Should the New Zealand Superannuation Fund become tax exempt? Inland Revenue is under scrutiny for its use of social media.
A bad week for Apple and Google in the European courts.
Inland Revenue releases an intriguing consultation on GST and management services supplied to managed funds.
In the past few weeks, the question of taxing capital has reappeared on the agenda featuring across a number of news stories. It probably kicked off initially when Inland Revenue’s long term insights briefing consultation document raised the question of whether the tax base should be expanded to meet what is the anticipated growing fiscal costs of superannuation, health and climate change.
“New ways of generating revenue”
Then a couple of weeks back, the outgoing chief executive and Secretary to the Treasury, Caralee McLiesh, commented to the New Zealand Herald that New Zealand needs new ways of generating revenue and cutting expenditure. She suggested a capital gains tax and a more efficient superannuation scheme.
Labour leader Chris Hipkins has been in the news talking about the Labour Party’s internal discussions around the question of taxing capital. And then at the start of the week, Bruce Plested billionaire co-founder of Mainfreight, raised the idea of wealth tax. Understandably he caveated it with a question around whether the funds raised would be spent wisely.
But the point is, across the whole spectrum the question of taxing capital is back on the agenda. It never actually goes away to be perfectly honest. Like spring it comes around at least once every year. Anyway, it’s interesting to see this debate carried on. I think a driving factor is a growing recognition that the present tax base probably isn’t sufficient to meet the coming demands of rising superannuation, rising health costs and climate change. Sure, managing government expenditure more efficiently will help, but it will only go so far.
The Treasury has talked about a structural deficit of 2% of GDP which is $8 billion. That’s a fairly sizable sum, and with the best will in the world, cuts in government spending aren’t going to fill that gap. So, a discussion has to be had on how this gap is to be filled.
Given we will need to find extra revenue, taxation of capital is the obvious point. We should be considering whether it’s a wealth tax, land tax, capital gains tax or even restoration of estate and gift duties, which were once quite a substantial part of the New Zealand tax base. It could be a combination of all or some of those, but the debate isn’t going away.
Time to make the New Zealand Superannuation Fund tax exempt?
Moving on, and talking about the rising cost of superannuation, the New Zealand Superannuation Fund (NZSF) was established more than 20 years ago by Michael Cullen, to help smooth the cost of superannuation. It has been an enormous success. The NZSF has now grown to well over $70 billion and along the way it has been paying tax.
This is quite unusual for sovereign wealth funds because most are tax exempt. New Zealand has two other sovereign wealth funds, ACC and the Reserve Bank of New Zealand, and neither of those are taxed. They have between them another $60 billion of assets. But when the NZSF was established back in 2003, the decision was taken that it would pay tax. Part of the reason for doing so was to provide a commercial incentive so the NZSF made decisions around investments on strong commercial grounds, rather than because of a tax-exempt status.
But this has created a sort of slightly odd money-go-round. The government would contribute capital to it based on a formula, and then the NZSF would then pay part of that back in the form of tax. This is before its designated drawdown date, which is coming up towards the latter part of this decade, when it’s expected that regular withdrawals will be made to start funding superannuation.
For the period to June 2024, the Super Fund received contributions of roughly $1.6 billion overall and paid nearly $1.5 billion in tax. It is by far and away the largest single taxpayer in the country, a reflection, by the way of our Foreign Investment Fund regime rules. Finance Minister Nicola Willis is now seeking advice as to whether in fact it should become tax exempt, on the basis now that its tax bill is beginning to outgrow crown contributions.
Now that the Government has contributed $16.9 billion after accounting for $9.6 billion in tax paid since the fund was set up, the Finance Minister will be thinking whether it’s now time the Government can wind back the contribution. Ultimately, this should have the same effect as also removing its taxable status. We shall see how this develops, but it’s interesting to see the discussions in this space, which are also a by-product of the question of how do we fund superannuation?
Inland Revenue under fire
Moving on, Inland Revenue is in a little bit of hot water after it emerged that it’s giving hundreds of thousands of taxpayers’ details to social media platforms as part of its various marketing campaigns. These campaigns are intended to target taxpayers who might owe taxes.
Unpaid student loans are one particular area that that pops up here. The controversy revolves around the anonymisation tool which is used to ensure that whatever information the social media companies get, the details are minimised as far as possible to protect the privacy of the taxpayers involved.
The question has been raised as to whether that tool is sufficient.
The horns of a dilemma
There are two issues here. One is the technical question about how effective is the anonymisation tool. But the bigger question is whether Inland Revenue should be doing that. It faces a problem that if it wants to reach out to the general public – or certain sectors of the public – to remind them about their tax obligations. The best outreach method is through social media platforms. Inland Revenue is on the horns of a dilemma.
I will say this, that in my 20-30 years’ experience watching and working with Inland Revenue, it has an exemplary record around disclosure of private details. It has strong processes in place, and I cannot recall over that time a data breach scenario similar to those we’ve seen with both ACC and MSD where private data of taxpayers has been emailed to persons outside the agency.
Notwithstanding Inland Revenue’s record, the practice seems questionable because of the fact that social media sites are constantly under attack from hackers. Supplying private information to social media companies, no matter how laudable the intentions, puts that data at risk. It would be interesting to hear from the Privacy Commissioner on this.
Then there is the huge irony that these social media companies are amongst the most aggressive exponents of tax planning in in the world. For the year ended 31st December 2023 Facebook New Zealand, for example, reported taxable income of $9.1 million, but we know from its accounts that it paid over $157 million offshore to related entities. And Google’s numbers are even bigger. The extent of the advertising now going offshore has absolutely gutted local media and the implications of this loss of revenue for our media landscape are still being worked through.
Inland Revenue has to work through the dilemma as to how far it should go with providing information to social media companies. Ideally, you’d say it should not. But if you want to reach out to taxpayers about their obligations, you have to go where you might find those taxpayers. And at the moment that’s the social media companies.
Apple and Google lose bigly in Europe
Speaking of the big tech companies, over in Europe, Google and Apple had a week to forget. The European Union’s top court the Supreme Court of the European Court of Justice (the ECJ) ruled that Google must pay a €2.4 billion fine for abusing its market dominance of its shopping comparison service. This fine had been levied by the European Commission in 2017, and Google has been fighting it since then but has now lost in the ECJ, the highest court in Europe.
But that news was overshadowed by a major tax decision by the ECJ the same day, ordering Apple to pay Ireland €13 billion. That’s an eye watering $23.3 billion the equivalent of just over 12. 5% of Ireland’s total tax revenue for 2023.
What’s particularly interesting about this case is that Ireland was also a defendant alongside Apple. Ireland had been accused by the European Commission of having given Apple illegal tax advantages in the form of state support. The European Commission ruled the state support was illegal in 2016. Apple appealed and won in the lower court of the ECJ in 2020. But now the ECJ’s Supreme Court Justice has ruled that there was illegal state support which must be repaid.
A major transfer pricing decision
This is going to be a key transfer pricing case which will be analysed for many years to come because it revolves around the way profits generated by two Apple subsidiaries based in Ireland were treated for tax purposes. The ECJ ruled these arrangements were illegal because only Apple was able to benefit from them. Other companies based in Ireland could not.
This is just the latest instalment of the general crackdown that Europe is going through right now about transfer pricing and other profit shifting mechanisms led by the European Commission. The decision is an enormously important case in the transfer pricing world.
It actually leaves Ireland in a little bit of an embarrassing case because, as I said, it’s an enormous sum of money, so people will be naturally saying, well, what are we going to do with this? The Irish Treasury has warned against using this for anything other than perhaps a one-off major capital project or debt repayment.
But the Irish also appear to be quite concerned about how their low tax regime (they have a corporate tax rate of 12.5%) will be perceived by other companies who would like to invest in Ireland which has pursued a long-term policy of attracting investment. Its industrial strategy was shaped in the late 50s, but really only started to come to fruition once Ireland joined the European Economic Community in 1973.
I would be very interested to see how this massive decision plays out in other jurisdictions and what lessons are taken by transfer price practitioners.
GST and managed funds – round two?
