Lessons from the largest known GST fraudster – could it happen again?
Corporate tax cuts – who benefits and what does the public think?
The tax year-end of 31st of March is fast approaching and at this time of year tax agents are busy with the last year’s tax returns and also giving a heads up to clients about what actions they need to take ahead of 31st March. It’s always an incredibly busy period and it’s often easy to overlook some important matters amidst the rush and the mayhem. So, here’s a quick reminder of key issues that that you should be considering as the tax year ends.
GST and Airbnb
First up, a GST election is running out in respect of being able to take assets out of the GST net. We discussed this a few weeks back. To quickly recap, this could particularly affect Airbnb operators that may have bought a residential property, rented it out and then realised that Airbnb produces a better return. They’ve therefore signed up to Airbnb or other apps and then registered for GST either voluntarily or because they’ve exceeded the $60,000 registration threshold.
Subsequently, the taxpayer may have claimed an input tax credit on the property but now realise that they could be liable for a substantial GST bill on any subsequent sale of the property. That obviously is a big shock.
To address this issue, a transitional rule was introduced under section 91 of the Goods and Services Tax Act with effect from 1st April 2023. The rule enables a person to elect to take an asset out of the GST if the following four criteria are met:
the asset was acquired before 1st of April 2023; and
it was not acquired for the principal purpose of making taxable supplies; and
it was not used for the principal purpose of making taxable supplies; and
a GST input tax credit was previously claimed, or the asset was acquired as part of a zero-rated supply.
If all those criteria apply, then the person can elect to take the asset out of the GST net and pay back the GST that was claimed on the original input tax. In other words, they don’t pay GST on the increase in value. A good example here would be a bach or family holiday home which was subsequently rented out for short stay accommodation.
The key thing is this election expires as of 1st April 2025, by which time you must have notified Inland Revenue of your election. You don’t necessarily have to pay the GST; you can do so as part of your GST return to 31st March, but you must have notified Inland Revenue in a satisfactory manner. I would recommend using the MyIR message service to do so.
Other year-end matters
There are a number of elections relating to whether or not a taxpayer wants to adopt or leave a tax regime. A classic example would be companies entering or leaving the look-through company regime. Another, lesser known one would be entry or exit into the little known, and apparently little used, Consolidation regime.
Another matter that pops up regularly around year-end is checking your bad debts ledger. Bad debts are only deductible for income tax purposes if they are fully written off by 31st March so make sure this happens. Then there is the year-end fringe benefit tax returns where taxpayers should check to see whether they are making full use of any available exemptions.
A very important one for companies is to ensure their imputation credit account, either is in credit or has a nil balance. If there’s a debit (negative) balance on 31st March, that will result in a 10% penalty. It may be possible in some cases to make use of tax pooling to rectify some of these issues.
Finally, if you’re registered with a tax agent, your tax return for the 2024 income year must be filed by 31st March otherwise late filing penalties may apply. Possibly more critically, the so-called “time-bar” period during which Inland Revenue may review and amend already filed tax returns is extended by another year.
Lessons from the country’s biggest known GST fraud
Moving on, an interesting story has popped up in relation to what was then the largest known GST fraud. Gisborne farmer John Bracken was jailed in May 2021 after he was found guilty of 39 charges of GST fraud. He had run a scam through his company, creating false invoices totalling more than $133 million between August 2014 and July 2018 which resulted in receiving GST refunds totalling $17.4 million to which he wasn’t entitled. He was jailed and is currently out on parole.
At the time he was sentenced Inland Revenue and the police issued restraining orders and are trying to make an application for an asset forfeiture. In other words, assets subject to the forfeiture order were acquired through fraud and should be forfeited and handed to the Crown.
Now naturally Mr. Bracken and his family, including his wife and his parents and his son, are all fighting back on this because they stand potentially to lose assets that may be subject to the restraining order and subsequent forfeiture. The interesting part of this is the sheer scale of what went on and how it went undetected for four years before an employee got suspicious, notified the Serious Fraud Office, who then tipped off Inland Revenue.
At the time the frauds were committed, Inland Revenue was at the start of its Business Transformation project, upgrading all its systems. Until it got tipped off It had no idea of the extent of the fraud. Mr. Bracken appeared to have covered his tracks reasonably well, although once uncovered it was a fairly simple GST fraud. He just submitted fraudulent GST invoices, but he was careful to get them from actual companies with whom he had established some form of trading relationship.
Obviously the concern is now twofold. The Crown will be wanting to recover as many assets as possible to the value of the $17 million that it was defrauded, but also, can this happen again?
I’d like to think “No”. Certainly, Inland Revenue feels that its new systems have enhanced its capabilities greatly and that would appear anecdotally to be the case. There was a GST fraud scheme spread by TikTok influencers which caught the Australian Tax Office completely off guard and was worth tens of millions of dollars. Inland Revenue feels that that sort of fraud could not happen here. Mr Bracken’s release on parole and the ongoing forfeiture case is a reminder that Inland Revenue has to be vigilant all the time.
But sometimes it comes down to a conscientious person, an employee usually, tipping off the authorities. But it shouldn’t always come down to that. Inland Revenue and other authorities should be able to pick up signs of these frauds. As I said, I have confidence they do, but I would also hope that confidence is not tested too much.
Corporate tax cuts – a possibility or just flying a kite?
In recent weeks there’s been some chatter or hints from the Government and Finance Minister Nicola Willis about a potential corporate tax cut. She made the not unreasonable point that our corporate tax rate is high by world standards. This prompted comments from the former Deputy Commissioner of Inland Revenue Robin Oliver that tinkering around the edges by reducing it from 28% to 25% might not achieve much. If the Government wanted to attract investment, they’d have to go big, maybe nine or ten percentage points cut. Robin was sceptical the Government could afford to do so because of the loss of revenue. And I agreed with that assessment.
I do wonder whether this idea might be something of a bit of a red herring. Some comments I’ve heard seemed to suggest that maybe the Government was just flying a kite to see the reaction.
Anyway, this week a poll run by Stuff which suggested that very few would support a corporate tax cut, or rather that the population was pretty lukewarm about the idea. The poll carried out by Horizon Research, found only 9% of adults supported lowering the corporate tax rate, while 25% actually wanted it increased. There were a few other interesting results:
Who would benefit from a corporate tax cut?
Craig Renney (the chief economist for the Council of Trade Unions) and researcher Edward Miller also looked at who would benefit from a drop in the New Zealand company tax rate. They concluded the main beneficiaries of a corporate tax cut would probably be overseas shareholders. In terms of attracting greater foreign direct investment, they saw little evidence that corporate tax cuts would be likely to achieve that.
As they noted,
“…company taxation is only one aspect of a decision by a company or fund to invest in New Zealand. In addition to the company tax rate, there is the R&D tax incentive, the lack of a capital gains tax, and the lack of substantial payroll taxes. These taxes affect the actual tax paid by corporates in comparison with other countries when considering investing in New Zealand.”
Renney and Miller’s modelling suggested that a tax cut would not result in further investment but would just simply increase the funds flowing offshore. In particular they saw the Big Four Australian banks as being prime beneficiaries. The pair estimated that a cut from 28% to 20% would have increased the annual income to offshore shore shareholders by up to $1.3 billion.
There’s always a lot of debate around the benefit of corporate tax cuts, whether they do drive investment, or they simply put money into the back pockets of the shareholders. That debate has gone on for a long time and continues again. But it’s interesting to marry that along with the public’s general lack of enthusiasm for such a cut.
Yeah, but what about the IMF?
