The Organisation for Economic Cooperation and Development (the OECD) has just published its Tax Policy Reforms 2025. The report is intended to provide comparative information on tax reforms across countries and the latest tax reform trends.
This year’s edition focuses on tax reforms introduced or announced during the 2024 calendar year in 86 jurisdictions. This broad scope makes it such a fascinating report as it gives insights and very interesting data on what trends the OECD are seeing and how other countries are adapting their tax systems to particular challenges.
Key trends
The first conclusion was that after 2023 marked a turning point away from the broad tax relief measures seen during the pandemic and the subsequent period of inflation, 2024 solidified that trend with a mix of rate increases and targeted tax support across all major tax types.
“High levels of debt coupled with the significant emerging spending needs relating to climate change, ageing and in some countries, increased defence spending has meant that jurisdictions of all income levels have adopted strategies to mobilise more revenues.”
Rising cost of climate change
In short, we’re not alone in realising that we’ve got issues coming down the path. I do find it interesting that while the debate in New Zealand has focused on the increasing costs of superannuation and health care, the OECD executive summary references climate change first. Although we definitely face future issues around changing demographics with rising superannuation costs and related health care costs, the immediate expenses in relation to climate change are arriving now.
Widespread tax and social security increases and base-broadening
According to the OECD, during 2024 more jurisdictions raised their top personal income tax and capital income tax rates than in previous years, “often to generate revenue or enhanced tax progressivity.” This also applied with social security taxes, another area where our system is a bit of an outlier. Almost all other OECD jurisdictions do have such taxes where they represent upwards of 25% of the total tax take.
According to the OECD, social security contribution rate “increases remained widespread and amid rising health and ageing-relating spending”. Meanwhile social security base broadening measures included focused on increasing maximum contribution thresholds and expanding the range of covered income, whereas based narrowing measures targeted specific types of workers or sectors to stimulate labour force participation.
ACC increases
Although we don’t have a general social security tax New Zealand is noted as one of the countries increasing their social security contribution rates during 2024. What the OECD is referring to here is ACC, where levies were increased by 5% with further increases set to occur in the next two years. These increases were announced in late 2024 and in case you missed the detail they are as follows:
Year
Levy rate (GST inclusive)
1 April 2027 to 31 March 20281 April 2026 to 31 March 20271 April 2025 to 31 March 20261 April 2024 to 31 March 2025
$1.83 per $100$1.75 per $100$1.67 per $100$1.60 per $100
It’s likely many haven’t noticed these changes because they are deducted through PAYE, so they are one of those unknown tax increases (like bracket creep) which happen without many realising.
Plenty happening with GST/VAT
I found the section on Value Added Tax (VAT) or GST one of the most interesting. As the OECD notes the use of reduced VAT rates/exemptions as a policy instrument remained widespread in 2024.
“In almost all jurisdictions, governments apply reduced VAT rates or exemptions, most often intended to reduce the tax burden on essential products such as food, healthcare, education and housing. Reduced VAT rates were also used as a means of supporting certain sectors, such as sports, tourism, culture and agriculture.”
In addition, many jurisdictions continued to use targeted temporary VAT rate reductions as a tool to cushion price increases on specific products or as part of support measures in response to natural disasters. (An interesting idea but probably not practical here).
By contrast to the single all-inclusive 15% GST rate applicable here there’s a lot of tinkering that goes on in other countries around applying zero-rating. For example, the UK extended zero-rating on menstrual products to include reusable period underwear. Over in Ireland, it reduced the VAT rate on the supply and installation of heat pumps from 23% to 9%. Ireland also extended zero rating on the supply and installation of solar panels for private dwellings to include schools.
As we discuss below GST/VAT is an efficient revenue raiser which is why Estonia raised its VAT rate from 20% to 22% to help rebalance its general budget. Similarly, Singapore has been gradually increasing its VAT rate. On the other hand, ten countries increased their VAT registration thresholds to support small enterprises.
Inflation and GST/VAT
The report notes Luxembourg previously lowered their standard rate of VAT to 16% to help deal with inflationary pressures. In 2024 the rate was raised back to 17%. I’ve often thought because it directly affects spending, VAT/GST is something that could be used to better target dealing with inflation rather than through interest rates.
Overall, it’s interesting to see the very active use of GST/VAT for public policy purposes
Going against the trend
Many jurisdictions increased taxes on tobacco, alcohol and sugar sweetened beverages, although we are noted as going against the trend in relation to heated tobacco products. By contrast sixteen countries including Canada, Ireland, Spain and the United Kingdom, implemented or announced increased taxes on tobacco products to improve public health and raise revenue.
Fuel excise taxes and expanding carbon taxes
Another notable shift according to the report was the move away from temporary fuel tax reliefs towards increases in fuel excise taxes. For the second consecutive year, high-income countries, and we are included in that list, “continued to strengthen explicit carbon pricing…with several increasing carbon tax rates or expanding their scope to include new sectors such as international shipping and agriculture.”
A carbon tax on agriculture – the Danish example
Something which will probably horrify farmers is Denmark’s carbon tax on agriculture aimed at reducing CO2 emissions from agriculture and forestry by 30% by 2030.
The Danes propose recycling the tax revenue into subsidies, including for carbon rich, low lying soils, reduction in fertiliser applied to fields and afforestation. I consider environmental taxes have a big role to play in climate adaptation, but my firm view is they are recycled to mitigate the effect of transition to a lower carbon economy.
Corporation tax trends
In 2024 more jurisdictions increased corporation tax rates than reduced them for the second consecutive year. It therefore seems the long-running downward trend in corporate income tax rates has halted or is reversing. That said, the OECD noted “many governments continue to prioritise support for investment”, such as the Investment Boost in this year’s budget. Governments continue to offer tax incentives for investments, particularly in research and development, clean technologies and strategic sectors.
The report notes there are continuing wide disparities in corporate income tax (CIT) revenue across countries particularly between low-income countries where CIT represented 22% of revenue in 2022 compared with 13.3% in high-income countries. At 13.69% we’re slightly above the OECD high-income average but quite some way below Australia’s 21.814% in 2022.
According to the OECD the average combined rate was 21.1% in 2024, which is down from 28% in 2000. Three countries (Austria, Luxembourg and Portugal) cut corporate tax rates in 2024, but five, Chechnya, Iceland, Slovenia, the Slovak Republic and Lithuania all increased their corporate tax rates.
Small business measures
The report discusses the wide range of incentives for small and medium sized enterprises (SMEs), which is very interesting to see. Several jurisdictions have specific incentives or tax rates for SMEs with the look-through company and shareholder-employee regimes being the closest comparison.
The report noted in relation to research and development incentives that “on average SMEs benefited from higher tax incentives due to the preferential tax treatment specifically aimed at smaller firms.” As noted above we typically don’t have such measures but arguably if you want to lift New Zealand’s productivity, specific incentives for SMEs is perhaps something worth considering.
