22 Aug, 2022 | The Week in Tax
- A big tax break for build-to-rent developers
- The role tax has played in the housing crisis
- Clarifying the treatment of donations to private schools
Transcript
Housing Minister Megan Woods recently made a surprise announcement that blocks of at least 20 new and existing build to rent flats will be exempt from the interest deductibility limitation rules in perpetuity if they offer 10-year tenancies. Currently, build to rent flats would only qualify for the exemption from interest deductibility rules if they are new builds and then only for 20 years.
This is quite a significant change clearly aimed at the developing build to rent market, which after the announcement of interest deductibility limitation was made last year was quite concerned that the sector would be very hard hit by the proposals. During the group discussions and consultation that went on with Inland Revenue in the run up to the release of the relevant legislation, these concerns came across very strongly from the build to rent sector.
Obviously, they’ve continued lobbying in the background and have won this concession. This is a big win for the sector as it will probably greatly shake up the rental market over the long term. It gives it security of supply and therefore for financing. But it’s also a win for tenancy advocates who have been pushing there should be longer tenancies available to renters similar to what we see in continental Europe.
It’s also worth noting that this new exemption will apply to existing properties. Therefore, if you take an existing property and convert them into 20 apartments or flats, then you qualify for this permanent exemption. Again, last year there was quite a bit of discussion over what constituted a “new build” and conversions were high in the list of matters under consideration.
On the other hand, the move does further sideline the mum and dad type investors who are currently a large part of the rental market. And at the moment they will definitely be left hoping for a change of government next year. Overall, this change seems a smart policy to boost the growing rent to build sector, but also give greater protection to tenants.
The reasons for very high house price inflation
Moving on, exactly why house price inflation in New Zealand has been so high has long been a matter of debate. The Multi-Agency Housing Technical Working Group, which consists of members from the Ministry of Housing and Urban Development, the Reserve Bank of New Zealand and the Treasury has been studying this issue in some detail.
And on Thursday the Housing Technical Working Group released a report on the housing system based on a close look at the housing development system in Hamilton, Waikato area.
Now the group’s key conclusion was:
“…a combination of a global decline in interest rates, the tax system, and restrictions on the supply of land for urban use have led to a large change in the ratio of prices to rents and are the main cause of higher house prices in Hamilton-Waikato, as well as other parts of Aotearoa New Zealand, over the past 20 years.”
The report has some interesting insights on the road tax matter. The report starts from the pretty standard theory that a neutral tax system is one that treats different economic activities equally. However, the report notes that “New Zealand’s tax system is not neutral” and there are a range of tax distortions that affect house prices, land prices, rents and construction costs.
According to the report, the most important distortions in the tax system are firstly imputed rent, that is the rent owner occupiers effectively pay themselves is not taxed, whereas other forms of income from investments are taxed. This is a very controversial point and conceptually counter-intuitive for owner-occupiers. But it is an approach that the Netherlands has adopted to tax housing on an imputed rental basis.
Secondly, capital gains are often not taxed, whereas other forms of income are. Well, this podcast is a broken record about the distortions the lack of a comprehensive capital gains tax produces.
Then thirdly, the GST is charged as a lump sum when a house is built and is charged on maintenance costs and rates but is not charged on rents. This is a very interesting point and not one that I’d actually considered in much depth.
The consequences of these distortions is the first increases the incentive for people to live in bigger or better houses than otherwise. We see that in New Zealand, new builds are the second or third highest in the world in terms of area.
The report expands on the matter of the first and second distortions, that the lack of capital gains and imputed rent also increases the investment value of housing relative to other investments. This is a well understood point which means those resources devoted to owner occupied housing “yield untaxed shelter in perpetuity as well as untaxed capital gain”. If on the other hand, you put money in the bank or in shares you will be taxed on the income. Finally, as is well known and is one of the reasons for the interest deductibility limitation rules, investing in rental housing yields tax free capital gains for those who hold property long enough.
The report concludes these tax distortions have caused a higher price to rent ratio in New Zealand than under a more neutral tax system. The group also reaches the interesting conclusion that New Zealand is “closer to restricted land supply than abundant and therefore we conclude that these income tax distortions are likely to have driven house prices higher rather than increasing supply and reducing rents.”
The commentary on the impact of GST is interesting because as I said, not many of us have actually thought about that and how it might play out. What it says is that the overall role of GST extends well beyond the “…direct impact on construction costs and includes a complex array of interactions stemming from the fact that GST is not charged on rents but is charged in other goods and that GST is charged only on some land transactions. The report notes “Assessing the overall impact of New Zealand’s GST on house prices is a possible area for future research.”
The report includes an interesting table estimating the impacts of tax distortions on house values for each type of buyer. The report notes the tax distortions were relatively small in 2002 when interest rates were much higher but by 2021, the impact of these tax distortions “had grown significantly”. The report further noted that in a low interest rate environment, the tax distortions were significantly amplified.
Table 2 Impacts of tax distortions on house values for each buyer type
Estimates with current tax settings
(Estimates with ‘neutral’ tax settings) |
| Date
Inflation rate
Interest rate* |
Q2 2002
π = 1.8%
i= 5.6% |
Q2 2011
π = 2.5%
i= 5.4% |
Q2 2016
π = 2.1%
i= 4.1% |
Q2 2021
π = 2.0%
i= 3.5% |
| Landlord
Equity financed |
$169,031
($114,495) |
$289,709
($185,365) |
$438,582
($261,808) |
$680,901
($379,377) |
| Landlord
60% debt** |
$164,869
($112,175) |
$276,188
($179,021) |
$435,601
($261,950) |
$431,979
($400,966) |
| Owner-occupier
Equity financed |
$189,161
($89,753) |
$278,309
($141,369) |
$367,980
($185,213) |
$516,949
($255,797) |
This is a very interesting report which feeds into the ongoing debate about housing. I think it underlines a constant theme of this podcast that we need to change our tax settings, settings around the taxation of capital and in particular, housing. Of course, Professor Susan St John and I would be pointing to the fair economic return methodology as one option for starting to take some of these tax distortions out of the market.
GST and private schools
And finally, private schools have been in the news recently, largely because of the revelations about the behaviour of the newly elected MP for Tauranga. Quite by coincidence, this week Inland Revenue has released a draft Question we’ve been asked on the GST and income tax treatment of payments made by parents to private schools. This also comes with a handy flow fact sheet as well which has a useful flowchart which explains how the rules apply.
