Inland Revenue’s clampdown on the horticultural sector.
Earlier this year Inland Revenue released an issues paper consulting on fringe benefit tax changes. This originated from a 2022 stewardship review of FBT. The issues paper noted it has been 40 years since FBT was introduced and it was therefore opportune to reconsider certain areas of the tax.
One of the key areas the Government is consulting on is in relation to the FBT treatment of motor vehicles. The issues paper noted that there may be some concerns and misconceptions around the work-related vehicle exemption as it applied for twin or double cab utes. There appears to be a widespread perception that twin cab utes are exempt from FBT because they represent work related vehicles.
On Tuesday, Inland Revenue Deputy Commissioner for policy David Carrigan stated in a press release that it is a myth that utes have always been free from FBT.
“When it comes to double cab utes, these are treated no differently to any other vehicle unless the use of the vehicle meets all requirements for an exemption from FBT, then a double cab ute is and always has been subject to FBT. That is the current law.”
He added that work related vehicles are only exempt from FBT if they meet specific requirements. But there is no blanket exemption for twin cab utes.
The press release goes on to explain the way the rules work and how the exemption might work. The basic position being that it is only exempt on days when it is used for essential work purposes as defined by Inland Revenue. Where vehicles are used partly for business and partly privately, they’ve always been subject to FBT on the days those vehicles are used for private purposes.
Simplifying FBT
According to the press release the purpose of the proposals out for consultation, if implemented, is to simplify FBT and reduce compliance costs, not create additional obligations. If a business, including a farm, is not currently liable for FBT on a vehicle, then it’s unlikely that that business would become liable for FBT on any proposals taken forward.
The press release then concludes by reminding that government still hasn’t made any final decisions in relation to any potential changes for FBT as it’s still considering the feedback it received on the issues paper released in April consultation which closed on 5th May.
My expectation is that if we’re going to see anything happen, we’ll see any changes included in this year’s tax bill, which we can expect to see in late August/early September based on previous years.
In the meantime, it is interesting to see Inland Revenue feels compelled to come out and remind people of the rules. Clearly, the perceived status of twin cab utes was something of a sore point for some people who felt that the work-related vehicle exemption was being abused.
Inland Revenue targets the horticulture sector.
Moving on, we’ve frequently discussed Inland Revenue initiatives on compliance and debt enforcement. As we noted last week, the Budget allocated close to $90 million this year in additional funding to Inland Revenue for investigation and general compliance work and debt management. The expectation is that Inland Revenue will get a return of $8 for every dollar put into such activity.
And then on Wednesday, the latest update on Inland Revenue’s progress in these areas was in relation to the horticultural sector where the press release noted
“Inland Revenue is seeing a few concerning practises in the horticultural sector, including people being paid under the table.”
In the past ten months, Inland Revenue has found $45 million of undeclared tax in the horticultural industry from under the table cash sales not being reported correctly, withholding tax either not being deducted on schedular payments made or deducted at the wrong rates. In some cases, the payments were not even reported to Inland Revenue.
Convoluted structures
According to the press release, many of the issues Inland Revenue has seen arise are in relation to labour hire firms, who frequently pay the labourers in cash. Some of those firms then use convoluted business structures to try and hide those payments and avoid the withholding tax obligations that come with them.
The problem Inland Revenue has with this behaviour is the withholding tax it’s obviously missing out on. But it also means that because the labourers’ incomes have been understated, they could possibly get benefit payments they’re not entitled to and in some cases avoid their child support and student loan payments.
Unsurprisingly, Inland Revenue is cracking down on this .
“…by requiring many contracting firms to withhold tax from their labour repayments and pay that directly to Inland Revenue, where Inland Revenue identifies growers and other payments not correctly deducting or accounting for their tax. We’re also following these up with interviews.”
It’s also pursuing the contracting firms through audits and prosecutions, and apparently there are nearly 100 such audits active at the moment.
“High use of cash and migrant labour”
The press release concludes by noting that there’s a high use of cash and migrant labour. The horticultural industry is therefore a sector open to abusing workers so Inland Revenue will work with other New Zealand government agencies to address these issues.
Cash payments are always a target for Inland Revenue, but it’s interesting to see a sector singled out and certain types of firms identified as the risky part of the equation. The initiative is another sign of how Inland Revenue is using its increased funding and the ongoing issues it encounters in the sector. It will be interesting to see the results of the prosecutions.
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.
The lastest Rich List re-ignites wealth tax debate.
Late last year, the Finance Minister, Nicola Willis, suggested that the charities area was ripe for some tax reform. She expressed concern that the exemption for charities business profits could be being exploited. The sector has nearly 8000 entities, which apparently report a total of over $36 billion of gross income with potential taxable profits of $1.56 billion annually. Now, in theory, those profits would represent over $400 million of tax revenue if the exemption was removed in full. Given the Government’s current straitened circumstances $400 million is not an insignificant sum.
Inland Revenue subsequently issued a consultation document on the topic in late February which closed on 31st March. The consultation sparked quite a bit of concern throughout the charity sector although the main concerns under consultation appeared to be about large organisations making use of the business exemption and donor-controlled charities.
In April, following the end of the consultation period, it became clear from the Finance Minister that in fact, contrary to what was anticipated, there wouldn’t be any budget reforms for the charity sector contained in this year’s budget.
Matt Nippert, the redoubtable business investigations reporter for the New Zealand Herald, filed various Official Information Act requests to get more background on what happened in that consultation process, and an understanding of why the Government might have changed its mind, and he published a story in the New Zealand Herald last Monday.
Sector push back
In essence, the sector unsurprisingly pushed back very significantly with 901 submissions received, which is actually a significant number given there are about 8,000 charities in the sector. 86% of those responding were opposed to removing the charity business tax exemption.
Incidentally, as part of the process, Inland Revenue met with 14 large charities and sector groups as part of the consultation. This is actually quite standard when Inland Revenue is doing consultation. It does go out to interested sector groups and discusses proposals. There can be arguments as to whether or not this borders on lobbying, but it’s a part of the Generic Tax Policy Process and it gives Inland Revenue a boots on the ground insight on its proposals. What was actually discussed at those meetings won’t be released under the Official Information Act request, although the formal submissions on the consultation will be published in due course.
There were complaints it was a very short period of consultation. And obviously there were big concerns about the potential implications for many charities if the exemption was removed in terms of compliance costs and funding. Quite a few people responded that it might be better if Inland Revenue and the charity service focused on the bad actors within the system, rather than taking a blanket approach.
It also became clear following consultation that the possible tax gains from reforms were nowhere near the suggested amount, in fact, were more likely to be around $50 million per annum. As Matt Nippert explained the sector is quite fragmented, with a huge pool of tiny operators and then a very small pool of huge operators such as Sanitarium. Inland Revenue’s proposals would probably have left at least 85% of the organisations untouched.
