of the complexity involved. Employee share schemes are used by a lot of companies and particularly small growth companies in the growth phase where they don’t have cash but want to attract and keep key employees as they expand until the ultimate goal, whether it’s ultimately a share market listing or perhaps a sale to a larger company.
The first interpretation statement is one of the more important ones, as it considers what represents an employee share scheme. The critical issue is when does the share scheme taxing date arise? That’s often a critical issue because one of the things about share schemes which causes difficulties is if there’s a mismatch between when the tax is due, but when cash might be available for the person who’s being taxed to actually pay the tax due. In fact, another of the drafts looks at the questions about an employer’s PAYE, student loan and KiwiSaver obligations where an employer wants to fund the tax cost on an ESS benefit provided in shares.
Another important draft reviews what happens with the ACC, PAYE and KiwiSaver obligations, when the employee share scheme benefit is paid in cash rather than shares. The draft concludes cash-settled ESS benefit is an “extra pay” under the general definition of extra pay and therefore a PAYE income payment, regardless of whether an employer elects to withhold PAYE in respect of the benefit.
Of the other draft consultation items, topics covered include what deductions are allowable for employers in respect of employee share schemes, and what is the treatment of dividends that are paid on shares held by a trustee for an employee share scheme.
Overall, this is very useful guidance and I do like Inland Revenue’s approach of issuing separate interpretation statements rather than consolidating all the items in a single item which would be close to 150 pages. Consultation is open until 26th April.
Thanks Chris
And finally, this week, Chris Cunniffe, CEO of Tax Management New Zealand (TMNZ) for 12 years, has just stepped down from his role. He made a brief presentation at the ATAINZ conference, explaining it coincided with the 44th anniversary of the start of his tax career at Inland Revenue. We’ve worked with Chris and his team at TMNZ for many years, helping our clients save tens of thousands of dollars. Chris has also been a past guest on the podcast. We wish him all the very best for the future.
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.
A suggestion for the new Minister of Revenue about tax simplification; and
What tax tattoo would you have?
The International Fiscal Association (IFA) tax conference is one of the premier tax conferences in the year as it is attended by most of the very senior tax specialists in the country together with senior Inland Revenue officials. Somehow, they also let me in as well.
The primary focus is on tax policy, and the conference is held under Chatham House rules, which means that comments that are made by officials cannot be directly attributed. Notwithstanding this you still get an indication of where officials’ thinking might be heading.
This year’s conference had a particularly interesting agenda covering topics ranging from, the use of trusts, international GST, the treatment of embedded royalties, limited partnerships, to a US perspective on the OECD’s international tax agreement process. It concluded with what was probably the highlight of the whole conference ‘What makes a tax good system?’ which we’ll discuss later.
Introducing Simon Watts
Traditionally the conference is opened by the Minister of Revenue the Honourable Simon Watts. A qualified paramedic, he had once worked at Inland Revenue as an intern before he moved on to later became a tax consultant with one of the Big Four firms. Coincidentally, the Commissioner of Inland Revenue Peter Mersi was also attending his first IFA conference. It was therefore interesting to see how they interacted, and they both explained to the audience how they felt they were progressing.
The Minister began by reiterating his commitment and that of the Government, to the Generic Tax Policy Process, GTPP, the open consultative process that has been a keystone of New Zealand tax policy for almost 30 years. He was aware that the business community and the tax community had become a little concerned that there was not enough certainty in the tax system as projects were being developed. In particular, he referenced the design of a wealth tax that was undertaken by the last Government but never followed through.
He wants to make sure that there is a strong degree of certainty within the tax system, so he supports the GTPP. Notwithstanding that, there will be times such as around the Budget policy process where the GTPP will be sidelined, and consultation will only begin in earnest when the budget measures are announced.
It’s also clear, he’s been getting himself up to speed very quickly. He referenced the long-term insights briefing, the Inland Revenue prepared in 2022 on the impact of tax on foreign investment and productivity. He also referenced the regulatory stewardship review of fringe benefit tax (FBT). Following on the Minister’s remarks and comments made by the Commissioner of Inland Revenue, I think we could expect to see more action following up the FBT stewardship review maybe in terms of greater enforcement but also in terms of simplification of the tax and compliance.
The Coalition Government’s is still under development, but the focus will be on tax simplification and reducing compliance costs. That’s not unexpected, and from what officials are saying, they’re all very heavily invested at the moment in working on those areas and meeting the pressures of the Government’s 100-day programme.
