The just concluded UK general election was the first general election held in July since 1945, when coincidentally the Labour Party also won by a landslide ending Sir Winston Churchill’s wartime prime ministership. Before he became Prime Minister again in 1951, Churchill started writing his monumental six volume history of the Second World War, the first volume of which was titled The Gathering Storm.
And if you’ll pardon the somewhat laboured analogy, this is very much what’s happening with Inland Revenue at the moment. There’s a very clear gathering storm approaching as Inland Revenue pulls together and beefs up its investigation resources. We saw signs of this a couple of weeks back with its commentary about targeting smaller liquor outlets. Now last Wednesday, an Inland Revenue media release announced it is “honing in on customers who are actively dealing in crypto assets but not declaring income from them in their tax returns.”
By way of background, back in 2020, Inland Revenue updated its guidance on the tax treatment of crypto assets. Clearly that was part of a plan to follow through and check on who was trading and investing in crypto but not reporting the income. However, first COVID and then the cost-of-living crisis got in in the way of Inland Revenue’s intentions to follow through up its guidance.
Targeting non-compliance
But those immediate crises have passed now, and it appears that Inland Revenue has been busy investigating potential non-compliance because according to the media release late last year, it wrote to “a group of high-risk customers and gave them the chance to fix any non-compliance issues before facing audit.” This is a standard tactic of Inland Revenue. It basically puts it out to taxpayers without being too specific that it is aware of potential non-compliance and “invites”, that is the terminology used, the taxpayers involved to come forward and make a voluntary disclosure. If the taxpayers do so, then the potential to be charged shortfall penalties is likely to be greatly reduced.
Following on from these “invitations”, the next stage if the taxpayers don’t come forward is directly targeted follow up action. This appears to have just happened, as Inland Revenue is saying it has “just sent another round of letters to those Inland Revenue believes are not complying.
According to Inland Revenue it has data which has enabled it to identify “227,000 unique crypto asset uses in New Zealand undertaking around 7 million transactions with a value of about $7.8 billion.” There’s a potentially sizable sum of tax on the line here.
Pay up, or else…
The media release continues with a rather veiled threat
“Cryptoasset values have reached new highs, so now is a good time for people to think seriously about tax on their crypto asset activity. The high value also means customers are well positioned to pay their tax for the 2024 tax year and earlier.”
In other words, Inland Revenue is saying as values have recovered that means taxpayers can’t plead poverty when it comes to paying the tax due on their profits.
The media release goes on to explain something that we’ve said frequently; Inland Revenue has more data available to it than people realise.
“We want customers and tax agents to know that we are stepping up our compliance activity for customers with cryptoassets. Despite popular thinking – people are not invisible on blockchain and we have the tools and analytics capabilities to identify and expose cryptoasset activities.”
So there it is, very clearly stated ‘We know more than you think we know and we are coming for you.’ Part of this, by the way, is that New Zealand and therefore Inland Revenue has signed up to the new Crypto-Asset Reporting Framework (CARF) recently developed by the Organisation for Economic Cooperation and Development. This is yet another example of the growing international cooperation on the exchange of information, a regular topic on this podcast.
Under CARF the first set of reporting is due to apply from the 2026/27 tax year which will lead through to increased tax revenue. In fact, according to the Budget, the expectation is that CARF will deliver $50 million of additional tax revenue in the June 2028 year..
That’s in the future. What’s happening right now is that Inland Revenue has used its existing network of information exchanges and data sharing almost certainly by tax treaty partners such as Australia, the UK and the US, to obtain data about transactions carried out by New Zealand based crypto-asset investors and traders. It’s now going to put the squeeze on those it considers non-compliant.
It’ll be interesting to see what comes out of it and we will watch with interest and bring you news of developments. In the meantime you have been warned and this is of course the latest sign of the gathering storm of Inland Revenue investigations.
Inland Revenue kilometre rates for 2023-24
Moving on, Inland Revenue has just published its kilometre rates for the 2023-2024 income year. Unsurprisingly, given the recent rise in fuel prices, the so-called tier one rates show an increase in vehicle running costs that are allowable for the year. These rates may be used to calculate the deductible running costs for a vehicle.
Note that the Tier 1 rate of $1.04 for the first 14,000 kilometres applies to all vehicles whether petrol, diesel, hybrid or electric. The Tier 2 rates above the first 14,000 km DO vary between vehicle type.
This is good to know, but I do wonder whether it might be a bit more useful to have this sort of information earlier in the relevant tax year. Inland Revenue obviously wants to be accurate, but a different approach perhaps might be to adopt an interim rate and index that for inflation. Anyway, these are the rates that are now applicable for the 2023-24 tax year if you wish to claim the relevant deduction.
Are we raising enough tax?
And finally, this week, the Tax Policy Charitable Trust held an event on Thursday last night to announce its four finalists for this year’s Tax policy scholarship prize. The first half of the event was a panel discussion on New Zealand’s tax revenue sufficiency. Ably chaired by Geof Nightingale, a member of the last two Tax Working Groups, the four panellists that joined him were Talia Harvey and Matt Wooley, joint winners of the scholarship prize in 2017, Nigel Jemson, the winner in 2020 and Vivian Lei, the winner in 2022. You may recall Vivien, have previously been a guest on the podcast.