Something else to keep in mind are the special rules for calculating GST on school boarding fees. Where students have arranged to board at the school for more than four weeks, the school charges GST at a lower rate (9% or 60% of the standard rate) to the extent the boarding fee is for the supply of domestic goods and services.
Well, that’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients.
Until next time kia pai te wiki, have a great week!
17 Aug, 2022 | The Week in Tax
- Insights from the Budget information release
- The IRS is a big winner in Biden’s tax proposals
- Inland Revenue writes off $100 million
Transcript
The Budget information document release on Thursday caused a bit of a stir and some excitable commentary. A few points stood out for me, particularly in relation to the ongoing controversy over the cost-of-living payment and its delivery by Inland Revenue.
We already knew Inland Revenue was less than happy to be involved in it, but some of the further documents released shed further light on it. Treasury’s recommendation was,
“…if you wish to progress with the payment along the lines of the commission[sic], the Treasury recommends that Inland Revenue be the delivery agency, given they are the agency best placed to deliver such a broad payment in the short term.”
Inland Revenue, on the other hand, didn’t want to be involved because,
“…delivering this payment, which is estimated to require around 1,000 staff at its peak for around two months, would have critical operational impacts on Inland Revenue while delivering the current COVID 19 economic supports. The addition of this payment to the portfolio of services that Inland Revenue already delivers would severely compromise Inland Revenue’s already stretched workforce.”
That’s quite an admission from Inland Revenue. I guess some of the controversy about accidental overpayments of the cost-of-living payment to ineligible recipients is an assumption that Inland Revenue is highly efficient. In reality once humans are involved then on the precept of “garbage in, garbage out” there were always going to be a few errors involved.
What concerns me about Inland Revenue’s admission, though, is it does seem to point to perhaps the organisation is a little bit too lean and mean after its staff has been cut quite substantially by over 20%. We know it makes extensive use of contractors which as we discussed last year, led to an Employment Court case, which it won, by the way. On the other hand the admission that basically it needs to increase its staff by about 20% to manage something like this points to perhaps Inland Revenue being more stretched than it ought to be in staffing levels.
And that also indirectly does raise some questions about Inland Revenue’s enhanced capability following completion of its Business Transformation project. It is perhaps too simplistic to think that a couple of pushes of buttons is all that was needed to enable the cost-of-living payments to be made. But it does strike me as surprising that Inland Revenue has to devote a thousand staff and additional resources to deliver the payment.
Now, one of the other criticisms that emerged has been made about the payment is that only 1.3 million people have received it so far of the estimated 2.1 million. But in reality, it was known beforehand that all 2.1 million estimated eligible people would not receive a payment straight away. One of the papers notes,
“around 25% of potentially eligible recipients, around 500,000 individuals, will not receive this payment during the proposed August to October window because their assessment for the 2020 122 tax year is not complete”.
The paper goes on to explain that based on tax filing information for the year ended 31st March 2020,
“…around 38% of people who submitted an IR3 did so by the end of July, and 53% by the end of September 2020. Assuming the same pattern for the 2021/22 tax year, Inland Revenue expects there will be a long tail of IR3 filers who would not receive their cost-of-living payment during the proposed payment window.”
The paper notes this will mean Inland Revenue will have “increased contacts” as people will be asking why they haven’t received a payment. This will then “have an impact on other services for taxpayers” such as Working for Families.
This is quite a reasonable point. But, of course, politics has intervened. And when you’re beating a dog, any old stick will do. So, the Government is copping it for what was obviously something that would have happened in the first place.
The other point that comes across is a wider one around the future sustainability of the tax system. Treasury was pouring a lot of cold water on Ministers’ various spending plans and pointing out the unsustainability of what was being asked for. Treasury warned
“Meeting these new targets consistently will require you to maintain a balance between revenue and expenditure. Over the medium term this would require significantly constraining spending growth, unless your revenue strategy is adjusted to maintain a higher level of tax revenue-to-GDP in later years.”
As the Herald noted, that would mean finding new taxes to leave spending as a share of the economy higher over the long term.
Now, one of the reasons the Tax Working Group recommended a capital gains tax was it had considered the long-term fiscal sustainability of the tax system based on the then current spending trends. Its Submissions Background Paper in March 2018 pointed out that based on then current projections, the Government’s primary expenses would rise steadily to reach 31.1% of GDP by 2030 and would actually mean that there would be a deficit of. 1.2% of GDP by then. The TWG recommended steps were needed to widen the tax base.
Those issues have not gone away and in fact will have been exacerbated because of the increase in borrowings that the Government incurred as a result of the COVID 19 pandemic.
We are not really having a discussion around how are we going to fund an ageing population, the increased demands on health and, as I pointed out last week, adapting to climate change. Every government seems to be stuck around keeping tax limited to 30% of GDP, Bernard Hickey has a long series of very interesting commentary on this.
The Budget documents don’t really address that issue in my mind, and it’s something that, as I’ve said beforehand, we’re going to need a serious discussion around how we expand our tax base and manage these pressures. Superannuation, remember, is now the second single biggest item of Government expenditure. This discussion isn’t going to go away and inevitably it’ll come back to the question of taxation of capital. We probably see the politicians fence around it during next year’s election. But those pressures will remain.
Pressure derails OECD deal?
Now, speaking of politicians under pressure, President Biden had been struggling to get his Inflation Reduction Act through Congress. But this week he managed to do so after a few recalcitrant senators finally came on board.
There’s a couple of interesting implications about this. Firstly, it appears to move forward the possibility of America coming on board with the OECD’s global tax deal. And in particular, the Pillar Two proposal for a minimum corporate tax rate of 15%.
However, it’s emerged that the Biden administration’s changes to the bill in order to get it passed appear to be at odds with how the minimum 15% corporate tax rate % is going to work. The details are a bit complicated, inevitably, but the corporate minimum tax of 15% will apparently only apply to the book income, that is income reported in financial statements of companies with revenue over US $1 billion. It will also only apply on a group level rather than at a country-by-country basis, which is contrary to the intention of the OECD tax deal, of eliminating the practise of setting up subsidiaries in tax havens.
Some international tax experts are saying the Biden deal may not now actually be compliant with the global tax deal. That possibly opens it up for other jurisdictions to say “Hang on, we’re not going to have that”. But ironically, it appears that US multinationals may in fact be keen to get the OECD Pillar Two deal passed through, because otherwise they may be exposed to additional taxes. So, watch this space. The point is, the Inflation Reduction Act is progress even if there are ructions still going on in Europe with Hungary now putting a spanner in the EU’s need for unanimity to agree the deal.