Property tax reforms
This section covering property taxation includes not just real property, but also capital taxes. Here the trend was predominantly focused on rate cuts and base narrowing measures. These measures were designed to make housing more affordable, simplify property tax systems and encourage investments. Where property tax increases did occur, “they were primarily driven by the need to raise revenue and address equity or fairness concerns.”
According to the OECD property taxes continue to make up a relatively small share of total tax revenues in most countries, although significantly more important in high-income countries where they averaged 5.6% of total tax revenues in 2022. (Perhaps surprisingly, New Zealand sits at this average).
As always, a fascinating report to review with plenty of detail and policies to consider. Well worth a read.
Yeah, nah, definitely maybe – what do the public think about capital gains tax?
Moving on, a recently released RNZ-Reid Research poll gives an indication where the public stands on capital gains tax. The headline summary is a plurality support it, so long as it doesn’t include the family home.
Of interest here is the relatively narrow plurality in favour and the over 20% “Don’t knows.” So very much up for debate it appears.
Happy 40th Birthday, Australia’s CGT
Saturday 20th September was the 40th anniversary of Australia introducing its CGT. When considering a CGT, we have 40 years of evidence from our closest neighbour as a counterfactual. If a CGT was as dire an issue a problem for our economy as its opponents often suggest, then we should be richer than Australia and have higher productivity. However, the objective evidence points the other way. That’s not to say that introducing CGT will immediately improve our productivity, but it should mean that more capital is deployed more effectively.
Yes, Australia’s CGT comes with great complexity, but that complexity is all around the world. On the issue of complexity, I think it’s also a relativity point. If Australia, which is our closest peer economy has it and we don’t, then this is where relative efficiencies come into play. Are we more efficient and productive than those economies because we don’t have that complexity? My view is the evidence is our productivity is already falling behind so arguing CGT inhibits efficiency and productivity is not necessarily true. If other countries consider they need to have a CGT for a variety of reasons beyond simple revenue raising, then that is something we should factor into our thinking.
Professor Keen is a very interesting gentleman who is a former Deputy Director of the Fiscal Affairs Department at the International Monetary Fund (the IMF). During his time with the IMF, he led missions to over forty countries, so he has a great breadth of experience. Currently, he is Ushioda Fellow at the University of Tokyo.
I attended the presentation he made to the Tax Policy Charitable Trust in Auckland which was followed by a panel discussion with Aaron Quintal (Tax Partner, EY), Robyn Walker (Tax Partner, Deloitte) and Kelly Eckhold (Chief Economist, Westpac). As you’d expect it was a fascinating event.
If you think our ageing challenge is big, at least we’re not Japan
Professor Keen began by praising Inland Revenue’s long-term insights briefing, for actually considering the coming demographic fiscal issues. Japan where he now resides also has an ageing population and its demographics are horrific. Furthermore, its government debt to GDP ratio is over 200%. Japan is facing major issues but, in his view, the Japanese policymakers just weren’t willing to engage on the topic, whereas we were.
Professor Keen thought our tax system on the whole has an underlying logic to it. He particularly liked our GST system for its comprehensiveness “Don’t touch it, it’s fantastic.” In relation to the topic of CGT Professor Keen noted that it could complete our comprehensive income tax framework. He suggested that any CGT adopted should be inclusive with exclusions as an approach, rather than where we are at the moment, where it’s exclusive with inclusions (and there are more inclusions than many realise). Most comparable jurisdictions have already implemented a CGT regime along the lines suggested. I did get the impression he was surprised at how much of an argument went on around the topic.
GST at 22%?
In the following panel discussion GST was seen as the area where if we are going to raise additional revenue then GST must rise. Professor Keen noted that if we were to increase GST to the average European rate which is nearly 22%, that would raise 4.5% of GDP, a huge sum of money which would go a long way to resolving future funding issues.
The big “But” to raising GST is mitigating its effect on lower income earners. We have an issue with this already in our system as I’ve discussed previously. We would need to bring in much greater targeted relief for those most adversely affected by an increase in GST.
Professor Keen noted that Inland Revenue’s view was that GST could go up to 17.5%, but any higher may hit potentially significant public pushback. This is interesting when you think about European rates of 25% and higher.
It was a very interesting presentation by Professor Keen. It’s always good to get an international perspective on our system. We get a favourable tick basically because we have a very good GST system, a reasonably solid basis of policy making and we are trying to address these coming fiscal pressures.
And on that note, that’s all for this week, I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day.
a new report on how the tech companies minimise their tax.
and tax agents rate Inland Revenue.
Recently we discussed the Taxation (Annual Rates for 2025−26, Compliance Simplification, and Remedial Measures) Bill which coincided happily with the New Zealand Law Society’s annual tax conference.
Making compliance with the financial arrangements regime easier
Amidst all the excitement, I overlooked a fairly critical measure in relation to the financial arrangements regime. As regular readers will know, the financial arrangements regime is highly complex, and little known to the average taxpayer. A major issue with the regime is that once certain thresholds are breached unrealised gains and losses must be included in taxable income, i.e. on an accrual basis.
These thresholds have not been amended since 1999 which was the last time there was a serious review of the financial arrangements regime. It’s therefore very welcome news to see a proposal to significantly increase the three key thresholds allowing persons to be treated as a ““cash basis person” and therefore able to return income or expenditure from a financial arrangement on a cash (realised) rather than an accrual (unrealised) basis.
However, Robyn Walker of Deloitte has pointed out the continued existence of the deferral threshold remains problematic. At present, even if the other two thresholds are met, income may still have to be returned on an accrual basis if the difference between income and expenditure calculated on an accrual basis and that under the cash basis exceeds the deferral threshold. In other words, in order to comply with the cash basis method taxpayers are required to calculate and track income and expenditure under the accrual basis.
As Robyn notes the deferral threshold just needlessly complicates matters. (The anecdotal evidence is that its effect is often not realised). She is therefore campaigning for the repeal of the relevant provision requiring the deferral threshold calculation. I fully support her suggestion as bringing about a much-needed simplification. As an aside my personal preference would be for the new thresholds to have retrospective effect from 1st April 2025, rather than 1st April 2026 as proposed.
PepsiCo and Big Tech
One of the papers at the recent New Zealand Law Society tax conference reviewed the Australian PepsiCo case involving what’s called an “embedded royalty”. In this case the Australian Tax Office (“ATO”) said that a bottling agreement for concentrate agreement between PepsiCo and Schweppes Australia Pty Limited involved an embedded royalty and therefore withholding tax was due on a portion of the payments under the agreement.
The ATO won in the initial court case in March 2023, but on appeal and a majority of the Full Federal Court ruled in favour of the taxpayers in March 2024. The case then went to the High Court of Australia which has just ruled 3:2 in favour of Schweppes Australia/PepsiCo.
