25 Feb, 2019 | Tax News
When hearing the lamentations about the purported cost and harshness a capital gains tax (“CGT”) will bring, I think of Paul1. Dying of cancer he applied to his UK pension scheme for an early payment. Paul died before it arrived, but his widow still got to pay the tax on the transfer.
I am reminded of Judy and Wayne, hard-working specialist nurses living in Auckland, who also transferred their UK National Health Service pensions to New Zealand. They too got a tax bill for their troubles even though it would be five years at the earliest before they could withdraw any cash. Judy and Wayne could not even withdraw funds to pay the $50,000 tax bill. So, in order to meet the bill, a pair of highly skilled nurses in a sector and city with chronic shortages, sold up and moved to the South Island. A real triumph of tax policy.
Nothing the TWG proposes in its final report will be anywhere near as penal as the present rules for taxing foreign superannuation schemes. Or, for that matter, the financial arrangements and foreign investment fund (“FIF”) regimes that will also remain in place. Amidst some of the frankly hysterical reaction these important details have been overlooked.
Listen to Terry discussing the TWG report with Jenée Tibshraeny journalist at Interest.co.nz
The TWG proposes extending the range of assets that will be specifically taxable on disposal. It’s therefore not a CGT in the sense of a specific part of the Income Tax Act covering all capital transactions. Rather it is, to borrow a phrase, a backstop, applicable if the transaction isn’t taxed elsewhere.
I do not read too much into the minority report by three of the TWG members. It is unusual but should not be a surprise: tax experts by their very nature are an argumentative bunch at the best of times and are as divided over the issue as the general public. What is interesting about the minority view is that all three, including long-time CGT sceptic Robin Oliver, support taxing disposals of residential property.
That, together with comments in the report that the Government doesn’t have to accept all the TWG’s proposals about extending the taxation of capital, opens the door for a partial extension only on residential property investment.
The issue will dominate politics between now and next year’s election and the Government will need to decide quickly if the relevant legislation is to be in place before the proposed start date of 1 April 2021. In this context, Inland Revenue’s capability to deliver will be tested, which prompted Michael Cullen to remark that it might need support from countries that have CGT regimes to help get the legislation ready. He and the report also stressed the need of ensuring Inland Revenue is properly resourced and keeps its most skilled staff, which according to Cullen isn’t happening at the moment.
Although a CGT is the preferred option, the TWG report does consider the use of a deemed return method similar to the fair dividend rate applicable under the FIF regime. Table 5.1 of the report suggests that the deemed return method could immediately raise more tax than adopting the CGT approach depending on the deemed rate of return applied:
Deemed Return Rate for CGT
According to the TWG, the projected revenue from a CGT over the first ten years rises from $400 million in the first year to $5.9 billion by 2030/31.
Future Tax Revenues estimate from Capital Gains TaxT
After ten years CGT would represent 1.2% of GDP and a not insignificant 4.2% of total tax revenue.
That raises an interesting point about how a Government might react if a downturn affected tax receipts from CGT. This was a very real problem for California and New York State in particular in the wake of the Global Financial Crisis. The deemed return method’s predictability of tax receipts is one reason why it might still be an option.
As noted above the broadening of the taxation of capital income doesn’t replace existing rules such as the FIF and financial arrangements regimes. With regard to the FIF rules, the TWG recommends that the FDR method should be retained. It does consider the present 5% rate should be able to be adjusted frequently as economic conditions change. However, the TWG considers the current ability for individuals and trusts to adopt the alternative comparative value (CV) method if it is lower than FDR as;
“anomalous and inconsistent with the idea behind taxing a risk-free return. It also potentially creates a bias in favour of non-Australasian shares because taxpayers are subject to a maximum 5% rate of return but can elect the actual rate of return if it is lower…. If the FDR rate is ultimately lowered from 5%, the Group recommends removing the ability to choose to apply the CV option only in years where shares have returned less than 5%”
Such a move would increase the tax payable by individual investors unless the FDR rate was set at a level which was fiscally neutral. But it highlights the complexity which will still remain if a CGT approach is adopted.
Volume II of the report has the design details of the proposed CGT.
Two areas of the design have provoked a fair amount of commentary, the treatment of inflation and the proposed valuation day approach.
