A scoop by Rebecca Stevenson revealed Inland Revenue had collected an extra $33 million from multinational firms as part of a campaign to keep COVID-19 wage subsidy payments in New Zealand.
During 2020 a total of 376 multinationals (those with annual turnover in excess of $30 million) received a total of $830 million in wage subsidies. Inland Revenue’s transfer pricing unit saw there was a possibility that although the wage subsidy was meant to ensure employment in New Zealand, multinationals could take the opportunity to transfer these funds overseas.
It therefore met with advisers of the Big Four accountancy firms to brief them on its views about this and then wrote to 436 multinationals, “setting out the expectation that all of the Government’s wage subsidy assistance should remain within the New Zealand economy.” Subsequently, some $33 million of wage subsidy monies was repaid voluntarily by multinationals.
Each year, Inland Revenue Transfer Pricing Unit sends out an annual survey to approximately 750 international firms. These are updated each year and this year’s survey included two new COVID 19 questions relating to the impact of the pandemic on multinationals. These are in addition in addition to more typical transfer pricing type questions about the “intensity and effect” of related party transactions which Inland Revenue wants to undertake so it can “refine its risk profile on firms with cross-border arrangements”.
According to Inland Revenue’s International Revenue Manager John Nash, who incidentally is part of the OECD Base Erosion and Profit Shifting (BEPS) initiative, Inland Revenue also liaised with the Australian Tax Office and with the OECD Secretariat to ensure that its approach to transfer pricing in this matter was consistent with transfer pricing regulations internationally. And the word that came back that it was.
Apparently not all multinationals are happy with Inland Revenue’s interpretation of the transfer pricing rules. And therefore, when it comes to looking at 2021 and 2022, Inland Revenue may expect experience and pushback as a result. This is unsurprising, but it is interesting to see how proactive Inland Revenue was on this issue.
However, as former tax working group member Professor Craig Elliffe noted, there is a potential for quite a significant dispute given that the amount involved is $830 million. As Craig commented “It is a hugely sensitive matter. You feel as a New Zealander there’s no moral justification for multinationals taking a difficult approach here.” This is shaping up to be a classic example of the clash between the technically legal correct approach and the morality of the multinationals’ approach. We will watch with interest.
Transparency for reporting crypto transactions?
Last week I discussed the OECD’s proposed Crypto Asset Reporting Framework, and thank you for all the feedback that generated. This week it’s the launch of the Asia initiative, an idea proposed in 2021 by Indonesia’s Minister of Finance Sri Mulyani Indrawati and the President of the Asian Development Bank (ADB), Masatsugu Asakawa.
The Asia Initiative will be “focused on setting tailored solutions to ensure the implementation of tax transparency standards across Asia.”
So far, 13 countries have signed up to the initiative, but these include all the major economies of the region India, China, Japan, Indonesia, Malaysia and Pakistan. The initiative is just the latest example of the agenda discussed previously all for international cooperation on information sharing and thus best exemplified by the Common Reporting Standard and the proposed Crypot-Asset Reporting Framework.
It so happens that the OECD Secretary General Mathias Cormann also reported back last week to the 14th Plenary meeting of the OECD/G20 inclusive framework on BEPS. He gave them an update on progress on the two-pillar international tax reform. In short, some progress, but plenty of hard work ahead. The intention is to finalise a new multi-lateral convention for implementation of Pillar one by mid-2023, and that is going to be for entry into force in 2024.
And again, as I’ve said previously, politics will get in the way here. It will be interesting to see what plays out, particularly in the wake of the upcoming US midterm elections.
Just a note that during that plenary meeting, Mongolia became the 100th jurisdiction to join the current multilateral BEPS convention, which now covers around 1850 bilateral tax treaties worldwide. This the level of international cooperation will continue to grow. There were more than 500 delegates from over 135 countries and jurisdictions at that plenary meeting.
Stuck with a questionable decision
Following on from the recent Supreme Court decision in Frucor, Tax Guru and past podcast guest John Cantin has done a deep dive on the decision.
As you’d expect from John it’s measured and insightful. He rightly points out that criticisms of the majority judgement are irrelevant – the case is now the law. He sees little prospect of this being changed either by a future Supreme Court decision or by a legislative change to the anti-avoidance provisions which he thinks would be a difficult piece of legislation to write.
In summary his view is
“Practically, taxpayers need to consider and prove the commercial, tax and the economic effects of what they do to counter a tax avoidance charge. They need to be able to explain what they did to persuade the court that the desired tax effects are achieved. Findings of fact are important and likely to be persuasive for future arrangements.”
John’s full note on the case is well worth a read. As I said we can expect to see more analysis of the case but although I expect there will be criticism of the decision, as John said for now it is the law.
Others are addressing fiscal drag
I’ve frequently discussed here and across other media the effect of fiscal drag because of non-indexation of thresholds, not just for income tax but for Working for Families and student loan repayment thresholds. So I had a bit of a wry smile when I read about the United States Internal Revenue Service inflation adjusting more than 60 tax provisions, including tax rate schedules and another tax changes as part of getting ready for the 2023 US tax year.
As Shamubeel Eaqub told Newshub, the failure to regularly index thresholds is really quite cynical politics by both major parties. It’s a view I share and which I discussed with Sharon Brettkelly as part of The Detail podcast last week.