I think it was also noticeable that the International Monetary Fund in its recent Concluding Statement for its 2025 Article IV Mission suggested “judicious adjustments to the corporate income tax regime.” So maybe it too isn’t entirely sold on corporate tax cuts as a key driver for investment.
No doubt more will be revealed in May’s Budget. And until that time speculation will mount, but we will find out on the day and as always, we will bring you the news when it emerges.
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 year, the International Monetary Fund (IMF) undertake an official staff visit or mission to New Zealand as part of regular consultations under Article IV of the IMF Articles of Association. Each IMF mission speak with the Minister of Finance, Treasury officials and other persons – economists, academics and the like about the state of New Zealand’s economy and related issues. At the end of the visit the Mission then issues a short concluding statement of its preliminary findings.
The IMF will then prepare a lengthier report setting out its findings in more detail which we can expect to see in a couple of months time.
“A window of opportunity”
After noting it expects real GDP growth to rise to 1.4% for this year and then to 2.7% in 2026 the Mission noted:
“The macroeconomic environment provides a window of opportunity for New Zealand to consider broad based reforms needed to address medium- and long-term challenges, including to secure fiscal sustainability, boost productivity, address persistent infrastructure and housing supply gaps, and initiate early dialogue on population aging.”
“A comprehensive capital gains tax”
My understanding of the IMF submission is that each Mission has a different focus. This year, I understand the Mission was looking at the question of funding the future cost of New Zealand Superannuation and therefore the tax policies required. This led the Mission to call for some tax policy reforms
“Tax policy can support a more growth-friendly fiscal consolidation, and reforms aimed at improving the tax mix can help increase the efficiency of the income tax system while reducing the cost of capital to incentivize investment and foster productivity growth. Options include a comprehensive capital gains tax, a land value tax, and judicious adjustments to the corporate income tax regime.”
I expect we’ll hear a lot more about this when we see the final report.
“Initiate early dialogue”
It’s not the first time the IMF have suggested a comprehensive capital gains tax, and the Organisation for Economic Cooperation and Development has also frequently made a similar suggestion. Generally speaking, the government of the day just responds, “Yeah, but, nah”. However, the issues prompting the suggestion still don’t go away. In this particular case, the IMF suggests we need to start transitioning into a new system to cope with the rising cost of New Zealand superannuation.
“It is essential to initiate early dialogue among all stakeholders regarding comprehensive reform options that can help mitigate these challenges and other long term spending pressures from healthcare and aged care care needs with a fair burden sharing across generations. This can be further supported by KiwiSaver reforms aimed at achieving greater private savings retirement savings.”
The IMF is echoing comments myself and others have repeatedly made. We have rising costs in relation to aged healthcare and superannuation and we need to start thinking seriously about how we’re going to address those. This is a multi-generational impact. One of the unusual points about New Zealand Superannuation is it is a fully funded universal pay as you go system.
An intergenerational issue
In other words, it’s available to everyone, but it’s funded out of current taxation. I think there’s a widespread perception that some part of your tax pays for your future superannuation. It doesn’t. Tax paid by working people below the age of retirement is used to fund the current superannuation of those who have retired. The funding of superannuation is therefore a major intergenerational issue but one rarely discussed. Hence the IMF’s call to initiate early dialogue. I’ll have more on this when the IMF releases its final report.
In the meantime, whenever the IMF or OECD calls for tax reforms, the Minister of Finance of the day usually responds, sometimes in quite snippy terms. Sir Michael Cullen was wont to do so as did Nicola Willis last year. This year the Finance Minister hasn’t publicly responded to the IMF concluding statement, possibly because her attention was on this week’s Infrastructure Investment Summit in Auckland.
Foreign Investment Fund changes announced
As part of the summit, the Minister of Revenue Simon Watts has announced that there will be changes to the current Foreign Investment Fund, or FIF regime. The Government has very heavily signalled that it would do something in this space, so this is no surprise.
The proposed changes to the FIF rules include the addition of a new method to calculate a person’s taxable FIF income, the revenue account method, in other words taxing capital gains. According to the Minister;
“This will allow new migrants to be taxed on the realisation basis for their FIF interests that are not easily disposable and acquired before they came to New Zealand. For migrants who risk being double taxed due to their continuing citizenship tax obligations, this method can apply to all their FIF interests.”
This last point is of particular interest to United States citizens who face this double taxation issue, and which is turning people away. Furthermore, these changes will apply to migrants who became New Zealand tax residents on or after 1st April 2024.
More detail needed and further changes ahead?
This is a very good move but there’s a bit more detail still required. Does the reference to new residents arriving on or after 1st April 2024 mean those new residents are able to make use of this provision in the current tax year? One of the other key issues is if you do opt to be taxed on the revenue account method, what tax rate would apply? From discussions with Inland Revenue policy officials, they seem to be intending that it should be at the person’s marginal rate. Which for those on the 39% bracket would not be terribly welcome. So that’s a key design point.
The other thing of note is that Mr Watts added the Government will also be looking at how the rules impact New Zealand residents and will have more to say later in 2025. That’s interesting, because for me, the rules are quite a compliance burden in terms of calculations and have huge impact for everyone who has a KiwiSaver with overseas investments.
How to pay for New Zealand Superannuation
As noted above the IMF are looking very closely at the question of the fiscal cost of superannuation and aged healthcare which they suggest mean reforms to the tax system are needed to address those growing costs.
Coincidentally, Assistant Professor Susan St John of Auckland Business School’s Economic Policy Centre Pensions and Intergenerational Equity Hub released a working paper on New Zealand Superannuation as a basic income. This is an interesting proposal, which I know Susan has been working on for some time with the assistance of Treasury modelling.
The idea is that New Zealand Superannuation is changed into a universal basic income and treated as a grant. This allows an effective claw back mechanism to operate through the tax system. The proposal is that this claw back would generate additional revenue to help meet the cost of pensions and aged care.
The paper begins by setting out the background to the issue, the increasing demographic strains that we’re seeing. It notes that Treasury has been raising this issue for some time now, such as in its 2021 Long Term Fiscal Statement, He Tirohanga Mokopuna and speeches last year by Dominic Stephens of Treasury on the fiscal projections and costs.
Demography and migration
One of the interesting points the paper makes is although we face some financial strains ahead, because of our demographics the cost of New Zealand Superannuation will not be as high as what some nations are currently dealing with.
Incidentally, as part of their concluding statement, the IMF made a number of presentations illustrating certain areas they’re examining in more depth. One was the question of demographic pressures of superannuation, and it made the point that migration is not going to be the magic bullet some policymakers seem to think.
What about means testing?
After setting out the background Susan St John discusses the option of using means testing as a means of addressing costs. The paper looks at what happens in Australia and our own experience when New Zealand Superannuation was means tested for a while – right up until Winston Peters and New Zealand First became part of the first MMP Parliament in 1996. One of the conditions of that coalition agreement was the abolition of the New Zealand Superannuation Surcharge.
Australia tests income and assets but it’s highly complex and achieves a fiscal objective of managing the cost. On the other hand, Australia has a much more well developed long running compulsory private saving scheme, which makes what they call the Age Pension (the equivalent of New Zealand Superannuation) more of a backstop. The paper also notes that the private pension savings in Australia are more generously state subsidised than KiwiSaver.
The Australian means testing approach is very comprehensive and frankly a nightmare. The paper notes our surcharge which operated between 1985 and 1998 was highly unpopular, but it did deliver useful savings. In short, surcharges or means testing helps mitigate superannuation costs. But they are unpopular and like the Australian approach complicated to run. Furthermore, they encourage attempts to mitigate their effect.
