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.
4 Jul, 2022 | The Week in Tax
- Focus on international tax – getting serious about foreign income compliance
- A $70 million win over Big Tobacco.
- How are we going to pay for our roads in the future?
Transcript
It’s been a very busy week in international tax, beginning with the launch of Inland Revenue’s Compliance Focus on Offshore Tax.
This was accompanied by a number of presentations in Auckland, Wellington and Christchurch. As part of the launch, Inland Revenue has released a couple of guides aimed at the general public, one on Offshore Tax Transparency and the other a Foreign Income Guide. Alongside those, there’s a Foreign income checklist and a flowchart on the rules relating to the transitional residency exemption. All this is aimed at the general public and written clear in plain English.
It’s good to see Inland Revenue have stepped up the focus in this area because we deal with quite number of clients in this space around their international tax obligations and there is a sometimes-surprising lack of knowledge. The main guide is the form IR1246 on Offshore tax transparency. It’s relatively short at 28 pages, including a glossary and as I said, is aimed clearly at the general public.
It begins with a little section at the start about “What your taxes pay for”. I think we’ll see more and more of this as Inland Revenue rolls out various publications as part of its compliance programmes. It’s a reminder of how much tax revenue is raised and where does it go. In case you’re interested Social Security and Welfare is the biggest single amount at $36.8 billion in the year to June 2021 with Health coming in second at $22.8 billion and education third at $16 billion.
This is adopted from similar initiatives we’ve seen in other tax authorities around the world, emphasising your taxes are for the common good and here’s where your taxes are spent and here’s how they may benefit you. So that’s a deliberate policy aimed at reminding people that tax is part of the price we pay for a civilised society.
The guide explains Inland Revenue’s role within New Zealand and then works its way through the various international obligations and standards. Some of this is pretty boilerplate and well known to tax agents and advisors but possibly isn’t so well known to the general public.
And the key point that Inland Revenue is really stressing is that it has access to a number of international exchange or information exchange programmes such as an exchange of information on request through one of the various double tax agreements or international exchange agreements New Zealand is a signatory to.
Then there’s a section which would make anyone with property overseas sit up and pay attention:
We annually exchange land data with many of our treaty partners. The data we exchange is a combination of this information we obtained from the land transfer tax statements, received land information in New Zealand and our own internal tax data. We also receive similar information from some of our treaty partners, which serves as good initial intelligence with an option to follow up with further exchange of information requests during the course of more in-depth compliance work.
We actually experienced this with one client when Inland Revenue requested whether we had disclosed income from property in the United States as they had received information from the US regarding the property. We had, but it was still illuminating to see how much Inland Revenue knew.
And then there are the spontaneous exchanges of information under FATCA (the Foreign Account Tax Compliance Act), and the Common Reporting Standard on the Automatic Exchange of Information. Incidentally, the next exchange under the Common Reporting Standard is happening in September. There are the collection assistance agreements under several double tax agreements. This is something I don’t think people are really aware of Inland Revenue’s ability to ask overseas jurisdictions to go hunting for delinquent taxpayers and outstanding tax.
And then there’s the foreign trust regime’s reporting requirements. An interesting point here is that any information collected during the registration and annual return process of a New Zealand foreign trust is shared with the Department of Internal Affairs as the supervisor of trust and company service providers and the Financial Intelligence Unit of New Zealand Police. This information is shared because of their regulatory role in relation to anti-money laundering and countering the finance of terrorism.
The guide then runs through the various types of overseas income, and you can find more details in the Foreign Income Guide. This also includes taxpayers working remotely in New Zealand for overseas employers. This appears to be part of a new initiative.
One page in the guide has the header “Offshore is no longer off limits” and the guide explains Inland Revenue is involved with other international collaboration outside those agreements have already mentioned. These include the Joint International Taskforce on Shared Intelligence and Collaboration which apparently includes 35 of the world’s national tax administrations. There’s also the Study Group on Asia-Pacific Tax Administration and Research. I was not previously aware of these two organisations. So, you learn something every day.
Overall, this is a welcome and important initiative from Inland Revenue. People are now able to access easily understandable guidance as to their overseas income obligations. There’s an interesting comment that as a result of an initiative under the Common Reporting Standards, it received over 900 voluntary disclosures from people after they were advised Inland Revenue had received information regarding their overseas income. Voluntary disclosures happen regularly once people realise they have not complied with their obligations they come forward to rectify their errors.