The other quite interesting thing that emerged is that the US Internal Revenue Service, the IRS, got US$80 billion of extra funding. And there’s a story from the Washington Post which explained why it needed that funding.
It includes an absolutely extraordinary photograph of the cafeteria in an IRS office in Austin, Texas. All that is visible is boxes and boxes of paper files, because the IRS had, as of the end of July, a backlog of 10.2 million unprocessed individual returns.
To give you an idea just how archaic the IRS’s system is, paper tax returns aren’t scanned into computers. Instead, IRS employees manually keystroke the numbers from each document into its system, (this is what Inland Revenue previously had to do until its Business Transformation programme).
It is absolutely extraordinary what’s going on with the IRS. I suggest every time you feel that Inland Revenue has dropped the ball and is hopelessly inefficient, thank God you’re not dealing with the IRS. We had a situation where we sent the IRS a letter in January 2020 and we did not get a reply until August 2021, and we were possibly one of the lucky ones.
Giant jump in tax writeoffs
And finally, a little snippet emerged about how much use of money interest the Inland Revenue has written off in relation to the COVID pandemic funding. National MP Andrew Bayly asked the Minister of Revenue how much tax interest and penalties have been written off for the last three financial years. The response was in the year to June 2020, it was $17.8 million, in the year to June 2021, $22.5 million, and in the year to June 2022, $26.8 million. Quite reasonably substantial amounts.
But what was also revealed was how Inland Revenue had applied its increased discretion to write off use of money interest as a result of the COVID 19 pandemic. The total amount remitted between 10th June 2020 and 4th of July 2020 was $104 million, which is way above what I would have ever estimated. This amount probably relates to well over $1 billion of debt, possibly as much as $2 billion. It gives an idea of the fiscal impact COVID 19 has had and will probably continue to have.
Well, that’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients.
Until next time kia pai te wiki, have a great week!
1 Aug, 2022 | The Week in Tax
- Inland Revenue draft interpretation statement on tax loss carry-forward and continuity of business activities
- Inland Revenue applies little-known provisions to find director personally liable for company’s tax debts
- What role for windfall taxes?
Transcript
Inland Revenue have released an extremely important draft interpretation statement covering the loss carry forward continuity of business activities provisions. These relatively new provisions enable a company to carry forward tax losses, even though there has been a breach of what we call shareholder continuity, so long as the company is continuing the same business activity.
The general rule is in order for companies to carry-forward tax losses for future use, at least 49% of the shareholders must remain the same throughout the period between when the losses arose and when they are used. Tax accountants and advisers pay particular attention to these shareholder continuity provisions because they are all or nothing. If there’s been a breach, you lose all the losses, and they may no longer be carried forward.
We therefore watch this very carefully, but they are not terribly popular and are seen as somewhat cumbersome because they are so hard and fast and they are regarded as impediments to enabling corporate reorganisations, allowing companies to access new sources of share capital or adapt their business activities in order to either grow or become more resilient.
When the Covid-19 pandemic hit in March 2020, one of the Government’s first responses was to introduce these business continuity provisions which took effect from the start of the 2020-21 income year. That’s generally 1st April 2020. But as one of the many good examples in the paper illustrates, sometimes the rules can actually take earlier effect.
Under the business continuity rules even if there has been a breach of shareholder continuity, a company’s tax losses may continue to be carried forward despite the breach if no major change in the nature of the business activity carried on by the company occurs throughout what is termed the business continuity period. This is subject to an exemption for some permitted major changes. This draft interpretation statement is therefore very useful in giving us guidance as to how these rules are meant to work.
Tax losses can continue to be carried forward for what is termed the ‘business continuity period’. Typically that is the period starting immediately before the shareholding continuity breach and it ends on the earlier of the last day of the income year in which the tax losses have been used, or the last day of the income year in which the fifth anniversary of the shareholding breach occurs. In other words, there’s a five-year cap on the ability to use these provisions. However, that five-year cap doesn’t apply where 50% or more of the losses are eligible for carry forward arose from bad debt deductions.
These new rules will apply where there’s a shareholder continuity breach starting in the 2020-21 income year and tax losses that arose in the 2013-14 income years or later can be carried forward using these provisions.
The key thing is determining what is the nature of business activities and have they continued? When you’re considering this, you look at matters such as its core business processes, for example, farming, manufacturing, construction, distribution, retailing, etc., the type of products or services produced or provided, what significant assets have been utilized, for example premises, plant machinery, livestock, etc. and if there are any other significant supplies or other inputs, such as key staff and the scale of the activity.
But even if there has been a major change in the nature of the business activities carried on, the business continuity test may still be satisfied if that change is one of four permitted changes. Broadly speaking, these changes can be those made to increase the efficiency of the business activity, to improve or keep up to date with advances in technology, are as a result of an increase in the scale of the business activity or a change of type of products to be provided.
Overall, this is a fairly significant and obviously very detailed interpretation statement. It runs to 54 pages, and includes 15 very helpful examples, together with a useful, if somewhat crowded, flowchart. It’s very welcome to see this guidance as we’ve already handled a number of enquiries regarding the application of these rules. Consultation on the draft is now open until 1st September.
Directors liability for company tax
In previous podcasts I’ve mentioned some Inland Revenue technical decision summaries. Inland Revenue has started releasing these summaries of decisions from its adjudication unit relating to disputes with taxpayers. These are released for information purposes only and are not meant to be formal guidance, such as the interpretation statement we just discussed. They do not represent the Commissioner’s official opinion. That said, they are often very useful indicators of how Inland Revenue might approach certain matters.
We therefore pay attention to what these summaries show and one released this week TDS 22/14 is particularly interesting because it involves a couple of provisions which we’ve not seen used extensively by Inland Revenue.
The facts are a little complicated, and initially the matter at dispute was whether a contractor providing services to a New Zealand company through another company (ABC Co) was an employee of the first New Zealand company. Ultimately, it was determined he was not.
Inland Revenue had a look at what was going on and discovered agreements between ABC Co and another company DEF Co. When these were examined, Inland Revenue concluded that ABC Co was providing services to DEF Co which had been returned. It therefore assessed ABC Co for income tax and GST on these services. These assessments were not disputed by the taxpayer so were deemed to be accepted.
So far there’s nothing particularly unusual about this, it’s what happened next that’s interesting, because when ABC Co didn’t pay its tax, Inland Revenue then deployed two provisions, section HD 15 of the Income Tax Act and section 61 of the GST Act. These provisions enable tax owed by a company to be recovered from the shareholders or directors of the company where there has been an arrangement entered into which has the effect that the company is unable to meet a tax liability.