Don’t mess with tax simplification
Finally, a quick note on the astonishing events in the UK. One of the measures announced in former Chancellor Kwasi Kwarteng’s mini-Budget was the abolition of the Office of Tax Simplification. In the wake of his resignation and now that of Prime Minister Liz Truss, UK tax guru Dan Niedle of Tax Policy Associates tweeted
“Let this be a lesson to future politicians to not abolish the Office of Tax Simplification”
The OECD proposes a crypto-asset reporting framework
New levy proposal for farmers’ greenhouse gas emissions;
TOP’s bright idea about tax rate
Last week, the OECD launched its Crypto-Asset Reporting Framework (CARF). This is a response to a G20 request that the OECD develop a framework for the automatic exchange of information between countries on crypto-assets. In other words, it is going to be a development of the existing Common Reporting Standards on the Automatic Exchange of Information or CRS. The CARF was presented to G20 Finance Ministers and Central Bank Governors for discussion at their meeting this week in Washington D.C.
The proposed rules cover four areas:
the scope of crypto-assets to be covered,
the entities and individuals subject to data collection and reporting requirements,
the transactions subject to reporting as well as the information to be reported in respect of such transactions and
the due diligence procedures to identify crypto-asset users and controlling persons and to determine the relevant tax jurisdictions for reporting and exchange purposes.
CARF is intended to complement the CRS and mean that crypto-assets will be subject to automatic exchange of information reporting. Now the reason that that has come up is unsurprising really. Individuals holding wallets which are not affiliated with any current financial institution or service provider, and are therefore then able to transfer crypto-assets across jurisdictions. As the OECD report notes:
“this presents the risk that relevant crypto-assets are used for illicit activities or to evade tax obligations. Overall, the characteristics of the crypto asset sector have reduced tax administrations visibility on tax relevant activities carried out within the sector, increasing the difficulty of verifying whether associated tax liabilities are appropriately reported and assessed”
This is a very long way of saying there’s probably a lot of tax evasion going on in the crypto-assets sector.
CARF is therefore an obvious response. It is also part of the huge ongoing trends in the modern tax world of the acceleration in reporting and exchange of information between jurisdictions. This is a very, very significant development in the tax world that happened in the wake of the Global Financial Crisis and has largely gone unreported in the wider press although it appears to be generally accepted by the public. When you align this alongside what’s happening with the Pillar One and Pillar Two proposals, then the days of tax havens where money can be parked outside the tax net of major jurisdictions, are numbered.
So what crypto assets are covered? Well, the definition is pretty broad, it targets assets “that can be held and transferred in a decentralised manner and without the intervention of traditional financial intermediaries”, i.e. banks and other financial institutions. This includes stablecoins, derivatives issued in the form of crypto-assets and certain nonfungible tokens.
There are three categories excluded from what’s termed “Relevant Crypto-Assets”:
crypto assets, where have it’s been determined they cannot be used for payment or investment purposes,
Central Bank Digital Currencies which represent a claim in Fiat Currency on an issuing Central Bank or monetary authority, which function similar to money held in a traditional bank account,
Specified Electronic Money Products that represent a single Fiat Currency and are redeemable at any time in the same Fiat Currency. (Not sure I’ve encountered any of these myself, to be honest).
Reporting entities are any intermediary or service provider which is facilitating exchanges between relevant crypto-assets or between relevant crypto-assets and fiat currencies. Generally, they will be subject to the reporting requirements of the jurisdictions in which they are either tax resident or have a regular place of business or branch through which they carry out reportable transactions.
Keep in mind, CARF ties in with the CRS which is already hugely comprehensive and covers most of the main tax jurisdictions and tax havens. The ability for crypto asset service providers to slip out from underneath the CARF reporting requirements is going to be quite limited.
Three types of transactions are going to be reportable:
exchanges between Relevant Crypto-Assets and fiat currencies,
exchanges between one or more forms of Relevant Crypto-Assets, and
transfers of Relevant Crypto-Assets.
CARF has been developed to sit alongside CRS and in fact at the same time the OECD carried out its first comprehensive review of the CRS regime. It’s proposing some amendments to bring new financial assets, products and intermediates within the scope of CRS. The changes are also being made to try and avoid duplicate reporting with that which is expected to happen under CARF.
The entire CARF framework runs to over 100 pages. It should be signed off subject to any further work requested by the Central Bank Governors and Finance Ministers at their meeting this week. There will no doubt be some further tweaking, so it’s not yet all set to go. No doubt there will also be some lobbying for changes in the regime.
CARF is, as I said earlier, part of a growing trend for international cooperation on the sharing of information. When implemented it basically will probably mark an end, or certainly a restriction, on the use of crypto assets for tax evasion and other nefarious purposes.
Making farms pay
On Tuesday, the Government released its proposals for how to price agricultural emissions.
These are in response to the recommendations earlier this year from He Weka Eke Noa, the Primary Sector Climate Action Partnership, for a farm level pricing system. The Climate Change Commission, He Pou a Rangi, also provided separate advice on agricultural emissions.
The Government’s proposals try and integrate what He Weka Eke Noa and He Pou a Rangi have suggested. The intention is to price agricultural emissions at the farm level. But it comes with a big stick – if the sector cannot reach agreement by 1st January 2025, then agricultural emissions will be be priced under the Emissions Trading Scheme.
The key part of the proposal is a farm level split gas levy to price agricultural gas emissions. It will apply to farmers and growers who are GST registered and meet certain livestock and fertiliser use thresholds. There would be separate levy prices set for long lived gases and biogenic methane and these will be set up after advice from the He Pou a Rangi and in consultation with the agricultural sector and iwi and Māori.
The long-lived gases (basically carbon) price will be set annually and then linked to the New Zealand Emissions Trading Scheme unit price. There’s a separate biogenic methane levy which will be adjusted based on progress towards domestic methane targets. One of the feedback matters the Government is seeking is whether that methane levy price should be reviewed annually or every three years.
With regards to the revenue raised, the Government proposes it that the revenue is used to fund incentives and sequestration payments, with any remaining revenue to fund the administration of the pricing scheme and a joint government and Māori revenue recycling strategy. There’s a proposal for incentive payments for a range of on-farm emissions reduction technologies and practises. I fully endorse this policy of using funding from an environmental tax to help the transition.