“Leaving on a jet plane…”
Now, with the borders reopening and international travel resuming, Inland Revenue has decided to release for consultation a draft “Questions we’ve been asked” (QWBA) in relation to the deductibility of overseas expenses. This publication was actually delayed because of the pandemic as Inland Revenue thought it and we advisors might be busy elsewhere and really nobody was travelling.
This draft consultation covers the issue as to what extent can income tax deductions be claim for overseas travel costs other than meal costs? And basically, the answer is they can only to the extent they have a connection with deriving assessable income or carrying on a business. No deductions can be claimed for any part of the costs that are of a private or domestic nature or incurred in deriving exempt income. Now where the costs need to be impulse apportioned between deductible and deductible, then this must be done on a basis that is reasonable.
The draft QWBA doesn’t consider two issues: the treatment of a companion’s travelling costs which is covered by QB 13/05. And secondly, the deductibility of meal costs which is dealt with in Interpretation Statement IS 21/06.
This draft QWBA is a short document, 14 pages. It sets out the legislation, considers some of the current case law and then includes four practical examples covering various scenarios. The first is where there’s a both business and private purpose for travelling overseas. The second where there’s a business trip involving incidental private expenditure. Example three deals with someone is travelling overseas privately, but then realises on arrival there’s actually some business opportunities.
The final example deals with cancellation costs, which have not been refunded, something no doubt quite a few businesses experienced because of COVID 19. The example suggests that the cancellation fees are deductible because the costs were incurred in the course of, carrying on a business.
This is more useful guidance on a day-to-day issue which businesses and advisors are going to be encountering regularly now. It’s particularly opportune with borders reopening now, and international travel resuming.
Big Tech’s transfer pricing strategies
Now, last week I covered Google New Zealand’s December 2021 results. The same day Facebook also released its December 2021 results. These are the first results it’s released since December 2014. This is because Facebook has changed its model to now report on a country-by-country basis.
It’s interesting to see what’s gone on in the interim. Back in in 2014, Facebook paid $43,000 of tax on $1.2 million of revenue. This year, it’s reporting $6.5 million in revenue with a tax charge of $605,000. But the detail that’s of interest is what’s going on with its related party transactions as these give you a clue to the level of activity actually going on.
Facebook ‘s gross advertising income for the year to December 2021 was $88 million, which I have to say surprised me a bit as I thought it was higher than that. But anyway, these are the first concrete numbers we’ve seen for a while now.
$84 million was paid to Facebook Ireland for purchases of services.
Coincidentally, Facebook Ireland’s corporate tax rate just is 12.5%. So, you can work out yourself the potential saving that could represent for Facebook.
As I said in relation to Google’s results last week, it’s possible Inland Revenue is looking at this. We know there’s a lot of review activity going on in this space. Transfer pricing, audits and investigations do take some time and we got a clue as to how long and how they might play out result when British American Tobacco released its December 2021 results.
Included in these was a note that it had been engaged in an Advance Pricing Agreement (APA) process with Inland Revenue and the UK’s H.M. Revenue and Customs. This has been going on since March 2016 and it related to the combustible tobacco operations of the British American Tobacco Group. Agreement on the APA was finally reached in July 2021.
As a result, British American Tobacco New Zealand’s 2021 financial statements included a profit adjustment for prior years resulting in $70.6 million of additional tax payable for those prior years.
Now, the effect also of this agreement is that the tax payable for the December 2021 year rose from $3.8 million in the previous year to over $17.8 million. This increase illustrates the impact of the reduction in what overseas associates can charge. The turnover for New Zealand was roughly similar for both 2020 and 2021 at $247 million and $251 million respectively.
A win therefore for Inland Revenue and a little bit of a windfall as well for the Government. The case does show how long it takes to reach agreement on these issues.
Funding the road network
And finally, back in New Zealand, back in March the Government cut the fuel excise duty as a cost-of-living countermeasure. That was initially for a three-month period but is now being extended for a further two months until mid-August.
And this prompted David Chaston to take a look at the fiscal impact of this.
The National Land Transport Fund (NLTF) uses the funds from fuel excise duty and road user charges for the maintenance of country’s highway network.