“A bit scattershot”
Speaking to Matt Nippert KPMG principal Darshana Elwela remarked the Inland Revenue proposals were “a bit scattershot and there was in our view a bit of incoherence about what the potential problem was and how it was being proposed to be fixed.”
I think with Darshana’s comment, sometimes we’ve seen Inland Revenue propose something and it’s not exactly clear the extent of the issue to be resolved, the only references involving subjective word like “significant” without an explanation as to how much represents “significant “.
The other interesting feedback I saw reported by Matt Nippert is that in relation to the potential issue around donor-controlled charities – which I think is a concern – only 46% of respondents opposed a mandatory minimum for distributions for such entities.
I thought that was very surprising because the issue around donor-controlled entities is whether in fact they’re making donations or using the funds appropriately for charitable purposes. Darshana Elwela of KPMG also touched on this, commenting
“Transactions between the donor and the charity could result in the more favourable tax profile for the tax paying side. There were some genuine concerns some of that might be happening.
“The question we had does raise a wider question as to whether these entities should be charities to begin with.”
“A lot of complexity”
Willis denied there has been an about-face, commenting “There is a lot of complexity involved with designing new rules so as to ensure they have integrity and are simple to understand. Therefore, the Government has asked Inland Revenue to do more work on the options.”
The end result is Inland Revenue has gone away to think again because, as the Finance Minister’s office noted, “the Government is focused on fairness and integrity of the tax system. It is important that any changes be the right one, so it’s going to take the time needed to get it right.” In short, watch this space.
Rich List re-ignites the wealth tax debate
Moving on, this week saw the publication of the National Business Review’s annual rich list for 2025, and it showed that for the first time ever, the country’s wealthiest people are collectively worth more than $100 billion. That’s up nearly $7 billion from last year and the criteria now to be included in the rich list is over $100 million of estimated net worth.
It should be said, establishing the wealth of our richest is often educated guesswork, to be frank. That’s because unlisted companies often form the core of the wealth of many of the wealthiest families and persons on the rich list.
By contrast, overall, in 2024 the net worth of all households declined by over $4 billion. Infometrics’ chief forecaster Gareth Kiernan said that average household wealth had fallen since the end of 2021, but that was unsurprising because housing makes up more than half of household assets, and house prices remain below their 2021 peak.
That is the knock-on effect for the average person in New Zealand. And just this week councils have been releasing their rating valuations, and they are showing declines too.
By contrast, the super wealthy have very much more diversified portfolios, so the core of their wealth is actually held in businesses and not so concentrated in property. There are some property magnates in that group, of course, but you’ll find highly diversified wealth, and wealth generates wealth and Thomas Piketty’s famous r > g formula from his monumental Capital in the Twenty-First Century.
Time for a wealth tax?
The publication of the Rich List prompted Chlöe Swarbrick of the Green Party to set out the Green Party’s Budget proposal for a fairly chunky wealth tax of 2.5%. In theory it all sounds very attractive, but as we’ve just discussed, the valuation issues are far trickier than people anticipate in this area, particularly when you have large numbers of unlisted companies in the mix.
And then there is the real risk of capital flight. And as I’ve said before, in our case, I think it’s significantly bigger than people might imagine because moving to Australia is very common and Australia has the temporary residence exemption, which is highly tax favourable. It would mean that, for most Kiwis moving to Australia, their non-Australian assets would not be subject to Australian capital gains taxes unless they became Australian citizens.
Tax is politics and why New Zealand is unique
The key thing to be kept in mind in the debate around wealth tax, and with all debates around taxes, is that what is taxed is entirely a political decision. So, the wealth tax yay or nay debate is going to be resolved at the ballot box ultimately. What is interesting at the moment is that other accountants are reporting they are getting queries from clients concerned about what they could do about a wealth tax if it happened. What are the options around that? This is interesting because it may reveal a shift in thinking that something might be happening. The debate seems to have heated up with growing concerns about inequality and record numbers of people applying for benefits.
In terms of wealth taxes, the classic wealth tax that’s being described by the Greens is basically an annual charge on all wealth. It’s well known that New Zealand does not have a general capital gains tax, but what really makes us unique relative to other countries in the Organisation for Economic Cooperation and Development (OECD) is we don’t have an estate tax, we don’t have a gift tax, we don’t have land tax (other than rates), and we don’t have stamp duties (which, although they’re transfer taxes, are effectively also a tax on wealth, being the value of the land at the time of transfer).
We’ve none of these taxes. But they used to be quite a significant part of the tax base. Back in 1949 such taxes represented 5% of all government revenue at the time, which would be $6 billion now, a very significant sum.
The absence of these taxes and any real form of capital taxation is putting pressure on the tax system to respond to growing pressures on funding. The calls are coming in for variations on some form of capital taxation, whether it’s a capital gains tax, a wealth tax or potentially an estate tax.
We are, as I said, an outlier with the absence of capital taxes, but ultimately tax is political. The arguments will be decided by the electorate and politicians taking a stance and running on tax reform in the future.
New Inland Revenue kilometre rates come with a change in approach
What makes these rates different this year is that, as Inland Revenue explained, traditionally the Commissioner has set a single Tier One rate. However, due to the significant difference in vehicle running costs between the different vehicle types (Petrol, Diesel, Petrol Hybrid and Electric), a Tier One rate has been set for each vehicle category – being petrol, diesel, petrol/ hybrid and electric – to ensure the rates accurately reflect reasonable expenditure related to the business use of that particular vehicle
The new approach may mean that you have to make adjustments to your mileage reimbursement processes going forward.
Inland Revenue performance targets
Finally this week, as part of the Budget, every government produces detailed breakdowns of spending for each ‘Appropriation’ or ‘Vote’ to be approved by Parliament as part of the Budget process. Reviewing the Vote Revenue Appropriation gives some useful guidance and detail about what specifically Inland Revenue is expected to do.
These appropriations are incredibly detailed. The Vote Revenue appropriation revenue runs to 40 odd pages setting out the various items of expenditure and what is to be spent or appropriated.
What’s also of interest are the performance criteria for each sub-part of the overall appropriation including a summary of what is intended to be achieved by the appropriation, and how performance will be assessed. Now, not every appropriation line item has an investment. Some get an exemption under the Public Finance Act.
Tax payments & debt collection
As can be seen the performance expectation for tax payments made on time for the current year to June 2025 is 90% but for next year it’s expected to be 84% maybe reflecting harder conditions in the economy are expected.
We’ve recently discussed the issue of student loans and overseas based student loan borrowers. Inland Revenue has a new expectation that 31% to 35% of all such borrowers will be making payments or meeting their obligations in the 2025-26 year. The percentage of collectable debt that’s going to be over two years old is estimated for the current year to stand at 35.3% but is expected to be 40% or less going forward.
In other interesting snippets the percentage of litigation judgements found in favour of the Commissioner is expected to be 75%. The actual is running at 90%, and as we regularly report, there is a whole series of cases coming through where criminal prosecutions have been successfully taken by Inland Revenue.
How long to answer a call?