Finally this week, Inland Revenue has been busy releasing a number of draft consultations on a range of subjects, including Commissioner of Inland Revenue’s search and information gathering powers, the income tax treatment of short stay accommodation, arrangements involving tax losses carried forward under the business continuity rules, and a big paper on the income tax company amalgamation rules.
However, the one that’s got me a little bit intrigued because of its back story is a consultation on the GST treatment of fees paid in relation to managed funds. If you recall back in August 2022, the then Labour government introduced a tax bill which included a measure which would impose GST on management services supplied to managed funds.
According to the supporting Regulatory Impact Statement that measure was to tidy up an anomaly that had been identified by a GST issues paper released by Inland Revenue In February 2020, just before COVID arrived. It was projected to bring in an estimated $225 million a year starting from 1 April 2026.
A furore erupted after the same regulatory impact statement noted that was according to modelling by the Financial Markets Authority, the impact of imposing GST on management fees would mean that the amount available for KiwiSaver investors would be reduced by an estimated $103 billion by 2070. For context, it’s worth pointing out that the KiwiSaver funds were projected to be valued at nearly $2.2 trillion. In an unprecedented move, Labour backed down and withdrew the bill within 24 hours.
Against that background, it’s interesting to see Inland Revenue’s final consultation on the same topic. And this is where I’m intrigued to know a little bit more about what’s changed. Basically, it seems that Inland Revenue is going back to a default position where manager fees are treated as exempt, but investment manager fees become subject to 15%. The proposal in 2022 was all fees become subject to GST at 15%.
An intriguing counter-factual
What intrigues me is that the 2022 Regulatory Impact Statement noted as the counterfactual that this would probably result in something like an overall increase in GST collectible of approximately $135 million per annum from 1 April 2026 onwards. That’s not an insignificant sum of money.
Although Inland Revenue’s job is to provide interpretation and guidance, my thoughts on this are if this is a sum that’s going to potentially raise $135 million dollars of tax annually, maybe that’s something that Parliament should legislate.
There is also a subsidiary issue here which is a long-standing issue in our tax system at the moment. It is surprising, given that this was a controversial point, that this issue had not reached the courts, or that no one has taken a test case.
So, although Inland Revenue is doing its job, given the sums apparently involved I think that is something that should be put into legislation and go through the Select Committee process. But for the moment though, Inland Revenue is consulting on the issue until 25th October. As always, we will bring you any news and 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.
My guest this week is Claudia Siriwardena one of the four finalists for this year’s Tax Policy Charitable Trusts Scholarship.
We discuss her proposal for a simplified fringe benefit tax regime for small businesses.
My guest this week is Claudia Siriwardena, a tax consultant with Deloitte and another of the four finalists for this year’s Tax Policy Charitable Trust Scholarship competition. The Tax Policy Charitable Trust was established by Tax Management New Zealand and its founder Ian Kuperus to encourage future tax policy leaders and support leading tax policy thinking in Aotearoa.
Claudia is suggesting a simplified fringe benefit tax regime for small businesses. I should make it clear here that everything in Claudia’s proposal and what is in this podcast represents her views and not those of Deloitte. Kia ora Claudia, welcome to the podcast. Thank you for joining us.
Claudia Hi, Terry. Thanks very much for inviting me on.
Terry Fringe benefit tax is a very controversial tax and one where there based on anecdote people seem to be shall we say, pushing the envelope. I think the main controversy around fringe benefit tax is around the charge that’s that payable for the private use of public company vehicles.
That’s by far and away probably the largest single component of FBT’s and the advent of the twin cab ute, with people thinking that it qualifies for a work-related vehicle seems to have magnified the issues here. There was an Inland Revenue Stewardship Review of FBT a couple of years back and that had a lot of interesting stuff.
What caught your eye about FBT into thinking “Oh there’s something here to consider.”?
Claudia Yes, like you say, Terry, it can be a very complex regime. There’s a lot of rules that that go into it and my initial inspiration for this simplified FBT regime came through my personal experience of undertaking tax due diligence. A common topic of discussion throughout tax due diligence is FBT, but particularly the FBT rules regarding motor vehicles provided to employees for private use.
I was thinking about ideas for the tax policy competition so I took that personal experience and I thought there was a real opportunity here to simplify these rules and to increase compliance. And aside from that, I think like you’ve said, there is a commonly held view that the FBT rules are relatively complicated and hard to understand. And that was something that was discussed in that Stewardship Review that you mentioned, and also a 2003 government discussion document. So what my proposal is intended to do is to simplify these rules and make it understandable.
A tax with a lot of non-compliance?
Terry Yes, that Stewardship Review was very interesting, one of the numbers that interested me was that it raised $592 million for the 2019-20 year. But there are only 21,885 filers
When you think there’s several hundred thousand companies around, that does point to a seeming mismatch. I think also, like the old 80/20 rule, the majority of FBT is paid by a few groups. When you look at it like that, you think, gosh, that does point to something of an inconsistency? You can put it like that.
Claudia Yes, totally agree. And I think throughout that sort of report, there’s a lot of comments in there from interviewees around non-compliance, or this perception that there is a lot of non-compliance.
Terry Yes, because that undermines the integrity of the tax system because people feel that they’re complying with the rules, but others aren’t. Then the incentive to keep complying is diminished.
It wasn’t in the Stewardship Review, but I had seen other somewhat offhand comments from Inland Revenue along the lines of “Well, we don’t know if it’s worth our while doing that.” And I always thought that’s not necessarily why you enforce the rules for collection purposes. It’s also about maintaining the integrity of the tax system.
And just to digress slightly, FBT is one of those regimes that was introduced to encourage compliance because with the high income tax rates in the early 80s, people were being provided with vehicles instead. And that was thought to bypass the high tax rates and that was why FBT was introduced in 1985.
How do you propose addressing these issues?
Claudia The cornerstone of my proposal is introducing a default private use percentage for motor vehicles based on 175 days of private use. And the idea of this is essentially if employers apply this default private use percentage, they can use that to calculate the FBT liability. And then what it means is they don’t then have to go and track the actual days of private use. We can sort of cut down time and costs having to actually track all of that, because for a lot of small employers, that is quite a large exercise. So what my proposal does is set a fixed percentage and apply that as the filing position.
And then obviously if people said, well, that’s not good enough for us, we want more accuracy because our use is lesser. They would then have to produce evidence or file on that basis. Inland Revenue would know they’ve moved off the 175 day default basis and then could ask for an explanation.
Terry Just coming back to those 175 days, how did you arrive at that?
Claudia So, the 175 days is calculated by treating Friday to Sunday of regular working weeks, the statutory annual leave entitlement and annual public holidays, as available for private use. Which in another way is essentially saying that Monday to Friday is treated as not being available for private use, and what I’ve done again for simply. What that does is it assumes that the Friday to Sunday of regular working weeks, your annual leave annual public holidays will typically confer a greater private benefit to employees then use on Monday to Thursday.
Terry Thanks. But you wouldn’t change the basis of how FBT is calculated. To recap , quickly on a car, it’s 20% of the GST inclusive value of the vehicle when new or when acquired. Alternatively, you can use 36% of the depreciated tax book value.
Claudia No, I don’t propose changing the basis of calculating FBT.
Terry The availability of alternative calculations reinforces your point about the complexity of FBT. If you’re a small business, it’s another compliance headache.
Eligibility thresholds
Terry Your proposal would not be available to all employers as you’re targeting smaller businesses. What are the relevant thresholds?
Claudia I’ve got three main criteria. So firstly, the business has to employ less than 50 full time equivalent employees. The business has got to have an annual turnover of the preceding income year of less than $10 million. And the company also is providing fewer than 10 motor vehicles to employees, which were available for private use.
My thinking in terms of that criteria, is that the small businesses, the compliance costs that they incur, are typically out of proportion to the larger businesses. So, what this is doing is focusing on smaller businesses who can actually get the most benefit from this, and who may not have sort of the processes in place or the scale of resources available to larger enterprises.
You’ve got to find some sort of threshold or middle ground. So, these criteria are where I landed in terms of deciding who falls in and out, because when we are considering revenue integrity and maintaining that. And what I don’t want is my proposal to then decrease revenue integrity by allowing, say, a lot more businesses than desirable into sort of this regime.