The NLTF has some fairly big numbers going through it: in the year to June 2020, the total amount of fuel excise duty and road user charges amounted to just over $3.7 billion. In the June 2021 year, that total rose to just under $4.2 billion. However, as of April 2022, the total expected income from fuel excise duty and road user charges was about $23 million short of target. And obviously the longer the government keeps the fuel excise duty cut in place, the lower the income for the NLFT is going to be.
David therefore raised the issue about how are we going to fund the NLTF in the future? Remember that electric vehicles are currently exempt from those user charges, but thanks in part to the government’s clean car discount and the growing availability of electric vehicles, the number of EVs is rising. When does this exemption end? Longer term as the proportion of electric vehicles in the fleet rises, the amount of fuel excise duty will fall. This has to be an accelerating trend in order for the country to meet its emissions targets.
So, how is the NLTF to be funded in the future in order to maintain the highways? It seems to me there’s only two possible answers to that; firstly, increase road user charges, which means the exemption for electric vehicles must end, probably very soon. And secondly, and this is part of a wider decarbonisation issue, shift heavier traffic which increases wear and tear on highways to other modes of transport like local shipping and rail.
So that’s an interesting dilemma for any future government to be considering. I think any sort of environmental taxation moves in this space, are really more like behavioural taxes and therefore as the behaviour you are trying to discourage, the use of internal combustion engine vehicles declines, your revenue declines.
So longer term, some thinking has to go into how are we going to fund the maintenance of our highways? And it seems to me ultimately general taxation will need to become part of the mix. Rather than being specifically funded out of the National Land Transport Fund, the taxpayer will be paying a different way through contributions from the general tax pool.
That’s it 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. Ka pai te wiki, have a great week.
28 Jun, 2022 | The Week in Tax
- Shining some light on the impenetrable maze of the financial arrangements regime
- Inland Revenue brings estate agents into line
- Google NZ’s latest results show the need for international tax reform
Transcript
The financial arrangements regime is one of the most complicated parts of the income tax. It has huge scope but is not particularly well known. And until very recently there has been little practical guidance on the regime from Inland Revenue. Fortunately, all that is changing now. In the past couple of years, Inland Revenue has issued a series of Interpretation Statements which have clarified how the regime operates.
This week it’s released a revised draft Interpretation Statement on the critical issue of cash basis persons and how the regime applies to these people. Now, this is particularly important guidance because a person who is a cash basis person accounts for income and expenditure from a financial arrangements regime on a cash or realised basis rather than the at accrual or unrealised basis. The draft statement also sets out the adjustment that must be made when a person ceases to be a cash basis person and then has to switch to accounting for their financial arrangements income and expenditure on the accrual or unrealised basis.
There’s an accompanying fact sheet, so you don’t have to go through the whole full 33 pages of the Interpretation Statement. Page four of this fact sheet has a very useful flowchart, setting out process for determining if a person is a cash basis person. In summary, a cash basis person is someone who does not hold financial arrangements which exceed either of the following thresholds $100,000 of income and expenditure in the income year or the total value of these financial arrangements is under $1 million.
In relation to the $1 million threshold, the taxpayer must be below that threshold throughout the entire income year. So, if you cross it for just one day, that’s it, and you may be in the regime. If both those thresholds are exceeded the person cannot be a cash basis person.
Then there’s the second test you apply, if neither, or only one of the thresholds is exceeded. In this case you still have to check whether the difference between income and expenditure calculated on the cash basis, realised basis and under the accrual or unrealised basis does not exceed $40,000. This is what they call the deferral threshold. If it does, then the cash basis cannot apply. Now this $40,000 deferral threshold is often overlooked when people are considering whether or not they’re within the cash basis person. The Interpretation Statement has some good, worked examples how this applies.
If someone falls into or out of the cash basis status, they have to carry out a cash basis adjustment. And again, the Interpretation Statement has a good, detailed example. One of the issues that many people encounter is exchange rate fluctuations, which can put people unexpectedly into the regime and therefore have unintended consequences.
The classic examples I’ve seen are with people holding overseas mortgages against an overseas investment property and the fluctuation of the thresholds. Brexit in particular was one of those events that caught quite a number of people. Incidentally, this is perhaps why one of the examples here refers to the 2016-17 tax income year when Brexit happened.
The Interpretation Statement has a useful tip about financial statements subject to exchange rate fluctuations. It suggests identifying when the New Zealand dollar was at its lowest point compared to the foreign currency in the year and calculate the value of the New Zealand financial arrangements at that time. That’s a quick way of determining the highest possible value of the arrangement during the income year, assuming the principal hasn’t changed materially.