Making New Zealand Superannuation a universal basic income
Instead, Susan proposes turning New Zealand Superannuation into a basic income, the New Zealand Superannuation Grant (the NZSG). She also suggests equalising the current different rates which currently apply depending on whether a person is in a relationship or living together, so it becomes a universal basic income for those who’ve reached the superannuation age.
As a basic income the NZSG would no longer be taxable. Instead, when a recipient earns additional income, it’s taxed under a progressive tax regime, so the tax system does the work of providing a claw back of the universal grant for high income people. The effect would be that above a certain point a person decides it’s simply not worth their while taking the NZSG.
For example with a flat tax of 40% on all other income, above $160,150 it would not be worthwhile taking the NZSG.
Another alternative would be a two-tiered rate of 17.5% for the first $15,000 of other income, and 43% on each dollar above. In this case the breakeven point becomes $151,885. A third scenario has a two-tiered rate, 20% for the first $20,000 earned and then 45% above that level. Under this scenario, the income cut out point drops to $135,000. Treasury has helped Susan with the modelling for this paper and its methodology is explained in the appendices to the paper.
15-20% savings possible?
Under Susan’s approach up to 5% of all eligible super annuitants will not apply for the NZSG because there’s no gain in it. She estimates savings could be between $2.8 billion and $3.8 billion or between 15% and 20%.
This is an interesting proposal which seems preferable to reintroducing the New Zealand Superannuation Surcharge or adopting the Australian means testing approach. I think it’s worth considering but the key thing is, as the IMF said, this is an issue we really need to start discussing now because these costs are starting to accelerate as baby boomers age.
It also seems fairer than raising the age of eligibility, which is unfair on Māori and Pasifika. There’s already a seven-year life expectancy gap between Māori and non-Māori so raising the age of eligibility for superannuation is politically difficult particularly as the proportion of the Māori population grows because of those changing demographics.
This is a worthwhile proposal which merits serious consideration as part of the ongoing debate.
This is an edited transcript of the podcast episode recorded on 14th March – it has been edited for clarity and length.
And on that note, that’s all for this week, I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day
Inland Revenue consults on not-for-profit sector and more.
It’s been an extremely busy week in tax – just as we were planning to go to air, Parliament’s Finance and Expenditure Select Committee (“the FEC”) released its report on the Taxation, Annual Rates for 2024-25 Emergency Response and Remedial Measures Bill initially introduced last August.
We covered the bill’s main initiatives when it was initially released, and now the FEC is reporting back on submissions it received, what’s been amended and why, together with Inland Revenue’s accompanying report on submissions. There’s also a supporting report from the independent adviser to the Select Committee, John Cantin, a former guest of this podcast. Overall, there are no major real changes to the legislation. There are minor amendments resulting from issues brought to the attention of the FEC which is how the submission and Select Committee process is meant to operate.
Tax relief for future emergency events
The Officials’ Report on submissions had some interesting submissions on the issue of procedures to manage tax relief for any future emergency events.
The measure was uniformly supported but several submissions proposed making ready to go after a trigger event some of the measures that were brought in and employed relatively successfully during the initial COVID response in 2020, such as carry back of losses, accelerated depreciation, or cashing out of losses. In most cases the submissions were noted or declined.
I thought it was interesting to see that the main submitters involved the Big Four accounting firms, Chartered Accountants of Australia and New Zealand, and the Corporate Taxpayers’ Group. I think these submissions were prompted by our experience during COVID in 2020, where a lot of policy had to be devised and implemented on the hoof, with frantic consultation going on between Inland Revenue and various parties.
I was involved in some of those consultations, and I think it’s not unreasonable to have these measures ready to go if needed. On the other hand, I can see why Inland Revenue and the Government might be a little reluctant to have the ambit of the bill expanded.
Transferring UK pensions to New Zealand
Moving on, one of the measures I was interested in was the proposal for what they call a scheme pays measure in relation to Qualifying Recognised Overseas Pension Schemes or QROPS. These are schemes that are able to receive transfers of pensions from the United Kingdom.
There’s been some debate around this, as under our rules those transfers are taxable, and it has been a long-standing issue that in many cases this triggered a tax bill which taxpayers could not pay as the funds were locked up in the transferred funds.
One suggestion that had been made was this scheme pays proposal, where transfers are made into a scheme. The scheme may make a payment on behalf of the transferring taxpayer and that will be done at a flat rate of 28%, a “transfer scheme withholding tax”. There’s been a bit of tinkering with the proposal mainly about reporting requirements. Otherwise, the regime looks all set to go ahead with effect from 1st April 2026.
It’s a measure I feel ambivalent about. I was part of a group which lobbied for this change so it’s good to see it finally in place. On the other hand, as I’ve said previously, I do think that we ought to be thinking harder about why we’re taxed. (I also think taxing people years ahead of when they could access the funds is technically questionable – what if they died before reaching the required age?)
Crypto-Asset Reporting Framework
The other thing of note is that this Bill also introduced the legislation for the Crypto-Asset Reporting Framework. No amendments have been made to that regime. So that will be coming into force with effect from 1st April 2026. From that date New Zealand-based reporting crypto-asset service providers would be required to collect information on the transactions of reportable users that operate through them and report it to Inland Revenue by 30 June 2027. Inland Revenue would exchange this information with other tax authorities (to the extent it related to reportable persons resident in that other jurisdiction) by 30 September 2027.
Taxation and the not-for-profit sector
Moving on Inland Revenue has now released for consultation an Officials Issues Paper Taxation and the not-for-profit sector. This consultation is something that has been telegraphed for some time, there’s what might be termed unease around the exemption for the charitable sector and the merits of some entities apparently making use of the exemption. For example, the involvement of Destiny Church in the recent events at the Te Atatu library prompted calls for its charitable status being withdrawn.
Quite surprisingly, given the scale of the topic, the Issues Paper is a reasonably short paper running to just 24 pages in all. It covers three main topics. Firstly, a review of the issues involved in the charity business income tax exemption including the rationale for providing such an exemption, and then what potential policy design issues would need to be considered if that exemption was to be removed.
The second topic is donor-controlled charities, which is probably where the most controversy is emerging. It considers the integrity issues that arise from the absence of specific rules for donor-controlled charities in New Zealand, and again looks at possible design issues, including how other countries treat such entities.
And finally, the paper considers a number of integrity and simplification issues to protect against tax avoidance.
The charity business income tax exemption
Apparently, there are over 29,000 charities registered under the Charities Act. Many raise funds through business activities ranging from small op-shops to significant commercial enterprises. There’s been long-standing grumbling about how charities which run a business and have an exemption have an unfair advantage. So, it’s interesting to read the background behind this exemption which has been in place since 1940.
Para 2.3 of the Paper sets out the scope of the review:
“Some tax-exempt business activities directly relate to charitable purposes, such as a charity school or charity hospital. Other tax-exempt business activities are unrelated to charitable purposes, such as a dairy farm or food and beverage manufacturer. It is the unrelated business activities that are the focus of this review.”
“…an international outlier”
According to the Paper “The current tax policy settings make New Zealand an international outlier”. According to a 2020 OECD study Taxation and Philanthropy most countries have either restricted the commercial activities that charitable entity can engage in, or they tax charity business income if the business income is unrelated to charitable purpose activities. As the Paper notes
“These countries have typically been concerned with a loss of tax revenue from businesses if a broader tax exemption was applied, unfair competition claims, a desire to separate risk from a charity’s assets, and a desire to encourage charities to direct profits to their specified charitable purpose.”