At first sight the criticism regarding the proposal to adjust for inflation seems reasonable. But as the interim report noted the tax system doesn’t adjust for inflation generally at the moment. Furthermore, as Cullen noted at the briefing the amount taxed under a CGT approach is often lower than that payable under an annual accrual-based approach.
For example, compare the totals taxable between a CGT approach and under the foreign investment fund fair dividend rate method. Assuming $100,000 is invested, which grows at 5% per annum and is sold after four years under CGT, the taxable gain will be $21,551. This is less than the total of $22,628 taxed under the FDR method (generally no income is taxed under FDR in the year of acquisition).
Capital Gains Tax versus Fair Dividend Rate
The TWG proposes that under the CGT approach only gains arising from the date of implementation will be taxed, the so-called “Valuation Day” method which both Canada and South Africa adopted when they introduced their respective CGT regimes.
The potential compliance costs involved have been criticised so the TWG proposes taxpayers should have five years from implementation (or to the time of sale if that is earlier) to determine a value. They also suggest a couple of default methods for assets held on Valuation Day. These are either the straight-line basis or the median method, helpfully illustrated below.
John purchased a small trucking business on 1 April 2015 for $200,000. On 31 March 2025, John sells the business to Paul for $600,000 (i.e. a $400,000 gain).
As a result of the extension of the taxation of capital gains, John will have to pay tax on the capital gain he has derived since Valuation Day (1 April 2021) from the sale of the business (i.e. for the last four years he has owned the business).
Applying a straight-line approach, John will have to pay tax on 4/10th of the gain on sale (i.e. $160,000).
Example business valuation and CGT
The median rule determines the deductible cost as the median or middle value of actual cost (including improvement costs), the value on Valuation Day, plus improvement costs, and the sale price.
In 2014 Scott bought a rental property for $500,000. On Valuation Day the property was valued at $450,000. Scott sold the property six years after Valuation Day for $850,000.
Applying the median rule:
Cost = $500,000
Valuation Day value = $450,000
Sale price = $850,000
The median value is $500,000. Therefore, Scott is able to deduct $500,000 from the sale price of $850,000, giving rise to a $350,000 taxable gain.
Without the median rule, Scott would have a taxable gain of $400,000 (i.e. sale price of $850,000 – price on Valuation Day of $450,000) despite only making a gain of $350,000 over the whole period he owned the property.
There is, as you’d expect, a wealth of detail in these proposals including some anti-avoidance provisions to prevent “bed and breakfasting” as a means of accessing losses. Some losses will be ring-fenced but in general most capital losses should be able to be offset against other income.
There’s plenty more elsewhere to consider in the report such as the proposals for KiwiSaver and the surprising suggestion that the Government “give favourable consideration” to exempting the New Zealand Superannuation Fund from tax. I’ll cover these and other snippets separately.
This post first appeared on Interest.co.nz
18 Feb, 2019 | Tax News
The year ahead in tax will be dominated by this week’s release of the Tax Working Group’s final report. The TWG is expected to recommend the introduction of a realisation based capital gains tax to close a perceived major gap in New Zealand’s tax system.
The coming debate over CGT will almost certainly drown out the majority of the rest of the TWG’s recommendations, and will dominate public discussions about tax this year.
But even without the TWG’s final report, 2019 is going to be a hugely significant year for Inland Revenue and its “customers”. In April the third stage (Release 3) of Inland Revenue’s Business Transformation goes live, the biggest test yet of Inland Revenue’s $1.5 billion programme. (The overall Business Transformation budget for the year ended 30th June is $206.8 million for operating expenditure and a further $91 million in capital expenditure.)
Release 3 implements changes affecting nearly two million taxpayers on PAYE. From 1st April Inland Revenue will automatically calculate the tax position for the year ended 31st March 2019 for all employees on PAYE. Taxpayers will no longer need to apply for a refund either themselves or through one of the tax refund companies. It’s anticipated an estimated 1.67 million taxpayers will receive a refund – about 720,000 for the first time ever. A further 263,000 taxpayers are expected to receive tax demands, about 115,000 for the first time.
Unsurprisingly, the spectre of Novopay hangs over Inland Revenue’s Business Transformation programme, so right now Inland Revenue is racing to make sure everything will be ready in April. However, there are signs it is not wholly on track.