Increased Inland Revenue activity & the integrity of the tax system
Terry You see your proposal as encouraging compliance, but you also expect Inland Revenue to increase its activity in this field?
Claudia Yes, when you look at the Stewardship Review together with recent comments from the Minister of Revenue around FBT and you put that together with the increased funding that Inland Revenue have recently received in terms of audit activity, then I don’t really think anything is off the table in terms of looking at FBT. Especially when there is this common view that there is potentially non-compliance either intentionally or because of the complexity.
Terry Yes, this is the thing it is all about. Protecting the integrity of the tax system always matters but I think FBT is an area where I would have said a risk has developed. there. Do we know about how many companies that could be affected in your proposal?
Claudia No, no, I haven’t come across that detail, which then also makes it quite hard to quantify potential impacts. But I think a lot of it this also goes back to the recent Inland Revenue Improvement Performance review which talks a bit about the tax gap. It doesn’t analyse what that FBT tax gap might be, which can make the benefit of this proposal quite hard to quantify.
Terry That’s a very interesting point. One of the things I took away from the Performance Improvement Review was commentary that although Inland Revenue, is a high performing organisation it probably could be doing a lot better for small and micro businesses.
Just to tie up this point about non-compliance is I think twin cab utes have been in the top 10 selling new vehicles in New Zealand for several years now. I must admit when I see a web company advertising on a twin cab ute, I’m thinking “Don’t be trying to tell me you’re a work-related vehicle.” So yes, I’d be wanting to focus resources on that.
The pros and cons of simplifying the tax system
Earlier we talked about how you calculate the FBT and straight away we got into a lot of detail. I guess there’s got to be scope as well for perhaps thinking further about can we how can we make this easier?
But Inland Revenue is reluctant to create options that people might use for simplification, for fear that it might be abused. I would point to the accounting income method as an example of a good idea made over-complicated. It means that the same standard of compliance is imposed on a small company with two or three employees and one or two vehicles as for a District Health Board. What’s your thoughts on that? About maybe simplifying the regime further on the grounds of integrity and maybe compliance?
Claudia I think general simplification of regimes is an interesting question and it definitely is the core of my proposal. I think what can be good with simplified tax regimes is it just makes it understandable; it makes it simple which I think is really important for ensuring taxpayer compliance and maintaining that revenue integrity.
I think, for example, I’m not too sure how many clients respond positively when we start discussing the FBT rules, and we need to review this and that because it’s complicated. On the other hand, a critique could be that you will lose revenue. Often with a simplified regime you sort of can strip back the detail, which is sort of what my default private use percentage is doing. But that potentially introduces is an under reporting or under collection of potential revenue.
But how I’ve sort of approached this, especially in the context of FBT and motor vehicles, is well, when you consider the current non-simplified regime is that actually losing revenue itself because of its complexity, because of people not complying? It’s a tricky one to balance and my proposal is definitely hoping that by simplifying the regime we increase compliance. I think it has its place in certain in certain regimes.
Terry That’s very well put. I think sometimes the perfect is the enemy of the good. Everyone should comply, but what is making it difficult for everyone to comply is because for small businesses it’s an enormously expensive compliance burden. With compliance there is an irreducible minimum requirement which I think we’ve reached in many cases. But that’s still a lot for small businesses and, micro businesses in particular.
I think a lot more support could be made available to businesses turning over between $3 and $30 million, and it would pay off in terms of increased compliance.
I come from Britain and the fringe benefit tax regime there, the value of the benefits, is included in an employee’s income at the end of the year and then taxed that way. When I came here and saw how New Zealand taxed fringe benefits I thought the approach here was much sounder in terms of revenue collection.
When you think that with a 39% personal income tax rate FBT is now 63.93% on the value of the benefit unless you get into calculating it in more detail. Have we reached a point that a better alternative for, say, larger companies to apply the fringe benefit to employees and tax it through PAYE rather than the company taking the hit. What’s your thoughts on that?
Claudia Yes, when I was going through my initial process of brainstorming FBT issues and potential proposal ideas, I did consider the case of whether employees should bear different benefit tax costs through PAYE.
I think like you say, times have sort of moved on and they continue to, but based on some initial research that I found, it actually appeared that it was questionable whether making such a change would simplify the FBT regime and reduce compliance costs, which was my key focus.
I mentioned earlier the government discussion document from 2003. It noted that changing who pays the tax is unlikely to result in any material compliance savings for employers and may in fact actually increase compliance costs on employers.
Which for my proposal and just in general, that’s not something that I would want to put forward. So, in this respect, who pays the tax doesn’t necessarily remove the issues that are associated with the FBT rules at present. So yes, noting that it was 2003, that’s probably still my view at the moment, based on that initial research.
Terry I think that’s a good point to leave it there for now, Claudia. What’s next for you in terms of the scholarship?
Claudia I’ve got my final 4000-word submission in a few weeks on the 16th of September. So over the next few weeks, refining my idea, sort of fleshing it out, answering my key points and then down to Wellington last week of October to do a 10 or 11 minute presentation to an audience and answer a few questions.
Terry That sounds quite intimidating.
Claudia Yes, but excited by it. It’ll be good fun.
Terry Well, good luck and thank you so much for coming along. It’s been great to have you on the podcast. It’s a very interesting proposal, full of merit in a space which I think needs initiatives like this.
And on that note, that’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day.
The one thing that wasn’t in there, which I was expecting, was a move by Inland Revenue to restrict the use of portfolio investment entities with a maximum rate of 28%. These are increasingly being used by trusts and individuals subject to the 39% top tax rate. I’ve had a feeling for some time that this might be something that Inland Revenue was looking at, and maybe this bill would see some action on that part. But nothing, so far.
Preparing for emergency events
Instead, there’s a number of key initiatives and a lot of remedial measures. The first key measure relates to developing a generic response to emergency events. This sounds pretty mundane but what’s intended here is to enable Inland Revenue to be quicker in responding to provide tax relief following any emergency events.
What’s proposed is to build in tax relief measures into the legislation, which then can be activated by an Order in Council. This has been something that Inland Revenue has had to do rather a lot recently. As the commentary to the bill notes there have been three national emergencies declared in the last 15 years, where Inland Revenue’s basically had to apply some discretion to provide some measures of tax relief. Those were the February 2011 Christchurch earthquake, the COVID-19 pandemic and then the flooding in the wake of Cyclone Gabrielle last year. Cyclone Gabrielle came hot on the heels of the Auckland Anniversary weekend flood. Then there was also a huge earthquake in Hironori Kaikoura in 2016, which was a local emergency.
This bill proposes to introduce primary legislation which will enable Inland Revenue in the wake of an emergency event to use an Order in Council to activate these measures so it can respond to the emergency event.
I think it’s a good move. The COVID response in particular, showed that there was a need for greater discretion for Inland Revenue in certain areas, and in fact the Finance and Expenditure committee suggested last year that some form of this measure was needed.
It’s a fact of the times that we need such a measure, and incidentally also supports my long-standing view that it’s climate change which is going to hit the balance sheets first, and we need to be responding to that.
Crypto-asset reporting framework
The Bill also introduces the legislation required to implement the Crypto-Asset Reporting Framework (CARF), an OECD initiative, which is planned to take effect from 1st of 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. The providers would then need to report any information for the year ended 31st March 2027 to Inland Revenue by 30th of June 2027. And then Inland Revenue would exchange this information with other tax authorities to the extent that it did come across information that a user of a platform in in New Zealand was actually resident elsewhere.
(Example of information reporting required)
As the commentary to the Bill notes, the market for crypto assets has grown enormously and there are now more than 22,000 crypto assets with a total market capitalisation of that is now close to NZ$4 trillion. This is up from barely US$17 billion back in 2017. According to the commentary between 6% and 10% of New Zealanders own some crypto-currency and Inland Revenue analytics show that 80% of crypto-asset activity by New Zealanders is undertaken through offshore exchanges.