Now, how long does it take Inland Revenue to answer a telephone call? Well, the budgeted standard they try to meet is currently 4 minutes, 30 seconds or less. At present they’re managing 3 minutes 8 seconds, which is very good. And next year the standard is again set at 4 minutes 30 seconds.
So, if you call Inland Revenue and you’re waiting for more than 4 ½ minutes, it has not met its expectations. In fairness, just remember, this is currently the busiest time of year for Inland Revenue as they process the March 2025 tax returns for over two million people. The chances are if you do find yourself waiting for more than 4 ½ minutes, you won’t be the only one.
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.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 to rā.
Budget Day lockup is a mad frenzy of activity as you basically have three and half hours to sift through a massive information dump, determine the key points and write something for release at 2PM when the Budget is officially released.
Surprisingly, in the midst of all the information provided, you don’t get copies of any accompanying legislation, bill commentary and Regulatory Impact Statements that will be also released at 2PM. Therefore, those of us who are in the Budget Lockup are a still little bit blind as to the full details of the Budget initiatives. Because of this I increasingly view the Budget Lockup as an interesting experience, a good opportunity to interact with Treasury officials, because you can actually ask for specific information and an opportunity to perhaps quiz the Minister of Finance on some points.
Budget Day – just a government showpiece?
On the other hand, it is increasingly clear from the run up to Budget Day that the budget itself is very much a set piece for the government of the day to boost specific Budget initiatives and narratives. Any detailed analysis on the day is swamped by all the good or bad news about the state of the economy or who’s getting extra or reduced funding. It’s not really until the week following the Budget that you start to get some detailed analysis of what is in the budget and the potential implications.
Investment Boost – a real boost to productivity or just meh?
On Budget Day the Investment Boost proposal was well received, but as people looked into the detail some concerns have emerged. What the measure does is essentially accelerate the depreciation which would have been claimed on these assets. This is done by way of an immediate 20% deduction with the remaining 80% of the asset expenditure depreciated as normal. My initial reaction was to recall the First Year Allowances I used to deal with when I was working in the UK and which operated in a similar fashion.
The twist is last year the Government removed depreciation on commercial buildings, including factories, to pay for its tax cuts. But this year commercial buildings are included in those groups of assets that are able to qualify for the Investment Boost. This about-face has prompted Andrea Black the former independent advisor to the last Tax Working Group, and a previous a guest on the podcast to write an op-ed in The Post about the Investment Boost initiative. In summary, she argues if we are trying to boost productivity, then Investment Boost is a step in the right direction but is not the productivity game changer that is being promoted.
New Zealand is an outlier, again
Andrea is critical that the Investment Boost initiative does include commercial property and notes that our labour productivity is poor and that direct assistance in terms of accelerated depreciation – which she strongly supports – doesn’t really exist for many New Zealand manufacturers. She includes a very telling graph put together based on information obtained under the Official Information Act from the Ministry of Business, Innovation and Employment about how other countries subsidise business, including through tax breaks and government loan guarantees.
As can be seen we only grant government loan guarantees for exporters, in contrast to most other countries in the OECD. Similarly, we and Finland are the only countries which do not provide direct government lending support to small and medium enterprises. The United States, for example, has the Small Business Administration, and this initiative was something we looked at when I was on the Small Business Council back in 2018-2019. I thought then, and still do, that the lack of government financial support for our SME sector is something we really need to address.
A step in the right direction but…
As Andrea notes until Investment Boost New Zealand had no accelerated depreciation which meant we were very much out of line with other jurisdictions. So the Investment Boost initiative is a step in the right direction even if it perhaps could have gone further. I have little doubt Investment Boost will have an effect on investment, like Andrea whether it will have the effect the government is hoping for in boosting productivity, I’m not so sure.
I’m particularly concerned wearing my devious tax planner cap that the opportunity now exists for some clever financiers to put some property related deals together to accelerate the building of some commercial properties to obtain the 20% upfront deduction. I saw something similar happen in the UK with the former Business Enterprise Scheme, which was designed to boost startups but quickly saw property backed schemes emerge to claim the generous deductions. Anyway we shall see how this plays out over time.
Investment Boost, Fringe Benefit Tax and skewing the composition of our vehicle fleet
Incidental to this issue Newsroom published an interesting article talking about the impact of proposed changes to the Fringe Benefit Tax (FBT) regime treatment of motor vehicles. The article suggested that the Investment Boost proposal, which applies to vehicles as well, might mean that we might see a shift away from the use of double cab utes.
There’s a number of reasons that they are now so prevalent on our streets and a growing component of the vehicle fleet. One reason is that there was a perception that double cab utes qualify for the work-related vehicles exemption from FBT. The other was that manufacturers were promoting these vehicles with some highly favourable deals.
The increase in the number of double cab utes prompted Angela Hodges, from NZ Tax Desk to comment the combination of those two factors and particularly the perceived exemption has
“skewed the composition of New Zealand’s vehicle fleet over time, with tax settings influencing business-purchasing decisions in ways that probably weren’t intended”.
The Newsroom article suggests that the coming FBT changes together with the Investment Boost initiative may encourage a switch away from double cab utes to alternative vehicles. It will be interesting to see how this develops.
Inland Revenue’s “significant funding boost”– what can we expect?
Moving on and in as big a surprise as the sun will rise tomorrow, Inland Revenue was given additional permanent funding of $35 million per year to invest in tax compliance and collection activities. As the Commissioner of Inland Revenue, Peter Mersi, pointed out, “This is a significant funding boost and is recognition of what we do and the excellent results we’ve had so far this year.”
These results include for the year to 31st March 2025 assessing additional tax of $880 million from audit activity and improved debt collection activities, with just under $3 billion collected in the year to date compared with $2.7 billion for the previous year. There’s also been a doubling in the number of prosecutions and a big increase in the collection of overseas student loan repayments. In my view this is a scheme that really needs a lot of re-thinking about how it’s managed.
In addition to that $35 million Inland Revenue also got an additional $29 million per year last year for compliance and debt collection. Furthermore, the Government has also agreed to continue $26.5 million of funding set to end this year. All up Inland Revenue is getting close to $90 million of funding for investigation and debt collection activities.
This should have a significant impact given the rate of return of between seven and eight dollars for each dollar invested, which has been achieved in the past. The total return from increased compliance and collection activities is therefore potentially as high as $700 million per year.
A warning and a reminder
Against this backdrop people should keep two things in mind. Firstly, as I’ve said on many previous occasions, Inland Revenue has vast resources. It receives data from many sources, and it is increasingly efficient at absorbing, analysing and acting on that data. The basic proposition you should operate on is; if you have put anything in writing anywhere, Inland Revenue will have access to that information at some point. In particular, Inland Revenue has become increasingly efficient in tracking property transactions.
The other point is in relation to tax debt. If you are behind, take action and front up to Inland Revenue. It’s much better doing so than hoping you won’t be on their radar. Being proactive will get a better result for you in the long term.