That would appear to be the end of the matter in Australia but as the paper and session at the New Zealand Law Society tax conference noted, the case remains of interest here. In particular, could our non-resident withholding tax and non-resident contractor’s tax rules apply to part of any payments made to an offshore related party by a New Zealand company.
The PepsiCo decision coincides with the release of a report from Tax Justice Aotearoa entitled Big Tech Little Tax – Tax minimisation in the technology sector. This report examines the publicly available records of the major tech companies in New Zealand to determine how much income tax they are paying and how they are structuring their affairs.
There’s a lot to pick apart in this report. It notes the Government has decided to withdraw the bill introducing a Digital Services Tax (DST) given the Trump administration’s plain declaration that any form of DST would be viewed unfavourably. Inland Revenue had estimated a DST would have been yielded perhaps $100 million in annual revenue.
Targeting the tech giants
The purpose of the paper (written by ex HMRC/Inland Revenue international tax specialist) is
“…to identify practical options to capture a greater proportion of income, including through the application of existing legislation. It argues, for example, that applying the 5% withholding tax stipulated in the New Zealand US double tax aggregation agreement to the service and licence fees of Google, Facebook, Amazon Web Services and Microsoft would have yielded withholding tax revenue of $130 million.”
The paper analyses the various types of fees paid by the New Zealand subsidiaries of companies like Google, Facebook, Amazon Web Services, and Microsoft, and explores whether some of these payments might, in substance, constitute royalties and therefore subject to non-resident withholding tax of 5%. This is where the PepsiCo case becomes particularly relevant, as it provides insight into how such payments might be classified.
The paper analyses the tax practices of the tech giants and their three primary models of tax minimisation: the service fee model, the inflated licence fee model, and the service company model. Facebook, Google and Amazon Web Services appear to use the service fee model involving substantial “service fees” to related offshore companies.
Oracle New Zealand and Microsoft New Zealand use the inflated licence fee model, under which the local subsidiary pays a large percentage of their revenue to offshore subsidiaries for the licensed use of certain intellectual property rights. According to the report in 2024:
“Oracle New Zealand earned revenue of $172.7m but paid licensing fees of $105.3m to an Irish related party, leaving taxable income of just $5.3m. In previous years, the company has disclosed royalties, which, at that time, made up between a third and three-fifths of total revenue.
Microsoft New Zealand earned revenue of $1.32bn but paid $1.075bn in “purchases” to an Irish related party, leaving taxable income of $62.8m.”
It so happens that Oracle in Australia is currently in the middle of litigation with the ATO regarding the sub-licensing of software and hardware from Oracle Ireland to Oracle Australia and whether these should be treated as a royalty. This is a major case as apparently at least 15 other multinationals are facing a similar dispute with the ATO. Inland Revenue (which tends to follow Australia’s lead on transfer pricing issues) will be watching with interest.
A lack of transparency
The paper also discusses MasterCard, Visa and Netflix where we really don’t know what’s going on because there is no publicly available information. At present all three companies meet the requirements to be exempt from publishing financial statements. The paper surmises the three companies utilise the service company model under which “the local subsidiary operates only as a marketing and support service to an overseas group company, while sales or service revenue is booked offshore.”
I agree with the paper’s recommendation that the Companies Act reporting requirements are changed “to require all local subsidiaries of overseas-headquartered companies to file accounts publicly.” The numbers are reportedly quite large for MasterCard and Visa; it’s the commission on $49.5 billion of credit card payments. In the case of Netflix, if it has 1.2 million subscribers in New Zealand then its expected subscription revenue should be approximately $250 million a year.
Overall it appears there is substantial potential profit shifting happening through the use of various fees, some of which could be subject to non-resident withholding tax. As noted above there is significant litigation happening in Australia on the issue and I don’t think the ATO is going to back off on the matter. I do wonder where Inland Revenue is on this and I expect that we will see more chatter and more discussion of this topic.
Tax agents survey results
Finally, what do tax agents think of Inland Revenue? Quite a few times it depends on what we receive in the morning mail and how our clients react. Joking aside Inland Revenue regularly surveys tax agents and it has just published its Tax Agents Voice of the Customer survey results for the just ended 2024/25 financial year.
According to Inland Revenue tax agents “continue to report strong satisfaction with our services. Some of these results are at their highest levels so far:
92% of tax agents are satisfied with their overall experience
95% found it easy to get what they needed, which is a significant improvement
88% trust Inland Revenue.”
Those are all fantastic numbers and very encouraging.
The benefits of answering the phone
Inland Revenue considers these results “reflect our improved responsiveness” which includes that “Over the past six months, many of you have noticed it’s now easier to talk to us on the phone.” Not being able to get through and speak with someone at Inland Revenue has been a sore point for many tax agents.
The reality is that although Inland Revenue would prefer tax agents and the general public interacted online with it, sometimes there is no substitute for a phone call. This is the swiftest way of sorting out any issues resulting from Inland Revenue not processing a transaction correctly. Often a tax agent will come under pressure from a client to resolve an issue swiftly. I think Inland Revenue doesn’t always appreciate that when it drops the ball, we as tax agent cop the flack for it because something we’ve said is going to happen hasn’t been done. It’s therefore encouraging that phone response times have improved.
Tax agent satisfaction with responsiveness on web messages is now 74% up from 70% for the year ended 30th June 2024. I think that’s too low it should be at least 80% in my view. To be fair I think Inland Revenue would want to reach this level too. Satisfaction with consistency of Inland Revenue’s advice was 76% for the year which is down from 79% for the 2024 year. As Inland Revenue notes consistency of advice is important but remains a challenge.
Outside of survey bodies such as the Accountants and Tax Agents Institute of New Zealand, the Chartered Accountants of Australia and New Zealand, and the New Zealand branch of CPA Australia all regularly discuss service delivery and operational matters with Inland Revenue officials. Overall, the survey is a pass mark for Inland Revenue, but areas for improvement remain and it’s good to see it acknowledging this.
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.
This year’s annual tax bill, the Taxation (Annual Rates for 2025–26, Compliance Simplification, and Remedial Measures) Bill (“the Bill”) was released at the tail end of August. The Bill’s release coincided with the New Zealand Law Society’s 2025 Tax Conference, which was a happy coincidence – unless you were one of the presenters affected and had to frantically rewrite your paper.
The Conference began with a short message from Minister of Revenue Simon Watts who highlighted the key measures in the Bill such as those relating to the Foreign Investment Fund regime, digital nomads, employee share schemes as well as the exemption for households selling electricity into the grid.
FBT reforms delayed
On the other hand, the Bill was also noteworthy for what it didn’t include. In particular there are no proposals for Fringe Benefit Tax reform, which had been highly anticipated. According to the Minister, “FBT reforms are going to need more time.” This appears to have been in response to fierce lobbying from Federated Farmers over the very vexed question of the application of FBT to twin cab utes and vehicles generally.