There are some interesting notes in the accompanying Regulatory Impact Statement that once this is all up and running, Inland Revenue expects to be gathering about $50 million a year from it. In the meantime, a colleague has told me about a client who was using the Binance platform who has received some queries from Inland Revenue. The CARF initiative once implemented will boost Inland Revenue’s audit activities in this area.
Foreign superannuation scheme transfers – a good fix for a bad policy?
The next couple of measures relating to foreign superannuation scheme transfers and the Approved Issuer Levy are good to see, but also raise some interesting policy questions.
Under our current foreign superannuation scheme rules, if you transfer a foreign superannuation scheme into New Zealand or withdraw funds from the scheme (the money doesn’t necessarily have to reach New Zealand), you trigger a liability.
What has been an issue all along, particularly for Britons, is if they transfer their overseas scheme into a Qualifying Recognised Overseas Pension Scheme – or QROPS – they trigger a tax liability but may have no access to the funds, because they’ve not reached the age in which they’re allowed to do so under UK pension law. Any attempt to do so would trigger what’s called an unauthorised payments charge which could be up to 55%.
This was a problem that was identified with the legislation when it was first proposed back in 2013. Thanks in part to COVID, it’s taken this long to come up with a workable solution which is to kick in from 1st April 2026. From that date there will be a “Scheme Pays” option, under which the receiving scheme will calculate the tax due and pay that on behalf of the transferring client. The receiving scheme will do so at a flat rate of 28%, which is the prescribed investor rate. Transferring clients will have the option to fund the tax liability out of their own pockets, presumably because their marginal tax rate is 10.5% or 17.5%.
As I said, it’s a solution to a long standing problem. I am not a fan of the foreign superannuation scheme rules. It seems to me that we are taxing the importation of capital. People are bringing capital into the country and yes, they have benefited from an overseas tax regime. Conceptually, what we do ties in with our tax policy and in particular, the Foreign Investment Fund regime.
A ‘highly problematic’ regime?
But those of you who have been reading Dr Andrew Coleman’s recent articles will know our tax regime in relation to the taxation of savings is quite unique. I think in this area it’s highly problematic. People are bringing overseas savings and currency, into the country and we are essentially taxing them for that. Now looking at the bigger macroeconomic picture, that doesn’t seem to make a lot of sense to me. It’s conceptually correct from our taxation perspective, but it seems nonsense. This has always been my view, and I’ve still not received a satisfactory explanation other than “Well, that just fits in with our tax regime.”
My second point here is with the proposal for schemes to apply the prescribed investor rate at 28%. The Regulatory Impact Statement notes that on average the tax rate transfers is about 29%. Now the reason we tax foreign superannuation scheme transfers is so that people who have overseas pension schemes don’t have an advantage relative to their New Zealand counterparts, who would be in KiwiSaver funds, which as prescribed portfolio investment entities have a maximum prescribed investment rate of 28%.
Over taxation of transfers?
This begs the question as to why these transfers have been taxed at a person’s marginal tax rate which in some cases would be 39%. Surely if we are saying we’re looking to try and prevent a disadvantage, the top rate that should have been applied was 28%. That’s not discussed in the commentary or the Regulatory Impact Statement. But I will raise it in my submission to the Finance and Expenditures Committee and see what develops of it.
I was also interested to see the numbers of people that are affected by this seem to have been dropping off. According to the Regulatory Impact Statement, 2,700 individuals reported a foreign superannuation scheme withdrawal or transfer in the 2022 income year. For 2023 the number was 458 with 113 reporting the amount was mainly sourced from the UK. That’s quite a drop off.
The “Schemes Pay” solution has taken a long time to get here. I’ve been involved as part of the group that’s worked with Inland Revenue on this policy measure, so I’ll give it a qualified pass. But I still think the bigger issue as to why we are taxing these transfers in the first place really should be addressed properly.
Changes to the Approved Issuer Levy – fixing a problem but not addressing the cause?
Another good measure which also resolves a long-standing issue, involves the Approved Issuer Levy regime. Where a person pays interest to a non-resident lender, the payer is required to withhold non-resident withholding tax (NRWT). Alternatively, if the interest payments are being made to non-associated lenders, then you can register to apply to register the loan and instead deduct the 2% Approved Issuer Levy (AIL) and that’s what most people do.
According to the Regulatory Impact Statement about 1200 taxpayers are filing AIL returns paying AIL totalling $153 million for the year ended 30th June 2023. This represents annual interest of approximately $7.7 billion subject to the 2% AIL.
But some people haven’t registered the loan for AIL and the current rules are that they can’t register for AIL until they’ve paid the NRWT. The loan cannot be registered retrospectively. There’s an example in the Regulatory Impact Statement that one borrower had to pay $2 million in NRWT as a result. The proposal is to enable Inland Revenue to allow retrospective registrations.
Paying withholding tax on your mortgage interest
What has also emerged as an issue is that there are a number of individuals with overseas mortgages. They have moved here, but they’ve kept their overseas property and usually rented it. The UK and Australia are the two most common examples I’ve encountered. These persons are paying interest to the UK/Australian located banks on UK/Australian located properties because they have mortgages. These payments are also subject to AIL and NRWT but practically speaking it’s very hard to explain why AIL/NRWT is payable particularly when the payments are being made from an account situated in the UK/Australia.
This AIL proposal will deal with some of the problems around retrospective registration. But the question has not been asked as to whether in fact individuals in those circumstances that I’ve just described should in fact be within the scope of the regime, because that’s not why the AIL scheme was introduced.
It’s intended to help lower the cost of capital for New Zealand borrowers. As mentioned above in my view taxing foreign superannuation schemes seems to be taxing the importation of capital. This is contradictory to the purpose of the AIL regime. Both those positions can’t be correct in my view if we want to make it easier to access capital. In my view we should be changing the approach in relation to foreign superannuation schemes.
Rant aside, allowing retrospective AIL registration is actually a welcome move. The bigger question still remains as to whether in fact individuals with overseas mortgages should be within the regime. As the Regulatory Impact Statement notes, we don’t really know what’s the impact for individuals. It’s pretty near minuscule overall and there’s probably more non-compliance than the Regulatory Impact Statements acknowledge.
A hefty dose of remedials…
Another policy measure is to increase the exempt employee share scheme threshold. The maximum value of market shares that can be offered will be increased from $5,000 to $7,500 with effect from 1 April 2024. Finally, there are a large number of remedial measures relating to GST, trustee tax rate changes, partnerships, land tax rules, international tax and sundries. These often pop up in tax bills, just tidying up inconsistencies in legislation.
Submissions are now open and close on 18th October.
Insights from ten years of Inland Revenue’s transfer pricing questionnaires
Every year Inland Revenue issues an international questionnaire designed to collect key information about financing debt and transfer pricing issues in regard to foreign owned businesses in New Zealand. The data request for 2023 was sent out in February 2024 and responses were required by 15th April 2024. These questionnaires generally target foreign owned groups with turnover exceeding NZ$30 million.
What’s happened is Inland Revenue’s now published a summary of the answers it received covering the10 years from 2014 to 2023 inclusive. There are some interesting little details in here. In both 2014 and 2023 years, the three countries with the highest ultimate ownership were Australia, Japan and the United States. In 2014 there were 292 foreign owned groups (excluding banks and insurers), 77 had ultimate ownership in Australia, 55 in the USA and 39 in Japan.
Flip forward to 2023 and there are now 802 groups. The top three were still the same, but the order has changed. In that now the United States with 178 groups is the country with the highest ultimate ownership Australia has 144 and Japan 71.
There’s also questions about how many groups are subject to our thin capitalisation rules which kick in where the debt to asset ratio exceeds 60%. In 2023, nine percent of the groups – that’s about 75 – would be subject to some form of interest restriction.
Back in 2014, that was much smaller. Only 14 of the 198 groups that had net finance costs were subject to thin capitalisation. That’s quite interesting because it shows that more debt has been taken on board by foreign owned groups over the ten year period.
I’m always interested to see data like this from Inland Revenue as it gives us insights into the shape of our economy.
“Who’s that knocking on the door?”