New Zealand’s exemption is based on the “destination of income approach.” This means that income earned by registered charities is exempt because it would ultimately be destined for a charitable purpose. But, and this is again one of the key concerns that’s emerged over time, this approach allows income to be accumulated tax free for many years within a charity’s registered business subsidiaries before the public receives any benefit.
What competitive advantage?
Paras 2.7 to 2.14 of the paper look at the question of the exemption providing a competitive advantage because they don’t pay tax. This is an allegation I’ve seen repeatedly raised. As the Paper notes not paying tax means
“One element of a firm’s normal cost structure, income tax, is not present in the case of charity run trading operation. It is argued that this “lower” cost could be used by a large-scale entity to undercut its competitors, to improve its market share, or to deter new entrants.”
The Paper does not accept this argument stating:
“Although the exemption does provide a tax advantage, it does not provide a competitive advantage. Any one type of cost can be looked at in isolation.”
The reasoning for this conclusion is:
[2.9] “Because the tax-exempt entity can generally earn tax free returns from all forms of investment, the “after tax” return it expects from a trading activity is correspondingly higher than that of its tax competitors. Therefore, an income tax exempt entity cannot rationally afford to lower its profit margins on a trading activity because alternative forms of investments would then become relatively more attractive.
[2.10] On this basis, the tax exempt entity will charge the same price as its competitors. The tax exemption merely translates to higher profits and hence higher potential distributions to the relevant charitable purpose. Consequently, funding the charitable activity from trading activities is no more distortion than sourcing it from passive investments such as interest on bank deposits or from direct fund raising.”
What about predatory pricing?
The Paper also discusses whether a charity has a greater ability to use predatory pricing to gain an advantage. Again, that’s dismissed because “the value of tax losses for taxable businesses mitigates this advantage. Taxable businesses can carry forward losses to offset future profits.” That said, if the taxable company goes bust then it has no use for those losses so maybe that is an actual advantage.
“Second order imperfections”
On the other hand, the Paper acknowledges that there are “various ‘second order’ imperfections in the income tax system that may need to be taken into account.” One is that charitable trading entities do not face compliance costs associated with meeting their tax obligations. This lowers their relative costs of doing business.
Another is the non-refundability of losses for taxable businesses and can result in a disadvantage for such businesses relative to tax exempt business resulting in a higher relative rate of return for non-tax paying entities when there has been a loss in one year.
A third is the costs associated with raising external capital such as negotiating with investors or banks can be significant. These costs often make retained earnings the most cost effective form of financing. Because charities retained earnings are higher, this may give them lower costs for raising capital. On the other hand, charities can’t raise equity capital because private investors cannot receive a return.
How much is ‘significant’?
Interestingly, the Paper describes the fiscal cost of not taxing charity business income unrelated to charitable purposes as “significant and is likely to increase.” But no numbers are given and I’m curious to know exactly what is the cost of this particular concession?
The Paper asks submitters to consider what are the most compelling reasons to tax or not tax charity business income before it analyses the potential implications and design issues involved. A major issue will be distinguishing between related and unrelated business activities which could prove difficult in practice without clear legislation and guidance.
There’s more detail about the trading activities of charities. According to the Paper 11,700 of New Zealand’s 29,000 registered charities reported business income in their published 2024 financial accounts.
These four defined tiers follow the reporting requirements within the Charities Act.
A de minimis exemption?
Based on this initial analysis the Paper suggests a de minimis exemption for charities within Tiers 3 and 4. This would take 10,400 charities out of scope with only 1,300 subject to any policy change. Part of any policy change would involve the treatment of accumulated surpluses and whether there should be minimum distribution requirement.
According to the Paper a donor-controlled charity is any “charity registered under the Charities Act that is controlled by the donor, the donor’s family or their associates.” The current issue that there’s no distinction between donor-controlled charities and any other charitable organisations. The concern is growing that this can enable tax avoidance and raised compliance concerns “because of the control the donor or their associates can exercise over the use of charity funds.”
The Paper gives a few examples of potential abuse such as ‘circular arrangements’ when the donor gifts money to a charity they control, claim a donation tax credit or gift deduction, and the charity immediately invests the money back into the businesses controlled by the donor or their associates.
Also of concern with donor-controlled charities there can be a significant lag between the time of tax concessions for the donor and the charity, and the time of ultimate public benefit. This occurs because funds are accumulated and no or very minimal charitable distributions are made.
Another issue arises when donor-controlled charities purchase assets, or goods and services from the donor or their associates, at prices exceeding what would normally be paid by unrelated parties. These acquisitions are often made on terms that would not normally exist between unrelated parties.
Defining donor-controlled charities
This is the nub of the matter what criteria should be used to define a donor-controlled charity? The funds contributed and level of control a founder has. In Canada for example a charity is considered a private foundation if it is controlled by a majority (more than 50%) of directors, trustees, or like officials that do not deal with each other at arm’s length, or more than 50% of capital is contributed by a person, or a group of persons, not dealing with each other at arm’s length and who are involved with the private foundation.
The Paper suggests that transactions between donor-controlled charities and their associates could be required to be on arm’s length terms or prohibited outright noting in para 3.13:
“This approach was supported by the Tax Working Group in 2019, which found that the rules were private charitable foundations in New Zealand appeared to be unusually loose. The group recommended that the government considering removing tax concessions for private controlled foundations or trusts that do not have arm’s length, governance or distribution policies.”
Apart from citing the Canadian approach the Paper considers the approach to this issue in Australia, the United Kingdom and the United States. It suggests there should be a minimum distribution rule to deal with the question of the time lag between the charity and a donor claiming a benefit and the actual public benefit accruing from the distribution.
Taxing membership fees?
Chapter 4 considers integrity and simplification. This section has already attracted some media comment because it raises the possibility of taxing membership fees which could affect as many as 9,000 not-for-profit organisations.
At issue is the concept of mutuality and member transactions. Generally speaking, most not-for-profit organisations are treated as mutual associations. That includes many clubs, societies, trade associations, professional regulatory bodies.
Up until the early 2000s Inland Revenue’s guidance was that mutual associations were not liable for income tax from transactions with their members, including membership subscriptions and levies. Inland Revenue has withdrawn that advice and has drafted a replacement operational statement which will be released pending what feedback it receives on this Issues Paper.
The impact of Inland Revenue’s revised position would be that trading and other normally taxable transactions with members, including some subscriptions, would be deemed to be taxable income regardless of whether the common law principle of mutuality would apply. The Paper notes that most not-for-profits would not qualify for mutual treatment anyway, because their constitutions will prohibit distribution of surpluses to members including on winding up. This prevents the necessary degree of mutuality required.
Fringe Benefit Tax exemption under review
Finally, the paper touches on the FBT exemption for charities, which has been available since 1985. The paper notes “there are weak efficiency grounds for continuing this exemption” which “lacks coherence”. Inland Revenue is currently reviewing FBT generally and these comments suggest the FBT not-for-profits exemption is likely to go.
Submissions are open on the Issues Paper now, and close on the very unhelpful date it has to be said, of 31st March, when we’re all rather tied up with tax year-end issues. Notwithstanding that I expect there will be plenty of submissions particularly around the potential impact of taxing membership transactions.
Meanwhile in America…
Finally, a quick update on last week’s comments in relation to my concerns about potential leaks coming out of the US Internal Revenue Service (“the IRS”), following the Department of Government Efficiency (DOGE) trawling through the IRS and every other U.S. government agency.