The other area not included was the taxation of charities and not-for-profits and in particular the question of donor-controlled charities. This was less of a surprise because the Government backed away from changes earlier this year.
Digital Nomads
The Bill includes measures to improve or clarify the tax of New Zealand visitors and in particular so-called digital nomads. These follow on from announcements made in January allowing visitors on non-work visas to work remotely. The tax changes are designed to
“…address issues that may be discouraging visitors from staying in New Zealand for longer periods of time while maintaining the integrity of the underlying international tax rules.”
Effective 1st April 2026 the Bill will allow certain visitors to New Zealand, called non-resident visitors, to be present in New Zealand for up to 275 days in a given 18-month period without becoming a New Zealand tax resident. They have to be here lawfully and not undertake work for a New Zealand employer or client.
The proposals would also deal with the questions around exempting the non-resident employer from New Zealand employment related obligations, such as PAYE and FBT. Crucially, because this has become a very important question in this area, Also, and this is pretty important because of the greater ease of working remotely, the activities of a non-resident visitor are disregarded when determining whether a foreign entity has established a permanent establishment in New Zealand.
Similarly, if the visiting person is a director of a non-resident company, then as long as they meet the other conditions, the centre of management of or direct control of the non-resident company will not be considered to have moved to New Zealand for tax residence purposes.
These are welcome proposals which clarifies a grey area. That said I think it’s time that Income Tax Act had a specific clause which gave the Commissioner of Inland Revenue discretion to exclude from the “days present” count days where a person has been unavoidably detained in New Zealand due to sickness or, for example, another pandemic.
Inland Revenue granted itself that discretion during COVID back in 2020, but actually there was no such provision in the Income Tax Act, which would have allowed it to do so. My view is it should have that discretion so it can deal with unique circumstances.
Foreign Investment Fund regime changes
The Bill includes the final details around the changes to the Foreign Investment Fund (“FIF”) regime which have been foreshadowed for some time. Under the Bill eligible migrants can elect into the “Revenue Account Method” which will tax FIF interests on a realisation basis.
The main person eligible will be those who are in overseas companies’ employment share schemes where the regular valuations required under the FIF regime aren’t easily obtainable because the company is unlisted. The other main group are American citizens who continue to be subject to US taxes, even though they are no longer resident in the USA.
Under the Revenue Account Method eligible FIF interests together with any dividends received would be taxable on a realisation basis. However, only 70% of any gains or losses will be reported and subject to tax. Assuming a taxpayer’s marginal tax rate is 39% this works out to be an effective 27.3% tax rate. I thought the Government might go with the highest prescribed investor rate, which would have been 28%.
This measure takes effect retrospectively from 1st April 2025. On the whole I think it’s a welcome move although there will be grumblings that the capital gains discount should have been higher.
Employee share scheme changes
The Bill allows unlisted companies to elect into a regime where the tax liability for employees who receive shares or share options as part of an employee share scheme can generally be deferred until a liquidity event, such as the sale of shares.
That obviously makes sense in terms of the point at which you can value the shares and the employee who is doing a lot of work there will have the ability to raise the funds to cover their tax liability.
Controversial provision repealed
The Bill repeals the controversial section 17GB of the Tax Administration Act 1994 introduced in 2020 by the last Labour government. Section 17GB allowed the Commissioner of Inland Revenue to collect information for purposes relating to the development of policy for the improvement or reform of the tax system. This section was then used to carry out the high wealth individual research project, which was highly controversial.
The section’s repeal isn’t universally applauded. John Cuthbertson, the head of tax for Chartered Accountants Australia and New Zealand (“CAANZ”) suggested it was useful for Inland Revenue to have such data gathering powers to help develop tax policy.so long as the powers are judiciously used and managed. I sparked a lively LinkedIn discussion after I commented in support of John’s comments as I don’t believe we get enough data and information on our tax system, certainly compared with other jurisdictions.
In the discussion it emerged that according to the accompanying Regulatory Impact Statement (“RIS”) Inland Revenue undertook targeted consultation with eight key stakeholders in September 2024. This consultation included “stakeholders from the private sector, public interest groups, as well as academics.” This is pretty standard as part of the Generic Tax Policy Process. However, John Cuthbertson revealed CAANZ was NOT part of that consultation, which is very surprising. I’m now quite intrigued to know who exactly was consulted in that group. (Interestingly, according to the RIS Inland Revenue’s preference was for retention of section 17GB but restrict the use of information collected to the development of policy.)
Privacy Commissioner disapproves of proposed ministerial-level information sharing agreements
One of the counterpoints to section 17GB was the potential invasion of privacy, which is fair enough. It’s therefore ironic to see the Bill’s proposal to enable the Commissioner of Inland Revenue to disclose information to another government agency pursuant to a ministerial-level agreement. These would by-pass the existing Approved Information Sharing Agreements.
The new ministerial-level agreements enable the Minister of Revenue and the Minister in charge of the other agency the power to agree to the disclosure of information to determine entitlement or eligibility for government assistance, for the detection, investigation, prosecution or punishment, or suspected or actual crimes punishable by terms of imprisonment or two years or more, or to remove the financial benefit of crime.
On the face of it this seems reasonable, but according to the accompanying RIS the Privacy Commissioner raised the following concerns:
“The Privacy Commissioner has concerns as it relates to the proposed changes to enable and earn revenue to disclose tax information to other government agencies. He believes the disapplication of principles 10 and 11 of the Privacy Act in the proposal is unjustified. The privacy commissioner is. Is of the view that there are existing mechanisms to facilitate the sharing of the types of information Inland Revenue are proposing, including Approved Information Sharing Agreements under the Privacy Act 2020 and the board information sharing provisions available under section 18F of the Tax Administration Act 1994.”
The measure will probably go through as proposed but it will be interesting to see if any amendments are made following submissions on the Bill (which are now open until 23rd October).
Do we really need a Capital Gains Tax?
At the NZLS Tax Conference there was a very entertaining session on the issue of a capital gains tax (“CGT”) presented by Joanne Hodge and Geof Nightingale. Joanne and Geof were both members of the last Tax Working Group the big controversy of which was its recommendation for “a broad extension of the taxation of capital gains“. However, Joanne was of part a minority group alongside Robin Oliver and Kirk Hope of Business New Zealand, who did not support the recommendation.
Joanne and Geof’s opposing positions made for a very lively session. Geof remains of the view that it is needed not only as a revenue raiser but for addressing inequality and the question of economic efficiency. Joanne is more of a sceptic about CGT. She’s concerned in part mainly about the economic inefficiencies that can result from a CGT and also considers that the costs of doing so relative to the revenue raised means that perhaps it’s not really worthwhile.