And finally, this week a reminder that Inland Revenue has upped the ante in terms of debt collection and just general enforcement across the board. I mentioned earlier on about the taxpayer who had received an inquiry in relation to their Binance account. This week RNZ ran a story about instances where Inland Revenue have actually been out door-knocking and making physical visits to people who owe them debt. It’s something we haven’t seen for about five years. Inland Revenue seemed to have dropped off using this practise prior to COVID and obviously COVID then had a huge operational impact.
Inland Revenue re-engaging in this process is to be honest welcome. You do get the sense that certain taxpayers just push the envelope and think they’ll get away with it. So, it probably was a big shock for them that Inland Revenue can actually turn up on their doorstep and say “Hey, we’d like to talk to you about your debt.” As I’ve said before we’re going to see more of this increased enforcement.
Coincidentally, but I haven’t time to cover it this week, Inland Revenue also released drafts for consultation, updating its operational statements in relation to the use of its (very) extensive search powers. That’s probably something maybe I’ll get a chance to cover later, but for now, 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.
How to deal with recipients of paid parental leave with tax underpayments
A bizarre tax avoidance case from the UK involving snails
In line with other government agencies, Inland Revenue is required to produce a long-term insight briefing once every three years. These briefings are intended to
“…help us collectively as a country think about and plan for the future. They do this by identifying and exploring long-term issues that matter for our future wellbeing. Specifically, [briefings] are required to make publicly available:
information about medium- and long-term trends, risks and opportunities that affect or may affect New Zealand society, and
information and impartial analysis, including policy options for responding to the trends, risks and opportunities that have been identified.”
This is Inland Revenue’s second long-term insight briefing, its first one released in 2022 was on tax, foreign investment and productivity and that was a fairly chunky topic. But this time around it’s proposing to take on a bigger topic “what broad structure of the tax system would be suitable for the future.” What it would do is look at this topic by reviewing our tax system through the lenses of what is the tax base and what regimes apply.
As part of the initial stage of consultation for this topic Inland Revenue has released a 50 page briefing document giving a background on the whole process. The briefing summarises the current state of the New Zealand tax system and the options for consideration. Chapter one gives a complete overview of the current system. Chapter two then gives options for a future tax system and looks at international perspective. The final chapter summarises the topic and the approach to be taken by the briefing.
A mini-tax working group review
There are a lot of interesting insights in this paper, because in essence it’s similar to the scoping paper usually prepared by a tax working group at the start of a review before the group gets into detailed analysis of particular aspects of the tax system. The briefing is a therefore a handy high level summary of the current state of the New Zealand tax system.
In summary, the level of tax revenue we currently raise relative to the size of our economy is pretty close to the OECD average. It’s in the composition of tax revenue. It’s where it gets interesting. We are almost unique in the OECD in not having any significant specific taxes on labour income such as social security contributions or payroll taxes.
Taxing labour…lightly?
Furthermore, quite a few of other OECD tax systems have what they call a schedular tax system, which means in some cases they tax capital income such as dividend, and in some cases capital gains at lower rates than taxes on labour. As a result, many OECD countries have a higher tax burden on employee labour than New Zealand.
To give an example, the UK has a 20% basic tax rate, but employees also pay National Insurance Contributions above a certain threshold (8% on income between £242 and £967 per week and 2% above £967 per week). Employers pay 13.8% on all earnings over £175 per week. By contrast we have no such taxes which means we have one of the lowest tax wedges in the OECD.
Also, where we stand out is we raise more than the OECD average on general consumptions and that’s because our GST is one of the most comprehensive in the world. We also currently have a higher company income tax rate than the OECD average.
The paper notes some concerns noted about high effective marginal tax rates on inbound investment. I have to say I do wonder whether the small size of our economy and its isolation is more of a factor than tax in attracting inbound investment.
And finally, and this is highly ironic and also relevant if, you just opened your rates bills and the comments from the Prime Minister earlier this week, New Zealand raises more than the OECD average from recurrent property taxes, mainly through local government rates.
Building fiscal pressures
As part of the background the paper explains the various fiscal pressures building up. This is something we’ve talked about before, and we’ve frequently referenced, Treasury’s He Tiro Mokopuna 2021 statement on the long-term fiscal position. The well-known pressures building in in relation of our changing demographics, rising superannuation and health costs are all mentioned again.
So too is climate change, but more in passing, although personally I think that’s the one the impact of which is going to land first for most people as we saw last year in the wake of Cyclone Gabrielle. Suddenly, climate change is not an abstract thing with targets for 2050. It’s here and now. Remember Auckland ratepayers, for example, we got a $400 million bill as a result of buying out properties rendered uninhabitable by the Anniversary Weekend floods and Cyclone Gabrielle.
A suitable tax system for the future
The paper discusses what would you do in terms of meeting these pressures. Do you expand the tax base by adding new taxes or what about increasing tax rates? The paper mentions that there are limitations about raising tax rates which is not always as straightforward as you might think. For example, we raised the rate of GST from 12.5% to 15% in October of 2010 and GST as a result is a very significant tax because our system is so comprehensive.
But GST comes at the price of being very regressive for people on lower incomes. How would you deal with that? And the paper, by the way, references an IMF Working Paper on a progressive VAT/GST which I mentioned recently.
There was also an interesting comment I’d like them to know more about in relation to company tax. The paper notes that we raise a relatively high amount of revenue from company income tax as a proportion of GDP compared with other countries.
It notes this “may be partly attributable to the level of incorporation.” I’d be interested in knowing how much more company incorporation goes on here relative to other OECD countries. I think our imputation tax system is also a factor in why we pay relatively high amounts of tax relative to other jurisdictions.
What the briefing does reinforce is something I think is agreed within the tax community that there’s pretty much little scope for increasing company income tax rates. There’s always a lot of talk about that, but I don’t think there’s much scope for actually doing so.
“New Zealand is unusual among OECD countries in not having a general tax on income from capital gains”
Unsurprisingly the paper considers the question of taxing capital, as part of reviewing the composition of taxes in other countries. There are a lot of interesting graphs and stats are in this section including an excellent section summarising the historical changes in the composition of the tax base over the past century.
As I mentioned, we raise more revenue as a share of GDP from recurrent property taxes compared to the OECD. In 2021 it amounted to about 1.9% of GDP. B comparison, the average in the OECD is 1%, ranging from 0.1% of GDP in Luxembourg to 3% of GDP in Canada.
On the other hand, we don’t raise anywhere near the same level as other OECD countries from taxes on financial and capital transactions, estates and gifts. I mean, many countries have a combination of estate taxes, gift duties, capital gains, taxes and wealth taxes. According to the OECD data taxes on estates, inheritances and gifts raised an average of 0.1% of GDP in 2021. That seems a surprisingly low number, although it rose to 0.2% in 2022. This take is starting to rise as the Baby Boomers, the richest generation in history are starting to pass on. In the UK Inheritance Tax, which is a combined estate and gift tax, is now over 0.3% of GDP (£7.5 billion) and rising.
What about corrective and windfall taxes?
The paper gives a background on the possible options which might deal with future cost pressures. Its focus is going to be on revenue raising taxes. The final briefing will not examine taxes that are primarily about changing behaviours (so called “corrective taxes” such as excise duty, particularly in relation to tobacco. It will not discuss environmental taxes which are another form of corrective taxes. All taxes change behaviour in different ways and I think considering the behavioural impact of certain types of taxes would be useful
The final briefing will not consider windfall taxes, which have recently popped up in discussion in relation to supermarkets and the banks. Such taxes are one-off in nature and frankly, a reactionary tax to a set of events. If the concern, correctly in my view is about responding to the pressure of ever increasing costs, then windfall taxes are not in that context a sustainable addition to the tax base.
All in all, this is very interesting and pretty digestible reading. Consultation is now open until 4th October, so my suggestion is get reading and start submitting.
A baby and a tax bill…
Moving on, Inland Revenue has mostly completed its year-end auto assessment process for the majority of taxpayers’ income for the March 2024 tax year. Subsequently, it’s emerged that some 13,261 recipients of paid parental leave, about 27% of all such recipients have finished up with a tax bill. This is causing some concern because in some of these cases, these bills are quite substantial, amounting to several thousand dollars in some cases which have to be paid.