The Digital Services Tax is dead – now what?
Now at last, in the run up to the budget, the Minister of Revenue, Simon Watts, announced that the Government had decided to discharge the Digital Services Tax bill from the legislative programme. This had been introduced in 2023 by the previous Labour Government. It was really intended as a backstop to OECD’s Two-Pillar international tax initiative.
According to Mr. Watts, “we’ve been monitoring international developments and decided not to progress the Digital Services Tax bill at this time. A global solution has always been our preferred option and we have been encouraged by the recent commitment of countries to the OECD work in this area.”
The consequence of the decision is that the forecast revenues from the introduction of the Digital Services Tax will no longer be included in the Crown accounts. This represents a $476 million reduction in tax revenue over a four-year period. The question therefore arises as to what replaces this lost revenue.
Google New Zealand’s billion-dollar service fees are not unique
In the same week as the Budget and the announcement about the Digital Services Tax, Google New Zealand released its results for the year ended 31 December 2024.
During the year Google NZ paid $1.05 billion in service fees to related parties, almost $100 million more than in 2023.
A week or so later, Facebook New Zealand announced its December 2024 results and the amount of fees it paid to associated entities was over $150 million, roughly the same as for 2023.
Jonathan Milne of Newsroom wrote an interesting article looking at the question of the payments that were being made by all the tech companies. Taking into consideration the fees paid by Apple, Amazon, Microsoft together with Google and Facebook he estimated the annual amount of service fees being paid to associated entities was close to $4 billion. Assuming all are deductible then at the corporate income tax rate of 28% that represents over $1.1 billion of lost tax revenue.
What about the OECD Two-Pillar deal?
Now, of course, it’s more complicated than this simple calculation. But the withdrawal of the Digital Services Tax should be seen alongside what can only be described as regulatory capture in Washington by the tech giants. That in turn has led to these trade threats made by President Trump against digital services taxes and other attempts to tax the tech giants. This all means that the international Pillar One and Pillar Two proposals in which Minister of Revenue Simon Watts places great faith are practically dead in the water.
The Government therefore has a problem. Having accepted it’s not going get $476 million of revenue from the Digital Services Tax, how does it replace that lost revenue. What about the potential $4 billion of service fees going in affiliate fees, should these be subject to some questions under the transfer pricing rules? What is going to happen in that space? Will some of the roughly additional funding of $90 million discussed earlier be deployed in boosting Inland Revenue’s reviews of the transfer pricing practices of the tech companies? We don’t know, but this is an area other jurisdictions around the world are also grappling with.
In Australia at the moment some of these transfer pricing issues are involved in the PepsiCo case. The case revolves around an embedded royalties issue, basically: do some of the payments made for concentrate include some form of royalty which should be subject to non-resident withholding tax? Typically, non-resident withholding taxes for royalties are between 5% and 10% of the payment. Increased focus here may be a means of recovering some of the lost revenue from the digital services tax.
This issue of the treatment of service fees is in my view probably one of the most interesting challenges in the international tax space right now. All around the world there’s great interest in addressing this issue of transfer pricing. We’re therefore watching to see how Inland Revenue moves and, as always, we will report on developments as and when they arise.
And on that note, that’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.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 to rā.
The investment boost tax incentive announced as a centre piece of “The Growth Budget” is one of the bolder tax initiatives in recent years.
From today businesses of any size can fully deduct 20% of the value of new assets (or secondhand assets purchased from overseas) in the year of purchase. For example, if a company invested $200,000 in new plant, $40,000 would be immediately deductible. The remaining $160,000 would be depreciated as normal. There is no cap on this allowance which is also welcome (and a little surprising).
Investment boost also applies to new commercial and industrial buildings. Although residential buildings and most buildings used to provide accommodation will not be eligible there will be explicit exceptions for hotels, hospitals and rest homes. Any construction project underway before 22nd May 2025 may also qualify if the asset is used or available for use for the first time after that date.
The allowance may also be available for improvements to depreciable property such as significant strengthening of an industrial building. This should be welcome news for owners facing earthquake strengthening costs.
Treasury and Inland Revenue estimate this initiative will increase GDP by 1%, wages by 1.5% and the country’s capital stock by 1.6% over the next 20 years. Half of those gains are expected in the next five years as it sparks an investment boom.
On the other hand, investment boost doesn’t come cheap with an expected cost of $1.7 billion per year over the next four years to 30 June 2029.
I speculated last week that the Budget might contain changes around accelerated depreciation, which I considered would be a better and more affordable option than a cut in the corporate tax rate.
Which is exactly what the Finance Minister Nicola Willis acknowledged when announcing the incentive it; “delivers more bang for buck than a company tax cut because it only applies to new investments, not those made in the past.”
I thought we might have seen an increase in the $1,000 full write-off for low-value assets. Although that didn’t happen this is a welcome move particularly as it is available for any businesses of any size without cap.
On the other hand it is somewhat ironic that having removed depreciation on commercial and industrial buildings last year, the Government has now enabled new commercial and industrial buildings to qualify for the 20% deduction. Allowing this is perhaps a belated recognition that removing depreciation in the first place would hinder investment?
The Ghost of Bill English?
I also described last week the many and quite significant changes to KiwiSaver Bill English made during his time as Finance Minister. The reduction in the Government’s contribution to a maximum of $260.72 annually and removal in full for those earning over $180,000 annually is therefore straight out of English’s playbook. (In fact during the question & answer session the Finance Minister commented that officials had advised removing the contribution completely).
This is to be compensated by increased employer and employee contributions first to 3.5% from 1 April 2026 and then to 4% from 1 April 2028. How that plays out in boosting saving will be interesting to see. On the other hand, the proposal to extend KiwiSaver eligibility to 16-17 year olds is a good move.
Not much love for low-income families
Earlier this year a Treasury paper noted 30% of all single-parent families faced an effective marginal tax rate of 50% or more. The Budget contains changes to the Working for Families which (very) partially addresses this with a lift in the family income threshold from $42,700 to $44,900. However, this has been paid for by means testing the first year of the Best Start tax credit and lifting the Working for Families abatement rate from 27% to 27.5%. (Another very Bill English-type move).
To put that in context if the Working for Families threshold had been adjusted for inflation since it was last set in June 2018, it would now be $54,650 or nearly $10,000 more.
The low threshold and high abatement rate mean many families find themselves in debt with Inland Revenue. To address this the Government is releasing a discussion document with proposals to make Working for Families payments more accurate. This is helpful but nowhere near as much as a meaningful increase in the threshold which, remember, is still below what a person on minimum wage would earn annually.
(Also worth noting that an additional $154 million over four years was found to increase the abatement income threshold for SuperGold cardholders from $31,510 to $45,000. That’s welcome but it’s interesting to compare this with the assistance given to younger families and workers whose taxes pay for NZ Superannuation).