Paragraph 69 of the Interpretation Statement also includes some nice examples of why people might adopt the accrual basis from the outset. Doing so might resolve the problems around cash basis adjustments or they might want to actually bring the income or expenditure such as an unrealised exchange loss into account immediately.
The financial arrangements regime is actually another example where thresholds have not been frequently adjusted. These particular thresholds were last set at the start of the 1997-98 income year. They now catch far more people than were probably ever intended. Using the Reserve Bank calculator based on CPI, those absolute thresholds now would be $170,000 instead of $100,000, $1.7 million instead of $1,000,000 and the deferral threshold would be $70,000. If you use the Reserve Bank’s housing inflation calculator, then the income expenditure threshold would be $560,000, the absolute threshold for all financial arrangements would be $5.6 million and the deferral threshold $225,000. So whichever inflation indicator you’re using an adjustment is therefore well overdue.
The point here that frustrates me is that there’s a persistent theme across the tax system, where thresholds are not adjusted for inflation frequently enough. It’s a sneaky way for governments of both hues to collect additional revenue without too much notice. Quite apart from these financial arrangements regime thresholds, the income tax thresholds were last adjusted in 2010 as is well known.
The abatement threshold for working for families, that is the threshold above which abatement clawback applies hasn’t kept up inflation. By my calculation, I believe it’s now lower than what someone on minimum wage would earn. And the threshold for student loan repayments above which 12% is deducted from your income, that hasn’t been adjusted for some period. Governments really ought to be much more proactive about changing these thresholds. There’s actually a good political point here, in that doing so would de-politicize the issue. However, as I said, governments appear to quite like this sneaky increase in revenue.
Rant aside, it’s good to see guidance like this from Inland Revenue, the fact sheet is particularly useful. No doubt we’ll see more guidance on this area, but in the meantime, you should definitely have read this because this is a complicated regime and it catches far more people than you would expect.
Targeting real estate agents
Moving on, there was an interesting little piece in Stuff this week regarding the success of Inland Revenue’s campaign about real estate agents claiming personal expenditure when they shouldn’t as an attempt to reduce their tax bills. Inland Revenue advertised it was looking at estate agents’ expenditure which it thought was excessive.
We haven’t heard too many stories about who has been caught by this, but Inland Revenue took the view that focussing some attention on the issue would encourage others to behave. Basically, what was happening that some agents were understating income and overstating expenses. And it appears now over 90% of the tax returns for the March 2021 income year have been filed, Inland Revenue compared the results from that sector relative to earlier tax years and it has seen these trends reverse, particularly in relation to what it called private expenditure.
One of the one of the issues is claims for gifts, personal clothing and grooming and entertainment expenditure. And there was also under-reporting for GST purposes. Some people apparently used a net amount in their bank account for GST purposes. This is actually a really good example of Inland Revenue applying the blowtorch by saying “We have got the data we can match this and don’t think we’re not noticing what’s going on here”. So good to see on that.
There’s an interesting point here which I think Inland Revenue should issue some guidance on. And that is where someone who is working with clients and has to look professional, and therefore purchases smarter clothes for that role, what proportion may be claimable?
I remember a very famous case on this issue from my time in the UK: Mallalieu versus Drummond. A female barrister claimed a deduction for some very sombre, dark clothing that she wore only in court. She didn’t win her case, but the point still stands if you are purchasing clothes which are only use work to what extend is that deductible. And I think Inland Revenue should come out and clarify what it thinks about that.
Incidentally, Mallalieu didn’t involve the astonishing Section 189 of the Income and Corporations Taxes Act 1970. This allowed an individual to claim an expense for “keeping and maintaining a horse to enable him to perform the same or otherwise expend money wholly, exclusively unnecessarily the performance of said duties”. Yes, the UK tax legislation in 1970 (and actually again in the 1988 consolidation), had a reference for a specific deduction for a horse. That provision actually wasn’t updated until 2003. So, if you think our tax legislation is a bit arcane to spare a thought for the UK.
How much of Google’s NZ revenue escapes the NZ tax net
International tax has been in the news lately because concerns are starting to grow as to whether the tax deal signed last year by 130 countries, including New Zealand, is actually going to be implemented. Inland Revenue currently has a major issues paper out on the topic, submissions on which close next week.