As I said, these provisions have been around for a while, but I’ve not previously seen them used. In order for them to apply there has to be an arrangement, the effect of which is the company has a tax liability whether an existing one or one which arises later which it cannot meet. It must also be reasonable to conclude that a purpose of this arrangement was that the company could not meet that tax liability. And finally, would a director who made reasonable enquiries at that time have anticipated that a tax liability would or would likely, be required to be met? So, there’s a few hurdles to get through before the provisions apply which is why we probably haven’t seen much use of it previously.
In this particular case, the arrangement appeared to be that the taxpayer’s private expenditure was met at all times, but the company never had any funds available to meet any tax liability. So that’s why Inland Revenue ultimately decided to apply these agency provisions.
Understandably, the taxpayer disputed the matter, but the Adjudication Unit ruled on Inland Revenue favour. As I’ve said, these provisions have been around for a while but have not seen much use of them, which also makes it uncertain when advising clients as to what could happen. Until now we’ve advised these rules could apply, but we haven’t seen much evidence of them being used. Now that has changed. This seems very much like a warning shot from Inland Revenue that feels it can deploy these provisions and obviously is doing so as part of a harder line on debt and attempts to avoid payments of tax debt.
It will be interesting to see whether this case progresses any further, for example if it’s taken to the Taxation Review Authority or High Court on appeal. More importantly, will we see more use of these provisions by Inland Revenue. As always, we’ll keep you up to date on developments.
How likely is a windfall profits tax?
And finally, this week, the rising cost of living has been in the news, as has obviously the Government’s response. As people should be aware part of that response involves a cost-of-living payment of $350, which Inland Revenue is now about to start paying, even though there’s about 160,000 people for whom it doesn’t have any bank details and who may therefore miss out on these payments.
There’s also been plenty of debate about what’s causing the spike of inflation and what can be done about that. And an issue that popped up this week was the question of windfall taxes which have re-emerged as tools in perhaps in fighting inflation. Italy, for example, introduced one last year on extra profits realised by Italian energy industry companies. The Spanish have a similar one, also targeting energy production companies. And in May the UK government announced a 25% energy profits levy charged on profits from UK oil and gas extraction activities.
I was asked by Geraden Cann of Stuff whether such a tool could be used here, and my response was not immediately, because we have no history of such taxes, although I understand that there were excess profit taxes levied in both world wars with varying degrees of success. I think most countries struggled with how they could define excess profits in that case.
But then following through on this issue, I did suggest that there might be room for developing such a windfall tax on the principle that it’s always good to speak softly and carry a big stick. However, that would involve determining what would be the trigger points as to when the tax would apply. When would they apply? What constitutes excess profits subject to the tax? What rate would apply? And for how long would such a windfall tax supply? There’s a lot to consider and they would be very complex to design.
Furthermore, although the Government might think, “Well, gee, that’s a nice stick we’d like to have”, businesses quite rightly would be saying “We’re not happy about that because who could be the subject of a windfall tax”.
Currently, windfall taxes are being applied to energy companies in Europe. However, in the past Britain has applied them to banks and privatised utility companies. Businesses might therefore be a little cautious about how they might invest if they felt there was a reasonable prospect of a windfall tax applying. Now our tax policy settings are very much about providing certainty for businesses and business investment. So, on that basis, I can’t see a windfall tax appearing any time soon, even though quietly a finance minister might like to have such a weapon in his or her toolbox.
Well, that’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients.
Until next time kia pai te wiki, have a great week!
25 Jul, 2022 | The Week in Tax
- Depreciating buildings
- Who are taxed the heaviest?
- The OECD says housing should be taxed
Transcript
Inland Revenue has released Interpretation Statement IS 22/04 on claiming depreciation on buildings. Critical to this issue is determining the meaning of a “building” for depreciation purposes and the distinction between residential and non-residential buildings. The Interpretation Statement addresses this issue when it sets out when depreciation may be claimed for non-residential building and also for some fit outs. It confirms that no depreciation is available for residential buildings.
The Interpretation Statement then sets out where you can find the right depreciation rate for buildings when fit outs attached to buildings may be depreciable. How to treat an improvement of a building for depreciation purposes. And then finally, what happens when the building is disposed of or its use changes?
To recap, depreciation for all buildings was reduced to zero, with effect from the 2011-12 income year. Back in 2020 as part of the initial response to the pandemic, the Government reintroduced depreciation for non-residential buildings with effect from the start of the 2020-21 income year. Generally, the depreciation rate is 2% on a diminishing value basis, or 1.5% on a straight-line basis. Some other depreciation rates may be used where the building has a shorter than normal useful economic life. Examples would be barns, portable buildings or hot houses. Additionally, it’s possible to claim a special rate if the building is used in an unusual way.
Now for depreciation purposes “building’ retains its ordinary meaning which means anything that is structural to the building or used for weatherproofing the building. The Interpretation Statement emphasises that whether a building is residential or non-residential is an all or nothing test. If the building is non-residential depreciation is available, otherwise not, there’s no apportionment.
Residential buildings are any places mainly used as a place of residence. This includes garages or sheds included with that building. Places used as residential residences for independent living in retirement villages and rest homes are residential buildings are is short stay accommodation where there’s less than four separate units.
On the other hand, non-residential buildings include buildings used predominantly for commercial and industrial purposes, but not residential buildings. This also includes hotels, motels, inns, boarding houses, serviced apartments and camping grounds. Retirement villages and rest homes where places are not being used for independent living are non-residential buildings as is short stay accommodation where there are four or more separate units.
If improvements are made to a building, you must treat it as a separate item of depreciable property in the first tax year. Then you can either continue to treat it as a separate item of depreciable property or simply add it to the building by increasing the adjusted taxable value of the building.
In some cases, a fit out can be separately depreciated depending on the nature of the building and the nature of the fit out. Where the fit out is considered structural to the building or used to weatherproof the building it must be treated as part of building and not depreciated separately. Fit outs are depreciable in a wholly non-residential building and sometimes in a mixed-use building. But remember, the key point is that depreciation is not available under any circumstances for a residential building. So overall, this is a useful Interpretation Statement and is also, as has become the norm, accompanied by a very handy fact sheet.
The agencies tackling organised crime and its tax evasion
Moving on, last week I discussed a suggestion by ACT Party leader David Seymour to use Inland Revenue against the gangs. I looked at the powers available to Inland Revenue and discussed how practical his proposal was. To summarise, Inland Revenue has extensive powers which would be useful in tackling gangs and organised crime. However, this is a resource intensive approach which probably in Inland Revenue’s view, would divert its attention from other areas it considers equally important.