As part of Business Transformation, Inland Revenue prepares monthly reports updating the Minister of Revenue on progress. The latest available report for November 2018 was prepared on 10th December 2018.
It doesn’t take much reading between the lines for it to become apparent there are concerns about whether Inland Revenue will be ready. The update reports
“Whilst our overall status remains at amber over the last reporting period the schedule “key” has deteriorated to amber as a result of the challenges we are experiencing with testing. The resources “key” has deteriorated to amber due to some constraints managing resources between Releases 3 and 4 and the delivery partners “key” has deteriorated to light amber”
An amber status means there are “some” risks to achieving the targeted go live date of 23rd April although Inland Revenue believes it is still on track. Those risks include testing, managing the transfer of data from the tax refund companies, payday filing and tax agents.
The report reveals that Inland Revenue “requested” the 31 tax refund companies (Personal Tax Summary Intermediaries in officialese) to hand over details of some 783,000 clients as part of the preparation for Release 3. 26 of the tax refund companies agreed to do so knowing that Inland Revenue could use its powers under the Tax Administration Act 1994 to compel them to comply. The remaining five companies will have no option but to follow suit. Many of the tax refund companies are expected to close down once Release 3 takes effect.
As another report on the Business Transformation prepared by the Minister of Revenue for the Cabinet Government Administration and Expenditure Review Committee observes, the tax refund companies are amongst a number of groups who are “potentially less positive” about the changes.
Other than the tax refund companies, these groups include the more than 5,600 tax agents responsible for 2.7 million taxpayers, financial institutions and over 200,000 employers. All face significant costs and disruption getting ready for Release 3, particularly in relation to increased reporting requirements.
As I outlined previously Inland Revenue’s relationship with tax agents has been problematic for some time and shows little sign of improving.
Inland Revenue should also be concerned about the slow progress on another key change starting in April payday filing. Under payday filing all employers are required to file salary and wages information with Inland Revenue on the date of payment rather than monthly as at present. Long term, payday filing will benefit employees by providing real-time information to ensure they are not under/overpaid during a tax year. In the short term, however, it represents a significant compliance cost for employers, particularly smaller employers.
At present Inland Revenue’s own online payday filing system could be generously described as “not very user friendly” and other software providers seem to be behind schedule in delivering alternatives. Worryingly, as of 30 November 2018 only 6,500 employers of approximately 207,000 had “indicated” an intention to begin payday filing. These are probably the largest employers covering the majority of New Zealand’s 2.5 million salary and wage earners. It still means a significant number of employers may not be ready by 1 April.
One option to help smaller employers and mitigate their costs could be to extend the existing payroll subsidy. However, this was rejected by Inland Revenue in its report to the Finance and Expenditure Committee on the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Bill partly because the estimated cost of $8.9 million was unbudgeted.
Imposing additional obligations on employers and simultaneously rejecting a subsidy to help them do so are not reconcilable decisions. In my view it represents a clear breach of Inland Revenue’s duty under section 6A of the Tax Administration Act to take into consideration “the compliance costs incurred by taxpayers”. This important point is barely acknowledged, let alone discussed in either report. Maybe it would be useful if MPs on the Finance and Expenditure Committee spent less time grandstanding and more time monitoring Inland Revenue’s performance and obligations.
Release 3 isn’t the only significant change happening in April. From 1st April residential property investors will lose the ability to offset losses against other income when loss ring-fencing is introduced. According to Inland Revenue about 40% of all residential property investors report rental losses with an average tax benefit of $2,000 per annum. The measure is expected to raise about $190 million in additional tax.
Looking beyond April, the Budget in May will be the first under Treasury’s new Living Standards Framework. It will be interesting to see whether tax changes are included to help meet the proposed focus on wellbeing and the environment. Separately, we may also see some measures implementing some of the less controversial recommendations of the TWG.
So, it will be a very busy year ahead in tax. Although for now, all eyes will be on the TWG’s final report, come April Release 3 will affect many more taxpayers than any hypothetical capital gains tax. Although Inland Revenue expects some teething problems as the changes bed in (it proposes to have additional support or “early life support” for staff and “customers” for some 13 weeks after Release 3), it also expects the initial pain will be replaced by long term benefits. Just don’t talk to tax agents and employers about it.