Paid parental leave is taxable and subject to PAYE. What seems to have happened is that people haven’t factored in the effect of their other income, for example they may have continued to work reduced hours in their main employment while also receiving paid parental leave. Consequently, because PAYE is designed around one person, one job per year the parental leave has been under taxed. But this only emerges as part of the end of tax year wash up. You can deal with this by using a secondary tax code, but that often goes the other way and leads to over taxation during the year.
Tailored tax codes
An answer to all of this, and also as a means of collecting the tax paid would be a tailored tax code. Tailored tax codes are ideal for an employee with other sources of income which aren’t subject to PAYE such as overseas pensions. What you do is advise Inland Revenue of these other sources of income and ask it to adjust your PAYE tax code taking into effect this other income. It’s then taxed during the year through PAYE. By the way, this also is a good way of bypassing the provisional tax system.
This approach is something I saw a lot of when I worked in Britain. HM Revenue and Customs adjusted tax codes for the equivalent of New Zealand Superannuation and used adjusted tax codes to collect underpayments of tax for prior years. If you underpaid one year, your PAYE code for the following year would be adjusted to collect the underpaid tax. I think this is probably an easier system than expecting lump sum payments.
My view is Inland Revenue could make a lot more use of tailored tax codes and should do so proactively. It has the information to know when someone has started a second job or starts receiving paid parental leave. It can then contact that person and ask they want to have a secondary tax code or a tailored tax code. This may already be happening but people with new babies have plenty going on, so this sort of admin detail just slips off the radar. I think it’s something where Inland Revenue systems ought to be good enough to be able to actively encourage people to make greater use of these codes.
Snail farm in city office sparks tax avoidance probe
Finally, and returning to an earlier topic, rates, there’s a story from the BBC about a quite flagrant tax avoidance scheme in the UK. The story involves a commercial building in Liverpool and what’s happened is this building has been home to a snail farm for more than a year. The firm renting the premises has told Liverpool City Council that because the building is being used for agricultural use that part of the building is exempt from business rates. Otherwise, the rates bill would be about £61,000 for the whole building.
Understandably, Liverpool Council’s not impressed, and neither are other snail farmers. (Apparently snails retail for £14 a kilo). They think the scale of the operation isn’t realistic because according to the owner there are only two snails in each crate which has been done to avoid “cannibalism, group sex and snail orgies”. (Yikes!)
This seems a fairly flagrant tax avoidance case. And it’s caught the eye of Dan Neidle of the UK tax think tank Tax Policy Associates. As he notes you’d think this sort of thing would be struck down quite easily by the courts but not so. There doesn’t appear to be a specific anti-avoidance rule in the relevant legislation, and it appears that there’s quite an industry around so-called “business rates mitigation”. Astonishingly, a recent case involved a Crown organisation Public Health England attempting to bypass rates through one of these schemes. Dan has suggested that the new Chancellor of the Exchequer, (Finance Minister) Rachel Reeves, put in place legislation to strike this sort of activity down.
An opportunity here?
Under our rating legislation here I think that a similar scheme probably wouldn’t work. Based on what I understand our rating approach seems to be a bit more comprehensive. But one of the things I know about working in tax is that where people perceive there’s an opportunity to, let’s say, push the envelope, they will do so.
And on that note, that’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day.
And issues draft guidance on the taxation of share investments and tax
The Olympics, a cautionary tale involving Snoop Dogg
Earlier this year in June, we talked about Inland Revenue’s releasing insights from its first round of a hidden economy campaign focused on smaller liquor outlets around the country. It noted that in this first stage, compliance staff had made 220 unannounced visits nationwide, looking for signs of issues such as income suppression, unreported sales and non-registered staffs. And it noted that although most of the businesses had their tax affairs in order, unfortunately some hadn’t.
That was described as a deliberate light touch campaign. And Inland Revenue said at the end of that release that more unannounced visits to businesses will be made as it steps up its compliance work
Well, last week we saw the second stage of that, where it announced that from 14th of August it will be sending letters to taxpayers in the liquor industry selected for a possible visit. This time Inland Revenue community compliance teams will be visiting liquor store businesses, including independent and franchise liquor retailers, across most locations. But this does not include bars or hospitality venues. I’d surmise they’ve got a separate plan for that group of taxpayers.
These teams will be looking at income suppression, record keeping practises – including when using cash – and employer obligations. All it’s said is that they will be issuing letters as of 14th of August, which meant they started going out last week. So, if you’ve been selected for one of these visits, I suggest you review your practises to see what areas could possibly be at risk. And certainly talk to your accountant or tax agent if you have one.
This isn’t surprising, Inland Revenue foreshadowed this in June. Remember they got an extra $116. million over four years in the budget to ramp up their compliance activity. This is merely the tip of the iceberg.
Inland Revenue’s harder line
What I and other tax agents are also noticing elsewhere, is that Inland Revenue has certainly adopted, let’s say, a harder edge in its approach. We’re now getting requests for information in situations where previously that didn’t happen, and I’ve heard one or two somewhat unsettling stories of borderline bullying of taxpayers.
I’m all in favour of ramping up compliance, but it’s always worth remembering that any tax system, even one as remarkably compliant as ours is, does depend on the goodwill of the taxed to enable its smooth operation. And I would just hope that Inland Revenue would keep that in mind. Because sometimes dropping a heavy hammer on those who’ve made innocent mistakes doesn’t actually achieve very much for the wider perceptions of the integrity of the tax system.
But that said, there’s nothing really surprising in this Inland Revenue campaign. And I expect I’ll be talking more about new investigation initiatives in other areas over the coming months.
Taxing share investments – what are the rules?
Moving on, an area where we spend quite a lot of work advising clients on is the question of share investments, particularly in relation to offshore shares. Although the Foreign Investment Fund regime in its current iteration, has been in place for a very long time, nearly 17 years in fact, it’s probably not as well-known as Inland Revenue perhaps might expect.
I think what I sometimes see in this space is that people coming from other jurisdictions which have a capital gains tax regime, pretty much assume it’s much the same approach here. So, it’s helpful that Inland Revenue last week released some draft guidance on the taxation of share investments for consultation.
The draft guidance runs to 43 pages including some detailed appendices and as always, there are a couple of helpful fact sheets attached. One explains when the FIF rules apply, and the other one summarises the general treatment of share investments.
The draft Interpretation Statement covers what happens when an investor is investing in shares, what liability do they have for dividends, share sales and how these rules interact with the Foreign Investment Fund rules.
Interestingly the guidance refers to share lending arrangements and foreign currency accounts.
“the statement focuses on investments who use online investment plan platforms, although the principles in this statement apply more widely to other share forms of share investments by individuals such as through brokers”.
This tells me that Inland Revenue have been collecting data through the Common Reporting Standards (CRS) on the Automatic Exchange of Information. Just before COVID arrived Inland Revenue had begun marrying up the data that they started receiving in 2018 and 2019 under CRS. Based on this it had started to ask questions of taxpayers, who they knew through the CRS information, had some form of offshore investment, but did not appear to have included that in their tax return.
So, I suspect this is another development in what I just talked about a few minutes ago – Inland Revenue ramping up its compliance activities.
Which set of rules?
Now, as the guidance and the fact sheets explain, there are two treatments at play here. The Foreign Investment Fund regime generally applies to all shares outside Australasia. And not to get into too much detail about that, just always be careful that some listed stocks in Australia do actually represent FIF interests. Shares outside the FIF regime such as those listed either on the New Zealand Stock Exchange or on the Australian Stock Exchange are subject to the “ordinary rules”.
The guidance explains when the ordinary rules will apply and when the Foreign Investment Fund rules will apply. And one of the things that it picks up on is what is the tax treatment where a taxpayer has realised gains from the disposal of shares? The general rule under section CB4 of the Income Tax Act 2007 is that those amounts from selling shares are taxable, where the shares were acquired for the “dominant purpose of disposal or were part of a share dealing business or profit-making scheme.”