This was a key factor for Joanne together with Robin Oliver and Kirk Hope to that was what drove her, and the other two minority opinions to dissent from the proposal for a comprehensive CGT. But always keep in mind that the entire Tax Working Group agreed “that there should be an extension of the taxation of capital gains from residential rental investment properties.”
Addressing the fiscal shortfall
In making the argument for a CGT Geof picked up matters we’ve raised in previous podcasts (and in Inland Revenue’s draft Long-Term Insight Briefing) about the coming fiscal shortfall which needs to be addressed. He described the outlook as “dire” and that we cannot outgrow these fiscal projections.
Joanne took a different approach. In her view the correct question is really “how comprehensively should we tax capital gains?” Although she’s opposed to a comprehensive capital gains tax because of the complexity involved, she’s NOT opposed to broadening the net. For example, she raised a question about private equity venture capital and how many people involved in capital raises are treating shares on non-taxable capital account when in fact they should be taxed on sale because they acquired the shares with a purpose or intent of sale. In Joanne’s view better enforcement will deal with a lot of issues and raise tax revenue.
She made a very interesting point that all blocks of land should have their own IRD number which would help with better enforcement. I think it’s a really good idea.
A matter of faith?
Joanne does raise valid concerns about the complexities that are involved in a CGT. Amusingly she and Geof also referred to an informal comment from Professor Len Burman an American CGT specialist to the 2010 Tax Working Group (of which Geof was also a member). Professor Burman suggested that you can do all the analysis on capital gains tax that you want, but in the end, whether you support it or not becomes analogous to religion, a matter of faith.
It’s an interesting proposition; I worked for 10 years in a system with CGT prior to arriving in New Zealand so the arguments around whether or not it should exist simply never arose in my professional career until I came here. So perhaps I am a believer in that regard, but it’s worth noting this year is 60 years since the UK introduced capital gains tax, 40 years since Australia introduced its CGT, Canada has had one since 1972 and South Africa since 2001. As is well known, the absence of a CGT makes New Zealand an outlier. The debate over a CGT will continue to rage, and no doubt we will bring you more commentary on future developments.
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.
calls for capital gains tax to help solve housing affordability.
Earlier this year, the popular Auckland Cafe chain Little and Friday closed its final store in Ponsonby. That was a great personal disappointment for me as its food was wonderful, although my waistline is probably all the better for its closure.
It has now emerged that at the time of its closure, the owners owed $640,000 in tax and the company has now been put into liquidation owing creditors over $1.4 million.
This obviously puts a different complexion on the closure, and it also prompted an interesting debate amongst my tax agent colleagues, with quite a few pointing out the inconsistencies that they see in Inland Revenue’s debt management. One took particular exception to the news, commenting how he had been grilled over a relatively small adjustment, less than three figures, and yet somehow Little and Friday had been allowed to build up unpaid GST and PAYE totalling $640,000.
Focusing on the wrong target?
Another tax agent noted that he had received a call regarding a client being overdue in making their small business cashflow scheme repayments. The amount outstanding was $18,000, but as the tax agent pointed out, the client also owed several hundred thousand dollars in relation to unpaid GST and income tax. The agent was therefore rather puzzled as to why Inland Revenue seemed to prioritise the small business cashflow scheme arrears. Several other tax agents weighed in with similar points about such inconsistencies.
Now, debt management is a core role for Inland Revenue. That goes without saying. But it is also an issue where there are clearly strains emerging. We’ve talked previously about what’s been going on with the student loan scheme, where substantial amounts of debt are allowed to build up over enormously long periods of time.
My attention has been drawn to a case where the student loan borrower left more than 20 years ago and was eventually contacted by Inland Revenue demanding over $200,000 of accumulated interest and penalties. Like Little and Friday, and other cases noted above, the unanswered question is “How did Inland Revenue manage to let it get to that stage?”
Earlier intervention needed?
When looking at Inland Revenue’s management of its debt portfolio two concerns arise – its approach seems inconsistent and it doesn’t intervene soon enough.
Inland Revenue has enormous tools at its disposal. It can put companies into liquidation and that’s actually what happened with Little and Friday. But it doesn’t want to do that all the time. It will sometimes hesitate before doing anything, for perfectly reasonable circumstances. But there does come a point where it is probably better for all concerned that the Inland Revenue moves sooner and doesn’t allow the debt to build up.
Now Little and Friday is not an unusual circumstance. While preparing for this podcast I came across an Official Information Act request about debt dating from June this year, and the number being reported was frankly horrifying. According to this report, as of 31st of March 2025, the total amount of unpaid PAYE and GST, excluding penalties and interest, stands at $3.727 billion.
As can be seen $711.7 million of that $3.7 billion represents businesses or individuals going into liquidation. The rest is simply outstanding debt which Inland Revenue is hoping to obviously try and recover. But the amount of debt it is writing off is starting to increase, as is the amount of debt that it deems non-collectible. According to this OIA report the non-collectible amount as of 31st of March 2025 is expected to be $1.1 billion dollars.
Then there’s a very interesting industry breakdown of how that amount of debt has accumulated.
The sectors hardest hit in that are our construction which has $347.2 million of unpaid debt as of March 2025. accommodation and food services, i.e. cafes like Little and Friday owe $130.6 million, manufacturing $93.7 million and professional, scientific and technical services have also accelerated remarkably $131.7 million. Even rental hiring and real estate services, which you would regard as relatively strong industries, has unpaid GST and PAYE of $179.9 million as of 31st March this year.
Across the whole of the economy, these numbers are piling up and it presents a huge problem for Inland Revenue, and by extension for the Government as to how is it going to manage this issue.
Unfairly targeting student loan defaulters?
A very real threat for people owing student loans who are not meeting their obligations is being arrested at the border. But none owe $600,000 of tax. In theory, someone owing that amount of unpaid GST and PAYE could be freely entering and leaving the country without customs making a move against them.
On the other hand, someone owing $100,000 of student loan debt, which is sizeable, yes, could enter the country and be arrested. I wonder why such an inconsistent approach applies.
To be fair Inland Revenue is working through the overdue debt issue and taking enforcement action. This week it reported how an accountant, Luke Daniel Rivers, also known as Mai Qu was jailed for six years over a $1.7 million COVID-19 fraud. He made false claims over wage subsidies in the small business cash flow scheme.
Now quite correctly Inland Revenue and the Ministry of Social Development have pursued that. But at the same time, we have these other businesses falling over, owing very substantial sums of money, and it appears almost as if the defaulters are able to walk away without consequences, to the frustration of myself and other tax agents.
What about MBIE?
One other thing of note in this area are the potential breaches under the Companies Act 1993. In some cases, you’d have to say there there’s a strong argument that businesses racking up hundreds of thousands of dollars of tax debt are in breach of their Companies Act obligations, which could lead to action by the Ministry of Business, Innovation and Employment.