The update I’ve had is that the DOGE people are looking more at IRS internal processes and nothing to do with any data that the IRS has received from Inland Revenue, or any other agency. There are a number of international obligations that the US has still to meet, but no doubt some concerns will have been raised.
But as I said at the time, which I believe is almost certainly the case, IRS officials will be highly professional in making sure that that information shared by other tax authorities is not leaked, accidentally or otherwise, to outside parties.
An interesting choice…
On the other hand, the IRS is getting a new Commissioner. The nominee is William Hollis Long II, or Billy Long, who is a former Republican House of Representatives member from Missouri.
He’s a controversial pick to say the least. He’s not a tax professional, and of particular note is that he was a co-sponsor of a bill in 2015 that would have abolished the IRS and introduced a national sales tax. He is also long-time supporter of a flat income tax for the US system. It’ll be interesting to see how this plays out, and as always, we will bring you developments as they emerge.
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
It has, to put it mildly, been a rather dramatic week in the geopolitical arena, with the United States appearing to basically abandon the security arrangements it established in Europe after World War 2, particularly the foundation of NATO.
Coupled with the US opening direct negotiations with Russia about the war in Ukraine, without the involvement of either Ukraine or NATO, it is now clear that a radical reshaping of the world order is underway after only a month of President Trump’s second term. It’s also clear that this is very much America First.
The OECD Two-Pillar deal is dead
The same is true in the tax world. In my first podcast of the year, I discussed one of President Trump’s initial executive orders, which in my view, pretty much meant the end of the Organisation for Economic Cooperation and Development’s (OECD) two pillar deal on international tax. My view was confirmed in a fairly bleak summary of the state of international tax by a Washington based presenter at this year’s International Fiscal Association (IFA) conference.
More on the IFA conference later. But as our presenter noted, it now appears that Value Added Tax (GST) is in the Trump administration’s crosses. On 13th February he issued another Executive Order on Reciprocal Trade and Tariffs. The issue here is protectionism which is very much part of President Trump’ economic policy agenda. He is particularly concerned about the decline in manufacturing and in particular about trade imbalances which he views as a consequence of the decline in manufacturing. Accordingly, many of the Executive Orders he has issued in this area are to redress these imbalances particularly those with Canada and Mexico. Hence the imposition of tariffs against both countries even if some are temporarily suspended. In the meantime, arguments continue.
In this vein Section 2 of the 13th February order noted
“It is the policy of the United States to reduce our large and persistent annual trade deficit in goods and to address other unfair and unbalanced aspects of our trade with foreign trading partners. In pursuit of this policy, I will introduce the ‘“Fair and Reciprocal Plan” (Plan). Under the Plan, my Administration will work strenuously to counter non-reciprocal trading arrangements with trading partners by determining the equivalent of a reciprocal tariff with respect to each foreign trading partner. This approach will be of comprehensive scope, examining non-reciprocal trade relationships with all United States trading partners, including any:
tariffs imposed on United States products;
unfair, discriminatory, or extraterritorial taxes imposed by our trading partners on United States businesses, workers, and consumers, including a value-added tax;”
A new and dangerous approach?
Note the word “each”. Value added tax is what we call GST. This is somewhat new and it’s frankly quite alarming because as you can imagine the impact of VAT is separate to that of tariffs. This is obviously quite concerning and causing consternation around the world. Because, as I said, this goes further than simply saying we’re going to impose retaliatory tariffs on you, because there is no equivalent to GST in the United States. There is no national sales tax. Every state imposes its own sales taxes at varying levels and sometimes local counties have separate sales taxes. It would actually take a constitutional amendment to introduce the equivalent of GST in the United States.
Another point that has been made in discussions around this, is that even if you added up the various state sales taxes that might be imposed, they’re nowhere near the same level of VAT that is often charged. And so, the question is, when a US firm has VAT applied to exports it now appears that this would open the door for retaliatory action by the US.
What about Netflix?
This led to quite an interesting debate at the presentation around the question of whether our “Netflix tax” might be within the scope of these retaliatory actions now. Potentially no, because the Netflix tax is a tax on services – in GST/VAT terminology a “reverse charge”. It’s imposed because otherwise no VAT or GST would be payable because the supply of services is outside the jurisdiction of the country providing the services. As Netflix is providing services from outside New Zealand to New Zealand residents, we’ve decided GST applies.
So, in fact it could be in scope. We really don’t know. One of the recurring themes of the assessment we got from the Washington based presenter at IFA was we have no idea what’s going on here, and we don’t know whether this is just rattling the cage for the sake of hopefully obtaining better terms on a deal. President Trump is very much transactional in his approach because that’s what he’s been about all through his life and he is applying that approach on a global scale now.
Maybe that’s the end of it, but it could also be that there is a genuine threat to impose tariffs where the US feels that GST has been unfairly imposed. We will have to wait and see.
What about a Digital Services Tax?
What I would say is that any hopes of a Pillar Two deal which has been moved forward (painstakingly slowly) by the OECD is probably dead in the water for now. This would probably extend to any digital services tax that we might consider introducing.
Remember that in President Trump’s Executive Order which withdrew the United States from of the OECD deal, there was also an instruction for the U.S. Treasury Department to investigate all potentially discriminatory taxes, and that would include a digital services tax. It would seem to me that our ability to impose that is quite restricted. So, we’re now into completely unknown territory here. The risk of retaliation might be lower at our end, but you never know.
Higher defence spending?
One of the issues that has been pushed on President Trump’s agenda (and it’s actually not an unreasonable point) is that America had borne much of the cost of defence throughout the Cold War, and even after the end of the Cold War it still continues to have a very large military establishment.
President Trump therefore demanded NATO nations needed to increase their defence spending to at least 2% of GDP. That is happening rather rapidly. This week, for example, Denmark announced further increases to its defence budget.
Our defence budget will come under examination, and this week the Prime Minister commented “We will be getting as close to 2 percent [of defence spending on GDP] as we possibly can, we know that’s the pathway we want to get to.” That’s probably not something Finance Minister Nicola Willis wanted to hear, but that’s the way of the world at the moment.
Could the sackings at the Internal Revenue Service have implications here?
The other thing of concern is what’s going on at the US Internal Revenue Service (the IRS)? Apparently some 6000 workers were sacked the other day, and we have reports that Elon Musk’s Department of Government Efficiency, DOGE, has been trying to gain access to records held by the IRS.
What I hadn’t been aware of is that the Commissioner of the IRS had resigned and will be replaced by a Trump appointee. I’ve previously commented about the risks that these actions represent to other tax jurisdictions. One would be in relation to all the information sharing agreements that exist, particularly FATCA.
I have no doubt whatsoever that IRS officials will do everything within their power to ensure the security of information shared under FATCA and other agreements is maintained. But if as is suggested, DOGE personnel are able to gain access to that information what will that mean for our international agreements? Will we and other nations be willing to continue to share information with the United States if we have concerns that it may no longer be secure? That’s a huge matter that there’s probably no answer to at the moment. I imagine quite a few tax authorities, including our own, are probably considering this very point right.
Time running out for an important GST election
One of the issues we deal with on an increasing basis is the treatment of Airbnb properties. In particular the implications when the GST threshold of $60,000 is crossed. In some instances, the taxpayer has claimed GST input tax on the purchase of the property involved, only to find out that they face significant GST liability if they decide to sell at a later point. This is something which obviously comes as a shock.
It so happens that two years ago, with effect from 1st April 2023, a transitional rule was introduced in section 91 of the Goods and Services Tax Act, which enables a person to elect to take that asset out of the GST net if certain criteria are met. The four requirements are:
if the asset was acquired before 1st April 2023, and
it must not have been acquired for the principal purpose of making taxable supplies, and
the asset was not used for the principal purpose of making taxable supplies, and
a GST input tax credit has been previously claimed, or the asset was acquired of as a zero-rated supply.