Determining the dominant purpose
Now deciding what an investor’s “dominant purpose” is done at the time the shares are acquired. The investor’s stated purpose is tested against a combination of objective factors. And it’s often the case, that an investor may have one purpose or more than one purpose, or not even really any clear purpose when buying shares.
The onus is on the investor to prove that their dominant purpose for buying shares was to dispose of them, or conversely, not dispose of them. The guidance notes an investor only has to prove that disposal was not their dominant purpose. They do not have to prove an alternative dominant purpose.
Generally speaking, share sales will not be taxable if an investor can show that the shares were bought with the dominant purpose of receiving dividend income, receiving voting interests, or other rights provided by shares or a long-term investment growth in assets or portfolio diversification. Other than situations “Where at the time of acquisition this is planned to be achieved through sale.”
The appendix here has some interesting commentary from case law, most notably is the Court of Appeal decision CIR v National Distributors. Inland Revenue had lost in the High Court but appealed, and their appeal was upheld two to one in the Court of Appeal, with Justice Richardson giving the main judgement.
The taxpayer National Distributors had made eight purchases and sales of shares over a two-year period. The shares were held between eight months and three years with an average of 19 months before sale. The dividend yields were inconsistent and ranged from less than 3% to over 11% year, depending on the shares. Overall, the dividend yield was 6.5% per year compared with 25%-year from gains on sales.
Richardson noted that share purchases fell into two categories. Some were purchased for family reasons, but the second group were held to have been acquired, on the facts, for the purpose of sale. The taxpayer did not in the court’s view establish that there was no dominant purpose of sale.
In summary another useful interpretation statement and fact sheets. It’s good to see Inland Revenue putting some general guides and clarifying the point around when someone is subject to the Foreign Investment Fund regime, and when the ordinary rules will apply.
Tax and the Olympics
And finally, this week congratulations again to our Olympians for their fantastic achievements. I greatly enjoyed the Olympics as I’m sure everyone did. Not just because of the great performances by so many New Zealand athletes, but also just the sheer spectacle of watching the best in their sport.
One of the more entertaining parts of the Olympics was that the American TV channel NBC sent across rapper and record producer Snoop Dogg to provide commentary on the Olympics. Some of what he got up to was quite hilarious, check out him dressed up for a dressage event for example.
All good fun but the sharp-eyed Andy Bubb, Special Counsel, Tax Disputes at the Australian law firm Clayton Utz has pointed out that Snoop Dogg has possibly ended up with a fairly hefty French tax liability.
Apparently, he was paid USD 500,000 a day for his work, and what Andy Bubb has noted, is that under Article 17 of the double tax agreement between France and America, France has the right to tax the earnings of an entertainer or sportsperson where the activities are carried out in France. Now you can’t divert the income to an entity under the tax treaty because that’s overruled as well. As France’s top marginal tax rate is 45% the multimillion dollar question arises did Snoop Dogg’s advisors deal with all the ramifications of his entertaining and well-paid gig at the Olympics?
Never mind Snoop Dogg, what about Hamish?
Now, being a nerd, I took a look at the double tax agreement between New Zealand and France and yes, a similar clause is in there for artists and athletes. Accordingly, if you are competing in France and you are paid, you will be taxed. And this might actually be of relevance for Hamish Kerr because as I understand it, the track and field gold medallists each got US$50,000. France might be looking to take a cut of that.
But there is an exception in Article 17 of the treaty where any payment made to an artist, or an athlete will only be taxed in the jurisdiction where that athlete is resident – New Zealand – if those activities (carried out in France at the Olympics) are supported substantially by public funds from New Zealand.
I’m guessing most of our Olympians are heavily supported by public funding which should mean that any payments that our athletes receive for winning medals, or in relation to their activities in Paris, are only taxable in New Zealand thanks to this exemption under the double tax agreement. It would be interesting to see what comes with this. (It’s also worth noting that although the International Olympic Committee earns billions from the Olympics, the majority of the athletes receive nothing for their efforts).
I thought it was an entertaining wee story, but it also highlights a common issue and something that people perhaps don’t appreciate. That artists and entertainers have some of the most complex tax planning issues of any individual, certainly outside the hyper wealthy and multinationals. That’s because when they trade, carry out gigs in various jurisdictions, they are potentially triggering tax liabilities in every country in which they perform. But in this particular case, although Snoop Dogg may have a tax problem, I’m hopeful that no such problem will be encountered by Hamish Kerr for his winnings.
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 has released an interesting technical decision summary in relation to the use of look-through companies. Look-through companies replaced the former qualifying and loss attributing qualifying companies with effect from 1st April 2011. They’ve therefore been around for some time, but great care is needed when using them.
The basic precept of a look-through company is a company which elects to be a look-through company for tax purposes. The company is still a separate corporate entity for all legal purposes, but for tax purposes, it’s rather like a limited partnership. Its losses and income will flow through to its shareholders. One of the key things to be in order to qualify for the look-through company status is you have to have five or fewer look-through shareholders.
Better ask Saul?
That was one of the questions at the heart of this application in this Technical Decision Summary. The company wanting to elect to be a look-through company applied to Inland Revenue for a ruling. There was quite an involved structure with three shareholder trusts with each trust benefiting the respective settlor together with a combination of their spouses, children, children’s spouses, grandchildren and other family trusts. The company had a subsidiary which was to be liquidated following the election and there was also a charity in the mix that was receiving distributions from on of the shareholding trusts.
One of the questions put to Inland Revenue in this application was whether the company qualified to make the election. There was also a question about what would be the treatment of the capital gain that arose on the liquidation of a subsidiary. All of this is highly technical, but it does highlight one of the major concerns many of us have had with the look-through company regime in that it is rife with little pitfalls. A very sensible approach was taken here by the parties involved to apply for a private ruling which was approved.
Inland Revenue said that there are only three look-through counted owners, so the company would meet the requirement of five or fewer shareholders. Each shareholding trust could make distributions to companies so a question was if a distribution went to a beneficiary company, could that compromise the status? Inland Revenue advised no and also accepted that if a subsidiary was liquated any capital gain which arose would still be available for distribution as a capital gain later.
This is quite a unique set of circumstances, but I raised it to show the great care that’s needed in dealing with look-through companies. Because if you get the timing wrong or you get the rules wrong, the election doesn’t apply and that can have quite severe tax consequences. It pays to tread carefully when making look-through company elections.
More on contractors and withholding taxes
Last week I spoke with Matthew Seddon, one of the finalists for this year’s Tax Policy Charitable Trust’s Scholarship Prize.
Readers raised a couple of questions: firstly, what happens when New Zealand companies offshore their work; and secondly wouldn’t it be simpler to make all contractors register for GST?
It so happens there is a set of rules that would apply withholding tax to payments that are made to offshore contractors, known as non-resident contractors tax. But the key point there is that the contractor must have actually performed the services in New Zealand. So, if an IT person flies into New Zealand as part of a project because they’re carrying out the services in New Zealand, non-resident contractors tax will apply even if the person is not tax resident in New Zealand. By the way, I’m sure this happened when Inland Revenue was going through its big Business Transformation project
The non-resident contractor’s regime has been around for quite some time. It was set up during the late 70s as part of the Think Big projects when the Government realised a lot of non-residents were working in New Zealand, but we had no mechanisms for capturing some of that tax revenue. So, the non-resident contractors tax regime was established, and it works pretty well.
Where all the work is done remotely then withholding will not apply because there is no New Zealand source as the services aren’t being performed in New Zealand but overseas. Under general tax principles, the taxing point therefore is in the offshore country. Overlaying these non-resident contractor rules are double tax agreements, so it’s another area where people can trip up very easily,
As for making contractors be compulsorily GST registered, this was something Matthew and I did discuss. I think the next stage in the evolution of GST is pretty much making business to business transactions zero-rated. This would simplify administration and compliance. So thank you to the questioners, Hamish, SolarDB and Kiwis, much appreciated.
“It was twenty years ago today…”
And finally, it’s actually been 20 years this week since I started Baucher Consulting. Back then I started with a single client, and I worked from home. Now there are three of us at the moment and we have offices in Takapuna. Change is constant in tax and it’s actually one of the attractions of your career. You really don’t know what challenges you will meet in the course of the day or week. And that keeps you on your feet.