This article first published on Interest.co.nz
29 Jan, 2019 | Tax News
Summary of points made by Terry during this 5 minute interview [link to watch].
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The trouble with Fiscal Drag as you cross a tax bracket and it’s not adjusted for inflation and so reduces your take home pay.
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All the tax brackets need to move up as they haven’t changed since 2010. On an inflationary basis the top tax bracket should be nearer $80,000.
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The real painpoint is below $48k – it’s a very big jump up in percentage tax payable.
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The government is setting up a big problem for themselves as they will have to deal with this in the future.
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Historically as brackets increase – average earnings always keep ahead of tax brackets – but we’re running surpluses and so this is a good time to adjust it.
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I think that NZ rely a lot on the taxation of labour for tax receipts and the taxation of capital is haphazard. This would re-balance the way the tax take comes into the Treasury.
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The interaction between tax and social policy is also important – Working For Families Credits get abated at 25% and so effectively it jumps to 42% for some groups of people. Who are being taxed at 100% at the margin when ACC and other taxes are added up.
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The big change from 1 April 2019 the new IRD system will give more real-time accuracy about people’s earnings it will adjust your PAYE rate during the year.
18 Dec, 2018 | Tax News
Capital gains tax is the New Zealand equivalent of the Irish Border in Brexit: An intractable issue which politicians have kicked endlessly down the road without resolution. Until now. Perhaps.
The Tax Working Group’s interim report released in September follows this pattern of deferring the dreaded day.
Rather than make an outright recommendation, the interim report instead explains the policy reasons for increasing the taxation of capital and wealth before reviewing two main alternatives; broadening the taxation of realised capital gains from classes of assets not already taxed (the CGT approach), or taxing on a deemed return basis, the risk-free rate of return method.
What the TWG isn’t proposing is a separate capital gains tax regime encompassing the taxation of all gains and replacing the present rather ad-hoc approach. This is an important point which seems to have been drowned out by all the noise around the issue. The TWG is recommending a “targeted” approach to tax asset classes which are not currently fully taxed. Existing regimes such as those for financial arrangements and foreign investment funds (FIF) will remain.
This is an extension of the incremental approach to taxing capital gains which has been in place for the past 50 years. What makes the TWG’s suggestions radical is that it should effectively result in comprehensive taxation of almost all capital gains. The suggested approach should also be legislatively easier to introduce as it would not require a complete rewrite of the existing legislation.
The TWG has decided to follow the example of Canada and South Africa and adopt a “valuation-day” basis under which all the gains from the date of introduction will be taxed. The TWG rejected the Australian approach of exempting assets acquired prior to introduction of CGT as encouraging “lock-in” or the retention of assets in order to defer realising a tax liability.
A valuation-day basis does require obtaining market valuations of assets held on the date of introduction. Much has been made of the compliance costs involved in obtaining market valuations of assets with the view that these costs would be a deal-breaker.
Although such an approach would indeed be prohibitively costly, other jurisdictions which introduced valuation day CGTs have managed to resolve the compliance issue. The TWG noted the Canadian approach where the taxpayer’s cost in an asset acquired prior to the introduction of CGT could be the median of either actual cost, the value on valuation day or the sale price.
Another option would be to allow taxpayers to pro-rate the gain or loss on a time basis. This was one method allowed by South Africa after it introduced its valuation day basis CGT on 1 October 2001.
In short, adopting a pragmatic approach can resolve the valuation issue without imposing unreasonable compliance costs. (It might also require banging a few heads at Inland Revenue which too often circumscribes promising initiatives such as the Accounting Income Method with overstated fears of potential tax avoidance).
Other key features of the TWG’s proposals are that the net gains will be taxed at a person’s marginal income tax rate, no concession will be made for inflation and capital losses will generally be able to be offset against other income. In some circumstances, such as death, the gain could be “rolled-over” and only taxed on ultimate disposal. All up the proposals are estimated to potentially raise close to an additional $6 billion of tax over the first ten years.