This prompted some discussion in the comments section and thank you again to all those who contributed. As I said, my view is Inland Revenue probably thinks other agencies, such as the Police, are better suited for this activity. But it will cooperate with those agencies. Its annual reports make clear they pass information to other agencies. So Inland Revenue is probably working on this matter in the background.
It was interesting just to take a look to see what other agencies were doing in this space and get a gauge of what’s happening. A key tool for the Police is the use of restraining orders to seize assets. According to the Police’s Annual Report for the year ended 30th June 2021 the value of restraints for the year totalled just over $100 million, including nearly $30 million seized from anti-money laundering.
The Department of Internal Affairs also has responsibilities for anti-money laundering, as it’s a key regulator on that. Its Annual Report to June 2021 indicates that perhaps it could do more in this space, as its budget for its regulatory services for the year was set at $52 million, but it only spent $44 million.
And then when you look at the DIA’s performance metrics, such as desk-based reviews of reporting entities, it’s supposed to be targeting between 150 and 350 such reviews annually, but managed only 219 for the year, up from 198 in the previous year. And on-site visits were meant to be somewhere between 70 and 180 but came in at 79. To be fair these were probably disrupted by the impact of COVID 19.
Still, there are other agencies involved in pursuing gangs including Customs who will also be very interested. Inland Revenue will be playing a role, it shares information with these other agencies. So even if it’s not wielding a very big stick publicly, it’s working in the background.
The interaction of tax and abatements on social assistance
Now tax has been in the news a lot recently with the election coming up even though it’s still just over a year away probably. National and the ACT Party have both set out they would proposed some tax cuts. Last Saturday, Max Rashbrooke, a senior associate at the Institute of Governance and Policy Studies, who has written quite a lot on wealth and taxation put out some counter proposals to National and ACT’s proposals.
He suggested that really the focus should be on middle income earners. And he made a suggestion, for example, that we could have a $5,000 income tax free threshold, something we see in other jurisdictions. Britain’s is just over £12,500, Australia’s is A$18,200 and the US has a slightly different thing. It gives you a standard deduction of US$12,000. But anyway, let’s take that comment elsewhere. And Max suggested that something could be done in that space.
But it got me thinking about the question of who does actually pay the highest tax rates in the country. And the answer isn’t those on over $180,000 where the tax rate is 39%, it’s actually more around $50,000 mark if those people are receiving any form of government assistance, such as Working for Families. If they have a student loan as well, then an additional 12% of their salary after tax gets deducted.
The interaction of tax and abatements on social assistance, such as the family tax credit and parental tax credit can mean in some cases, the effective marginal tax rate for some families is more than 100% on every extra dollar they’re earning. This is an issue which the Welfare Expert Advisory Group touched on, but the Tax Working Group wasn’t allowed to address. But it’s a huge problem.
Take, for example, someone earning $50,000, just above the $48,000 threshold where the tax rate goes from 17% to 30%. And that, by the way, is the rate where I think we need to focus our attention on adjustments to thresholds and tax rates. At that level every extra dollar they’re earning is taxed at 30%. If they’ve got a student loan then they pay a further 12%. If they have a young family and are receiving Working for Families tax credits, then these are abated at 27%. Incidentally, the abatement threshold is $42,700. So that means that that person is on a marginal tax rate of 69%. Definitely not nice.
Then there’s a separate credit, the Best Start tax credit which has a separate abatement regime in addition to the Working for Families abatement regime I just explained. So that’s why people could be suffering an effective marginal tax rate of over 100%.
In my view, this is the area where we really need to be thinking about changing the tax system, because to compound matters, governments have been very cynical about not adjusting thresholds for inflation, something I’ve raised repeatedly in the past.
Working for Families thresholds were adjusted for inflation every year until National was elected in 2008. Starting in the 2010 Budget they started freezing thresholds. They also increased the abatement rate which used to be 20% and is now 27%. The current Working for Families abatement threshold is $42,700, which is less than what someone working full time on the minimum wage will earn annually
Looking at student loans the threshold where repayments start in 2009 was $19,084. That is now $21,268 but for a long period of time under the last government it was frozen. National also increased the repayment rate from 10% to 12% in 2013.
So this is an area where governments of both hues have been really quite cynical in my view, and where a lot of serious thought needs to go in about trying to address the inequities that have arisen. The Welfare Expert Advisory Group suggested the abatement rate should be 10% on incomes between $48,000 and $65,000, then increase to 15% before rising to 50% on family incomes over $160,000. (Yes, large families with that level of income could be receiving social assistance in some instances).
There’s a lot of work to be done in this space and inflation adjustments to thresholds is something that should be done anyway. But I think we need to think carefully around the thresholds and how the interaction with social assistance works. At the moment we’re not getting that sort of analysis from either any of the main parties and that’s disappointing, as it’s something that really needs to be addressed.
Why the FER deals with recurrent taxes better
And finally this week, just hot off the press is an OECD report on Housing Taxation in OECD countries. This makes for some interesting reading. Briefly, the report is concerned about how housing wealth is mostly concentrated amongst high income, high-wealth and older households. And in some cases, they believe that a disproportionately large share of owner-occupied housing wealth is held by this group. There’s been unprecedented growth in house prices, not just in New Zealand, but across the whole OECD, making housing market access increasingly difficult for younger generations.
In terms of suggestions the OECD believes that housing taxes are “of growing importance given the pressure on governments to raise revenues, improve the functioning of housing markets and combat inequality.” The report notes the way housing taxes are designed often reduces their efficiency. Recurrent property taxes, such as rates, are often levied on outdated property values, which significantly reduces their revenue potential. This also reduces how equitable they are because where housing prices have rocketed up, people are underpaying based on current values. And conversely people in places where prices are falling or have been stagnant are paying more relative to those in richer areas.
One of the suggestions the report makes is that the role of recurrent taxes on immovable property should be strengthened, by ensuring that they are levied on regularly updated property values. And this is one of these reasons why Professor Susan St John and I have been promoting the Fair Economic Return approach. One of the strongpoints of our proposal would be strengthening the role of recurrent taxes.