Now, this was a fascinating panel discussion conducted under Chatham House rules, focusing on the scale of fiscal challenges for the next few decades and how could we meet those? Does this mean for example, some new taxes might be required such as capital gains tax? What about boosting Inland Revenue’s investigation efforts? And then on the spending side of the equation what do we do about rising health care and superannuation costs? Do we perhaps increase the age for eligibility or (re)introduce some forms of mean testing for New Zealand Superannuation? All these points were raised for discussion.
The panel discussed ‘the tax gap’, the gap between what we think the tax collection should be and what’s not being collected. There’s a lot of work to be done in this space, because we really don’t have a clear handle on the extent of this particular issue. Some work carried out several years ago by Inland Revenue suggested that when you look at the consumption patterns between self-employed persons and employees, there might be as much as a 20% gap. In other words, self-employed people appear to have about 20% higher levels of consumption than employees on ostensibly similar levels of income. This is a topic which actually might be worth a podcast episode in itself.
And the finalists are…
It was then followed by the announcement of the four finalists of this year’s Tax Policy Charitable Trust scholarship prize. Every two years the Tax Policy Charitable Trust invites young professionals (anyone under 35 on 1 January 2024) to submit proposals for review, improving any aspect of New Zealand’s tax system. Entrants submit a 1500 word overview proposal on any part of the tax system from which the judges choose four finalists will be selected to go through for the final main scholarship prize, which is worth $10,000.
Submissions are judged for their creativity, original thinking and sound and reasoned research and analysis. In addition the judges take the following factors into consideration:
Impact on the New Zealand economy, including GDP and business growth.
Social (including distributional equity) and environmental acceptability.
Feasibility of introduction, including political and public acceptability.
Impact on simplicity of tax system.
Ease of administration by taxpayers and Inland Revenue, or other relevant government agencies, and impact on compliance costs.
This year, there were 17 entrants and the four finalists chosen are
Matthew Handford, who proposes an Independent Tax Law Commission aimed at improving the Generic Tax Policy Process, or GTPP. The GTPP is a cornerstone of tax policy and is internationally well regarded, but it’s now 30 years old, so is due a reconsideration. I look forward to hearing more about Matthew’s proposal.
Claudia Siriwardena, who is suggesting a simplified FBT regime for small and medium enterprises. This gets a big tick from me, and I’m very interested in hearing more about this one.
Matthew Seddon, who proposes extending the independent contractor withholding tax regime. Mathew’s suggestion picks up the point just raised about the tax gap and deals with it by improving compliance. Again, another interesting proposal.
Finally, Andrew Paynter who is putting forward a proposal to increase the GST rate from GST but also tackle the regressivity of GST with a rebate for low and middle income earners. I’ve seen some international papers on this particular topic, so I’m very, very interested to hear more about what Andrew’s proposing here.
My intention is to get all four scholarship finalists on the podcast to talk about their ideas before the winner is announced in October, so stay tuned for developments. In the meantime, congratulations to Matthew, Claudia, Matthew and Andrew and to everyone else who entered. No doubt there were some interesting ideas put forward that did make the cut this time, but overall, it’s a great sign of the healthy state of tax policy debate in New Zealand.
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.
Tax cuts delivered, but watch out student loan borrowers.
After what seems to have been an interminable dance of the seven veils, all has been revealed and we now know the final shape of the Government’s tax package. Nicola Willis has delivered on National’s manifesto and increased thresholds as promised.
That was unsurprising, although there’s a twist in that these changes will take effect from 31 July, four weeks later than expected. The delay is to enable payroll providers to update their systems.
The big surprise for me is the decision to increase the threshold for the Independent Earner Tax Credit (IETC) to $70,000. As I said in my Budget preview, I expected this to be cut to help pay for, or even increase, the threshold adjustments. Speaking on Breakfast TV, I expressed the hope that any threshold adjustments would focus on the group around the threshold where the tax rate jumps from 17.5% to 30%. The lift in that threshold to $53,500 together with the extension of the IETC will help, but more needs to be done in my view.
Giving with one hand, taking with the other…
The Government has also increased the in-work tax credit (IWTC) by $50 per fortnight, which is welcome. However, its effect will be mitigated by the fact that the $42,700 annual family income threshold above which the IWTC will be abated at a rate of 27 cents per dollar remains unchanged. The threshold has not been increased since 1 July 2018 which means that families with income above the threshold face an effective marginal tax rate of at least 46.1% (17.5% plus 27% abatement plus 1.6% ACC Earner Levy) which is higher than that of the Minister of Finance. It remains remarkable to me that this issue has been allowed to continue for so long, but when I raised the issue with the Minister of Finance her response was “I utterly reject the question”. (There were quite a few other questions also rejected with varying degrees of utterly).