But fitting a CGT into the existing patchwork has its issues. The “tax, tax, exempt” (TTE) approach applicable to investment vehicles such as KiwiSaver funds and other portfolio investment entities (PIEs) creates issues around aligning their tax treatment with that of individuals. This was an issue seized on by the New Zealand stock exchange (NZX) and the Securities Industry Association (SIA) in their submission to the TWG.
An answer to the problem identified by the NZX and SIA might be to tax Australasian shares using the FIF regime fair dividend rate (FDR) methodology. In this regard the TWG noted that the current 5% FDR rate was set in 2007 and may now be too high. It is considering whether that should change and whether the present comparative value option available for individuals and trusts should be removed. Alternatively, overseas shares currently subject to FDR could instead be subject to CGT, a move which would raise an estimated $680 million over ten years.
The alternative to a CGT, the risk-free rate of return method (RFRM), was proposed by the McLeod Tax Review in 2001 and adopted for the FIF regime introduced in April 2007. Its attraction is more predictable cash flows for the government and the issue of “lock-in” doesn’t arise. However, it also has issues around valuing assets, taxpayers may not have the cash flow to meet tax liabilities (an existing problem with the FIF regime), and how would it tie in with the availability of interest deductions. Intriguingly, RFRM is seen by some as a better tax solution for addressing housing inequality.
On housing, the TWG’s terms of reference exclude taxing the family home but the interim report raises the issue of whether an exception should be made for “very expensive homes” defined as worth more than $5 million. The suggestion is that imposing an upper limit should act as a deterrent to owner-occupiers over-investing in their property. It will be interesting to see if that suggestion makes it into the final report.
A largely unremarked feature of the TWG’s work is the greater attention given to the implications of the tax system for Māori. This is in marked contrast to previous tax working groups. Māori submitters were overwhelmingly opposed to a land tax, so a policy backed by the last tax working group in 2010 has this time been rejected.
Māori concerns about how a land tax would operate would be equally applicable to the RFRM alternative.
The TWG’s interim report also identified the potential implications of a CGT on Māori freehold land and assets held by post settlement governance entities as requiring further analysis. If a CGT is introduced then a possible exemption for such assets might be one outcome.
The issues the TWG identified for expanding the scope of capital taxation centre on the longer-term sustainability of the tax system in the face of growing fiscal pressures from an ageing population and the fairness and integrity of the tax system. As the interim report notes;
“Taxing capital income that is currently untaxed is likely to provide a significant and growing revenue base for the future. Such gains are the single largest source of income that other countries tax and that New Zealand largely does not. …
The lack of a general tax on realised capital gains is likely to be one of the biggest reasons for horizontal inequities in the tax system. People with the same amount of income are being taxed at different rates depending on the source of the income.”
Against this background my belief is that despite the reservations of several of its members, the TWG’s final report will recommend the introduction of a realisation-based CGT.
However, it may also suggest that its implementation is deferred by a year until 1 April 2022 to allow time for further consultation. We will be hearing a lot more speculation about CGT for a while yet.
This is my last column for 2018, my thanks to David and Gareth for their support and to all my readers and commenters, thank you for your engagement. Have a great Christmas and see you in 2019.
20 Nov, 2018 | Tax News
Terry Baucher details how the previous National-led government appears to have successfully raised at least $1 billion of extra revenue annually with little or no fanfare.
Louis XIV’s finance minister, Jean-Baptiste Colbert, famously declared that “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”
What was true in the seventeenth century remains true today. And although Colbert might not recognise much of the modern economy and tax system, he would probably still appreciate some of the sleight of hand used by New Zealand finance ministers to raise funds without too much hissing. At a rough guess the last National government seems to have successfully plucked at least $1 billion of extra revenue annually with little or no fanfare. How?
We’re not talking about specific tax related measures often of a quite technical nature. These are a staple of every government’s budget.
A long-standing option used by governments of both hues is inflation, and in particular ‘fiscal drag’. This is when income tax rate thresholds are not inflation adjusted so wage growth lifts more earners on to higher marginal tax rates.
Income tax rates and thresholds were last adjusted in October 2010. At that time someone on the average wage had a marginal tax rate of 17.5%. According to the labour market statistics for the September 2018 quarter, average weekly earnings are $1,212.82 or $63,067 annually, well above the $48,000 threshold at which the 30% tax rate applies. Even median weekly earnings at $997 are also well above the $48,000 threshold.