More money for Inland Revenue
As expected, Inland Revenue will get another $35 million a year for compliance and debt collection. This is expected to return four dollars for every dollar spent in the year to 30 June 2026 and rising to eight dollars per dollar spent in the year to 30 June 2027. The expectation is that Inland Revenue is on track to collect more than $4 billion in overdue debt by 30 June.
Elsewhere, we got no further details on the proposed tax changes to thin capitalisation and employee share schemes announced earlier this week. These are expected to cost $75 million over four years, the majority of which relates to the thin capitalisation proposals.
Overall, a growth budget perhaps but one that relies on several sleight of hand moves, and does next to nothing to address the problem of low-income families facing high effective marginal tax rates.
Earlier this year, Inland Revenue ran a consultation on the not-for-profit sector. In the course of that consultation it raised the treatment of the taxation of mutual associations, including clubs and societies. Inland Revenue indicated that mutual transactions between clubs and members, such as subscriptions, which were previously thought to be exempt from tax, were in fact taxable. It transpired Inland Revenue had actually been sitting on a draft operational statement on this matter for some time.
Inland Revenue has now released a draft operational statement (“OS”) on the taxation of mutual transactions of associations, clubs and societies.
This OS takes into account submissions Inland Revenue received on the not for profits consultation. One of the issues this draft OS considers is whether the principle of mutuality applies. As the draft OS notes, under the common law principle of mutuality, an association of people such as a club or society, cannot derive taxable income from transactions within the circle of membership of the association. Mutual transactions do not generate profits for the association, because the amounts received by the association come from members transacting with themselves.
This primarily refers to subscriptions, but as the draft OS also notes, the principle does not apply where legislation provides otherwise. And what Inland Revenue has highlighted in this consultation is that it wants to give greater clarification about the scope of these potentially mutual transactions.
The basic position is supplying stock or services to members is taxable. That’s not a new position, but as the draft OS comments
“…this has not been communicated clearly or consistently, and Inland Revenue is aware affected customers take different approaches. We are hoping to increase awareness of the correct treatment and achieve certainty and consistency by finalising a statement on this aspect following consultation.”
A change of tack
The key point the draft OS proposes is that member subscriptions may be subject to tax, which does represent a change in practice. Therefore, “an object of this consultation is to test whether the reasoning for that conclusion is sound.”
To be frank, this has caused a bit of a stir amongst the potentially affected clubs and societies. There are exemptions given for specific charities and sports clubs, but a large number of organisations would previously have thought and filed tax returns on the basis that transactions involving member subscriptions were exempt. This does work both ways. If the subscription is treated as exempt, then costs relating to subscriptions are not deductible.
The paper contains 7 examples setting out various scenarios and how transactions might be treated. As noted, Inland Revenue’s position is that in some cases membership fees and levies are not mutual in nature but represent income and are taxable. A key point in this approach is if the associations constitution allows distributions to be made to members. If distributions are prohibited, then membership fees and levies are income. The following examples taken from the draft OS illustrate the issues under consideration.
One for legislative reform?
The sector has been taken a bit by surprise by this consultation. In my view it represents such a change of interpretation it should be legislated if Inland Revenue wants to achieve that clarity. To be fair, Inland Revenue is saying that any changes made after consultation is finalised would be prospective and it would not generally seek to reopen prior years. I recommend all potentially affected groups to submit on this draft OS, consultation on which is open until 25th of June.
Inland Revenue gets tough on student loan debts
Moving on, Inland Revenue has been regularly providing updates on the progress of its debt collection and general enforcement in the wake of the additional funding of $116 million over 4 years it got in last year’s Budget for this purpose. Last week, we discussed the extra $153 million Inland Revenue has recovered in the year to date from the property sector alone.
Its latest update this week is about its progress on recovering student loan debt and included the news that “One person was arrested at the border last month and they have since paid off their debt.” According to Inland Revenue at the end of April, there were 113,733 people with student loans believed to be based overseas. More than 70% of those people were in default of their loans and in total they owe $2.3 billion. This includes 150 overseas based borrowers with a combined default debt of $15 million. It is therefore understandable why Inland Revenue is a tougher line on student loan debt.
Information sharing with New Zealand Customs…and airlines
Inland Revenue gets notified by New Zealand Customs about any border crossings into New Zealand by overseas based borrowers. According to the RNZ report apparently airlines are also providing similar information to Inland Revenue. This is an interesting, and previously unknown, detail.
Once notified Inland Revenue will then apply to the District Court and the police can make an actual arrest, which, as noted, happened last month. Since 1st January 2024, 89 people have been advised they could be arrested at the border. This has prompted 11 of them to take action, either by making acceptable repayments or entering into repayment plans and applying for hardship. So far during the current financial year to 30th June, this programme has collected $207 million in repayments from overseas borrowers. This is up 43% on the same period in the previous year. So yes, it’s making progress.
Progress, but…
On the other hand, some of the reported numbers are quite concerning to me, and I consider also highlight why student loan debt has become such a problem. As noted above those 113,733 overseas based borrowers owe over $2.3 billion, but more than a billion dollars represents penalties and interest. What happens is that as the interest and penalties pile up, many debtors get to a point where they feel it can’t be repaid, and they simply freeze hoping the issue will somehow go away. This phenomenon is well understood by Inland Revenue because it happens with other tax debt.
Therefore, the question arises about the efficacy of the current penalty and interest rate regime. Interest and penalties accumulate swamping repayments, so little progress in repaying debt is made even where repayments are being made. The overall amount of debt on Inland Revenue’s books then just blows out.
Debt more than 15 years old? How did that happen?
One particular point really concerns me about Inland Revenue’s latest update. Apparently for over 24,000 of the overseas based borrowers, the debt is more than 15 years old. In many cases, it’s highly likely that people in that category are not going to return to the country, so the threats of arrest at the border are probably not going to be effective.
But then the question also arises is it really very realistic to expect people to repay debt which has been allowed to accumulate for 15 years? And a really big question here is what was Inland Revenue doing during that time?
It’s all well and good to say Inland Revenue is clamping down now. But it seems to me to be against natural justice that it can target debtors where the debt has been allowed to accumulate, and insufficient action was taken early enough to control the debt and prompt earlier repayment.
Inland Revenue, as we repeatedly mention on this podcast, has enormous information sharing and gathering powers. The question really arises as to whether sufficient resources were made available in the first instance to keep control of the student loan debt. And now we’ve reached a situation where, to borrow an old saying, “You owe the bank $100,000, it’s your problem. You owe the bank $1 million; it becomes their problem.” It seems to me that’s where we’ve reached with overdue student loan debt.
Are the rules fit for purpose?
It should also be noted that looking into the legislation applying to student loan debt it appears it’s quite difficult for Inland Revenue to write off debt and interest as part of reaching a settlement. The rules are very prescriptive in such instances, apparently deliberately so.