Increased Inland Revenue funding
As also promised by New Zealand First in its manifesto, the Budget proposes an additional $29 million annually for increased compliance activities. Interestingly, the specific appropriation for investigation, audit and litigation activities will be increased from $106.2 million to $165.4 million. The Appropriation for Services to manage debt and unfiled returns will also rise from $83.5 million for the June 2024 year to $105.7 million in the coming year. Both increases indicate we should expect to see a significant rise in Inland Revenue investigation and debt management activity.
Student loans
Unlike my prediction about the IETC, my speculation that there would be some increases here was correct. The Government proposes increasing the interest rate on student loan debt payable by overseas based borrowers from 3.9% to 4.9% from 1 April 2025. Furthermore, the late payment interest for both overseas AND New Zealand based borrowers will increase by 1 percentage point.
However, as previously discussed, the amount of student loan debt has steadily increased and only 26% of overseas-based borrowers are making repayments. The Budget Appropriations include a provision for debt impairment of $633 million (up from $539 million) for the coming year.
As noted above Inland Revenue is boosting its compliance activities for student loan overseas-based borrowers, “including those returning to or visiting New Zealand”. We can therefore expect to see a few defaulters being detained at airports. It will be interesting to see if such moves result in significantly increased repayments.
Waste disposal levy changes
Elsewhere, the Government proposes increasing the level of Waste Disposal Levy but at a lower rate than initiated by the previous Government. It’s anticipated the Levy will raise a total of $1.195 billion over four years to 2027/28 which is split 50:50 with local government. The Government proposes amending the Waste Minimisation Act 2008 to expand the range of activities the levy can be used for, such as restoring freshwater catchments. This sort of recycling of environmental levies is to be supported but perhaps the split between local and central government should be shifted in favour of local government.
Calling Inland Revenue?
Wading through the detail of the Appropriation Estimates often reveals some interesting nuggets. The Vote Revenue Estimates included the following details about Inland Revenue’s expected performance when answering calls and responding to correspondence. It will be no surprise to many to note that the standard of answering calls within 4 ½ minutes was not met. Going forward Inland Revenue expects to answer 60% of all calls so I will check in next year to see how it performed.
Now what?
Having delivered on its campaign promises what next for the Government’s tax policy? The Finance Minister referenced the ACT Party’s proposals to flatten the tax scale but made no commitment as to when that might happen.
Willis also acknowledged Treasury’s advice of a structural deficit of about 1.5% of GDP (roughly $6 billion). This can only be addressed by spending cuts or tax increases and the expectation at present is for spending cuts to meet that gap. That means any future threshold adjustments are off the table, including the possibility of automatic indexation at some point. For the moment the Finance Minister will be happy to take the credit for the changes announced today. Let’s just hope it doesn’t take another 14 years for the next revisions.
This week a preview of what tax measures might be in Thursday’s Budget. What could Finance Minister Nicola Willis do to cover the cost of the tax threshold adjustments and where might Inland Revenue get additional funding for investigations and enforcement?
Also the UK election and the latest fallout from the ATO’s raid on Exclusive Brethren related businesses.
Before we preview next Thursday’s Budget a quick note on a couple of other interesting developments this week. The announcement of the UK General Election on 4th July will further delay details around the replacement of the current remittance basis of taxation. You may recall this was originally announced in the UK’s Spring Budget on 6th March. The proposal was for the remittance basis to be replaced by something similar to our Transitional Resident’s Exemption.
We were meant to have seen draft legislation by now, together with consultation on the related inheritance tax implications of the proposed change. But neither of those had materialised by the time the Election was called. We therefore remain in limbo as to what will be happening, although we do understand that the Labour Party, currently odds-on favourite to win the election, is broadly in favour of the new rules. As always, we’ll keep you up to date on when further developments arise, but in the meantime, anyone potentially affected should continue to plan on the basis that the existing remittance basis rules will remain in force.
Fallout from the ATO’s investigation into the Exclusive Brethren
In early April, I covered the Australian Tax Office’s (ATO) no notice raid on the offices of businesses related to the Exclusive Brethren. This week, the accounting firm Universal Business Team Australia or UBTA which is controlled by the exclusive Brethren, advised its clients that its accounting division would close with immediate effect. The same announcement said that UBT’s UK and New Zealand operations will continue unaffected for the moment.
As I said at the time of the initial ATO raids it would be interesting to see whether Inland Revenue will initiate a similar investigation of the Exclusive Brethren’s New Zealand related operations. It has to be said that closing down the accounting operation indicates that something fairly serious has been identified by the ATO. But no doubt we’ll find out more in the coming months.
A much anticipated Budget
Thursday is Budget Day. This will be my 14th Budget lockup and I’m looking forward to it as I always do. But this year is probably one of the most anticipated budgets in in a long time. There are two reasons for that. On the one hand, many people are very keen to finally discover the size of the proposed tax cuts and how they will personally benefit. On the other hand it’s a pretty anxious time for civil servants and a myriad of agencies and organisations waiting to see how the accompanying budget cuts will affect them.
Lessons from Bill English
Former Prime Minister Bill English, who’s been advising the current government, delivered eight budgets during his time as finance minister and it would be surprising if Nicola Willis had not absorbed a few lessons from his experiences. Clearly what she would love to do is match what English did in 2010, when he masterminded a so-called tax switch. This cut the top personal income tax rate from 38% to 33%, together with a reduction in the corporation income tax rate to 28%. But at the same time, he increased GST from 12.5% to 15%. As former Labour Minister of Revenue David Parker ruefully admitted it was a masterpiece of political campaigning and delivery.