So how much revenue does fiscal drag raise annually? The short answer would be “Heaps.” The Budget Economic and Fiscal Update released in May’s Budget estimated the effect of fiscal drag as $1.6 billion over the five years to 30 June 2022.
A more detailed analysis of the issue was prepared for then Finance Minister Bill English in November 2016.
The aide-memoire noted that adjusting for inflation since October 2010, effective 1 April 2017, would cost $1 billion in the first year. Clearly, baulking at this “large cost,” the paper instead modelled adjustments to thresholds based on price inflation over a single year, from June 2017 to June 2018, and applying that inflation factor to current thresholds beginning 1 April 2017. This produced a cost of $220 million for the 2017-18 year rising to $720 million by 2019-20.
The paper concluded by noting “a downside to not annually indexing is that there is less transparency for taxpayers.” This is something that politicians of both hues will rather conveniently rely on when trumpeting “tax cuts.”
Although fiscal drag is a well known tactic, Bill English also employed variations of it elsewhere to raise revenue. In the 2011 Budget inflation adjustments to the student loan repayment threshold of $19,084 were frozen until 1 April 2015. This and other changes to the student loan scheme added up to $447 million in “savings” over five years. The freeze on the student loan threshold was later extended until 1 April 2017.
The 2012 Budget froze the parental income threshold for student allowances until 31 March 2016, a measure worth $12.7 million over four years. More controversially, the same Budget increased the repayment rate applying to income above the student loan repayment threshold from 10% to 12% – a defacto tax increase. This increase raised (sorry “saved”) $184.2 million in operating costs over four years.
The 2011 Budget saw changes which also stopped inflation adjustments of the threshold at which abatement of working for families tax credits applied. Instead, measures reducing the threshold over a four year period from $36,827 to $35,000 were introduced. A “slightly higher” abatement rate of 25 cents in the dollar instead of 20 cents in the dollar was also phased in over the same period. These measures were intended to realise savings of $448 million over four years. (The current government’s Families Package partly reversed these changes by raising the abatement threshold to $42,000 whilst lifting the abatement rate to 25 cents in the dollar from 1 July 2018).
The 2011 Budget also removed the exemption from employer superannuation contribution tax (ESCT) on employer contributions to KiwiSaver funds. This is probably the biggest single measure that increased the tax take outside of the rise in the rate of GST to 15% in October 2010.
The exemption was removed with effect from 1 April 2012 and the compulsory employer contribution was also increased from two to three percent from 1 April 2013. These changes saw the annual ESCT collected rise by almost $400 million from $681 million in the June 2011 year (the last full year before the changes) to $1,078 million in the June 2014 year (the first full year of the changes).
Finally, there is the opportunity to increase various duties such as those on alcohol, petroleum and tobacco. For example, tobacco excise duty has been increased every year since January 2009 as part of the country’s Smokefree policy. As a result, the excise duty per cigarette has gone from 30.955 cents per cigarette in 2009 to 82.658 cents per cigarette as of 1 January 2018. During the year to June 2018 the government collected over $1.8 billion in tobacco excise duty.
All told, the combination of fiscal drag, ESCT increases and changes to student loans and working for families cumulatively represent at least $1 billion of additional revenue collected annually. Throw in the various excise duty increases, specific “base protection” tax measures such as changes to the thin capitalisation rules for foreign-owned banks or the the “Bright-line test” introduced in 2015, and the increased annual “tax” take is close to $1.5 billion.
These under the counter tax increases have happened with little fanfare under the guise of “savings”, or “better targeting of government programmes” (how the Budget 2011 changes were described). Colbert would no doubt approve of this efficient plucking of the goose with very little hissing.
9 Nov, 2018 | Tax News
Terry Baucher wades through a series recent IRD reports and concludes the taxman has room to improve
Whatever the final recommendations of the Tax Working Group are, Inland Revenue will be a key player in implementing and managing the changes to the tax system. But is it up to the task?
In the run-up to Labour Day weekend it released its 2017-18 annual report and two other reports. Collectively, these reports give a good insight into its current and future state which might be summarised as “Can do better.”