But if you’ve been watching this, you’ll know it has taken a long time to get here. It’s almost 20 years since the infamous ‘Fart tax’ was first proposed and Shane Ardern MP drove a tractor up the steps of Parliament. So progress has been very slow on this, which I personally find very frustrating.
Here in the city, we need to be working on reducing our transport emissions. Rather ironically, on the same day of the Government announcement, Ruapehu Alpine Lifts went into voluntary administration. The ski field operation has clearly been affected not just by one very bad year and the effect of Covid. This is something that’s been building for some time.
We’ve also had the recent floods and damage reports coming out of Nelson where the insurance claims so far total $50 million. So change is happening all around us and my view is we are going to have to adjust to it and try and do something to reduce emissions as part of the global effort. We can’t rely on everyone else to do it for us.
TOP tackles tax bands
Finally, this week, there’s been a lot of talk about tax cuts ahead of next year’s General Election, particularly in the wake of the massive u-turn by the UK government over a proposed higher rate tax cut which has now resulted in the sacking of the Chancellor of the Exchequer (Finance Minister) Kwasi Kwarteng.
Amidst all of that chaos The Opportunities Party released its two-phase tax policy, phase one of which contains substantial tax cuts. But what caught my eye about TOP’s suggestion is their proposal to introduce a tax-free threshold of $15,000, together with adjusted tax thresholds.
Now tax-free thresholds are expensive, but they are seen around the world. Australia has one for the first A$18,200. The UK tax free personal allowance is £12,570 and America has a flat $12,000 exemption.
But what I thought is interesting about TOP’s proposal is they have looked at the question I’ve talked at length about what happens for low- and middle-income earners when their income crosses the current $48,000 threshold and the rate jumps from 17% to 30%. Under our current tax structure 12.5 percentage point jump is the highest such rate – the next jump at $70,000 is only from 30% to 33%.
So, I’ve been thinking for some time that we really ought to be looking at these thresholds and rate bands and maybe combining three into two, which is what TOP propose.
Now, TOP have got to either win an electorate or get across the 5% threshold before they’ll be in any position to propose their policy. (The second part of their policy would fund those tax cuts by a land value tax, which, of course, is longstanding TOP policy). We’ll have to wait and see until after next year’s election.
But if you want to hear more about what type of tax changes could happen and their implications then this week on RNZ’s The Detail podcast, Jenée Tibshraeny of the Herald and I spoke to Sharon Brettkelly about tax cuts here and in the UK, how our tax system works and what could be done if we’re helping people at the lower income level.
Well, 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 te wiki, have a great week!
Change on the way for GST recordkeeping requirements
A clear-eyed dissent by a Supreme Court justice
Tax revenue exceeds $100 billion for the first time
Over the next few months, GST registered businesses will receive a stream of information from Inland Revenue explaining new recordkeeping requirements for GST purposes, which will take effect from the 1st April next year. These changes relate to what information needs to be shared or retained to support GST input tax claims.
These changes are permissive in nature, and existing invoicing practises and systems which are compliant with the previous GST rules will still remain compliant with the new information rules. The new rules are less prescriptive about the information required to support a GST input tax claim.
The key purposes of these changes are to try and reduce compliance costs for businesses and facilitate the introduction of e-invoicing. The changes will be done by way of requiring the supplier and recipient of a taxable supply to retain a minimum set of information relating to that supply. The current rules, which required formal documents such as tax invoice, credit notes, debit notes etc. to support input and output tax will be repealed.
One of the most noticeable changes will be that there will no longer be a requirement for an invoice to have the words ‘Tax Invoice’ in a prominent place. Tax invoices will now be caught termed ‘taxable supply information’ and the former debit and credit notes which had to be issued when a correction was made, will now be termed ‘supply correction information’, which is better terminology as it actually reflects what’s going on.
There are also changes to the buyer credit created tax invoice regime which are now called ‘buyer created taxable supply information’. And these changes have already come into effect and actually are pretty helpful because you now no longer need to get Inland Revenues permission to operate the buyer created taxable supply information.
There will be a minimum set of information required to be retained in business records under the new rules for a taxable supply. According to Inland Revenue these rules are generally consistent with the requirements of commercial contract law relating to invoicing and recordkeeping. The requirement to hold a tax invoice in order to claim an input tax deduction is now replaced with the requirement to have business records showing that GST has been borne on the supply.
Now key information for both a supplier and a recipient of a supply of goods or services is that of, ‘supply information’. This includes, at a minimum, all the following information:
– the name and registration number of the supplier,
– the date of supply,
– a description of the goods or services, and
– the amount of consideration for the supply.
Helpfully, the low value transaction threshold for taxable supplies has been increased from $50 to $200. And that is part of a drive to simplify recordkeeping requirements for a large number of low value transactions.
There are now three value thresholds for the general meaning of taxable supply information and the information requirements for each of these are mutually exclusive. The thresholds are:
– Supplies exceeding $1,000,
– Supplies between $200 and $1,000,
– and then those for supplies not exceeding $200.
All these changes come into effect from 1st April next year, although, as I mentioned, the changes to the buyer created taxable supply information have already taken effect. As noted, existing systems will still remain compliant. So, there’s no need to dramatically go out and change everything to meet the new requirements. Inland Revenue will continue to release information about the changes over the coming months.
Supreme Court justices display worrying lack of tax knowledge in key decision
Last Friday, the Supreme Court released its decision in the case of Frucor Suntory New Zealand Ltd v Commissioner of Inland Revenue. This case has been watched with some keen interest by tax professionals. It relates to a series of transactions that took place in 2003, as a result of which DHNZ, a predecessor to Frucor Suntory, claimed interest deductions totalling $66 million in respect of an advance made by Deutsche Bank.