But Bill English was also a master of slipping in some quiet and relatively unnoticed tax increases. There was a controversy in 2012 about the removal of an old measure which primarily affected paper boys. But one which was turned out to be very significant was the reintroduction of employer superannuation contribution withholding tax on employer KiwiSaver contributions in 2011. That’s now worth almost $2 billion a year according to Inland Revenue’s annual report to June 2023
Bill English, and to be fair, Grant Robertson, were both happy to allow fiscal drag to increase the tax take, hence the fact that tax thresholds have not been adjusted since 2010. Tax cuts were a key promise of the National Party and the ACT Party and the key delivery in this budget will be increasing income tax thresholds. These are certainly one of the tax measures we know will happen. We also know that there will be increased funding for Inland Revenue for investigations as that was included in the coalition agreement with New Zealand First.
What did National promise?
On the tax threshold adjustments, National’s promises in its election manifesto were fairly modest.
As long-standing listeners to the podcast will know, I think the $48,000 threshold is highly problematic.
Steven Joyce and the Independent Earner Tax Credit
Now it’s worth noting and remembering back in 2017, then Finance Minister Stephen Joyce proposed quite a significant family incomes package, including threshold adjustments, for the 17.5% and 30% rates. As part of the measures to pay for those increases, he proposed cancelling the Independent Earner Tax Credit (IETC). This is a tax credit worth up to $520 a year for people earning between $24,000 and $48,000. One of the rationales given by Joyce for cancelling the IETC was that only 30% of those people who could claim it actually did so.
Here’s where it gets quite interesting. According to the Tax Expenditure Statement (tax expenditure statements estimate the cost of a specific tax relief) released at the time of the 2017 Budget, the estimated cost of the IETC for the year ended 31 March 2017 was about $223 million. The Tax Expenditure Statements released in last year’s budget estimates the value of the IETC for the year ended 31 March 2023 to be $174 million. According to Treasury the amount of IETC claimed “has fallen by 9.5% over the past two years.
The Independent Earner Tax Credit to be abolished?
My first big prediction is therefore that the tax threshold adjustments, the IETC, will be abolished, which would free up $174 million. As I said, it would be interesting to see where the emphasis of those threshold adjustments will fall. I’d like to see them focus around that $48,000 mark.
By the way, Steven Joyce would have increased the threshold where the 17.5% rate kicks in from $14,000 to $22,000 and the threshold at which the rate increases to 30% would have been increased to $52,000. Inflation has really devalued those thresholds, so it will be interesting to see what comes out on Thursday relative to what was proposed in 2017.
What Inland Revenue investigation activities will get funded?
Now the other thing that definitely is going to happen is increased investigations and enforcement funding for Inland Revenue. I expect there to be a reasonably substantial increase. At present in the Appropriations to June 2024, there’s $133.8 million of funding for investigations. Just to put some things in context, in Steven Joyce’s 2017 Budget, the Appropriates for investigations for the year to June 2018 was $173.7 million. Inflation adjusted that would now be close to about $200 million. However, I doubt whether Inland Revenue presently has the capacity to use what would effectively be in a 50% boost in funding. (As an aside, the reduction of investigation staff funding since 2018, has been a matter of some controversy – were too many skilled people let go just to make the numbers balance?)
A fringe benefit tax review?
Whatever additional funding is provided I expect to see tied to specific initiatives. One of those will be in relation to fringe benefit tax (FBT) which has just been in the news. Inland Revenue’s Stewardship Review of FBT in 2022 has clearly caught the Minister of Revenue, Simon Watts’ attention, because he’s mentioned it in a couple of speeches. We also know through an Official Information Act release that he has received advice on his options for review. These are either a once over lightly approach or a more fundamental review. Inland Revenue prefers the latter approach. As previously mentioned, FBT has been around for a long time and it’s long overdue for serious review. Expect the Budget to contain funding for that review.
Dealing with the hidden economy and organised crime
There will also be substantial funding given for an initiative into the hidden economy. Minister Watts has received advice on Inland Revenue’s role in defeating organised crime which includes money laundering and tax evasion. Increasing funding here would not only tick the box for the Coalition agreement with New Zealand First, but also with the Coalition Government’s wish to get tough on crime and the gangs.
Cracking down on Student Loan debt
I also expect to see a fairly substantial amount of funding given to addressing the question of student loan debt which currently stands at over $9 billion. There’s a particular problem with overseas based borrowers, many of whom are in default either because Inland Revenue doesn’t know where they are, or they’re simply ignoring any requests for payment.
At the moment, Inland Revenue’s record with overseas defaulters is not terribly impressive. According to Inland Revenue’s annual report for the June 2023 year, it received just 108 payments totalling $16,421 from 18 overseas based student loan defaulters.