Bright-line test and commercial building depreciation changes confirmed
He confirmed that the bright-line test period will revert to two years with effect from 1st July 2024. From that date sales of bright-line property will not be taxed under the bright-line test, if the property has been held for two or more years. (Other tax rules may still apply). He also confirmed that commercial building depreciation will no longer be available from the start of the 2024-25 tax year.
The timing of the withdrawal of commercial building depreciation is possibly going to be controversial. The Minister confirmed it would be from the start of the 2024-25 tax year. For most taxpayers, that is 1st April 2024 so it’s a future impact. However, for what we call early balance, date payers such as those with a 31st December 2023 balance date their new tax year started on 1st January. Therefore, from that date they can longer claim depreciation on commercial buildings.
That I think is slightly controversial in that there’s a retrospective effect to it, obviously, and it may mean some tweaking around provisional tax payments. But the policy has been outlined previously. We’ll see the relevant legislation and more detail in due course maybe around the time of the budget policy process announcement towards the end of March.
(Interestingly, the issue of 39% rate for trustees didn’t actually come up in discussions with either the Minister of Revenue or the Commissioner of Inland Revenue). Apparently, the Finance Minister’s wish for a 6.5% reduction of costs is still on the table although the effect of this may be counter-balanced by the increased funding for audit activities.
The Minister came across as someone wanting to listen. He also holds the Climate Change portfolio, and he sees quite an overlap with Revenue because they’re both seen as financial portfolios. He mentioned that a lot of emphasis is developing in the climate change area around climate finance, which apparently is going to be a focus at this year’s COP 29 Conference, which will be held in Azerbaijan.
I had the impression he’s already across a lot of aspects of the portfolio and from comments from the Commissioner and others, he’s following up on past Inland Revenue asking if “we’ve done this, where are we with it? Let’s move it forward” which is good to hear.
The uses of trusts – trouble ahead?
Trust specialist Vicki Ammundsen regaled the audience with often hilarious tales of some of more extreme situations she’s encountered in her role as a trust lawyer and as a trustee. But amidst all the laughs, a serious point was made time and again: trusts are mostly established and used for non-tax reasons. However, they are not always administered well and in some cases she felt many people had set up trusts for the wrong reasons or completely incorrect reasons and had failed to understand how they would operate.
She also thought there was probably very pretty widespread, if accidental non-compliance with the impact of overseas resident trustees and the treatment of distributions to overseas resident beneficiaries. Her comments echo my own view on what’s happening in the trust space. I would also agree with Vicky that we’re likely to see more and more trusts wound up as people realise that something that was possibly useful 30 years ago is no longer relevant, and in fact the same objectives can now be achieved by holding assets outside trust.
One point she raised, which I found very relevant in relation to some decisions coming out of the Jersey Tax Court which ruled trustees should not be equalising distributions to beneficiaries to account for asymmetric tax treatment. This may arise when one beneficiary may get a distribution which is tax free in their jurisdiction, but another one has to pay tax on a similar distribution, because they live in a different tax jurisdiction. The Jersey Court’s view is that beneficiaries make a choice to live overseas, and other beneficiaries should not be indirectly affected by that. It’s an interesting point to make because issues around distributions to overseas beneficiary is something that’s going to be coming more to the fore in the future. Right now it’s an area I’m receiving more enquiries around.
Embedded royalties and the PepsiCo case, an Australian precedent?
“Embedded royalties” might sound strange, but this Australian decision is potentially very significant. To cut a very long story short, PepsiCo the American soft drinks company signed an exclusive bottling agreement with an Australian company Schweppes Australia Pty Limited. Under the agreement Schweppes Australia would make payments for concentrate which it would then turn into soft drinks such as “Pepsi”, “Mountain Dew” and “Gatorade”.
The Australian Tax Office (the ATO), which has always had a reputation for being pretty aggressive in the transfer pricing space, decided to take a case against PepsiCo on the basis that some part of those payments represented an embedded royalty. That portion was therefore subject to the Australian equivalent of non-resident withholding tax even though the payments by Schweppes Australia were actually made to another Australian company, which was a subsidiary of PepsCo. Last November the equivalent of the High Court ruled in favour of the ATO.
It’s a very interesting case, but the key point which emerged in the session was that the overlap between Australian and New Zealand legislation was strong enough that maybe Inland Revenue here might be tempted to take a similar case. (There was another aspect about Australia’s Diverted Profits Tax that’s not relevant here). The decision has been appealed and it’s thought likely PepsiCo might choose to settle. But it’s interesting to see what happens in Australia because we do tend to watch closely what’s happening with the ATO and transfer pricing.