Inland Revenue sought to restrict the interest deductions totalling just over $22 million dollars claimed for the 2006 and 2007 income years on the grounds the funding arrangements constituted tax avoidance. Just for good measure, they also levied shortfall penalties totalling $3.8 million for the two years because they considered the tax avoidance was abusive.
The case reached the High Court in 2018, which ruled in favour of Frucor which was something of a surprise at first sight for those not familiar with the facts. Inland Revenue unsurprisingly appealed the decision and in 2020 the Court of Appeal held that the deductions did represent tax avoidance. However, the Court of Appeal did not accept the criteria for shortfall penalties had been met, so both parties were unhappy with their decision and naturally both appealed to the Supreme Court.
Last Friday it ruled by a 4 to 1 majority that the arrangement did represent tax avoidance and the shortfall penalties were correct as the tax position adopted by DHNZ (Frucor) was unacceptable and abusive as DHNZ acted with the dominant purpose of obtaining tax advantages.
Now, in some ways, the Supreme Court’s ruling is unsurprising. New Zealand courts have taken a fairly hard line on what is perceived as tax avoidance for the last 15 years or so. But there’s still a number of points of interest here. Firstly, you will note the length of time involved: the transaction happened in 2003. The assessments, which are the subject of the appeal, were for the 2006 and 2007 tax years. And there’s nothing I’ve seen yet explaining why it took nearly so long to reach the High Court. Under the principle of justice delayed is justice denied it’s concerning to see the amount of time involved.
Then there is the imposition of shortfall penalties, which seems harsh. If you are taking something all the way to the Supreme Court, you know you’re arguing on the margins. Nine judges looked at the matter and five said no shortfall penalties were appropriate. The only four that did think they were appropriate were the ones that mattered most because they were all on the Supreme Court. And you often see this in in court cases, the lower courts rule one way and then the Supreme Court says, nope, it’s the other way, and that’s the end of it.
But most interesting of all is the strong dissent by Justice Glazebrook in the Supreme Court now. Dissenting justice judgements are often very interesting reads, and I suspect Justice Glazebrook’s will be read and examined in quite considerable detail, given what she rebutted completely the principles adopted by the other four justices. Just for the record it’s worth noting that before she became a judge back in 2000, Justice Glazebrook was a tax partner in a law firm. She’s actually one of the co-authors of a book on the financial arrangements regime. In fact, the first edition, published back in 1999, is still had not yet been updated. So she’s got a good background in tax.
But the paragraph, I think is going to raise a few eyebrows is the penultimate one of her judgement.
[247] “The majority say that the dominant purpose of the arrangement in this case was to reduce the tax liabilities of Frucor. This despite the fact that the whole reason for the restructuring was to ensure that Danone Asia did not incur tax liabilities in Singapore, unlike the position before the refinancing where direct debt funding was provided by Danone Finance. Given that, before the refinancing, Frucor was deducting interest payments roughly equivalent to the amounts it claimed deductions for under the current arrangement, it is difficult to see how its purpose could have been to achieve a result it was already receiving (deductibility of interest) and thus difficult to see its dominant purpose as being to reduce its tax liabilities or to achieve an illegitimate tax advantage in New Zealand.”
Now that’s quite some paragraph, I have to say I don’t think I’ve seen for a while a judgement where you’ve got such completely opposite views on between the judges.
You often see differences in interpretation, but here there’s a very marked difference on the core of the case. Justice Glazebrook has questioned how it is tax avoidance in New Zealand when you consider that the real purpose of the restructure was to resolve a tax problem for the offshore parent.
It will be interesting to see feedback from other, more experienced legal practitioners and tax specialists who work in this space about this decision. As I said, I find Justice Glazebrooks dissent there quite strong, and I suspect it will generate quite a bit of commentary.
Hiding the effect of fiscal drag
Moving on, the Government published its financial statements for the year ended 30th June 2022 on Wednesday. As you no doubt are aware by now these turned out to be better than expected and have generated quite a bit of chatter around the overall tax burden and the implications for next year’s election.
From a tax perspective, what’s interesting to see is the strong rebound in company income tax. The forecast in the 2021 Budget was that corporate tax would be just over $13 billion. By the time of this year’s budget in May the estimate had risen to $17.25 billion. In fact the total for the year was just under $19.9 billion.
For individuals the tax source deduction payments (PAYE) are up. Two factors are at play here: the well-known one of fiscal drag or bracket creep which means as people’s wages rise, they cross tax thresholds and their tax increases. On top of that, you’ve got the introduction of the new 39% tax rate. Those two combined, according to the commentary to the financial statements, represented about $1 billion of extra tax.
You have to dig very hard to find out what is the effect of bracket creep or fiscal drag, because that’s not being reported in the budget statements. You can draw your own conclusions as to why that is so. But we do know that when it was included in the 2012 Budget the effect was between 0.1 and 0.2% of GDP.
At a rough guess the current effect of fiscal drag would be somewhere around $500 Million a year.
The GST take rose to $43 billion gross with the net GST for the year being $26 billion through. Overall, as I mentioned at the top of the podcast, tax revenue, including indirect taxation, exceeded $100 billion for the first time at just under $107.9 billion.
So, lots of excitable chatter about what that means politically for tax cuts and other changes. Speaking on RNZ’s The Panel yesterday afternoon, (about 12 minutes in) I reiterated what I have said elsewhere that we need to do more about the tax brackets at the bottom end because that’s where the effects of fiscal drag are the hardest. The non-indexation of income tax and Working for Families thresholds means there are people on say $50,000 a year & receiving Working for Families who are on an effective marginal tax rate of 57%.