The first report released was the result of some follow up research on “strengthening stakeholder engagement.”
Undertaken by Wellington based research firm Litmus, the research targeted groups identified by Inland Revenue as having an important role in its billion-dollar Business Transformation process. The stakeholders surveyed included central and local government agencies, business representative groups, large enterprises, vendors and suppliers and tax agents/intermediaries.
Litmus surveyed 229 organisations and received 118 responses. Just seven of the mere 10 tax agents surveyed responded. Given there are 5,600 tax agents with over 2.7 million clients, tax agents represent a substantially under-represented demographic in the final survey’s results.
Significantly, the feedback from tax agents was less positive than from other stakeholders. According to the report, tax agents were “less supportive about how Inland Revenue is changing and its ability to deliver”, with only a third “confident Inland Revenue will successfully deliver the change.”
It might be tempting for Inland Revenue to argue the small sample size means the Litmus survey was not representative of tax agents. However, its customer satisfaction surveys show that those tax agents surveyed who were “very satisfied” with Inland Revenue declined from 77% in 2015-16 to 66% in 2017-18. This was the largest drop amongst any of the surveyed groups.
An explanation for the dissatisfaction of tax agents can be found in Inland Revenue’s 2017-18 annual report.
The upgrade of Inland Revenue’s secure online service myIR in April 2018 (“Release 2”) did not go smoothly. Users had problems logging on and some services became unavailable. Frustrated taxpayers and tax agents rang Inland Revenue for assistance only to find their call “capped” by Inland Revenue because call volume exceeded its capacity. As page 38 of the annual report explained:
“We capped 286,392 calls during June 2018 to manage the spike in demand. This is a 69% increase from 169,533 capped calls in June 2017. This contributed to an 85% increase in complaints in April-June 2018 compared to the same three months in 2017. We received 3,541 customer complaints during this quarter, 1,623 of which were received in June 2018.”
Inland Revenue eventually resolved the problems encountered in Release 2, but it faces a much bigger test with Release 3 next April which will affect over a million taxpayers.
Its annual report has some fascinating details about how Inland Revenue is progressing with its Business Transformation programme. Its use of contractors and temporary staff has almost tripled in the past three years: increasing from $45.3 million in the June 2015 year to $124.1 million in the June 2018 year. Spending on contractors and temporary staff represented 22.8% of all Inland Revenue’s $545 million personnel costs for the June 2018 year.
The increase in the use of contractors and temporary staff is almost certainly down to implementing the Business Transformation programme. 11% of Inland Revenue’s 5,250 staff are now on fixed-term contracts compared with 2% in June 2014. Despite this shift, the proportion of staff who are female has remained constant at 64% over the same period. However, the department has a gender pay gap of 19.4% as the difference in average salaries for men and women is $16,235. As the report explains “Women only make up 43% of the people who earn over $100,000, while they make up 68% of the people who earn under $100,000.”
After four years of declining recruitment Inland Revenue made 604 new hires in 2017-18. However, during the year 938 staff left which is why Inland Revenue paid out over $21 million in termination benefits, a more than twenty-fold increase from the $919,000 paid during the 2016-17 year. The staff losses meant its staff turnover for 2017-18 was 15.4% overall, not exactly an encouraging sign of a healthy workplace. Curiously though, the average length of service of staff rose to 13.6 years. (Incidentally, the department paid $339,000 in bonuses during the year although it’s not clear to whom).
And yet, despite all these comings and goings, Inland Revenue’s personnel costs for the June 2018 year were lower than budget by over $87 million. According to the report:
“The majority of this variance reflects the change in both the phasing and delivery of the Business Transformation programme, and organisational change required to deliver the programme outcomes.”
All this points to an organisation in a state of flux with an unsettled workforce, hence the recent strikes. It’s one reason why I and many other tax agents are dissatisfied with Inland Revenue’s current performance and view the approaching Release 3 next year with some concern.
Apart from collecting $73 billion of revenue during the year, Inland Revenue also did its bit for the government’s books by returning a surplus of more than $59 million to the Crown. This seems to be part of a deliberate policy – over the five years to 30 June 2018 the department recorded surpluses totalling more than $192 million.