You can therefore expect a crackdown. Not only will there be increased funding to track down defaulters (including greater use of the existing agreement with Australia), I expect the Government will make it very clear that the already existing powers to detain student loan defaulters at the border will be enforced. Expect to hear more stories about that.
More Student Loan changes?
I also wonder whether the student loan repayment rate may be increased. One of Bill English’s sneaky tax measures was back in April 2013 when he increased the repayment rate from 10% to 12%. Another increase would mean student loan borrowers would have one of the highest effective marginal tax rates because this 12% or whatever it might be, is on top of their PAYE deductions.
Alternatively, the Government might introduce a nominal interest charge on student loan debt, or they could increase the minimum amounts of repayments required by overseas borrowers. Re-introducing interest on student loans would be a controversial measure. But my view is, if you’re going to have controversy around tax, you do it in your first budget.
What about GST on fund management fees?
If Nicola Willis is considering measures which could help claw back the cost of threshold adjustments GST on management services to managed funds is one which I think might come back onto the table. You may recall when the Labour Government introduced this proposal in August 2022 it withdrew the bill within 24 hours in the face of some ferocious pushback, which also included the fairly creative use of some long term fiscal impacts as to the potential impact on KiwiSaver funds.
That measure would have done two things. It would have clarified the treatment, which is currently very ad-hoc, but it would also, and this is where Finance Minister Nicola Willis, will be paying attention, have been worth about $225 million a year from 1st April 2026. So don’t be surprised if it’s reintroduced again to help pay for the tax threshold adjustments and as part of a “rebalancing.”
Could Cash PIEs be in the firing line?
Potentially the most controversial measure, though, would be to tackle the question of the prescribed investor rate (PIR) on portfolio investment entities (PIEs). Currently the highest PIR for a PIE is 28%, which means there’s an 11-percentage point difference between the top maximum prescribed investor rate and the top personal tax rate, (and also now since 1st April, the trustee tax rate). This has helped the development of what are called Cash PIEs, which are largely invested in term deposits/money markets. If the funds had been directly invested in term deposits held with banks, the interest would be taxed normally up to 39%. But because they’re in PIEs, that’s capped at 28%.
Inland Revenue has increasing concerns about this mismatch between the corporate income tax rate of 28% and the top marginal rate of 39% and it tried unsuccessfully back in 2022 to introduce some measures around this issue. If it was going to make a start on addressing these issues, I think you could see a proposal to income of Cash PIEs taxed at 39%. The Government might even try to make all PIEs except KiwiSaver funds subject to ordinary tax rates. Such a move would be hugely controversial, but it would probably also raise a fair bit of cash as well.
Anyway, we’ll find out on Thursday. As usual, I’ll be in the lock up and you’ll be able to hear our view on this year’s Budget just after 2PM.
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.
Facebook New Zealand’s 2023 results show the scale of the advertising revenue going offshore.
Treasury’s blunt warning ahead of the Coalition Government’s December Mini-Budget.
The Australian budget was announced last Tuesday evening and although comparisons with Australia are not always constructive, there are several points of interest, not just in terms of how the tax systems operate, but also about initiatives which could replicated here.
The Treasurer is predicting a surplus for the period to June 2025, but after that, apparently things get a bit tougher. A little bit like Aotearoa-New Zealand in that regard. The key point with an election coming up, is the “Stage Three” tax cuts take effect from 1 July. As is well known and has been the subject of some commentary over time, Australia has a tax-free threshold of A$18,200. That threshold isn’t changing, but what is happening is that the tax rate for the next bracket between $18,200 and $45,000 is dropping from 19% to 16%. The big change is in the next tax bracket where the rate drops from 32.5% to 30% for income from A$45,000 all the way up to A$135,000 Australian. Quite apart from the rate change the bracket has been extended from A$120,000 to A$135,000. The 37% bracket remains in place and applies for income between A$135,000 and A$190,000. Over $190,000 the top rate of 45% kicks in.
We had record migration last year and a lot of those people are heading to Australia and no doubt these tax measures will make it more attractive. I’m in the camp that you can’t ever compete on tax cuts because there’s always someone better able to reduce tax rates further. Right now that’s Australia.
One of the interesting comments I’ve heard about the Australian budget, is that the Australian Treasury forecasts, are frequently incorrect sometimes resulting in unexpected surpluses. Apparently, the Australian Treasury consistently under-estimates forecast inflation and the iron ore price, which since Australia is such a huge minerals exporter, is quite critical. Generally, the Australian economy tends to perform better than Australian Treasury predictions.
Another strong Australian corporate tax result
Furthermore, as the Australian economy is performing so well, the Australian company tax take is now a significant proportion of the total tax revenue. For the coming year to June 2025 it’s predicted to be A$141.2. billion or just over 21%.
(Deloitte Australia)
That’s a substantial sum by world standards. For comparison, in the UK (a near comparatively sized economy) the proportion of the tax take that comes from companies is usually between 7% and 10%. We are also a country with a fairly high corporate tax take. In the year to June 2023, it was 16.1% of total tax revenue. However, one of the reasons the Government’s books are deteriorating is the decline in the company tax take which is expected to fall to 15.6% of the total tax revenue this year.