Note that ALL the above criteria must be met.
A good example would be a property which was acquired as a bach or holiday home but then rented out for short stay accommodation during the peak holiday period via Airbnb. Another example might be a business that has a residential property which was acquired as part of a larger land purchase.
Although primarily acquired for GST-exempt purposes the properties have been used to make GST supplies. Consequently, GST will be payable on sale. However, if you apply this transitional rule, you must make the election to take the asset out of the GST net before 1st April. If the election isn’t made in time, then the sale of any asset with business use, where GST was claimed on purchase, will be subject to GST on sale.
Basically, people have now just under five weeks to review their GST position and consider whether to make this transitional election and potentially bypass a large GST bill on a future sale.
Obviously in the run up to the end of the tax year on 31st March, there will be a number of other income tax and GST elections for people to consider if action is required.
An interesting conference
And finally, as I mentioned earlier, this year’s International Fiscal Association Conference was held on Thursday and Friday, hence why this podcast been delayed. It’s a policy-focused conference whose attendees are mainly partners from the large accounting and law firms, together with the heads of tax in major companies and very senior Inland Revenue officials.
This conference is subject to Chatham House rules, so while I can’t say much about what specifically was discussed, I can say it was an extremely interesting conference as always, and my thanks to the organisers.
As I mentioned earlier, we had a very interesting and thought-provoking presentation on the state of international tax as viewed from America. Inland Revenue has been very busy working on a number of topics, so we ought to see some very interesting legislation coming through this year, around either the time of the Budget, or more likely, when the annual tax bill is released in August.
Growing problems with double tax agreements
In relation to international tax, we had an interesting presentation on the impact of very specific anti avoidance rules on double tax agreements. Now double tax agreements generally override domestic law. In other words, we might have legislation where we might say we’re going to tax this. But then the double tax agreement says actually the taxing rights go to another country.
What is happening is there’s been a steady growth of what’s been called the general anti-avoidance rules, where it appears that companies have made what’s seen as abusive use of these double tax rules to claim tax relief. Countries are increasingly updating their tax treaties to include this general anti avoidance provision overriding the double tax agreement.
For example if you look at how Netflix, Visa and MasterCard seem to have substantial income from New Zealand without apparently paying much income tax, the question arises are the double tax agreement rules being abused and should this be dealt with by way of a general anti avoidance rule overriding the tax treaties?
Or you could also see these issues as being part of what we discussed at the top of the podcast is that the changes to the international tax order means more friction as basically tax authorities get more willing to get down and dirty and fight with each other over who has the taxing rights over income. We certainly live in interesting times.
And on that note, that’s all for this week, I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day
Inland Revenue consults on treatment of repairs to newly acquired assets
Last week I discussed the suggestion from the Minister of Finance, Nicola Willis, that a cut in the corporate tax rate from 28% was under consideration.
Subsequently, on last Sunday’s Q+A, Robin Oliver was interviewed by Jack Tame on the topic. Robin is a former Deputy Commissioner of Policy at Inland Revenue and was also a member of the last Tax Working Group. In his role as a Deputy Commissioner at Inland Revenue he would have been involved in most of the major tax reforms of the last 30 years, so he really is one of the Titans of tax and always worth listening to.
Go big or go home…
In discussing the question of a corporate tax cut he made a very important point – go big or don’t bother. In his view dropping it from 28% to 25% simply wouldn’t make much difference. Instead, he suggested a bolder approach would be to cut it to say 18%. Because if you really are wanting to attract investment then you have to show something significantly different.
He raised the point that Singapore, which is often raised as a comparable, has a 17% corporate tax rate. Ireland, another comparable country has a 12.5% rate. Against these countries we would need to cut our tax rate substantially in order to attract investment.
But Robin Oliver also raised the question as to the consequences of such a cut and whether there might be other opportunities for improvement. He mentioned the problems which we’ve previously discussed about the Foreign Investment Fund regime. He also floated the alternative of accelerated depreciation for plant and machinery, which in his view was more fiscally realistic. Personally, I think this would be a more worthwhile move.
Reshaping our tax system – higher GST?
If he was given the opportunity for complete freedom of action over the tax system, Robin Oliver would be bold and go for a higher GST rate and taking the emphasis away from income tax. But he pointed out that although this might be nice in theory, the GST rate might have to rise to 28%, which would be pretty near unacceptable to the broader public. His key point was there are trade-offs to be to be made and it’s not simply a matter of a corporate tax cut will attract investment. Other considerations have to come into play.
I agree with Robin that if you are going to go with a corporate tax cut, you probably have to be bold about it. The question then is how do you recover that lost revenue? Robin’s response was that some hard choices would have to be made. He was a bit gloomy on those options, I thought.
What about a capital gains tax?
As I said Robin is a vastly experienced tax practitioner and he would have considered many options during his time supporting the work of various tax working groups and then as part of the last tax working group. He made a passing comment suggesting people stop whinging about capital gains tax. Robin was one of the three dissenters to the general capital gains tax proposal made by the last Tax Working Group but remember that the whole group was unanimously supportive of increasing the taxation of residential investment property.
Overall, very interesting to hear Robin’s take and I recommend watching the interview. It may be a corporate tax cut needed to be really attractive is probably beyond the Government’s fiscal capabilities at this point and therefore other alternatives might be more cost effective.
Further clues about tax changes?
Incidentally Iain Rennie, Secretary to the Treasury, made a speech to the 2025 New Zealand Economics Forum Bending two curves: New Zealand’s intertwined economic and fiscal challenges which supported a speech made by Finance Minister Nicola Willis, yesterday about the Government’s Going for Growth economic plan. Both mentioned tax with Iain Rennie noting
Our taxation of investment is also uneven, which distorts investment choices. Such economic settings can discourage the acquisition of productivity-enhancing assets like machinery and equipment.
This suggests that the policy responses are likely to include those that create an environment more conducive to firms making these investments. This could be through the structure of business taxation, savings policy, and regulatory frameworks that keep pace with business changes and create certainty for investment in emerging sectors.
These speeches provide a few more that a corporate tax cut could be perhaps a possibility. But there are, as Robin Oliver pointed out, other opportunities. Anyway, we’re obviously going to see a lot more speculation in the run up to the Budget on 22nd May.
Netflix’s tax reporting under investigation in France
An interesting story popped up this week involved Netflix’s tax activities. It appears Netflix’s offices in both Paris and Amsterdam had been raided late last year by French fraud investigators. European Union investigators started looking into the matter after France’s National Financial Prosecutor’s Office raised suspicions about the company “covering up serious tax fraud and off-the-books work”.
It transpires Netflix’s French subsidiary reported turnover “at odds with paying user numbers in the country.” Between 2019 and 2020, Netflix France paid less than €1,000,000 in corporate taxes, despite having more than 10 million customers.
What about Netflix New Zealand?
This is an ongoing investigation which after it came to the attention of Edward Miller the researcher at the Centre for International Corporate Tax and Accountability and Research, piqued his interest about Netflix’s activities here. When he went looking, he found out Netflix does not file any financial statements in New Zealand. This is actually acceptable under our low compliance approach to corporate filings. At present under the Companies Act 1993 public financial statements of a foreign-owned company must be filed if either the total assets are more than $22 million or the total revenue exceeds $11 million.