The economy is under strain and tax debt is rising. Sometimes really bad luck hits a business or person. Small businesses can get hit particularly hard if a key person falls ill. Tax debt may just be down to sheer bad luck, the wrong thing happening at the wrong time.
But overall, Inland Revenue looks to be struggling, for want of a better word, managing the portfolio. Even allowing for maybe getting better resources to manage this, there’s still the question of an inconsistent approach that I and other tax agents have noted. So, there’s a lot of going on in this space.
I expect the Commissioner of Inland Revenue is reporting very frequently to the Minister of Revenue on this issue and any new initiatives to address these concerns. The most important thing would be to get the economy going again and hopefully some of these businesses are able to trade their way out. But we’ll have to wait and see.
Capital gains tax to deal with housing affordability?
Now, in recent weeks, there’s been quite a lot of chatter around Inland Revenue’s long-term insights briefing, which has talked about the need to perhaps expand the tax base. Last week we discussed how CPA Australia called for a capital gains tax.
This week at the Government’s Building Nations 2025 Infrastructure Summit on Wednesday 6 August, Group Chief Economist and Head of Research for ANZ Richard Yetsenga discussed the question of what he described as runaway house prices in Auckland, Australia and New Zealand. He said that we should look seriously at introducing a capital gains tax as a means of addressing house price affordability. In his view, if this issue is not resolved, “I think it’s going to eat us alive. It’s our biggest intergenerational issue.”
Mr Yetsenga was speaking after addresses from the Finance Minister, Nicola Willis, and Transport Minister and Housing Minister Chris Bishop. In response he suggested looking at both the supply and demand issues of the tax system, which in his view, was one of most effective ways available to influence economic activity.
That’s something I would agree with. What we don’t tax is as important as what we do tax. I think the fact that we don’t have a capital gains tax has resulted in major distortions for our economy. This was something which the recent International Monetary Fund report on our poor productivity mentioned. It’s very interesting to see all the constant chatter on the topic of capital gains taxation.
How many people return overseas income?
Finally, Inland Revenue proactively publishes any Official Information Act (OIA) requests that it receives. These often include some very interesting data such as the breakdown of debt I discussed earlier.
The question was rather oddly phrased because the requester asked “Do you know if/believe there high compliance with NZ tax rules for NZers working overseas?” Inland Revenue’s response was basically this is actually not a request for information, it’s more for an opinion so we aren’t answering that.
The request then asked for specific data about taxpayers reporting overseas income, and also the split between taxpayers who reported it and those taxpayers with tax agents who report it. Inland Revenue provided the following breakdown for the 2018 to 2024 tax years. (The final due date for filing tax returns for the 2024 tax year is 31st March 2025 so 2024 is the latest year for which complete details are available).
What caught my eye about this data is that the numbers have fallen since the 2019 year. In 2018, 151,703 taxpayers reported overseas income, of which 114,760 were linked to a tax agent. After an increase in the 2019 year the numbers reporting income decline each year until the 2024 year when it rises from 112,069 to 125,335.
I find it quite surprising, given the international mobility of our labour, that fewer people appear to be reporting overseas income when we have a lot more migrants arriving.
I suspect it’s possibly piqued Inland Revenue’s interest, because I’ve had some clients requesting assistance after they have been contacted by Inland Revenue which has received information under the Common Reporting Standards of Automatic Exchange of Information. It will be interesting to see how that number of taxpayers reporting overseas income tracks.
By the way, this OIA also references the Common Reporting Standard, confirming in response to a question it “receives financial account information automatically from the Australian Tax Office under the Common Reporting Standard. This information is matched to taxpayer accounts and risk assessments.”
This ought to be well known and, as noted above, maybe we might see an increase in the numbers reporting overseas income.
Happy Twenty-first!
Now finally this week, according to LinkedIn, Baucher Consulting is 21 years old today. So Happy Birthday to me. It’s been and continues to be an amazing journey and who knows what the future will bring. In the meantime, thank you all for all the messages of support.
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.
New Zealand has an extraordinarily high number of trusts relative to its population. We don’t actually have official numbers on the number of trusts in the country but estimates range as high as 600,000. Inland Revenue’s recent trust disclosures data notes that as of 31st March 2023 it had 412,000 trusts with IRD numbers. Not all of them have to file tax returns but to put it in context that number of 412,000 represents one trust for every 12 people in the country. By comparison, based on UK tax return filing statistics filed for the same period, there is one trust in the UK for every 434 people.
(Prepared by author using latest available official tax return statistics)
So, there are a significant number of trusts in New Zealand. And that means unintended consequences are lurking for the settlors, trustees and beneficiaries of these trusts. One I would consider is a well-known issue is that for Australian tax purposes, a trust is deemed resident if any trustee is tax resident in Australia. A common pre-migration planning tactic for people moving from here to Australia is to ensure that they resign any trusteeships.
Watch out for Australian resident executors
By the way, this trust residency rule also applies to executors. I’ve frequently advised clients that they need to update their wills and if they have an Australian executor, they need to remove that person or consider alternatives.
Got an Australian resident trustee? Get ready to pay Australian capital gains tax even if it is your main home.
The implications of having an Australian resident trustee are frankly messy, to put it mildly. For Australian tax purposes a trust is deemed tax resident in Australia if ANY trustee is tax resident in Australia. This potentially makes the trust subject to Australian capital gains tax with the Australian resident trustee responsible for collecting the tax on any capital gain derived by the trust.
As an Australian resident trust any capital gain will be calculated under Australian tax law. This applies regardless of the fact that we don’t have a general capital gains tax. The issue that’s emerged in several cases that I’m dealing with relates to property has been sold by a trust and the disposal was not taxable for New Zealand because either the bright-line test didn’t apply or in some cases the property was actually the main home of one of the trust beneficiaries.
Australia has an exemption from capital gains tax for the main home, but and this is a huge but, this exemption does NOT apply to main homes held in trust.
The danger scenario
The danger scenario is a typical New Zealand complying trust with an Australian resident trustee. The trust sells a New Zealand situated property and then looks to distribute the gain. Even if that gain is distributed only to New Zealand resident beneficiaries, under Australian legislation, the Australian trustee is liable for the tax on that gain. Conceptually, it seems inconceivable that the sale of a New Zealand property distributed to New Zealand residents is taxable in Australia but it’s the interpretation the Australian Tax Office has adopted because at least one trustee is an Australian tax resident.
Well, what about the double tax agreement?
What can be done about this? Well in some cases, if there are only Australian resident trustees, then to use a technical term you are frankly stuffed. But more often than not, the majority of trustees are New Zealand tax residents. In this case you might be able to apply the clauses within the double tax agreement between Australia and New Zealand (the DTA) dealing with residency.
The problem is that the current DTA following the modifications made in 2017 to adopt the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (the MLI), doesn’t have an easy process for resolving this matter. Generally, you can apply the relevant double tax agreement to determine the place of effective management for non-individuals.