Roasting the idea of GST exemptions
Obviously what went on over in the UK has also attracted attention. This week the UK Government abandoned its higher rate tax cuts in the face of extreme political pressure from all sides, including Conservative MPs. It’s been very interesting and entertaining to watch a really classic example of the “Order, Counter-order, Disorder” maxim. And I do wonder how Prime Minister Liz Truss and her [Finance Minister] Kwasi Kwarteng are going to survive.
And finally, speaking of the UK, one of the things that comes up in discussions about how do we help with the cost of living is a not unreasonable suggestion on the face of it, to remove GST on certain foods. Now I’m in the GST purist camp here. I don’t believe we should do that. To repeat a point I’ve made several times, if you are trying to help people who have not enough income, give them more income. Any changes to the GST system such as zero-rating food benefits everybody and therefore are also more expensive as a consequence. And that idea of targeted assistance is consistently noted by the Tax Working Group and also the Welfare Expert Advisory Group.
But there’s another reason why you wouldn’t want to do it unless you wanted some inadvertent laughs. And that is the absurdity of the distinction which happens at the point where you are trying to determine whether a particular product is zero rated or standard rated. Now, Britain, with its VAT (value added tax) regime, has produced a number of very entertaining cases on this. I think people may be aware of the Max Jaffa case, which involves the distinction between a biscuit (standard rated) and a cake (zero-rated).
But this week I was alerted to one which is even more spectacularly hilarious, and it involved marshmallows of unusual size, which really sounds like something a line from The Princess Bride. A VAT tribunal case ruled that marshmallows of an unusual size are 0%, but standard sized marshmallows were standard rated at 20%. As one commentator noted, it’s sometimes very difficult to decide whether a VAT case is indistinguishable from satire.
This case involved a £470,000 dispute between Innovative Bites Ltd and H.M. Revenue Customs about the product “Mega marshmallows”. The VAT tribunal ruled that mega marshmallows were zero rated because they have to be roasted before they could be consumed and therefore not a standard rated snack.
On that bombshell, that’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.taxor 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 te wiki, have a great week!
The Government ignored Treasury and Inland Revenue advice on its build-to-rent tax proposal
Thee British mini-budget implications for Kiwis
A few weeks back I discussed Inland Revenue’s regulatory stewardship review of FBT, and I suggested it should be looking at improving its compliance in this area. Well this week Inland Revenue has announced that it will be launching a campaign in October which will address common errors in FBT.
Actually, a footnote in the regulatory review referenced this campaign. The footnote noted “Particular attention will be drawn to FBT on motor vehicles with the primary audience being businesses registered for FBT and tax agents.” The footnote Information from tax filings that indicates an FBT error will also be used to determine whether particular taxpayers should review their FBT position
The common errors Inland Revenue expects to see includes calculating FBT incorrectly, applying the exemptions available incorrectly and using the best rate to suit a taxpayer’s circumstances. This latter one is now a particular issue as following the increase in the top personal income tax rate to 39% the equivalent FBT rate has risen to 64%. It’s already been noted there’s quite possibly a risk that some FBT filers may be overpaying tax.
On the other hand, as Deloitte partner Robyn Walker observed in a LinkedIn post, Inland Revenue might perhaps need to also look at some employers who are not registered for FBT. According to the regulatory review only 83% of employers with 500 or more employees are actually registered for FBT, a statistic Robyn found surprising. It’s hard to imagine an organisation with that many employees not providing some form of fringe benefits.
Of course, sometimes what might be subject to FBT can be quite obscure. Apparently, over in Australia, the owner of a specialty shop in a shopping centre is liable for a ‘property fringe benefit’ by permitting staff to use centre toilets in common area. This is such an extreme example, it’s practically unenforceable and in fact is widely ignored.
On the other hand, as the regulatory review noted there’s a fair bit of complexity to FBT now. There are probably quite a few employers who might well have provided fringe benefits without understanding that they were in fact doing so. The campaign begins next week and will run for four weeks. It will be interesting to see what comes out it.
Rejecting advice
Last month the Government unexpectedly announced that the build-to-rent sector would be exempt permanently from the interest limitation rule so long as tenants were offered leases of at least 10 years. Earlier this week it emerged this was contrary to advice from Inland Revenue and Treasury on the proposal.
Both agencies considered that the new build exemption which allows an interest deduction 20 years from the date a code compliance certificate is issued was sufficient. However, the build-to-rent sector was unhappy about the initial interest limitation rules and continued to lobby for a wider exemption which has now been granted.
For the purposes of the exemption, the build-to-rent development must consist of at least 20 dwellings. Inland Revenue advised the Government, because build-to-rent investors tend to be large institutional investors, this means the exemption “…could be viewed as inequitable, because it would benefit large investors but provide no relief for smaller investors who hold similar properties”.
On the other hand, the Ministry of Housing and Urban Development supported the tax break, arguing the 20-year “new build” exemption wouldn’t go far enough to encourage investment in purpose-built rentals. In its view,
“The initial policy (for interest limitation) did not take into full account the diversity of residential property supply and was mostly built around standalone properties. Emerging residential models such as build-to-rent were not captured in this model.”
We probably haven’t seen the end of this controversy and you can expect to see more lobbying as the new tax bill containing this measure works its way through the Finance and Expenditure Committee submission process. Submissions on the bill are now open and the final date for submission is 2nd November.
In the fog of [tax] war
Last week’s UK mini-Budget sparked massive turmoil in the UK’s financial markets, something not seen since the GFC and the 1992 crash out of the European Exchange Rate Mechanism. The proposed tax cuts are about 2% of UK’s GDP and the largest in 50 years. To put them in a New Zealand context, they are approximately equal to $7.2 billion annually or four times the size of the tax cut National are currently proposing if they win next year’s election.