Now, surprise, surprise, Netflix New Zealand Ltd is apparently falls below that threshold, which as Edward Miller pointed out, seems odd given that there’s about 1.3 million users in New Zealand paying at least $18.49 a month to access its service. We’re therefore looking at another example of how multinationals are apparently able to shift profits offshore. Simultaneously, this is also an example of how tax authorities are increasingly taking a look at these activities and saying, ‘well, this is no longer really acceptable in our view.’
What do Netflix and Uber have in common?
Where it becomes quite entertaining is that ultimately the head office for Netflix appears to be an address in a very unassuming building at 1209 Orange St, . Wilmington, Delaware in the United States. Delaware is a very tax favourable jurisdiction within the United States, and this particular address is so favourable that it is registered address of no fewer than 285,000 U.S. companies, including Uber.
That somewhere so modest is the home to so many companies is entertaining but also points to the serious issue of highly sophisticated tax planning where apparently income is earned in a jurisdiction but little or no income tax is paid.
In fairness to Netflix, notwithstanding its income tax position, it’s highly likely that it will be paying a substantial amount of GST. That’s because its customer base is individuals who will not be GST registered and therefore will not be able to recover the GST paid.
Incidentally, Visa and Mastercard are two other companies that we know very little about but have a significant effect here. Neither company have published financial statements for almost 10 years now. The revenue they earn on fees probably runs to hundreds of millions of dollars, but we just don’t know what portion is being taxed here. What Netflix is doing is a bigger issue than perhaps is generally appreciated.
Time to rethink our reporting requirements?
Given how opaque these transactions are, perhaps we need to rethink our rather relaxed approach to reporting and filing of a company’s financial statements, particularly in relation to multinationals. Interestingly, Australia now requires large multinational groups with an Australian presence to submit data on their global financial and tax footprint to the Australian Taxation Office (ATO), which will give more disclosure where around international profits are being booked. The Post approached the Minister of Revenue, Simon Watts, for comment and said that a similar proposal was not under consideration. (Note that the Australian proposal goes beyond country-by-country reporting https://www.ird.govt.nz/international-tax/exchange-of-information/count… which applies to a small number of multinationals).
What next?
The French investigation of Netflix is just another example of how many tax authorities around the world are looking at this question of where’s that income being really taxed and wanting justification for enormous fees that seem to end up in tax havens. But then, as I said last week, we now have the potential threat of the United States under the new Trump administration not favouring such investigation activities. It will be interesting to see how this plays out.
Are repairs to a newly acquired asset deductible?
As always, Inland Revenue is busy producing guidance on a number of matters and this week it was an exposure draft (ED) on a very interesting point – are expenses incurred on repairing a recently acquired capital asset deductible.
This draft is part of a series on repairs and maintenance expenditure which will eventually replace the current Interpretation Statement IS 12/03 – Deductibility of repairs and maintenance expenditure – general principles.
This exposure draft is potentially pretty significant – it reaches a different conclusion from IS 12/03 on the relevance of whether the price of the asset was discounted. Consequently, Inland Revenue is “particularly interested in comments on the relevance of the assets price in the context of initial repairs, as it appears there may be differences in opinion and practice.”
The ED guidance centres on what happens if you buy an asset that’s pretty run down, and then you carry out repairs to it to get it up and running? Are you able to claim those costs as repairs or should they be capitalised? For example, if you buy machinery that’s pretty run down and carry out repairs. If you can’t show that the repairs are genuine repairs – that they reflect wear and tear – Inland Revenue’s view is you must capitalise those costs. As such those costs are probably going to be depreciable.
What about repairs to buildings?
However, it’s a much, much bigger issue in relation to buildings. Because with the withdrawal of depreciation allowances for all buildings (not just residential buildings) the question of whether expenditure represents repairs and maintenance becomes an all or nothing issue. In other words, if it’s a repair, it’s deductible. If not, no deduction, whether in the form of depreciation or any other form, is available. I see a real pressure point emerging on this matter.
As always there’s lots of useful examples, but there’s also one or two matters we’d like to see clarified. For example, the ED refers to “normal wear and tear.” But what does that mean? If you’re talking about an asset that’s depreciated over, say, five years economically are Inland Revenue saying that repairs in excess of what the normal depreciation would be on that asset must be capitalised?
What about buildings?
It’s something I think needs more certainty, particularly in relation to buildings. The ED has an example on the treatment of repairs to a newly acquired building and I’m not so sure I’d agree with Inland Revenue’s conclusions. In summary, a 100-year-old tenanted residential property has been inherited by James. It’s in a poor state of repair and its condition was such that it could only be rented on a short-term basis with a high turnover of tenants and poor rental returns.
Because the property is in a good location James therefore decides if he restores the property to good condition the rental return can be increased by attracting different tenants for longer term letting. So, he carries out repairs to the property while it remains tenanted, including repairing the leaking roof, replacing some of the guttering down pipes, repainting portions of the exterior proper, and a number of other matters, including a repair to the main water supply pipe to the property.
The conclusion is that the expenditure incurred was necessary to restore and maintain the functionality of the property to the level required for its intended use of letting it on a longer-term basis. And for that reason, it’s capital in nature. No deduction will be available, and as I mentioned earlier, because it’s a building, no depreciation is available.
I’m not sure that would stand up in court if tested, because James is still deriving gross income. Yes, there’s an improvement to enhance it, but court cases have accepted that all repairs involve some form of improvement because you’re replacing old materials with new materials.
I’m intrigued to see what the response is to this and what comes out in the finalised guidance. Certainly, as I saw Robyn Walker of Deloitte point out, buying a car without wheels and then claiming a repair by sticking wheels on is clearly something that is not appropriate. But then in that case there should be a depreciation deduction available. It’s much more tricky in relation to repairs carried out to newly acquired properties. Again, watch this space.
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
Could the US retaliate against a digital services tax?
Last week, in a series of interviews with the press, notably with Newstalk ZB, Finance Minister Nicola Willis dropped several hints about what might be in the forthcoming May 22nd Budget. In particular, she talked about the corporate tax rate, and the possibility of cuts to that as part of promoting the Government’s growth agenda.
Corporate tax rate above OECD average
Speaking with Heather Du Plessis-Allan, Ms Willis commented:
“Well, if you compare New Zealand with the rest of the world, we’re not as competitive as we used to be. Which is to say that our corporate tax level is reasonably high when you compare it to the rest of the developed world.”
This is a very valid point which comes up frequently in discussions. Our current company tax rate at 28% is well above the OECD average of 24% and has been out of alignment for some time.
New Zealand back in the late 80s under the Fourth Labour Government was actually at the forefront of cutting company tax rates. A particularly interesting action was to align the company tax rate with the top individual and trust rates of 33%. The three basically stayed in line until the election of the Fifth Labour Government and the increase in the top personal tax rate to 39% in 2000.
There have been a couple of corporate tax cuts over the past 15 years or so. In 2007, the rate was cut from 33% to 30% and then in 2010, as part of the rebalancing that took place under Bill English with the increase of GST from 12.5%, the corporate tax rate was cut to 28% where it remained since.
As I’ve discussed previously, there has been a long running global trend towards lower corporate tax rates. But that has slowed in recent years, first because of the effect of the Global Financial Crisis and secondly, the fiscal shock to government finances because of the COVID-19 pandemic. As a result, according to the OECD in 2023, corporate tax rates rose generally across the board. Nevertheless, we are out of sync at the headline rate level.
More to investment than the corporate tax rate and will it work?