For example, a trust might have five trustees with only one in Australia and the remaining four trustees plus the settlor and this is the group which carries out the management of the trust. Accordingly, the place of effective management is in New Zealand. Australia therefore gets no taxing rights in relation to any disposals of non-Australian situated property. (Keep in mind that even if this scenario plays out, if a distribution is made to an Australian resident beneficiary who does not qualify for the Australian temporary resident exemption, the distribution is still taxable in Australia).
However, at present under the modified DTA, trustees wanting certainly will actually have to make an application to Inland Revenue through the mutual agreement process to ask them to consult with the Australian Tax Office and resolve the matter of residency.
A helpful United Kingdom court case?
Coincidentally, Howarth v HMRC [2025] EWCA Civ 822 an interesting UK Court of Appeal decision on the issue of place of effective management for a trust has just been released. The case involved a widely marketed tax avoidance scheme known as a “round the world” scheme, which was designed to avoid UK capital gains tax (CGT).
Under the scheme the trust’s Jersey based trustees held shares in a UK incorporated company. The Jersey trustees resigned in favour of a Mauritius resident trustee company who then sold the shares. Following the sale the Mauritian trustees resigned in favour of UK resident trustees. At the time the shares were sold, the trust would be deemed tax resident in Mauritius, a jurisdiction which, very conveniently, does not tax capital gains.
When the Court of Appeal considered the issue of the trust’s place of effective management it concluded the trustees in Mauritius were following a predetermined single plan set out by the UK settlors of the trust. The Mauritian trustees were “playing their parts in a script which had been written by others”. The Court of Appeal therefore upheld two lower court decisions (the equivalents of the Taxation Review Authority) that the place of effective management of the corporate trustee was in the UK.
It’s quite useful to see courts talking about the residency of trusts because double tax agreements don’t specifically refer to trusts but “non-individuals”. As a UK Court of Appeal decision, it represents a good precedent. Incidentally it’s expected if the case goes up to the UK Supreme Court, it will probably still rule the same way.
I think Haworth v HMRC could be useful for any trustees who find themselves dealing with the complications of an Australian resident trustee and they wish to ensure any Australian tax is limited only to gains actually distributed to an Australian resident.
CPA Australia calls for a capital gains tax
Still in relation to capital gains tax, as previously discussed Inland Revenue has a long-term insights briefing currently out for consultation. (Submissions are open until 1st September). The briefing discusses how we need to look at ways we could expand the base tax base to meet coming financial demands mostly around superannuation, health and in my view, climate change.
This week CPA Australia, the accountancy body which represents over 3000 accountants here in New Zealand, has called for a rethink of the tax system, including consideration of an introduction of capital gains tax (CGT). The organisation agreed with Inland Revenue; there are many pressures on the New Zealand tax system particularly around ageing demographics. CPA Australia felt the absence of a capital gains tax puts pressure on other taxes. I agree with that analysis, and I also think that’s tied to the question of productivity and diversion of our scarce capital into lower return assets, mainly residential property investment.
It’s interesting to see the CPA Australia come out in favour of a CGT. It suggests that a CGT should only apply to assets acquired after a certain date. In other words, assets held prior to the introduction of that date would be exempt. This is what Australia did when it introduced CGT, coming up 40 years ago next month.
Follow Australia? “Yeah, nah.”
Interestingly, when the last Tax Working Group considered CGT, it got advice from Australia which recommended not to follow the Australian approach and instead go for what’s sometimes known as the valuation day approach. This would base CGT on the valuation of assets on the date of introduction. CPA Australia rightly point out there are compliance problems with that approach but like so much of the stuff we encounter in the tax world, other countries have met and dealt with these issues, so they are not unique or insurmountable.
More on the abatement web
Last week I discussed a substack from Ganesh Ahirao, former head of the Productivity Commission analysing what I called The Dirty Secret of the New Zealand tax system – that very high effective marginal tax rates apply, sometimes over 70%, to people on very modest incomes.
Ganesh has written a follow up this week providing further examples illustrating how people trapped on low-income or benefits, who are trying to work their way out of the system, as they are encouraged to do so, are hit very quickly by very high marginal tax rates.
For example, Manaia is single with no children, no student loan, paying immediate rent of $415 a week for a one-bedroom flat. Manaia is eligible for Jobseeker Support alongside the Winter Energy Payment and Accommodation supplement for a total of $592 per week before tax. Six hours employment at the living wage will raise her weekly pre-tax income to $700 but above that threshold, she starts losing her Jobseeker Support at a rate of $0.70 on the dollar. Her effective marginal tax rate jumps above 80% plus.
As Ganesh details, many low-income earners seeking support even one as widespread as Working for Families face similar situations.
These graphs illustrate Ganesh’s argument which I fully endorse, is we have allowed a huge problem to develop over the last 30-40 years through constant tinkering with the benefits system and swapping universality for a more “targeted” approach. The result is a horrendously complex position which really needs cut through and reform.
I support that and make no apologies for bringing the story up. It is something we should be discussing more frequently and asking our politicians to fix. We can’t be saying to people we need you to work if you’re a beneficiary and then promptly hitting them with 80% marginal tax rates. That is unrealistic and unfair.
The meaning of ‘payment’ for GST purposes
And finally, this week, Inland Revenue has released a valuable draft interpretation statement for consultation on the meaning of payment for GST purposes. When a payment is made is crucial for determining the GST time of supply, the tax period for which you may return output tax. It’s also relevant when an input tax deduction can be claimed and particularly in relation to secondhand goods input tax deductions which are only available when a payment is made.
This draft interpretation statement (only 22 pages) will replace a couple of previous Inland Revenue guidance items, which are actually over 30 years old. The principles involved haven’t changed, but it’s still useful to see the advice consolidated in an updated interpretation statement.
The draft considers typical examples of what constitutes payment. Obviously, cash or bank transfers are payments, but what about if there is an offset or some vendor finance. For example, payment could be made by setting off against an existing debt owed by the supplier to the recipient. Accounting entries can count, but you have to have the evidence to support them, and obviously payment of a deposit represents a payment (and can trigger some GST time of supply issues in relation to the sale and purchase of a property), Overall a very useful guidance.
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.
Every industry has a dirty secret which is known to its practitioners but is not generally known by a wider audience. In my view the New Zealand tax system’s dirty secret is how high effective marginal tax rates most impact our lowest earners.
The effective marginal tax rate (EMTR) is the highest rate of tax that is applied to the very last dollar that you earn. This also takes into consideration abatements or clawbacks which apply. Now for most persons, the natural assumption would be if the highest income tax rate is 39%, then the highest EMTR would be 39%. That’s a fairly logical, quite understandable and mostly correct approach.