Beyond the headlines of the very dramatic tax cuts for high income earners, there were a few points of interest, which I think have a New Zealand relevance. Surprisingly, for example, there was no proposal to cut either capital gains tax or inheritance tax, which for a party of tax-cutters odd, but may represent an acceptance that those tax settings are acceptable. On the other hand the nil rate threshold for Stamp Duty Land Tax was doubled to £250,000, and the threshold for first time buyers was increased to £425,000. Stamp Duty is still a significant tax in the UK (about £14.4 billion annually)
Something which has discussed quite a bit here is more generous capital allowances. The UK has what it calls the Annual Investment Allowance. This was temporarily increased to £1 million and was supposed to be reduced to £250,000 with effect from next April. Instead, it’s going to be permanently set at £1 million. What that means is there’s an immediate deduction for the full cost of qualifying plant and machinery (excluding cars) up to the £1 million threshold.
Something similar here would be very welcome. Treasury and Inland Revenue would oppose such a measure because of its revenue cost. But you can see its potential impact following the temporary increase in what we call the low value asset write off to $5,000 in 2020-21.
UK employers are also required to pay National Insurance Contributions on employee’s salary, currently at a rate of 15.05%. This is on top of the salary they pay. Inevitably, this led to attempts to work around this levy a trend accelerated by the increased use of contractors with personal service companies. This is something that’s been going on for decades, I saw it when I was working in the UK nearly 30 years ago now.
The UK government has responded with a set of rules known as the IR35 rules to clamp down on such practices. The rules ensure contractors who would have been employees if they were providing their services directly to the client, pay broadly the same National Insurance Contributions as employees.
Inexplicably, the mini-Budget has repealed those rules with effect from next April. This is actually of interest to New Zealanders in two forms. Firstly, Kiwis working over in the UK have made use of personal service companies and I’ve come across instances where they’ve been caught up in investigations into their use by HM Revenue and Customs.
But they’re also of interest here because the use of contractors and personal service companies might be something that could pop up in the context of the proposed social insurance levies that are currently working their way through consultation in Parliament. It could be that companies may attempt to use a similar mechanism to avoid paying those levies. The Government here might want to watch this much more carefully if the social insurance proposals do go ahead.
And finally, the UK has an Office of Tax Simplification, which was set up in July 2010 to advise government in simplifying the UK tax system. In another surprise move it will be abolished and its role in simplifying the tax code will be taken over by the UK Treasury and H.M. Revenue and Customs. It’s an interesting move but a bit disappointing because it’s always nice to have an independent agency outside tax authorities or Treasury looking at this sort of matter. On the other hand, the UK tax year still runs to 5th April, so a cynic might say maybe it hadn’t got that far with simplification.
Well, 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 te wiki, have a great week!
Earlier this week, Nicola Willis, National’s finance spokesman, released information she had obtained from Inland Revenue regarding the cost-of-living payments. Included in this information was the fact that some 6,629 payments were made to individuals with overseas mailing addresses. Now it is possible that some of those persons did actually meet the criteria of being tax resident and also physically present in New Zealand at the time of the payment, however it seems more likely most of those payments were made to ineligible recipients.
This data supports anecdotal evidence I’ve heard from other tax agents who have reported examples of non-resident clients receiving the payment. And the fact that a significant number of payments were made to apparently readily identifiable non-residents is concerning is concerning and points to a potentially systemic error.
Nicola Willis also asked a number of questions regarding ineligible recipients. According to written answers provided by the Minister of Revenue currently, Inland Revenue is not aware of any recipients who were either in prison or under the age of 18, which is a bit reassuring.
It also emerged that 49,300 payments were made to persons who only declared investment income. Now that’s an interesting statistic itself, but as an Inland Revenue spokesman noted, the eligibility conditions did not prohibit payments to such persons so long as they met the three key criteria of their income being under $70,000 are tax resident and are physically present in New Zealand at the time of payment.
In the wake of the fallout from the first payment cycle in August, Inland Revenue has tightened up its processes before the second wave of payments made at the start of this month. As a result, the number of people receiving cost-of-living payments dropped by about 54,000. These types of checks apparently included Inland Revenue screening and questioning people who accessed their myIR accounts from an overseas Internet address.
MyIR is likely to be an extremely useful tool for Inland Revenue for spotting potential discrepancies. I do know one case where they noted that some numerous changes had been made to a draft return before it was finalised and when the return was subsequently investigated it turned out that the changes had been aimed at maximizing the available foreign tax credits in excess of what was allowable.
In relation to the cost-of-living payments errors were inevitable given that they would be made to an estimated 2.1 million recipients. For me, the bigger issue here is whether Inland Revenue is properly resourced. It estimated it required between 750 and 1,000 staff to deliver the payments. This is the equivalent of nearly 25% of its headcount of 4210 as of June 2021. The questions I’d be raising is why are so many additional staff required, particularly when you consider that Inland Revenue has just completed a $1.5 billion Business Transformation programme?
There’s also the question that there does seem to be a systemic error in relation to those payments made to individuals with overseas mailing addresses. In short, this is disappointing and shouldn’t really have happened. No doubt we’ll hear more about this as National is firing lots of questions on the matter at the Minister of Revenue, its MPs address on average somewhere between 80 and 100 written and oral to the Minister of Revenue each month.
Doomed, but an important point made
Moving on, last year I discussed a Taxation Review Authority (“the TRA”) case in which the taxpayer wanted assessments to be amended to reverse the effect of the over-taxation of a lump sum payment of $150,000 she had received from the Accident Compensation Corporation. This payment represented backdated compensation in respect of the previous compensation, which she should have received over the period April 2014 to September 2017. Instead, the back dated compensation was eventually paid as a single sum and subject to PAYE.