As a consequence, I wonder if this holds people back about making attempts to settle outstanding debt. There’s also the question of debt over 15 years old and what records are available to prove outstanding amounts. Inland Revenue has the luxury of having the upper hand here where the age of the debt means debtors may not be able to provide any contradictory evidence about lost payments or incorrect adjustments. Although it’s good to see Inland Revenue is making progress on the overall collection, I don’t think that means that it should avoid scrutiny for how the debt book has been handled in the past.
Pre-Budget teasers
The Budget is next Thursday and ahead of it, there’s always plenty of speculation as to its contents. Things have got spicier because of the pay equity issue: depending on who you want to believe this has either “saved the Budget” or just happens to be a coincidence.
As usual there’s been a steady stream of announcements from the Government about particular items which will be in the Budget. A very interesting and quite significant one relates to future drawdowns from the New Zealand Superannuation Fund (“the NZSF”), established by the late Sir Michael Cullen in 2002.
The country’s biggest taxpayer
Ahead of the Budget the Finance Minister announced that the Government will start drawing down on the NZSF with effect from 2028, five years ahead of first forecast. It is just worth keeping in mind that since inception the NZSF has been paying tax. In fact, it is the only sovereign wealth fund in the world which is taxed. For the year ended 30th June 2024, its tax bill was $1.2 billion. It’s usually the largest single taxpayer in the country, meaning it’s already contributing to the funding of New Zealand Superannuation.
Changes ahead for KiwiSaver? National’s record would indicate so
Elsewhere there’s been speculation about what’s going to happen with KiwiSaver. The Finance Minister has alluded to some changes leading to speculation that the Government’s contribution could be increased for lower income earners or might be means tested for higher income earners.
It’s worth noting that previous National-led governments have a pattern of playing around with KiwiSaver. The maximum Government contribution each year used to be $1,043 a year until that was halved by Sir Bill English with effect from 1 July 2012. He also scrapped in 2009 a $40 annual fee subsidy. English also removed the $1,000 kick start payment from 21st May 2015.
The biggest KiwiSaver change English made was introducing employer superannuation contribution tax (“ESCT”) on employer contributions to KiwiSaver funds from 1 April 2012. To illustrate how important that change was, the amount of ESCT collected annually was $1.982 billion for the year to 30th June 2024 or about 1.7% of the Government’s total tax take for the year. Consequently, ESCT is too big for it to be changed in any way. But I do think we might see some tweaking of the Government’s KiwiSaver contribution settings.
A potential corporate tax cut or accelerated depreciation?
There’s also been talk about a potential corporate income tax cut, but I’m with Robin Oliver who said that if they’re going to do it, they’d have to go big. In other words, from probably 28% down to 18%, and that’s simply not going to happen because it would be unaffordable. On the other hand I do think we might see some more targeted investments around increased or accelerated depreciation allowances, which I, and the business sector, would certainly welcome.
The Green alternative
The Greens took the opportunity also to publish their alternative budget on Wednesday. Looking past the predictable scoffing from opponents a few initiatives stand out. They’re proposing a higher top rate of 45%, which is the same top rate as Australia and the UK just for reference, it should kick in at income over $180,000 with the 39% rate starting at $120,000. The trade-off is that every person will get $10,000 a year tax free exemption. The 45% top rate is comparable to other jurisdictions, notably Australia and the UK. I’m not so sure about the thresholds though as the level they kick in seem on the low side.
Think 45% is high? Try Austria
As an aside and about high tax rates I was very surprised to find out this week that Austrian Government, which is a centre right coalition, has kept in place for the next four years a top income tax rate of 55% applicable to income above €1,000,000. Food for thought therefore claiming the Greens’ suggestions are excessive. (As a sidebar and follow on from my comments last week about mandatory indexation of thresholds, Austria is actually reducing part of the inflation adjustment for the tax rate thresholds. In Austria income tax thresholds are automatically adjusted annually by 2/3 of the inflation rate unless the government legislates otherwise).
A Capital Acquisitions Tax?
The Greens are also proposing a 2.5% wealth tax on net assets over an individual’s threshold of $2,000,000 with a 1.5% tax applying to net assets held in “private trusts,” The press has talked about the Greens introducing an inheritance tax, but that’s not actually correct. In fact, and I think this is probably the most interesting revenue raising idea from the Greens, what they are actually proposing is a variation of the Irish Capital Acquisitions Tax. Why this is interesting is Capital Acquisitions Tax is a donee based tax. In other words, it is the person who receives the gift who is taxed. By contrast a typical inheritance tax or estate duty work on the principle of any taxes being paid by the donor (the person, or their estate making the gift.
Under the Greens proposal a 33% wealth transfer tax will apply to significant gifts and inheritances received, over an accumulated lifetime threshold of $1,000,000. The 33% rate is the same as the Irish Capital Acquisitions Tax. This is an interesting proposal and it’s the first time I’ve seen a New Zealand party raise it as an option.
Elsewhere the Greens want to increase the corporate tax rate to 33% and also restore a 10-year bright-line test, as well as reintroducing interest deductibility restrictions. All of the tax increases are to pay for a huge social. Investment programme, including free dental care. It would also include a major increase in the threshold for Working for Families from the current $42,700, which has not changed since June 2018, to $61,000. The current 27% abatement rate would also be reduced.
Wealth taxes and capital flight
On wealth taxes, a reason why tax practitioners including myself are sceptical about the revenue projections for a wealth tax are the issues of valuation and capital flight. Valuation issues are always a key objection to wealth taxes, but I think the question of capital flight is one that we perhaps have to think hard about when considering the impact of a wealth tax. That’s because I think we are very vulnerable to capital flight to Australia.
Australia has always been a huge land of opportunity for many Kiwis but it’s also very attractive for those Kiwis moving there who qualify for the Australian Temporary Resident exemption. This exempts non Australian sourced income and capital gains from Australian tax. It’s similar to our Transitional Resident exemption, but unlike that which is generally only available for 48 months, the Australian Temporary Resident exemption, is more or less indefinite or until the point you either become an Australian citizen or marry or cohabit with an Australian citizen.
A bewildering brouhaha
In the run up to the Budget, there’s been a quite bewildering to me brouhaha over who can or cannot attend the Budget Lockup. It’s really surprising that Treasury would get itself dragged into such a controversy with its unpleasant tones of attempting to silence critics. I do think as a result of that, together with the pay equity issue, Thursday’s Budget Lockup could get a little fractious. I certainly think the Parliamentary ‘debate’ will be particularly rowdy.
What does happen in the Budget Lockup?
Thursday should be my 15th Budget Lockiup. I’ve attended every single one since 2010 other than the COVID affected 2020 Budget. The routine is that we get access to the Budget documents at 10:30 and then we have about 90 minutes to analyse them before the Minister of Finance (and several colleagues) comes in to give a speech and answer questions. After that Q&A session Treasury provides lunch, and everyone finalises their analysis for release at 2 o’clock when the Finance Minister starts delivering the Budget to Parliament.
To be honest, I don’t know why the Finance Minister bothers with a speech to analysts. We’ve all read the material and frankly it’s much more interesting to ask questions about particular details. Obviously, finance ministers all want to sell the big picture, but for most in the Lockup, including myself, we’re very much more interested in the detail.