Australian cost of living initiatives
There were also a number of other direct cost of living initiatives, including a $300 energy bill rebate to all Australian households. Eligible small businesses will get a $325 rebate during the coming year to June 2025. The Australian Government will also provide A$1.9 billion Australian over five years to increase the Commonwealth Rent Assistance maximum rates by 10%. (This would appear to be the Australian equivalent of the Accommodation Supplement).
Over here we don’t know whether the Budget in two weeks’ time will contain specific cost of living responses similar to these Australian initiatives but that appears highly unlikely. Based on what we’ve heard so far, the Government is relying on the individual tax threshold adjustments to sort of deliver cost of living relief.
Beefing up the ATO
Australia has a capital gains tax and some changes are proposed around the application of capital gains tax to non-residents. These are intended to ensure from 1 July 2025 that foreign residents are caught within the rules in relation to disposals of land. That’s something people tend to forget, that non-residents are taxable on disposals of Australian property and these proposed rules are intended to strengthen that compliance.
Another thing of note, which I think we will see something similar in our budget, is increased funding for various Australian Tax Office (the ATO) compliance programmes. The ATO has currently got three such programmes on the go, covering personal income tax, the shadow economy and tax avoidance (Tax Avoidance Taskforce). The Budget announced a new initiative countering fraud. In terms of dollar returns on these programmes, they range between four to one for the funding of the personal income tax down to a little two to one for the Tax Avoidance Taskforce.
Small businesses and ABUMS
The other thing that I think people would love to see here is the Instant Asset Write Off. This is where small businesses can purchase an asset up to $20,000 in value and claim an instant write off. This programme has been extended for another year. Apparently one of the reasons it has been extended is that the legislation which would have terminated that programme hasn’t yet been passed. Australian governments have a habit of announcing measures and then not getting around to passing the relevant legislation resulting in something with the delightful acronym ABUMS – Announced But Unacted Measures.
Overall, there was some interesting stuff in the Australian Budget including another measure I’m going to talk about next, which I also wonder whether we might see applied here.
Facebook’s results
Moving on, Facebook has now released its New Zealand financial statements for the year to 31 December 2023, and these are bound to generate some controversy. The official income reported for the year was $9.1 million and the profit before tax was $4.4 million, resulting in income tax of $1.3 million.
Like Google New Zealand details of the payments to related parties is the very interesting section to look at, together with the statement of cash flows because these give you a better clue of what the scale of Facebook’s activities within New Zealand are. Note 4 to the financial statements, which explains the revenue, sets out what is happening. “The company reports advertising reseller revenue and associated direct cost of sales for reseller activity on a net basis” This note explains that the gross amounts it received in the year to December 2023 from advertising and services was $163,567,786 and then a reseller expense was $157,428,667.
So, although Facebook is reporting income for income tax purposes of $9.1 million, the real scenario is that the revenue that’s passing through it, is substantially higher.
Another Australian example to follow?
Now it so happens there’s a case going through Australia at the moment involving what they call an embedded royalty. Basically the Australian Tax Office took a case against drinks company Coca-Cola in relation to what it perceived as an embedded royalty (and therefore subject to withholding tax) in payments for the right to brew Coca-Cola in Australia.
The Australian budget has a number of what’s termed Intangibles Integrity Measures. One of those it appears is a new provision, effective from 1 July 2026, where it applies a penalty to taxpayers who are part of a group with more than $1 billion in global turnover annually, that are found to have mischaracterised or undervalued royalty payments to which royalty withholding tax would otherwise fly.
Now that’s two years away from implementation, but it’s clearly a shot across the bow of companies such as Facebook or Meta, and Alphabet, the owner of Google, about these reseller services expense. So that’s something to watch how this develops.
And I just wonder whether we might see something similar here, because significant sums of money coming from advertising, are going overseas, and, as I’ve mentioned before, that has had a detrimental impact on our media landscape that it’s basically been starved of cash as a consequence. So, watch this space.
Treasury’s warning on structural reform
Finally, this week there was a budget information release from Treasury of papers relating to the Government’s mini budget in December. And one of the papers titled Implementing the fiscal strategy has attracted quite a great bit of interest.
In the paper Treasury sets out in fairly blunt terms that there is a requirement or need for structural reform of the tax system. The key paragraphs are 24,25 and 26. Paragraph 24 notes
“Structural reform of the tax system is the most effective way to ensure it is flexible and capable of raising additional revenue sustainably… Such reform would need to recognise that while revenue raising is the primary purpose of the tax system, its distributional and economic objectives are also important.”
Plenty of wry smiles here for those who listened to the Titans of Tax expand on this very point.
The problem with fiscal drag
Paragraph 25 then discusses the importance of fiscal drag
“Since 2010, fiscal drag…has played an important role in enabling successive governments to use the tax system to meet their revenue objectives. This has placed increased pressure on the tax system’s other objectives. If you wish to offset or end fiscal drag, through adjustment of personal income tax rates and thresholds the fiscal headroom which needs to be created will further increase”.