I’ve been working in tax for 40 years and even now there’s always something that turns up and makes you think “Oh, I hadn’t come across that before.” It’s a great, intellectually stimulating challenge. And you’re always having to think on your feet sometimes very, very rapidly. Such as when you’re in the middle of a meeting with Inland Revenue who suddenly fires in a question you weren’t expecting. I’ve had a few of those over the years.
“Don’t look back in anger…”
Looking back over the past 20 years it’s interesting to look back and think how much has changed and yet in some ways how little has actually changed. Back in in August 2004 the top marginal income tax rate was 39% which kicked in at $60,000. The corporate income tax rate was 33% and the trustee rate was also 33%.
As we know the corporate income tax rate is now 28% which reflects the worldwide trend we discussed recently of falling corporate income tax. rates. We’re back up to a top 39% rate, but this time on income over $180,000. And as of 1st April this year the trustee tax rate is 39% for most trusts.
In August 2004 Michael Cullen, who was also the Minister of Finance, was the Minister of Revenue. Following the 2005 General Election he was replaced by Peter Dunne, who began his second stint as Revenue Minister after a brief period in 1996. Peter Dunne actually has the distinction of being the longest serving Minister of Revenue in New Zealand History. He held the post from 2005 right through until June 2013 when he was replaced by Todd McClay. Over the past 20 years, there have been nine Ministers of Revenue, including Sir Michael and Peter Dunne.
“The Minister reads his papers”
Quite a few ministers had quite interesting tax related careers prior to becoming MPs. Judith Collins, for example, Minister of Revenue between 2016 and 2017 was a former tax partner at the law firm Simpson Grierson. Barbara Edmonds, who was briefly Minister of Revenue last year between July and November, was previously an Inland Revenue official and then later attached to the Minister of Revenue’s office. And the current Minister of Revenue, Simon Watts, started his career as a tax consultant with Deloitte.
Fortunately, I’ve got to meet many of these ministers and their officials. I remember one Inland Revenue official remarking to me “The Minister reads his papers. Not every minister does.” Now I think all the ministers I have encountered in office read their papers. I think it’s particularly true of Simon Watts, who has impressed me this year where a couple of times I’ve come across some at conferences where he’s very clearly been across the brief and the massive amount of detail involved.
Back in 2004 David Butler was halfway through his period as Commissioner of Inland Revenue. He was succeeded in 2007 by the genial Canadian Bob Russell, who lasted until 2012. His replacement was Naomi Ferguson, one of the longest serving Commissioners of Inland Revenue in recent years. Naomi oversaw the Inland Revenue’s critically important Business Transformation project which upgraded Inland Revenue’s computer system.
Business Transformation was brought in on time and under budget, although the recent Performance Improvement Review highlighted some concerns about the reliance on a single supplier. Business Transformation was just in time to cope with the COVID pandemic. As officials told me without it Inland Revenue would not have been able to handle the demands that were placed on it as a result of the pandemic.
Sir Michael Cullen – the tax reformer
Looking back over the major changes in tax, as I mentioned, Sir Michael Cullen was both Minister of Revenue and Minister of Finance when Baucher Consulting started. I think he deserves to be recognised as one of New Zealand’s most significant finance ministers in modern times. He’s probably second only to Roger Douglas in that regard.
His tax initiatives included Working for Families in 2005, but the critical ones would be the setting up of the New Zealand Superannuation Fund in 2003 and most importantly, KiwiSaver which started in 2007. KiwiSaver’s start coincided with the introduction of the portfolio investment entity or PIE tax regime and the very controversial Foreign Investment Fund (FIF) regime, which took effect from 1st April 2007. A couple of weeks back we discussed the FIF regime its impact for some migrants. All of these were significant achievements which changed the tax landscape.
Not one but two tax working groups
We’ve also had two tax working groups. The first one was the Victoria University of Wellington Tax Working Group 2009 – 2010, led by Bob Buckle of VUW. The second and much better resourced group sat between 2018 and 2019, chaired by Sir Michael Cullen. It is one of the highlights of my business career to date that I was invited to write a paper for that tax working group on whether there should be a separate tax ombudsman and a tax advocate for smaller taxpayers. My view was and remains, yes to both. In fact, it was one of the proposals that was picked up for further work by Inland Revenue’s tax policy division. But then something called COVID turned up. So those proposals are now way down the back-burner
In 2018 I also had the very good fortune to be a member of the Government’s Small Business Council. That was a great learning experience and very much a professional highlight. It also built networks which enabled me to have direct contact with Stuart Nash who was both Minister of Revenue and Minister of Small Business during the pandemic, when what became the Small Business Cashflow Scheme was being devised. Incidentally that’s an initiative I think should be picked up and expanded by the Government.
A tax switch and sneaky fiscal drag
October 2010 saw a major change to the tax system with the top income tax rate dropping from 39% to 33% as part of a tax switch with the GST rate increasing from 12.5 to 15%. That was the last time until the 31st July just gone that the tax thresholds were increased. I’ve said it before and I will keep saying it, I think it is unacceptable how successive Ministers of Finance of both parties have been allowed to get away with not regularly increasing tax thresholds.
Starting in 2010, I started writing for interest.co.nz and I’d like to take the opportunity to thank the publisher, David Chaston and managing editor Gareth Vaughan for their patience and their support through these past years. From that start I got to meet Dr Deborah Russell, who’s now the Honourable Deborah Russell MP, former associate of Minister of Revenue and our collaboration resulted in the publication in 2018 of the BWB text in 2017 Tax and Fairness, a huge personal and professional highlight.
Bright-line test and capital gains
Another significant tax milestone was on 1st October 2015 and the introduction of the bright-line test. It originally only applied to sales within two years of acquisition but during the last Labour government the period was increased to first five and then ten years. The bright-line test is significant because it recognised that having a tax provision which taxed on the basis of a person’s intention – was the property acquired for the purpose or intent of sale – was largely unenforceable.
No capital gains tax…for now
The last Labour government of course turned down the Cullen Tax Working Group’s proposed capital gains tax. However, that issue isn’t going to go away, in my view. Partly to redress that decision Labour then introduced the controversial and deeply unpopular interest limitation rules in October 2021. I could see the theory behind these rules, but I thought they were overcomplicated. Personally, if I was addressing the issue of interest deductibility, I would have gone with adapting the existing thin capitalisation regime. This has been in place since 1995 and therefore is well established.
With regards to interest limitation rules, it’s worth remembering, as I noted a couple of weeks back when talking about the OECD’s corporate tax statistics, there are over 100 interest limitation rules currently in existence around the world. So, the issue of over generous interest deductions is not one solely focused on residential property. Contrary to many of the claims made that the interest limitation rule that was a breach of business practice it’s actually quite a standard feature as the thin capitalisation rules demonstrate.
Podcasting since 2019…
Amazingly, this podcast started five years ago in 2019 with my first guest Jenée Tibshraeny then of interest.co.nz but now with the New Zealand Herald. I’d like to thank all my guests who have appeared over the years. The podcast is approaching its 250th episode. It’s something I enjoy which seems well received and it’s actually pretty handy for keeping abreast of developments.
One other professional highlight was providing data to the Finance and Expenditure Committee and Inland Revenue about the instances of over taxation of backdated ACC lump sums. Subsequent discussions with Inland Revenue led to legislative change which took effect at the start of this tax year.
A big thank you
But most of all, I’d like to thank the people who have helped me prosper over the past 20 years, starting with my wife Tina without whose endless support and patience none of this would have been possible. My colleagues here at Baucher Consulting, Judith, Eric, Darren, and Trent, my business coach Bruce Ross. David Chaston and Gareth Vaughan at interest.co.nz, my colleagues of the Accountants and Tax Agents Institute of New Zealand, where I was honoured to be on the board between 2010 and 2016. The many friends have made along the way and of course, my clients.
So, thank you all very much it’s been a fascinating 20 years. As I said change is a constant and there’s a lot more to come. I think we’re going to see big changes with the tax system as we try to fund the challenges ahead of climate change and the changing population. And as always, we will bring you those developments as they happen.
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.