Capping a capital gains tax exemption on the sale of a primary residence
Another proposal would not at all popular. It is to consider capping the capital gains tax exemption on the sale of main houses so that the highest value gains are taxed. This should strengthen progressivity in the system and reduce some of the upward pressures. This is what happens the U.S. There is a US$250,000 exemption on the main home per person, and above that the gains are taxed. There’s no reason why we shouldn’t have a similar type exemption here if we want to introduce a capital gains tax. But as I said, that would be particularly unpopular.
The OECD also believes there should be better targeted incentives for energy efficient housing, because housing, according to this report has a significant carbon footprint, maybe 22% of global final energy consumption and 17% of energy related CO2 emissions.
So, there’s a lot to consider in this report, and we come back to it and consider it in more detail. But again, it sort of comes to this point we’ve talked about repeatedly on the podcast, the question of broadening the tax base and the taxation of capital. These issues aren’t going to go away, particularly when you consider, as I mentioned a few minutes ago, how very high effective marginal tax rates are paid by people on modest incomes who may not have any housing. No doubt we’ll be discussing all these issues sometime again in the future.
Well, that’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients.
Until next time kia pai te wiki, have a great week!
18 Jul, 2022 | The Week in Tax
- Using tax law against gangs
- OECD tax coordination on MNCs
- Ireland’s tax risks
Transcript
Last Saturday, the ACT party leader David Seymour appeared on Newshub Nation and suggested that Inland Revenue be used to deal with the gangs.
He believed the powers currently being used by Inland Revenue as part of its high wealth individual research project could equally be applied to deal with the gangs. It did make for some entertaining viewing, as interviewer Rebecca Wright was more than a little incredulous at the suggestion that gang members wearing patches would happily submit to filling out questionnaires. On the other hand, the notorious mobster Al Capone, was ultimately jailed for tax evasion so the use of Inland Revenue against organised crime is not that unreasonable a suggestion.
Mr. Seymour does seem to have misunderstood the nature of the powers currently being used by Inland Revenue as part of its high wealth individual research project. Those powers have been deliberately limited so that the information gathered is solely for research purchase purposes. They are therefore more prescribed than the general powers available to Inland Revenue. I also think Mr. Seymour was overstating how much of a sanction non-compliance with the high worth individual research project would be.
Now Inland Revenue does indeed have some extensive powers of information request and where appropriate, search and seizure. And if you want an example of how it can apply those rules that can be found in the case of Tauber v Commissioner Inland Revenue.
In this case, Inland Revenue was investigating a former accountant who it believed was suppressing income. After its initial information requests were not satisfactorily answered in its view, Inland Revenue then decided to use the powers available to it under Section 16 of the Tax Administration Act. It carried out simultaneous search and seizure operations at six separate locations, including a boat shed.
Mr Tauber responded by making an application for judicial review, claiming that the various Section 16 warrants were too widely drawn and not specific enough. The application also questioned whether the searches were necessary for carrying out the Commissioner’s functions and if the searches were carried out in an unreasonable manner. Unfortunately for Mr Tauber and the other claimants the courts upheld Inland Revenue’s use of its powers.
The case illustrates the extensive powers available to Inland Revenue. However, what it also illustrates is that applying those powers is a very intensive operation requiring a considerable number of resources. If you’re raiding six properties simultaneously with teams of investigators, you’re talking about an operation which may have involved somewhere between 40 and 50 people. Now if you think about dealing with gang members Inland Revenue would also want to be raiding several premises simultaneously. Therefore, that would require considerable resources from it and no doubt police officers to be available in case matters escalated.
It’s therefore questionable whether Inland Revenue would actually have the resources to carry out major investigations into gangs. And although tax evasion is a criminal offence, Inland Revenue would probably be of the view that the powers available to police and other authorities under the anti-money laundering legislation, which have been strengthened this week, mean those agencies are more appropriately deployed to deal with organised crime.
This isn’t to say that Inland Revenue wouldn’t pass up the opportunity to investigate tax evasion involving gangs if it felt considerable sums were involved. But as the Tauber case shows, using its full range of investigatory powers requires considerable resources, which ultimately, I think, Inland Revenue might feel better used elsewhere. In other words, “Nice idea, but yeah nah.”
Update on OECD tax reform
Moving on, the OECD delivered its latest update on the status of the international tax reform agreement to G20 finance ministers and central bank governors a couple of weeks ago. This included a progress report on the status of Pillar One, which is the proposal to ensure that market jurisdictions can tax profits from some of the largest multinational enterprises.
The OECD Secretary-General presented a comprehensive draft of what these proposed technical model rules will be for Pillar One. These are now going to go out for public consultation between now and mid-August. The intention then is to finalise a new Multilateral Convention by mid-2023 for entry into force in 2024.
In addition to updating the status of the Multilateral Convention to implement Pillar One, the Secretary-General’s Tax Report also gave an update on how an implementation of the OECD transparency agenda (the Common Reporting Standards on The Automatic Exchange of Information). And the latest update is that information on at least 111 million financial accounts worldwide covering total assets of nearly €11 trillion was exchanged automatically between tax administrations in 2021. And later this year, the OECD will finalise a new crypto-assets reporting framework, which will be included as part of the Common Reporting Standards. So things are moving ahead even if they’re going more slowly than people had expected.
In relation to the Pillar Two work, which introduces a 15% global minimum global minimum corporate tax rate, the technical work on that is largely complete and an implementation framework is to be released later this year to facilitate the implementation and coordination between tax administrations and taxpayers. All G7 countries, the European Union and several other G20 countries, along with several other economies, have scheduled plans to introduce the global minimum tax rules. New Zealand hasn’t reached that stage but consultation on the matter has just ended, so we may see something later this year.
IRELAND’S TAX RISKS
Now one of the ideas behind the Pillar Two global minimum corporate tax rate is to try and stop tax competition driving corporate tax rates lower. Now, one of the poster child’s for lower corporate tax rates is Ireland. And last week I mentioned Ireland’s strong GDP per capita growth in recent years. This appears in part to be a by-product of multinational and multinational investment in Ireland, attracted by Ireland’s low corporate tax rate of 12.5%.
Now tax is always full of unintended consequences and this week the Irish Finance Ministry highlighted a potentially huge downside of this policy for Ireland.
Apparently just ten multinational firms pay over half of Ireland’s corporate tax receipts. These are expected to be between €18 and €19 billion this year, up from an estimated €16.9 billion forecast just three months ago. And by the way, that’s nearly a five-fold increase in the last decade.