In other words, if you want to end fiscal drag, you really do need to rebalance and reshape the tax system,
I’ve seen some commentary that this was blunter advice than was provided to the previous government. I don’t actually subscribe to that view because in my view Treasury’s 2021 long-term fiscal insights briefing He Tirohanga Mokopuna was pretty clear that a fiscal crunch was coming. I just think that because there’s been a change in government, what Treasury has done here is taken the rather softly, softly approach in He Tirohanga Mokopuna and just made it very blunt so the new Government knows from the offset that there are challenges ahead. And to be fair to Finance Minister Nicola Willis and the Prime Minister, they have not denied that. But what they propose to do about it, of course, we’ll have to wait and see.
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.
And I reflect on 40 years in tax – what’s changed or not changed.
The Finance Minister Nicola Willis made the first of what is going to be a series of pre-Budget speeches to the Hutt Valley Chamber of Commerce, and in it she dropped a few clues as to the likely contents of the Budget.
In particular, she announced that the Budget’s “tax relief package will increase the take home pay of 83% of New Zealanders over the age of 15 and 94% of households.”
In case you’re wondering who is in the unlucky 17%, these are taxpayers with annual income currently below $14,000 or with no income at all. They therefore would not benefit from any increase in tax thresholds. According to Inland Revenue in the year to March 2022, there were over 800,000 taxpayers whose income is been between $1.00 and $14,000. There were another 210,000 or so who had no income at all during the 2022 tax year.
14 long years?
In her speech Nicola Willis noted that New Zealanders have not seen any changes to personal income tax rates and thresholds for 14 years. “Unlike most developed countries, New Zealand has made no adjustments to tax brackets to compensate for rampant inflation.” However, having highlighted this point, there wasn’t a commitment in her speech to regular indexation of thresholds, which is how we got 14 years without changes. I’ll have more commentary on that a little later.
The Finance Minister talked about “tax relief aimed at middle and lower-income workers” which is interesting because it hints that maybe threshold adjustments might be focused most on those earning below $70,000. The threshold which I think is most problematic, and Geof Nightingale, Sir Rob McLeod and Robin Oliver all agreed with this, is at $48,000 where the tax rate goes from 17.5% to 30%. There doesn’t appear to be any plans to adjust the tax rates there, but whether there is a bigger proportional increase around that threshold relative to the other thresholds, we’ll have to wait and see. We know by the way that the $180,0000 threshold at which the 39% tax rate kicks in is not likely to be increased.
The OECD joins the call for a capital gains tax
The Finance Minister’s speech came hot on the heels of the latest Organisation for Economic Cooperation and Development (OECD) Economic Survey on New Zealand, released on Monday. The big headline here from a tax perspective that the OECD joined the IMF in recommending a capital gains tax. What was interesting here is that when the IMF made this suggestion, Nicola Willis, dismissed it with a snippy comment following in the footsteps of her predecessor Sir Michael Cullen. This time around, there was no such snippy dismissal.
The report actually is quite sobering reading, not just around the tax side of it, but just generally about what it has to say about certain aspects of the New Zealand economy. Education was specifically mentioned as a point where attention needs to be focused on improving standards and therefore flowing through to greater productivity across the economy.
The OECD agreed with the Government’s proposed fiscal approach trying to squeeze spending and keep it under control. It had some criticisms about how budget operating allowances have been allowed to increase in recent years without any real explanation.
The OECD supports the broad-base, low rate approach, a capital gains tax, and tax reliefs for pension saving
But it also made the point that “any tax cuts should be fully funded by offsetting revenue or expenditure measures”, before going on to add “raising revenues should first be achieved through broadening the tax base and reducing distortions before raising rates of existing taxes.” That very much endorses the broad-base, low-rate approach Sir Rob MacLeod in particular espoused in a recent podcast.
No surprises there, but the report continues:
“There is a need to reduce distortions to household choice of asset allocation. Shares, land and owner-occupied residential property are tax favoured. Most capital gains from shares, owner-occupied residential property and land are not taxed. To ensure the tax system is not overly distorting, saving and supporting broader growth, capital gains taxation reform should be done as part of a wider review of tax settings for saving. New Zealand’s tax settings remain an outlier in some respects in international comparison, and notably in offering no tax deduction for contributions and in taxing the returns pensions funds earned while they’re invested and prior to withdrawal at progressive rates, this likely distorts saving away from private pension saving.”
Robin Oliver made the point about over-investment in housing, but as mentioned last week Dr Andrew Coleman picked up on how our taxations of savings is unusual by world standards,
There’s a lot to digest in this 150-page report which is only available online. It’s probably no surprise that expanding the capital gains tax base is not likely to be very high on the agenda of the Coalition Government at the moment. But there’s plenty of food for thought in the report.
One of the other points of interest, and there has been some commentary about this, is the suggestion for an Independent Fiscal Institution, basically, a policy costing unit. The OECD picked up that there had been no independent costings of policies in the run up to last year’s election. This is something that could be done by an Independent Fiscal Institution. Some work was done on this under the last government and Nicola Willis seems open to revisiting the issue.
Following the Irish example?