At the time, the taxpayer argued that this represented over-taxation as the payment should have been treated for tax purposes as having been derived on the accruals basis and spread over the income years to which the payment related. The Taxation Review Authority dismissed her challenge, but she has taken her case to the High Court who heard it late last month.
Her appeal was pretty much doomed from the start because currently there is no authority for the payment to be treated as she wishes, although conceptually I believe it’s a reasonable approach. And it transpired that it was a doomed appeal because the High Court declined to exercise its discretion to extend the time for her to file an appeal against the TRA decision.
But as I said, I think the point she is making is valid. Subsequent to the TRA case I obtained information from ACC under the Official Information Act about how many people had received backdated compensation.
And it turns out hundreds of people each year do receive such payments. I therefore took the matter up with Inland Revenue and Parliament’s Finance and Expenditure Committee. I understand that Inland Revenue officials are currently reviewing the treatment of lump sum payments made by ACC and the Ministry of Social Development with a view to reporting to ministers in the coming months. I’ll update you on any developments as they emerge, but that does sound hopeful.
Global tax reform effort broad but it stutters
Yesterday, the OECD released its annual publication on tax policy reforms. This provides comparative information on tax reforms across countries, and this edition focuses on the tax reforms that were introduced or announced during 2021. This 2022 edition has the largest country coverage in its history. It covers the tax policy reforms made in 71 member jurisdictions of the OECD/G20 inclusive framework on the Base Erosion and Profit Shifting on international tax reform and includes all 38 OECD countries.
The report (not available as a download) breaks down into four parts. The first looks at the macroeconomic background and includes an overview of developments in the global economy. Part two presents the latest trends in tax revenues and in the composition of taxes and also identifies how these were affected by the arrival of the pandemic in 2020. Part three provides detailed description of those tax reforms that were introduced in calendar year 2021. Part four is a special feature which examines measures countries have introduced in response to rising energy prices and also has some policy recommendations.
The key policy trends identified are that personal income taxes and Social Security contributions reduced in most countries, as policymakers tried to boost economic growth and promote equity. That said, changes in personal income tax rates were less common than in previous years. Measures were targeted towards low- and middle-income households, particularly those with children aimed at promoting employment and providing in-work benefits.
Corporate income tax rates were cut in four countries. And the general convergence of corporate income tax rates across the countries continues. However, the big development last year was the agreement of 137 jurisdictions to the Two Pillar solution to reform international tax rules. Now, that seems to be stalling at the moment, but still, as I said, represents a major development.
With regard to VAT (Value Added Tax or GST), not many changes happened last year other than the reversal of most of the temporary VAT reductions introduced in the wake of the pandemic in 2020.
In the field of environment related taxes, the OECD report some progress, but at a slower pace than previously. The effect of carbon prices remains low overall because of the temporary cuts to energy taxes that started to come in with effect towards the end of 2021.
In relation to property taxes there were some measures introduced promoting progressivity and fairness. These predominantly involved tax rises either through increases in tax rates or base broadening measures. The bright-line test being extended from 5 to 10 years last year is one such example of that. The report points out that such measures are often trying to promote the efficient use of existing housing stock as well as greater fairness of property taxation, a long running theme of this podcast.
Part Four on the support measures introduced by governments to try and protect households and firms from the impacts of high energy prices is interesting reading. Here in Aoteaora New Zealand, the major energy issue has been the impact of petrol prices. Fortunately, because of our high renewable sector, we’ve been somewhat shielded from the impact of higher energy prices. But if you’ve seen reports coming out of Europe and Britain in particular, you will know that some horrific energy price rises are either on the horizon or are happening right now.
The OECD report recommends a shift towards more targeted measures aimed at helping those on lower incomes. This “may require improvements to existing transfer and social welfare systems.” So as often with a lot of the stuff we see coming out of the OECD it’s very interesting to see international trends and consider those in a New Zealand context.
Well, 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 te wiki, have a great week!
We frequently discuss Binding Rulings issued by Inland Revenue and a couple issued this week illustrate why you need to be thinking of potential tax issues in what might seem relatively routine transactions.
Binding Rulings are Inland Revenue’s interpretation of how the tax law applies to a particular arrangement. The whole purpose behind the binding ruling process is to provide greater clarity. Most of those we discuss are public Binding Rulings but there are also product binding rulings where a product provider wants to get clarity on the tax consequences of the particular product or transaction that’s happening.
Two such product rulings this week illustrate the point. The first one is for Sustainable Mobility Limited trading as Zilch. What Zilch does is provides electric vehicles to a business customer who uses the vehicles for business purposes. Under the arrangement, the driver–employee of the business customer to pay Zilch for the use of the vehicles for their private purposes.
Zilch was concerned about whether this arrangement might give rise to a fringe benefit for anyone who uses these vehicles. In the product ruling Inland Revenue confirmed subject to meeting all the conditions set out in the ruling the use of the vehicles would not be regarded as a fringe benefit.
The second ruling is in respect of a Westpac mortgage offset arrangement. Westpac customers can elect to use the balance of eligible transaction and savings accounts to offset against home loan accounts. And the idea is more efficient use of those funds will reduce the interest payable on the home loan accounts. The concern here was whether this would give rise to issues under the financial arrangements regime, the quantum physics of New Zealand tax where there are plenty of hidden tax traps.
Inland Revenue ruled that the offsetting in itself does not give rise to any income or expenditure under the financial arrangement fees. Furthermore, no requirement to deduct resident withholding tax on offset transactions arises. Technically, if there had been a payment for the purposes of the Income Tax Act does that represent a payment of interest? And therefore do resident withholding tax or non-resident withholding tax apply? Subject to meeting the conditions, no, according to the ruling.