The financial statements included in the report have some other interesting revelations: child support collections exceeded payments to caring parents by $181 million. Again, this is a long-standing policy: the corresponding amount for June 2017 was $184 million. Child support late payment penalties, which at 36% per annum in the first year are more than those payable for late payment of tax, effectively represent a backdoor tax on liable parents.
A serious review of child support debt is long overdue: despite writing off $594 million of debt during the year, the total child support debt at 30 June was $2,259 million. This is Inland Revenue’s largest single debtor type. By comparison the total of GST, PAYE and income tax outstanding at 30 June was $2,841 million. The $1,662 million of child support penalties owed is more than the $1,651 income tax outstanding, an absurd position.
Inland Revenue also collected $49.796 million of “other revenue” during the year. Unexplained in Inland Revenue’s annual report, it transpires that this is the total of penalties imposed in relation to late repayment of overpayments of working for families’ credits. I found the answer in note 3 to the government’s financial statements for June 2018, which includes $231 million of “Child support and working for families penalties” in its Sovereign Revenue for the year.
To put that total in context, it’s almost double the $118 million of court fines included as revenue in the government’s financial statements. Penalties on top of repaying overpaid working for families credits seems a harsh outcome for what is most likely to be the result of an error.
The annual report also details the vast amount of data sharing going on between Inland Revenue and other government agencies. During the year the department received 520,561 “contact records” from the Department of Internal Affairs. The Ministry of Social Development (MSD) provided details to Inland Revenue during the year relating to 94,378 child support cases. MSD also shared 7,041,500 student loan cases in what must have been a one-off information transfer. Inland Revenue in return shared details with MSD relating to 1,373,489 Community Service Card holders, 402,047 child support cases as well as proactive information sharing for 743,346 benefits and student cases.
Quite apart from data sharing with other government agencies, during the year Inland Revenue sent details of 128,930 persons to the Australian Tax Office as part of its Student Loan collection programme. This resulted in matches being found for 85,147 persons who will soon find they have not escaped their student loan repayment obligations.
The extent of data sharing currently going on between Inland Revenue and other agencies here and around the world is enormous yet goes largely unnoticed. It invariably comes as an unpleasant surprise to anyone caught up by the data exchanges. A data leak would surely represent one of the biggest risks for the department, but it’s not clear from the annual report whether the independent Risk and Assurance Committee has specifically considered the issue.
The other document released, Statement of Intent 2018-2022 (the SOI) is rather like a glossy corporate brochure packed full of buzz-words and corporate-speak. The SOI never uses the word “taxpayer/taxpayers”, instead “customer/customers” appears 141 times in the 24-page document. This aversion to using the word “taxpayer” is also apparent in Inland Revenue’s Annual Report: it appears a mere 41 times in 224-pages compared with 708 mentions of “customer/customers” – more than 17 times more frequently.
The use of “customer” is well meant, but in my view is ultimately disingenuous. It implies a voluntary relationship which simply does not apply to an organisation extracting money with the full power and backing of the state. As anyone involved in a dispute with Inland Revenue will attest, its view is not “the customer is always right,” but “the taxpayer is guilty until proven innocent.” The alternatives to Inland Revenue are not a “competitor” tax agency, but either outright non-compliance or emigration. Inland Revenue would do better to more honestly recognise that for most people it is the “Bad Guy” and use its new “customer-centric” approach to ameliorate that reality.
In fairness, for all its earnest corporate-speak, the SOI recognises that Inland Revenue’s future success is dependent on trust. Page 11 of the SOI comments:
“[Trust] is vital for motivating people to pay their taxes and for the successful implementation of policy. This trust has been eroding in many countries. The situation is not yet clear in New Zealand, but longer term it may mean Inland Revenue cannot rely on operating in an environment of high trust. There are already differing levels of trust in Inland Revenue and the wider public sector between different ethnic, socio-economic, and demographic groups.”
Currently Inland Revenue will need to work hard to maintain trust in it, particularly amongst tax agents. The next stage of the Business Transformation programme (Release 3) in April 2019 is therefore both a threat to that trust yet also an excellent opportunity to reinforce the public’s trust in it. Inland Revenue is at present outwardly confident that Release 3 will succeed. We’ll have the first verdicts on whether that confidence was justified in under six months’ time. Watch this space.