Now, on the face of it that all sounds good. But John McCarthy, the Irish finance ministry’s economist, warned that the fact that just ten multinational firms pay more than half of honest corporate tax, represents “an incredible level of vulnerability” for the Irish economy, as a shock, which impacted on the multinational sector would have severe fiscal implications for Ireland. I understand something like one in nine Irish employees are employed by multinationals such as Facebook, Google and Pfizer. Therefore, the fallout from a shock in this sector could be huge for Ireland.
Mr. McCarthy told reporters the level of concentration in such a small number of firms is something he has never seen in any other economy. He was therefore more worried about the overreliance on these types of firms than the impact of the global overhaul of corporate tax regimes could have on Ireland’s position as a hub for multinational investment. Ireland power. The same report estimates that Ireland’s tax take would be affected negatively by about €2 billion over the medium term.
Irish Finance Minister Paschal Donohoe then chipped in saying he has long shared the concerns McCarthy outlined. He said the best way to manage the risk was to return to the pre-pandemic position where corporate tax receipts are not used to fund permanent spending. This seems an incredible admission that a low corporate tax rate is actually not sustainable over the long term. So that’s something to pause to think about when you hear talk about corporate tax cuts.
By the way, these concerns of the Irish finance minister and the Finance Ministry might explain why Ireland didn’t oppose the proposed 15% global minimum tax rate. I suspect that on the quiet this represents an opportunity for Ireland to raise its corporate tax rate without too much fuss. It would be interesting to know the level of concentration here in New Zealand. I guess the big four Australian banks and the New Zealand Superannuation Fund would represent at least 20% of the corporate income tax take.
IRD BACK LIQUIDATING DEFAULTERS
Moving on, a quick follow up from last week’s items about Inland Revenue’s enforcement and collection activity increasing. As of 30th June 2021, 140,000 taxpayers had arrangements with Inland Revenue covering $3.7 billion of tax. Now, Inland Revenue would be keen to ensure those numbers don’t continue to grow. Historically, what it’s done is taken strong enforcement action including initiating liquidations. Apparently about 70% of all high court liquidations were initiated by Inland Revenue. However, during the pandemic, as part of its more sympathetic response, that number fell to just under 30%.
However, I’ve been informed that since April that there’s been a huge escalation in Inland Revenue activity in the High Court and liquidation proceedings. So that’s the clearest sign of Inland Revenue’s increased focus on debt collection and a clear warning to all those out there that if you if you’re in trouble you need to front up and try and make arrangements with the Inland Revenue before they take it further to the liquidator.
AWARDS FINALISTS
And finally, this week, the Tax Policy Charitable Trust has just announced its four finalists in this year’s Tax Policy Scholarship competition.
This competition is designed to support tax policy, research and thinking. Entrance is limited to those under the age of 35, and the intention is that people are asked to give ideas of proposals for reforms to our current tax system, to address potential weaknesses and unintended consequences of existing laws. Now there are three topics in this year’s competition: environmental taxation, tax, administration generally, or the powers granted to the Commissioner of Inland Revenue and to investigate for research policy purposes. (These are the powers that Mr. Seymour was referring to in his interview about tackling the gangs).
The four finalists are Daniel Doughty, a senior consultant with EY in Wellington. He’s proposing a small business consolidated reporting regime to simplify tax reporting for small companies. I think this is an excellent suggestion, so look forward to finding more about this. Our tax system expects a lot of administration from small businesses without really trying to adjust the compliance burden to help them with those processes.
The second finalist is Mitchell Fraser, a tax solicitor with Mayne Wetherell in Auckland. Mitchell is worried that the new powers granted to Inland Revenue for tax policy purposes may have unintended consequences. He’s suggesting alternative means to collect the information that’s wanted, including through Statistics New Zealand.
The third finalist is Vivien Lei, a group tax advisor with Fisher Paykel Healthcare. Vivien has got another interesting proposal to change New Zealand’s environmental practises by introducing an impact weighted tax regime. Under this model, organisations will be taxed on a net positive or negative impact on the environment. Now this is an area I’m very interested in and previous readers or listeners of the podcast will know that John Lohrentz, one of the runners up in the last competition, proposed a progressive tax on bio genetic biogenic and methane emissions in the agriculture sector. It’s therefore good to see there’s plenty of focus on this area.
And finally, there’s Jordan Yates, a senior tax consultant with ASB in Auckland, and he believes the tax policy landscape has been fractured and suffocated by political roadblocks. I don’t think he’s wrong there. Jordan’s proposing an independent statutory authority that would be responsible for the independent management of fiscal policy as it relates to the tax base. It’s an idea I’ve heard floated in other places and another one I look forward to hearing more about. This fracture is one reason why the Minister of Revenue, David Parker, has proposed his Tax Principles Act.
The finalists have all been asked to develop a 5,000-word submission on their proposal. They’ll then make a final presentation and answer questions at a function later this year in October, after which the winner will be announced.
This is a great initiative by the Tax Policy, Charitable Trust, and I look forward to hearing more about these proposals. And as we did with Nigel Jemson, the winner of the last competition and runner-up John Lohrentz we will hopefully have the prize winners on the podcast.
Well, that’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients.
Until next time kia pai te wiki, have a great week!
11 Jul, 2022 | The Week in Tax
- IRD targets overdue tax debt
- GST on directors’ fees
- RBNZ analyses housing
Transcript
Inland Revenue has begun taking more action on outstanding tax debt. It dialed back how hard it was pushing on overdue tax debt during last year in the wake of Covid-19. But in recent weeks, its activity has stepped up, and those involved with corporate reconstructions are seeing much more activity with Inland Revenue pursuing tax debt.
There are some reports that it’s particularly targeting the housing and construction sector, but that’s not necessarily the case, as I understand it. But the housing and construction industry has a record of nonpayment. Inland Revenue is particularly concerned about those companies or individuals not keeping up to date in relation to their GST and PAYE obligations. Inland Revenue’s longstanding view is that such receipts are held on trust (because they’re being withheld from the payees) and therefore the companies have no right to the payments and need to pass them straight through to Inland Revenue.
An Inland Revenue spokesperson confirmed they were taking more action adding “We give high priority to any business that has failed to pay employee deductions when due.” In the past Inland Revenue sometimes seemed quite extraordinarily slow in taking action with overdue PAYE. But if it’s boosted its efforts in this space that’s all well and good because following Gresham’s law, bad money drives out the good. And those conscientious employees and businesses that follow the rules and make the payments as required are being undercut by more unscrupulous operators.