Tax system oversight – the Australian experience
Speaking of the ATO, one big difference between New Zealand and Australia is that there are more bodies involved in tax oversight of the system in Australia. There’s the Australian Board of Taxation and then there is the Inspector General of Taxation, who also is the Tax Ombudsman for Australia.
The current Inspector General of taxation and Taxation Ombudsman for Australia, Karen Payne, presented on how these two bodies were created and what had been the experience so far. This is a particularly interesting topic for myself because I wrote a paper for the last tax working group on the issues around a tax ombudsman.
She also referenced the American experience with their Taxpayers Advocate Service raising the question whether such an independent office also be an advocate for taxpayers. This could partly resolve the disparity in powers and resources between the tax authority and the ordinary taxpayer. As Karen Payne noted, many of the clients of the partners at the conference are big enough and ugly enough to look after themselves in a dispute. But the general public isn’t, so that’s a question that comes through when considering the role of a taxpayer Ombudsman/advocate.
Karen Payne also referenced the fact that in certain certain circumstances the Australian Commissioner of Taxation has the power to take some remedial actions, in other words say, “We got this wrong and here’s how we wish to remedy it”. She noted that the Australian Commissioner of Taxation has exercised this power that seven times. On the other hand, even though the Commissioner of Inland Revenue here has a similar power, it’s never been exercised. Overall, a very interesting session on what oversight should be in place and the issues involved in setting up that oversight.
International GST, Aotearoa New Zealand leading the way?
On international GST policy, a couple of interesting notes that came out of that one, was that generally speaking in New Zealand has been a world leader in this GST space. We have one of the broadest GSTs in the world which because of much broader reach represents 30% of the total tax revenue. This is above most other countries with GST or Value Added Tax (VAT) system where it generally represents about 20% of the overall tax take.
Around the world, the average VAT/GST rate is 19.2%, whereas ours is lower at 15%. Our GST is a classic example of a very popular topic, the broad based, low rate (BBLR) approach to taxation, where a broader tax makes lower tax rates possible which just about every tax practitioner, including myself, will endorse.
Economics and the environment
We had an economic update from Michael Firth of the New Zealand Superannuation Fund. Several interesting snippets came out of session including that barely 10% of the total funds of the Super Fund are currently invested in New Zealand. Of greater importance when looking ahead to consider the impact of climate change on GDP, the outlook isn’t particularly good. In fact, every forecast seems to make previous ones look over-optimistic even if the best policy response is adopted and we do everything to lower emissions by 2050. The climate change implications around tax policy are how we’re going to fund dealing with the physical effects of climate change.
Alternative tax raising options
Michael Firth’s session led into a very interesting presentation from Young IFA about alternative options for raising revenue. The Young IFA presentation referenced the Treasury Briefing to Incoming Minister, which shows that core expenses are rising and unless changes are made, there’s going to be a growing and unsustainable deficit, the cost of which will be borne by younger generations, hence their particular interest on the topic.
Young IFA deliberately excluded capital gains tax but looked at three areas, windfall profits and a wealth tax. By OECD measurements our environmental taxes are at the the lower end of the scale, but how you define environmental taxes is elastic so once Road User Charges and Fuel Excise Duties are included, we are nearer to the OECD average.
In any case many environmental taxes are mostly behavioural in that they are levied with the aim of changing behaviour so that less of that particular activity happens. This means so they’re not actually long term sustainable because if they work as they should then revenue should decline over time.
Young IFA discussed the suggestion made in 2021 by the Parliamentary Commissioner for the Environment for a departure tax which reflects the environmental cost of flying internationally. Essentially three bands would apply, Australia and the Pacific Islands, Asia and long-haul flights to the US, Europe etc., The Parliamentary Commission for the Environment suggested it could raise about $400 million annually, based on a similar approach taken by UK passenger duty. However, $400 million although welcome still isn’t a game changer.
Windfall taxes?
What about a windfall profits tax? These target profits caused by extraordinary events. But they’re temporary, retrospective in effect and intended to correct behaviour. They’ve been used internationally the UK has had a long running bank surcharge to pay for the Global Financial Crisis bailouts.
When Treasury considered a windfall profits tax it estimated a 1.4% surcharge would raise about $230 million per annum rising to close to $700 million based on a 4.2% rate. However, forecasting can go awry when the UK recently introduced a windfall tax on the fossil fuel sector that only raised about 60% of what was expected.