This is why the Lockup matters; it’s one of those few opportunities where experts can directly ask questions of the Minister of Finance and other attending ministers. The first few questions will go to the Press Gallery after which economists and other experts chime in.
It’s quite interesting to see who attends the Lockup. I’ve sat next to next to overseas economists, analysts from the British Embassy as well as plenty of other colleagues from the Big Four and other various accounting and advisory firms. But the best part of the Lockup is the question and answer with the Finance Minister which I’m looking forward to as I think it could be a bit spicy this year.
Budget predictions?
I don’t actually think that we’ll see a lot of tax measures in the Budget other than possible accelerated depreciation changes. We might get more details about those changes previously announced in relation to the Foreign Investment Fund regime. As I said, I think the Lockup could be a little bit more entertaining this year and I do expect the Parliamentary debate to be more raucous than usual.
Tax Freedom Day
16th May was Tax Freedom Day according to business accounting firm Baker Tilly Staples Rodway. From this day onwards, workers will have paid their tax bill for the year and are now working for themselves for the rest of the year. Interestingly, according to Bake Tilly Staples Rodway the overall tax paid has increased by 4.66% on last year. That’s despite the tax cuts announced in last year’s budget.
Happy Anniversary…to me 😊
May 16th was also the 32nd anniversary of my arrival in New Zealand, and for those who don’t know my back story, I arrived on this day in 1993 as a backpacker, to follow that year’s Lions tour. The All Blacks finished up winning that series 2-1. Despite that result, I had a great time, and I decided I rather liked New Zealand so I explored opportunities about how I could stay. The rest, as they say, is history. One of the key changes is these days I’m very much an All Blacks fan. Anyway, happy anniversary to me and many thanks to many, many people not least of all my wife Tina for what’s been a fantastic 32 years.
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.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 to rā.
Inland Revenue uncovers over $150m from property sector.
Five suggested changes to the tax system compliance.
Early last month, Inland Revenue issued a draft interpretation statement The Commissioner’s duty of care and management under Section 6A of the Tax Administration Act 1994. This is a largely unchanged update of the previous interpretation statement issued in 2010.
This might sound a little arcane, but Section 6A, and the related section 6 of the Tax Administration Act are, in my mind, two of the most important sections in the tax legislation. As the interpretation statement puts it, “these are important provisions governing the day-to-day operation of Inland Revenue and the exercise of the Commissioner’s power of the under the Inland Revenue Acts.”
So, what are these provisions? As you can see Section 6 requires Ministers and officials to “protect integrity of tax system” including “the public perception of that integrity.”
Section 6A then sets out the Commissioner’s duty of care and management.
What does “care and management” mean and why are these provisions here? The opening two paragraphs of the interpretation statement explains it as follows:
“A reality of modern tax administration is that the Commissioner must operate the tax system with limited resources. This means the Commissioner cannot always collect every last dollar of tax owing in every case. As a result, the Commissioner must decide how to best use his resources to maximise the taxes collected and to foster the integrity and effective functioning of the tax system.
The Commissioner’s resource allocation and management decisions can affect the integrity of the tax system, including taxpayers’ perceptions of that integrity. What one taxpayer may consider as flexibility that achieves a practical and sensible outcome, others may consider as inconsistency or favouritism.”
What has this got to do with Mickey Mouse?
Setting out the history as to how this section gets here is very interesting, and that’s where Mickey Mouse comes into play. It might be no surprise to find out the actual origins of Mickey Mouse’s involvement in our tax system go back to the UK and a case known as the Fleet St Casuals[i] case.
This was a decision by [the British] HM Inspector of Taxes to reach a settlement with casual workers in the Fleet Street printing industry who had not been compliant with meeting their tax obligations. Instead the workers had “engaged in the process of depriving the Inland Revenue of tax due on their casual earnings.”
As part of this the casual workers had falsified their identities and addresses when collecting their pay so that HM Inspector of Taxes could not assess and collect tax due. Apparently, Mickey Mouse of 1 Sunset Blvd was a regular worker and there were several similar such aliases employed. When the HM Inspector of Taxes investigated, they found there was around 6,000 workers who had not been compliant at all, and many of them had provided false addresses. Chasing down every amount of tax due was impracticable. So, a settlement was reached.
When this became known it attracted the ire of the National Federation of Self-Employed and Small Businesses, and they took a case against the Commissioner of Revenue, on the basis that they were being unfairly discriminated against. The Federation sought out a writ of mandamus to basically compel the Commissioner to assess and collect all taxes properly owed.
The case eventually reached the House of Lords, who held that the Commissioner had a “wide managerial discretion under Section 1 of the Taxes Management Act.” It was therefore within the exercise of the Commissioner’s care and management to reach settlements, even though not all the tax due would be collected.
The Organisational Review of Inland Revenue
Back in 1981, when the House of Lords decided the case, there was no such equivalent provision in New Zealand. During the overhaul of our tax system in the 1980s and early 1990s, the Valabh Committee concluded that a similar measure was needed. Subsequently an organisational review of Inland Revenue was carried out by a committee chaired by Sir Ivor Richardson, the late great tax jurist. This was a highly important review if now somewhat lost in the mists of time.
The Organisational Review’s 1994 report concluded a similar discretion to that of the UK was needed and this led to the introduction of sections 6 and 6A of the Tax Administration Act. (The Organisational Review also prompted a substantial overhaul of the dispute process which is another story).
The thrust of Section 6 and 6A is Inland Revenue has some discretion about how far it can use its resources to collect tax, but in doing so it is bound by keeping the perceptions of the integrity of the tax system. A key point that is repeatedly made clear is that discretionary care and management does not mean that Inland Revenue can override or ignore tax law that exists. Nor do sections 6 and 6A give the Commissioner of Inland Revenue the ability to issue what might be called extra statutory concessions.
The interpretation statement includes a useful appendix setting out the history of the provisions. There’s a separate handy reading guide accompanying it as well for those who want to avoid wading through the full 59-page consultation. As is now common, the interpretation statement contains 17 examples illustrating how the Commissioner might use his discretion. This example will sound familiar.
The response given in the above example is what I would expect to see. Although it addresses the issue of a shortfall penalty, what about use of money interest? Would the Commissioner have discretion to remit that interest? The example doesn’t cover that, but it’s something that a taxpayer might raise an objection about. Obviously, everything is fact dependent and Inland Revenue may be able to point out that key facts were not provided at the time of the initial inquiry.
As I said, this is a highly important document. Even though the practical effects on day-to-day taxpayers may not seem significant, it’s good to see it updated.
What about Inland Revenue mistakes?
On the other hand, I have to say that the emphasis on Section 6A does overlook the question of whether operational practices of Inland Revenue may be a breach of Section 6. In other words, Inland Revenue does something operationally, which may be correct under the law, but actually is highly disruptive to taxpayers because it failed to process matters promptly or incorrectly.