The OECD survey suggested the Irish Fiscal Advisory Council (IFAC) https://www.fiscalcouncil.ie/as a model that could could be followed. Given Ireland has a similar population this seems a good idea. Personally, I think we ought to look very closely at countries of comparable size to ourselves. The IFAC has been mandated to independently assess the government’s fiscal stance and budgetary forecasts and monitor compliance with budgetary rules. As I mentioned earlier the OECD thinks that we need to review our budget rules.
According to the OECD survey about 80% of OECD have some form of Independent Fiscal Institution. The Congressional Budget Office in the United States which has 270 staff is a very well-known example. Over in Australia, the Parliamentary Budget Office, with 45 staff has this role. The Canadians have a similar Parliamentary Budget Office and over in the UK they have the Office for Budget Responsibility. There’s plenty of examples around the world to consider and it would be encouraging if we heard something in the Budget about this.
Small businesses and statistics
The OECD survey, noted that the business entry and exit rates are higher in international comparison although this means “business dynamism is vibrant” the OECE also noted that the “high share of the population working in micro, small and medium enterprises…hints at a difficulty for these firms to grow into larger businesses.”
One other thing I thought was very interesting was commentary around improving the timeliness of New Zealand’s macroeconomic statistics. I’ve long thought it was a weakness that we don’t see monthly GDP or inflation data, but I wasn’t aware we were, like Australia, very much in the minority within the OECD in not producing a monthly CPI index. As the OECD noted “Older and less frequent statistics increase the risk of costly policy mistakes”. I wonder what the OECD would have made of the news that all Stats NZ staff were offered voluntary redundancy?
Don’t look back in anger? Forty years in tax
This week, it is 40 years since I started working in tax. They say the past is a different country, we did things differently there and that’s true, but one thing that hasn’t changed over my time in the past 40 years is the behavioural impact of tax. When I started working in the UK, the top rate of income tax was 60% and I saw people very incentivised to make sure that they’re claiming all the possible deductions, maximising pension deductions and the like. The top rate in the UK now is 45%, but you still see the same behavioural impact.
For comparison in 1984 the top rate in New Zealand was officially 60% but a further 10% surcharge had been introduced in 1982 by Sir Robert Muldoon, the Prime Minister and Finance Minister at the time. The top rate was therefore 66% which applied to income above $64,000. Based on CPI since then that’s the equivalent of roughly $260,000 now. According to the Inland Revenue date for the March 2022 income year, just over 42,400 taxpayers earned more than $260,000. That’s a little bit under 1% of all taxpayers. But they had a substantial amount of income between them, close to $20 billion and therefore paid a sizeable amount of tax nearly $7 billion in total.
The effects of forty years of inflation – how New Zealand taxpayers appear to have lost out compared to their UK counterparts
In terms of inflation, it’s quite interesting to look back at the tax rates and the income bands which applied. In 1984 the lowest rate was 20% on the first $6,000 of income. That $6,000 in 1984 dollars would now be $24,350 so in terms of inflation adjustments, even when we see the current 10.5% tax threshold move from $14,000 to maybe $16,000 in the Budget you can see that maybe New Zealanders have been losing out. Consequently, because we aren’t adjusting thresholds regularly, fiscal drag means that inflation has affected the ordinary working New Zealanders quite substantially.
That becomes clearer when you swap notes with what’s gone on in the UK with the tax thresholds there over the same period. The UK has a tax-free personal allowance which Was £2,005 back in 1984 when I started working. It’s now £12,570, but if it had just kept in place in place with inflation, it would be only £6,300. In other words, the value of the tax-free personal allowance has doubled in the past 40 years.
Interestingly, the tax threshold after which the higher tax rates kick in was £15,400 back in 1984. Inflation adjusted that would £48,300 compared with the £50,000 where it actually takes effect. There is an additional rate of 45% in the UK on income over £100,000. Back in 1984 the highest 60% tax rate kicked in at £38,100 inflation adjusted that would be £120,000 now.
What you see looking at these numbers is broadly speaking average earners in the UK have been less affected by fiscal drag and inflation than New Zealand workers have been. And that is something that I think I’d like to see changed here for the better and we should be having regular inflationary adjustments as is required by the UK tax law. I think such a move would tie into the better fiscal discipline suggested by the OECD.
The behavioural impact of no capital gains tax
I’ve now worked for over 30 years in New Zealand, but I still remember my shock when I realised there wasn’t a general capital gains tax here. When I consider the behavioural impact of taxation, that’s where you see it apply most where people will be looking to turn something that could be taxable at 39% into a non-taxable gain. And so, there’s a distortionary effect there.
And just to circle back to discussions we’ve had previously on the podcast and what the OECD have just said, there is a tremendous amount of value in the broad-based low-rate approach. It’s not perfect, but one of the things it does deal with is this question of behavioural impact and distorting behaviour chasing tax benefits. My personal view is the absence of a general capital gains tax has had an effect on our productivity. If it’s better in investment returns to invest in residential property in which the returns are largely tax free, than investing in a business or in shares that are taxed, such as overseas shares under the Foreign Investment Fund regime, then that diverts investment into less productive assets. Whether that’s for the benefit of the wider economy as a whole, well, that is a matter for ongoing debate. My view is it’s not.
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.