In that context, what I’ve been told is that Inland Revenue is also upping its efforts in relation to developers who are claiming GST on land purchases, but then failing to declare the GST when they make the subsequent sales of the properties. In some cases, you also have what they call “Phoenix companies” where there’s a pattern of developers establishing companies which then fall over leaving unpaid tax debts. Inland Revenue got itself extra powers to try and deal with those matters. And I would expect that with its enhanced capabilities following completion of the Business Transformation programme, Inland Revenue should be on top of that situation.
As always with tax debt the key thing to do if you run into trouble, is talk to Inland Revenue. It is actually surprising how little tax debt can soon become unmanageable for people. Inland Revenue’s own research suggests that break point is as little as $10,000. This ties in anecdotally what I’ve seen.
The key thing is, if you get in front of Inland Revenue early, tell them that you have hit difficulties and want to arrange an instalment plan, they will be cooperative. Where they won’t be cooperative, and in fact they may look to take action and prosecute, is where someone persistently fails to meet their obligations in relation to paying over PAYE and GST and then tries to evade any responsibility by attempting to liquidate the company. Such scenarios increasingly will lead to prosecutions by Inland Revenue.
People will be surprised at how reasonable Inland Revenue can be. But to do so you have to be front up early, put all your cards on the table and you can then hope to get a reasonable hearing. Sometimes it doesn’t work out, but you would be surprised at how often these issues can be resolved.
And this also takes the stress away from people, employers and business owners who get into tax trouble quite naturally stress about the matter and often put their heads in the sand. It’s remarkable how much of a difference to stress levels it makes once you’ve spoken to Inland Revenue, and you find is this they are prepared to come to some form of arrangement. That’s dependent on a number of factors, the key factor being willing very early on to deal with the issue.
GST for directors’ fees
Moving on and still talking about GST, Inland Revenue has released some draft guidance for consultation on the treatment of GST for directors’ fees and board members’ fees. This covers a number of draft public rulings and is accompanied as well by a very useful fact sheet. I’m liking how Inland Revenue is sending out a lot of these fact sheets alongside the longer papers with detailed consultation, because the fact sheets of what you can put in front of clients as they are a good summary of the issues.
The rulings will cover directors of companies, board members not appointed by the Governor-General and board members appointed by the Governor-General or the Governor-General in Council. Basically, what the rulings say is board members or directors must charge GST on the supply of services where the director or board member is registered or liable to be registered for a taxable activity that they undertake, and the director or board member accepts a directorship or membership of a board in carrying on that tax taxable activity. Remember, liable to be registered means they are carrying out taxable supplies which over a 12-month period would exceed $60,000.
And the director or board member cannot charge GST on the supply of services where they are engaged as the director or board member in their capacity as an employee of their employer or they’re engaged in in that capacity as a partner in a partnership, or they do not accept the office as part of carrying on a taxable activity.
As I said, these draft rulings are accompanied by a fact sheet, which includes a very handy flowchart, these flow charts and fact sheets makes life a lot easier and more understandable for those affected. The proposed rulings are reissues of previous rulings on the matter. They’re fairly uncontroversial as they generally are simply restating the law, updating the statutory references and setting it out in a clearer and more understandable format for the general public.
Tax take up strongly
Now, this week, the Treasury released the government’s financial statements for the 11-month period ended 31st May 2022. And it all looks a lot better than what was being forecast in May’s Budget. Core tax revenue is $2.9 billion ahead of forecast just at just under at $98.9 billion. Now, the main reason it’s ahead of forecast is a higher than expected corporate income tax take which is $1.6 billion ahead of forecast. There’s also more tax from individuals which is $700 million ahead of forecast and PAYE collections are another $600 million ahead of the Budget forecasts.
The corporate income tax take for the 11 months of the year to date is just under $17.9 billion compared with a forecast $16.2 billion. Just for comparison, in the year ended 30th June 2021, the total corporate income tax take was $15.7 billion. So corporate profits look strong, and I think one or two economists might be pointing to whether that might be feeding inflation. But whatever its role is, I’m sure the Government will be grateful for the continued strong growth in the corporate income tax take. By the way, that increased corporate income tax take will also reflect the fact that the New Zealand Superannuation Fund will be paying substantially less tax this year than in 2021 because of the volatility in the financial markets.
Favourable winds for windfall taxes
Elsewhere in the world President Macron in France is under pressure to consider a windfall tax on some parts of the corporate sector where high energy prices have resulted in higher profits. Britain, you may recall, imposed a windfall tax on some oil companies, although it’s come with a potential subsidy which may dilute the impact of that. Windfall taxes have no real history in New Zealand, so are unlikely to happen here. But it is to see how other jurisdictions are reacting to questions of what they perceive as excessive profiteering.
Housing’s tax-free advantage
And finally, this week the Reserve Bank of New Zealand issued an Analytical Note on how the New Zealand housing market looks in the international context. What it does is compares facets of the housing market in New Zealand with those in 12 other developed countries[1] over the 30-year period from 1991 to 2021.
And it notes that several other economies, Australia is one, have experienced increasing house prices in recent years, but the rate of increase has been the highest here. Interestingly we have also seen the steepest decline in mortgage rates since the Global Financial Crisis and then almost the strongest increase in population. Apparently, although we’ve been ramping up construction quite dramatically in the past few years, the number of dwellings per inhabitant remains low and below the average for the OECD.
There was some mostly passing commentary in the note about the impact of tax. The paper does touch on the absence of a general capital gains tax commenting:
“Another feature of the New Zealand economy that may support higher housing demand is the absence of a comprehensive capital gains tax. New Zealand is unique in that aspect in the sample of countries we consider, fiscal authorities in other countries tax capital gains from asset sales at or close to the personal income tax rate.”
Being an analytical note, it doesn’t make any recommendations as to whether there should be increased taxes on housing, although the OECD has been for a long time pushing that point. It’s always interesting to consider the role of tax in our housing market and also whether the absence of the fact that housing is treated so generously for tax purposes means that investment is driven into that rather than into more productive sectors.
On that point, there’s a very interesting graph illustrating the surge in Irish GDP per capita over the last ten years or so, it’s really quite marked. The note comments that this surge
“was supported by high-performing multinational companies that relocated their intellectual property assets to Ireland attracted by lower corporate tax rates [12.5%] as well as Brexit-related uncertainty in the United Kingdom.”
Figure 4: per capita GDP in US dollars at current PPP
This Reserve Bank note reinforces my long held view that our favourable tax treatment of housing does divert funds away from productive investment and we need to change that treatment. As previously stated, my preference is for the Fair Economic Return approach Susan St John and I have proposed. .
Well, that’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients.
Until next time kia pai te wiki, have a great week.