How your EMTR can be above the maximum income tax rate
But, “mostly” is doing a lot of lifting because in certain instances a person’s EMTR can be above the highest tax rate. This is usually where a tax relief is withdrawn, or abatements apply. One example of where tax reliefs will be withdrawn is the Independent Earner Tax Credit, which is available to taxpayers who are not receiving New Zealand superannuation or Working for Families and have annual income between $24,000 and $70,000.
However, between $66,000 and the upper $70,000 threshold, it starts to get clawed back at a rate of 13%. This means that although the personal income tax rate for income between $66,000 and $70,000 is 30%, the effect of the clawback means a person’s EMTR within that income range is actually 43%.
The most common example that impacts most people are the interlocking layers of abatements that apply when someone is claiming a tax credit or benefit. The most notable example, which we’ve discussed quite frequently, is Working for Families. These tax credits are abated at a rate of 27.5 cents on the dollar, where a family’s income exceeds $42,700. (Respectively 28 cents and $44,900 from 1st April 2026).
Abatements also apply in relation to Accommodation Supplement and Jobseeker and the combination of all these results in people on modest incomes having extremely high EMTRs.
Working 40 hours a week for an additional $6.07 per hour
Ganesh Ahirao (Ganesh Nana), the last head of the recently disestablished Productivity Commission, has put together an illustration of how this Gordian Knot of abatements and benefits affects the family of Alex and Taylor and their two children.
The relevant facts are that Taylor is employed full-time at $25 per hour. So the family income is $1000 gross per week which, after deductions for income tax and ACC, is $829 per week net.
The family rent a two-bedroom house in Island Bay, paying the median rent for the suburb of $625 per week. This means that, after rent, the family has $204.30 per week to meet all other non-rent living costs and expenses. They’re therefore claiming additional assistance. Alex can claim Jobseeker Support there’s also Working for Families credits and Accommodation Supplement available.
However, as Ganesh illustrates, if Alex and Taylor do make a claim, they can find themselves trapped in nightmarish web of overlapping, interlocking benefits where the level of abatements can be dependent on what other assistance they’re receiving. Complicating matters is the requirement for anyone like Alex claiming Jobseeker Support to accept employment.
How to lose 71.2% in tax and abatements on the minimum wage
If Alex takes five hours at the minimum wage of $23.50 per hour (i.e. $117.50 per week) this won’t affect his Jobseeker Support because he’s allowed to earn up to $160 per week before abatement. His earnings will be subject to tax and ACC but crucially they also have an impact on the Working for Families and Accommodation Supplement because the family income is above the abatement thresholds.
The abatements and tax on $117.50 total $83.62 leaving net cash in hand of $33.88, or an EMTR of 71.2% – more than double the official income tax rate of 30% (31.67% once 1.67% ACC earner levy is added).
Remember this 71.2% EMTR is for a family earning a little bit under $60,000 a year, $1200 a week. As Ganesh’s analysis illustrates their EMTR can get even higher.
A well-known problem, at least amongst the experts
Earlier this year I discussed a paper prepared by Treasury which examined this issue of how the tax and transfer system affects financial incentives to work. In the paper Treasury noted that most New Zealanders have EMTRs below 50% with only 6% experiencing EMTRs over 50%.
The Treasury paper noted families with children are more likely to face higher EMTRs. Single parent families are particularly hard hit, with 30% of single parent families having EMTRs greater than 50%, and in some cases higher than 100%.
The lesson from the Treasury paper, and Ganesha’s substack, is that over time we have built a complicated, interlocking and confused system of means tested benefits.
We also have a not unreasonable expectation that people receiving benefits should attempt to work. However, the EMTRs of 70% or even more resulting from the abatements applied by means testing may make the actual return for any additional hours minimal.
In such situations, and faced with such disincentives, why would people work extra hours? What Ganesh’s substack hammers home is the need to be step back and have a real think about what we are trying to do with our work and benefits system and the interaction between tax and benefits.
Inconsistent approach
This problem has also been recently highlighted by the changes to the FamilyBoost initiative where the Government is reducing the abatement rates and increasing the abatement thresholds with effect from 1st October because the initiative – a key election promise – wasn’t reaching as many people as expected.
FamilyBoost is now available for families earning up to $229,100, well above the low threshold impacting families like Alex and Taylor. Understandably this has led to questions as to whether such families should be receiving assistance. Which is perhaps a bit rough, because raising children is not cheap.
A long-standing issue ignored for too long
In my view the Government is sending wildly opposite messages here. In many cases, the abatement thresholds have not been increased with inflation for some time. Therefore, with the rise in cost of living and rent in particular, people on lower incomes are struggling to keep up.
This is leading to more applications for supplementary assistance, which then feeds this spiral of higher EMTRs applying. It’s time for someone to grasp the nettle and say, “Well, this is really not achieving very much. Let’s go away and rethink it.”
Strange bedfellows?
Now, in the strange story basket this week is one where the Green Party and the Taxpayers Union have found common ground.
This curious tale is a byproduct of the local government election in Wellington. Two Green Party candidates running there are proposing a change to the taxation rating system. Instead of taxing properties on their total value, including improvements, the Green party candidates want to base rates solely on the value of the underlying land.
Jordan Williams, the executive director of the Taxpayers Union, came out and endorsed this approach on the basis that the current system effectively penalises developments by taxing improvements.
Meanwhile the Green Party candidates are looking to target what they see as land banking, where people are just simply sitting on land, not paying rates. The move is intended to encourage the land to be used for productive purposes, whether it’s more housing or alternative commercial developments.
It’s interesting to see very opposite political bedfellows come together on this point. It’s probably a once in a Blue (or Green) Moon but certainly it’s an example where a principled tax approach can result in a common approach from what appear at first sight to be some unlikely bedfellows.
Is that a business you’re carrying on? New Inland Revenue guidance
Inland Revenue has released a draft interpretation statement for consultation on the important issue of when and whether a taxpayer is carrying on a “business” for income tax purposes.
As the draft interpretation statement notes:
“It is important to understand if you are carrying on a business, and when that business is being carried on, because carrying on a business is a requirement of many provisions in the Income Tax Act 2007. In particular, an amount that a person derives from a business is included in a person’s income for tax purposes and the person is allowed a deduction for expenditure incurred in carrying on that business.”
This draft statement is part of a project whereby Inland Revenue is modernising and updating its previous guidance, which in this particular case goes back to 1971. Unless otherwise stated these updates are not changing any previous interpretation.
The leading decision in this area is Grieve v CIR (1984) 6 NZTC 61,682 (CA). In Grieve the court ruled that deciding whether a taxpayer is in business involves a two-fold inquiry as to the nature of the activities carried on and the intention of the taxpayer in engaging in those activities.
The draft statement (which runs to 46 pages including references) discusses these relevant factors in depth but it also has a useful summary.
Overall, this is a useful guide to a commonly asked question.
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.