Now, you can look at what we’re seeing here is just examples of the traps you can find in what appears at first sight to be relatively routine transactions. Offsetting credit balances to minimise interest, you would think, “Oh yeah, that makes a lot of sense.” But then you drill into it and you hit the financial arrangements rules, and then suddenly there’s a number of issues you have to consider.
There are two key points. One, organisations offering products need to be careful about the tax consequences involved. Secondly, once they have done that asking Inland Revenue for clarity around the arrangements is a good first step. Product Rulings do involve a fee payable to Inland Revenue ad they can take a bit of time. They do provide certainty and you can probably use the ruling as a marketing tool as well. So as always, with taxes, plenty of unintended consequences to be mindful of.
House deposit unaffordability
Moving on, a few weeks back, I mentioned a report that had been produced by The Treasury, the Reserve Bank, the Ministry of Housing and Urban Development. In the form of the Housing Technical Working Group had published an assessment of the housing system with insights from the Hamilton-Waikato region.
Last Friday, Dominick Stevens, (formerly the Chief Economist at Westpac but now the Deputy Secretary and Chief Economic Adviser to Treasury), delivered the opening comments at the Economic Policy Centre’s Workshop on Housing Affordability at the University of Auckland.
He referenced the Housing Technical Working Group report and then expanded on Treasury’s conclusions were on the implications for policy.
His speech is very worthwhile reading because it does cover the whole ambit of economic policy on housing, with plenty of interesting insights. For example, apparently there’s very little relationship between where house prices have risen the most and the regions with the most population growth or the most acute housing shortages, which is an interesting conclusion in itself.
I think one of the real major insights generally is that high house prices and low interest rates affect deposit affordability more than mortgages for affordability or rent affordability. Basically, mortgages are affordable because we’re in a low interest regime, but accumulating the deposit in order to purchase a property is not so manageable and there are some fairly alarming looking graphs illustrating that particular issue.
Treasury’s conclusion was we already knew “that houses are income tax advantaged relative to many other forms of investment due partly to our lack of a comprehensive capital gains tax.” But then he expanded on this by noting
“…the more restricted the supply of land, the more that changes to the tax system will be capitalised into the value of urban land, rather than affecting housing supply or rents. Our Assessment concluded that tax distortions have added significantly to the price of scarce urban land in New Zealand. In the current context, reducing these tax distortions would make land cheaper, and would have less effect on rents or housing supply. Indeed, last year’s change to the tax treatment of some investment properties may have influenced urban property values.”
A couple of really interesting conclusions here. Firstly, tax settings really have made an impact on house prices and the changes last year may have eased those issues to some extent. When you consider that you’re only getting a full interest deduction for new builds, that directs investment towards concentrating housing in urban area and hopefully both brings down house prices and increases the supply of housing.
Plenty more to watch in this space and no doubt there will be some controversy about the matter. And there is actually a few more interesting papers from that conference which we will try and pick up on another time.
DIA still traveling at a snail’s pace
Tax agents and Accountants have been subject to the Anti-Money Laundering and Countering Financing of Terrorism provisions for a number of years. To be honest these measures weren’t entirely welcomed. In the run up to the introduction of the provisions in 2018 I was at a couple of conferences where the Department of Internal Affairs officials telling us what we must do and this was the way it was going to be, were greeted with a fair amount of scepticism, to put it mildly. One of the issues raised was how the compliance costs were going to fall on small businesses.
One of the other issues identified, but which at that time DIA officials did not have answers for, was in relation to tax transfers in two scenarios. One is where the taxpayers may have overpaid tax and they want to transfer that overpayment to a related party or associated party. The other scenario was transfers made by tax pooling agents, such as Tax Management New Zealand, Tax Traders and Tax Solutions. These are all companies to which you make tax payments which sit in a pool and are transferred across to Inland Revenue to meet tax liabilities.
We wanted to know whether these were subject to the AML regulations and initially, the advice was that they were subject to the AML regulations. We raised this issue more than four years ago questioning whether this was proper. Is that really what the AML legislation should be targeting?
And finally this week the Associate Minister of Justice granted a class exemption from most of the AML regulations for accounting practices (including accountants, bookkeepers, tax agents, and insolvency practitioners) carrying out “most” types of tax transfers under the Tax Administration Act 1994 or “most” types of tax transfers. The question of transfers from tax pooling companies is still to be decided.
This class exemptions is a good thing to have, but the question remains why has it taken four years to get this to this position? This was an issue identified, as I said, many years ago, before the legislation started to apply to accountants and tax agents. And yet it’s only now that particular matter, which is something we do all the time has been resolved.
So, one step forward, one step sideways. But you do wonder whether the agencies are resourced well enough to be managing these questions and what other businesses have been raising questions, saying, “Here’s a standard business practise which we think shouldn’t be covered. Can you give us a ruling on that?” We’ll have to wait and see.
Monarchs go tax-free
And finally, with the Queen’s death dominating the news headlines a bit more on the Royal finances. It’s quite fascinating to see all the rituals on the death of the Queen. For example, the King’s Duchy of Cornwall Estate, which is apparently worth £1 billion, passed automatically to Prince William. The Duchy of Cornwall goes back to 1337 and owns some centuries old assets including the Oval Cricket Ground in London as well as Dartmoor Prison.
Apparently, the total crown estate is worth £15.2 billion. As for the Queen’s own estate, this is quite substantial for example, she received £70 million free of inheritance tax from her mother back in 2002. Although the UK has inheritance tax, under an agreement reached with the Queen in 1993, it does not apply to sovereign-to-sovereign transfers. The majority of the Queen’s estate will pass to the King without inheritance tax.
However, if any bequest was made by the Queen to anyone other than King Charles, then inheritance tax at 40% would apply. It will be interesting to see what the Queen’s final inheritance tax bill will be.
Well, 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 te wiki, have a great week!