A lower corporate tax is undoubtedly attractive. However, the tax rate needs to be seen in context with what other incentives are available. Overseas companies and investors are very focused on what else might be on the table. A lower company tax rate would certainly be attractive, so the suggestion has been met with enthusiasm by some. Others are a bit more sceptical. Economist Ed Miller noted that when the effect of the corporate tax cuts in 2007 and 2010 are considered there does not seem to be any significant increase in foreign direct investment as a result.
The last tax working group didn’t see overwhelming evidence to support the theory that lower tax cuts at lower corporate tax rate would attract investment.
Problems and an alternative
There’s a flip side to this though, and it’s tied into the Government’s intention of restoring a surplus. Our corporate tax rate is not only above the OECD average, but our corporate tax take is also high by world standards. According to OECD statistics, 14% of the total tax receipts in New Zealand for 2022 came from company tax, whereas around the OECD the average is 12%.
So, if the Government, in an attempt to boost economic growth, is going to cut the corporate tax rate, it must then look at other alternatives to replace the lost revenue. One of the things it did back in 2010 and which it has already repeated, was to remove depreciation on all buildings. Depreciation for commercial buildings was restored under Labour but then removed again from the start of the current tax year on 1st April 2024.
A counter argument to the Government’s proposal for corporate tax cuts would be that enhanced depreciation allowances, including restoration of commercial building depreciation, which would include factories, might be a more effective approach than across the board tax cut.
How to replace lost tax revenue?
But if the Government is thinking of a corporate tax cut, and that does seem to be the case, what counter measures could they take to ensure that it is not fiscally too draining on the resources? One option might be that the availability of imputation credits may be restricted. For example, it might be that you can elect to have a lower corporate tax rate, but you imputation credits are no longer available to for shareholders.
As an aside, imputation (sometimes called franking) credit regimes were very popular during the 1980s, but gradually fell out of favour over time, mainly because, or in part because the European Court ruled that imputation credits or franking credits have to be available to all shareholders resident in the EU. After the German government lost this case its response was to heavily restrict the use of franking credits.
Change the tax treatment of Portfolio Investment Entities?
Another option might be to review the taxation of portfolio investment entities held by persons with effective marginal tax rates above the 28%. To quickly recap, Portfolio Investment Entities (PIEs) have a tax rate of 28%, equal to the company tax rate, which is also the maximum prescribed investor rate for individuals. So, there is actually a tax saving opportunity for individuals whose other income is taxed above the 28% rate for PIEs.
The Government might look at this, decide that will no longer apply and instead income from PIEs will be taxed at the person’s marginal rate. That could raise sufficient sums to partially offset the effect of a lower corporate tax rate.
The Finance Minister also mentioned reforming the Foreign Investment Fund regime, which is currently being considered by Inland Revenue and made some encouraging sounds about that potentially being an option.
We shall see. No doubt there’s a lot of work going on in Treasury and Inland Revenue looking at these options. All will be revealed in the Budget on 22nd May.
A threat to our Digital Services Tax
As covered in our first podcast of the year, one of President Trump’s initial executive orders withdrew the United States from the OECD Two-Pillar international tax deal. I drew attention to the second paragraph of that Executive Order, which directed the US Treasury to consider taking actions against other jurisdictions for tax actions which are potentially prejudicial to American interests.
Vernon Small, who was an advisor to the former Minister of Revenue, David Parker, now writes a weekly column in the Sunday Star-Times has picked up on this point noting that “Treasury has budgeted to rake in $479 million between January 2026 and June 2029 from a 3% Digital Services Tax (DST) on tech giants like Google and Meta.”
This, according to Small, “is an heroic piece of forecasting given current uncertainties and the provision for delaying collections until 2030 if progress is made on a multilateral approach through the OECD.”
And then the crunch point:
“Trump has bosom buddies in high places in the industry with Elon Musk first amongst them, and Mark Zuckerberg making a play for the new US administration’s affections.
Trump has promised to retaliate against discriminatory or extra-territorial taxes aimed at US interests. So the DST could be a prime target.”
Vernon Small is underlining the potential threat to our revenue base and our sovereign right to tax. If the OECD deal does fall over there are a number of countries including Canada, no longer America’s best friend, it seems, with DSTs ready to go. So there’s a whole potential for a tax war.
The Trump threat to tax administration
But equally worryingly, coming out of the United States is something about the question of bureaucratic independence from the executive. This might sound an arcane issue but it’s actually quite important to the independence of tax authorities.
One of the first actions of the Trump administration was to sack 17 Federal Inspectors-general. There’s also a move to put all Federal Government employees on the basis that they serve at the pleasure of the President. This would mean that an employee could be fired without the need for cause as the American terminology puts it.
Project 2025’s Schedule F
The implications of this have been picked up by Francis Fukuyama, the author of the famous The End of History essay written in the wake of the collapse of the Soviet Union and the end of the Cold War.
Writing for the Persuasion Substack under the title Schedule F is Here (and it’s much worse than you thought) Fukuyama wrote:
‘ “For cause” protection means that the official cannot be removed except under specific and severe conditions, like committing a crime or behaving corruptly. And now many individuals have been moved, in effect, to Schedule F because they are said to serve at the pleasure of the President.
Consider what this may mean if Trump hand picks a new Internal Revenue Service chief, that individual can be pressured by the Government to order audits of journalists, CEOs, NGOs and NGO leaders. Removal of Inspectors General will cripple the public’s ability to hold his administration accountable.’
Trump’s decision to move all Federal employees to Schedule F status is a step towards autocracy. What perhaps we all need to keep in mind is that the separation between the Commissioner of Inland Revenue and the Minister of Revenue is actually incredibly important. Yes, at times the Inland Revenue might do something which probably might embarrass the Minister of Revenue, but he cannot directly intervene in Inland Revenue’s operations.
A key part of a well-functioning democracy is that civil servants can act independently from their nominally political superiors. Fukuyama is right to say we should therefore have some concern coming at what’s happening in, in the United States because it does seem to be centralising power very rapidly around the President. The .potential for mischief is therefore enhanced as a result, and don’t think that such a step ultimately doesn’t have tax consequences.
Latest on the changes to the United Kingdom ‘non-dom’ regime
On a more positive note, last year I discussed the changes to the so-called ‘non-dom’ regime in the United Kingdom. This is where persons who are not domiciled in the UK have a special basis of taxation. Basically, they’re not taxed on income and gains which are not remitted to the UK.
This is a significant concession which is ending with effect from 5th April this year when it will be replaced by something which is more akin to our transitional resident’s exemption. This is pretty important for the approximately 300,000 Britons like me who’ve migrated here, plus the significant number of Kiwis who have assets in the UK or family going to the UK but have retained assets here. All of this group are potentially within the scope of these reforms.
There’s been a fair amount of push back on the reforms together with concerns that there will be a flight effect as wealthy, ‘Non-doms’ leave the UK. The UK Labour Government has been under pressure to make some changes to the proposals.
In response, the Chancellor of the Exchequer (Finance Minister) Rachel Reeves announced a concession (ironically at the gathering of the super-wealth at Davos) which will increase what’s called the temporary repatriation concession.
This concession will allow non-doms a three year window to pay a temporary repatriation charge on designated foreign income and capital gains so that they can subsequently be remitted to the UK without any further tax. The temporary repatriation charge will initially be 12% before rising eventually to 15% in the year ended 5th April 2028. For comparison, without the concession remitted income would be taxed at rates up to 45% and remitted capital gains would be subject to capital gains tax at 24%.
There’s a lot of opportunity here for potential tax savings for those who could be affected or will be affected by the proposed change to the non-dom regime. We’re still working through all of the implications but we will be updating our clients and bringing you developments as they arise.
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