What happens then, and also regarding the matter of costs that are incurred by the taxpayer? How does that affect the integrity of the tax system or taxpayers’ perception of the integrity of the tax system?
This is an interesting area and one where I think we ought to see more case law involved. But as this updated paper points out, there have only been four tax cases since 2010 where there has been some reference to section 6A, so it is yet to be tested. Consultation is open until 26th May
Inland Revenue’s clampdown on the property industry
Speaking of Inland Revenue and reassessments, last week Inland Revenue released a press release proclaiming its latest success in the clamp down on under-declared income and GST.
According to the press release, it has uncovered more than $150 million in undeclared income tax and GST from the property sector. This initiative is part of the additional $116 million funding given to Inland Revenue in last year’s budget. According to the press release, the $153.5 million discrepancy for the first nine months of the current financial year is almost the same as the total $156.8 million figure for the whole of the year ended 30th June 2024.
Now, there are four risk areas identified here. GST, rental, bright line and developers. The majority of the discrepancies relate to GST and developers.
Defaulting developers under increased scrutiny
The press release also revealed Inland Revenue is focusing on defaulting developers because
“…we’re also seeing a pattern of property developers claiming significant refunds as they incur costs upfront but then failing to file and pay once properties sell.
Where we expect a GST payment from a property sale and we don’t see the sale in the return, we contact the developer to make enquiries.
If there is no response or no return filed, we will take enforcement action quickly.”
This is unsurprising and will be an ongoing project. As noted above, Inland Revenue got $116 million over four years in last year’s budget. I would expect it to get more in this year’s budget, but who knows at this point?
Five proposals to improve the tax system
Last month I had the very great privilege of speaking to Inland Revenue’s Policy Advice Division. They asked me to present to them some of my insights about the tax system and on communicating tax policy. It was a fascinating session around those wide-ranging topics. The Q and A session was particularly interesting and entertaining. Again, my thanks to Inland Revenue for inviting me along. It was an enormous privilege to speak to you all. I thoroughly enjoyed it, and I hope you did too.
Now, one of the questions was “if you’re in charge of tax policy for a day, what changes would you propose?”. I put forward the following five proposals.
Number one – introduce a capital gains tax
Firstly, I would introduce a capital gains tax, and I would do so as much for economic efficiency and clarity as for raising revenue. I don’t accept the argument that it’s too complex. Anyone who looks at the Foreign Investment Fund and financial arrangement regimes, both of which trip up experienced taxpayers and practitioners, can’t honestly be saying a CGT would be too complex.
At present there’s a large part of our tax system, particularly in relation to property transactions, that contains some rather subjective definitions around a person’s intent or work of a minor nature. Those are subjective terms and perhaps unsurprisingly, in my experience non-tax specialists people tend to think tax should be pretty much cut and dried. It is therefore surprising for them to discover there is so much potential subjectivity involved.
But I also think that when you consider how our economy has developed over the last 40 years leading to over investment in property (in my opinion and that of economists such as Bernard Hickey and Associate Professor Susan St John), then trying to shift the allocation of capital away from investing in property would be a good thing. I’m not saying capital gains tax would solve that issue overnight, but it would be a start.
Number two – time for the “Fair Economic Return”
My second suggestion would be the fair economic return (FER), which is something that I’ve talked about before which I’ve developed alongside Susan St John. How it operates is that above a certain threshold, a set percentage will be applied to the net value of a person’s residential property. I see this alongside a capital gains tax as a twin track approach to address the issue of better allocation of capital.
Furthermore, as the Tax Working Group noted in its discussion of the deemed return method (on which FER is based), it would initially raise more revenue than a CGT, and we need to raise revenue. The Government’s books are clearly under strain, and this will increase. That was something I talked to Inland Revenue Policy about where I saw the strains manifesting. Cost cutting is part of managing the books, but in my view, tax increases are inevitable.
Number three – mandatory indexation of income tax thresholds
The suggestion I have, and this has been a bugbear of mine for quite some time, is automatic indexation of income tax thresholds. To me, this is primarily about transparency and addressing the issue of fiscal drag (when inflation pushes taxpayers into higher tax brackets).
Fiscal drag has been a tool which governments of both hues over the past 30 years have been very happy to use to disguise the actual tax take. It led to the position we saw last year, where in the first threshold adjustment since 2010, the adjustment was limited to inflation since 2017. In other words, a lot of inflation gains were locked in.
I think there’s a lack of transparency about this process and it doesn’t just extend to income tax thresholds. It also extends to other income tax thresholds, in particular around the financial arrangements regime which have not been adjusted since 1999. It doesn’t apply to GST, however, because I think there are different issues involved with the GST threshold.
These thresholds wouldn’t need to be changed annually as happens in the United States, but they could be changed no more than three yearly or when a threshold, say 5% inflation, has been breached. The key thing is these threshold changes would happen automatically unless the government of the day specifically legislated otherwise. If a government decides not to increase thresholds this decision goes through the regular Parliamentary legislative process and the government must then explain its decision.
Number four – legalise and tax cannabis
I don’t smoke, but around the world there has been a trend to legalising/decriminalising cannabis. The present criminal status of marijuana enables its supply to be captured by organised crime syndicates and those of you who know crime history will know that it was tax evasion that got Al Capone busted.
I think legalisation of cannabis is something that should happen and could be a useful revenue raiser. To give an example, Colorado, a state of about five million people, legalised cannabis in February 2014 and since then, its total tax collected has been over US$2.9 billion, roughly NZ$5 billion. In the year to December 2024, it collected US$255 million, about NZ$440 million.
Granted, the tax take from marijuana in has been falling in recent years. But that’s because other states are legalising it as well. If I was Nicola Willis, I’m not sure I’d want to leave a potential $400 million plus per year lying around.
Number five – time for a Tax Ombudsman
Finally, I would establish a tax ombudsman and a tax advocate for small businesses and small taxpayers. This is a more administrative issue, but it’s based on a report I was lucky enough to prepare for the Tax Working Group in 2018.
A tax ombudsman is common in other jurisdictions. For example, when preparing my report for the Tax Working Group, I spoke to the then Inspector-General of Taxation and Tax Ombudsman of Australia. It could be a standalone office, or it could be part of the Ombudsman’s office. Either way, it would give taxpayers a second right of complaint against improper practises as they see it, by Inland Revenue. In that way it ties into our main story this week about Inland Revenue’s duty to preserve the integrity of the tax system.
The tax advocate together with changes to the dispute process would redress the imbalance between Inland Revenue and smaller taxpayers. Something I raised in my presentation to Inland Revenue, is that for a very litigious subject, we actually don’t have many tax cases going through the courts (something Supreme Court Justice Glazebrook has also noted). I consider in many cases Inland Revenue wins because it is playing with a loaded deck. This is the result of the changes following the Organisational Review Committee. I think 30 years on from that review its time we had another look.
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.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 to rā.