Wealth tax? No thanks
On wealth taxes it would be fair to say that the audience and to be fair, the Young IFA presenters themselves, were not sold on the idea, because of the complexity, whether it would raise much revenue and concerns about capital flight. The work of Thomas Piketty around wealth taxes is often cited, but as someone from the floor noted he suggests a wealth tax should be applied on a global basis. This would then deal with the question of capital flight. As Young IFA pointed out when Norway recently raised its wealth taxes, there was some capital flight with some rich Norwegians moving overseas in response.
Although Young IFA and the audience were not sold on the merits of a wealth tax, I think it will still be raised as option because questions about wealth inequality will keep coming up and politicians being politicians see the appeal in an apparently simple solution to the problem.
What makes a good tax system?
The conference ended with a panel discussion on what makes a good system. The panellists were three of the most experienced tax practitioners in the country: Rob McLeod, Robin Oliver and Geof Nightingale. Rob chaired the 2001 McLeod Review, whilst Robin as a Deputy Commissioner at Inland Revenue worked with both the McLeod Review and the 2009-10 Victoria University of Wellington Tax Review before being a member of the Sir Michael Cullen chaired Tax Working Group. Geof Nightingale was a member of both the Victoria University of Wellington Tax Review and the Cullen Tax Working Group.
As you would expect with such a fantastic panel, it was a very lively session which deserves a whole podcast for itself. We had quotes from Dylan Thomas “Do not go gentle into that cold dark night (of bad tax policy)” and also Hunter S Thompson ‘Never turn your back on fear. It should always be in front of you, like a thing that might have to be killed.’
Rob, Robin and Geof expressed varying degrees of confidence in the New Zealand tax system although acknowledging it was under some strain. All three noted the primary purpose of a tax system was to raise money for the government at the lowest practical economic cost.
There was less unanimity around whether income redistribution really was a key role for a tax system. To some this was a distraction from good tax policy as it leads to distortions but to another panellist it was an inevitable part of modern tax systems. Determining the right level of government expenditure was important, at around 30% of GDP the present system raised sufficient funds but above that level the pressure would mount.
All three were mostly positive that the present system could raise the desired revenue but noted there isn’t a lot of low-lying fruit around. Rob McLeod referenced his time working in Australia and the complexities of the capital gains tax. He also mentioned in passing the work done on the Risk-free Rate of Return method as a possible alternative means of taxing housing. Time and again each emphasised the focus should be on keeping the tax policy process and objectives as clear as possible.
Unsurprisingly, all three favoured the BBLR broad-based low-rate approach. They recognised that divergence from this principle is causing strain in the system now. 30 years ago, the company, trustee and top individual tax rates were aligned at 33%. Now this disparity between 28% for a company and Portfolio Investment Entities and 39% for individuals was causing strain. Overall, it was a great ending to an excellent conference all round.
A suggestion for simplifying the tax system and reduce compliance
Moving on, as previously noted, the Minister of Revenue said the Government was committed to simplification. And the limited partners session raised an issue about whether the various withholding tax rules apply to a limited partnership. The policy intent might be that it shouldn’t happen, but there’s an argument it technically should. Either way some clarification would be useful. (Apparently a draft consultation on various limited partnership tax issues is happening at the moment).
This got me thinking about another area where I think simplification would be helpful, the question of non-resident withholding tax on interest payments made by New Zealand tax residents to an overseas bank in respect of interest payable on an overseas investment property. Those interest payments might be made from a UK bank account to the relevant UK bank lender. However, because they’re being made by a New Zealand resident taxpayer to a non resident, the UK bank lender, then non-resident withholding tax should be deducted. (Worth noting the UK lender’s terms will not accept having tax deducted from the payment which must be grossed up for this purpose).
Theoretically this is the correct treatment, but it involves an enormous amount of compliance and I think there’s also a massive amount of non-compliance because the policy is both unknown and seems counter-intuitive to a lay person. (It would be fun to see the Commissioner, or some MPs, try explaining to a person they must withhold tax on the interest payment they make from a UK bank account to another UK bank). This is an area where there’s a great deal of complexity and I don’t think the policy when the withholding tax rules were set up in the late 1980s was intended to catch such situations. (Separately, it’s another area where some thresholds have not been updated for inflation in some time). In summary it’s a ripe area for simplification. Over to you Minister.
What tax tattoo would you get?
And finally, what tax tattoo would you get? This was one of the less serious topics discussed at the IFA Conference and yes, alcohol was involved. For me, the winning suggestion was to tattoo Generic Tax Policy Process on one set of knuckles and BBLR Board Based Low Rate on the other, which puts a rather nice tax spin on Robert Mitchum’s sinister preacher in The Night of the Hunter.
That’s all for now. 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.