The Revenue Minister David Parker was speaking to the Finance and Expenditure Committee this week. From his reported comments he expressed some concern about whether the so-called Pillar One and Pillar Two proposals would come into effect.
But the need for those rules to come into place was underlined, in my view, by Google New Zealand’s December 2021 results, which were published on the Companies Office website yesterday.
Google’s revenue, as reported for income tax purposes, rose from $43.8 million in 2020 to $57.8 million in 2021. Its pre-tax profit went from $10.2 million to just under $18 million, and Google ended up with $3 million corporate income tax for the year ended 31st December 2021 once you take into account timing adjustments.
But what’s really interesting when you drill into the financial statements is what’s going on with related parties. The notes to the financial statements disclose the transactions with the related parties. We can see that the service fees Google New Zealand paid to other overseas companies in the Alphabet Group (the owner of Google) in the year amounted to $697.8 million. Now that’s up from $517.1 million in 2020.
This gives you an indication of the level of advertising revenue activity actually going through Google New Zealand. These service fees are perfectly valid although Inland Revenue will no doubt have its transfer pricing specialists run their eye over these fees. There may be some queries going on, we don’t know as the accounts are silent on that. But the level of activity here indicates how much advertising revenue is going through Google New Zealand and how much is being paid offshore as a legitimate deduction for income tax purposes.
But it shows the arrangements that are in place that enable substantial amounts of advertising revenue pass through Google New Zealand, but it finishes up paying only $3 million in income tax. It does pay a substantial amount of GST, according to the financial statements the GST payable has on 31st of December 2021 was just over $21 million. This would indicate a very significant level of taxable supplies deemed to be made in New Zealand. But it’s likely that the GST Google New Zealand is charging is probably also being claimed by New Zealand businesses. In other words, it’s largely a net zero-sum game.
Anyway, my hope is that the international tax deal will go through. There is politics being played in America, no surprises there, but also in Europe where the EU is trying to get unanimity amongst its 27 member states. It’s a question of “Watch this space” for developments. But Google gives you an example of why we would want to know more about what’s going on here and hope the deal goes through.
International Tax was a topic at the International Fiscal Association Conference held last week. As this was held under Chatham House rules, I can’t really say too much about it, but there were a lot of interesting topics from excellent presenters and a fairly lively debate on a number of topics including international tax.
Another featured topic was the controversial dividend integrity and personal services attribution rules, and that had probably the liveliest debate. The key takeaway for me from that particular session was a comment that these proposals show the limits of what can be done in the current tax system without a capital gains tax system. Because when you sit back, the cause of controversy there was that there were potentially capital transactions happening, which would be tax free under our present regime. However, Inland Revenue was looking at this and saying, “These transactions mean tax is not being paid”.
Now, the other take away I had, is that this tension is just getting worse and isn’t going to be resolved until the matter of taxing capital gains is resolved as well. I’m on record as supporting a capital gains tax. It probably is needed not so much as a revenue raiser but to preserve the integrity of the tax system. Because when you have such a hole in your base, it will be exploited. Incidentally, this means you can’t really argue, you’ve got your tax system is broad based. There are measures in place to deal with this, but we are talking about patches upon patches.
And so, this debate, which is going on for all the time I’ve been here in New Zealand but has intensified in recent years, is going to continue. At some point the issue will have to be grasped and resolved. No, it won’t be terribly popular. But if you want to maintain the integrity of the tax system, it seems to me that some form of capital gains tax is pretty near inevitable.
Well, that’s it 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 Mānawatia a Matariki, enjoy Matariki!
20 Jun, 2022 | The Week in Tax
- Land taxation
- Is the disputes process fair?
- How much tax could legalising cannabis yield?
Transcript
Inland Revenue has just released an Interpretation Statement IS22/03 income tax – application of land sale rules to co-ownership changes and changes of trustees. Now, this is actually quite an important Interpretation Statement because it looks at whether the land sale rules in the Income Tax Act will apply when there is a change of co-ownership in an interest in land or a change of trustee.
It’s important because the Income Tax Act has provisions where a tax charge arises, where there is a disposal of land. And the question that’s been raised is whether any changes in ownership or changes in trustees represent a ‘disposal’ for the purposes of these rules, because obviously, if they do, then that could have significant implications under the bright-line test, for example.
The Interpretation Statement concludes when you consider the ordinary meaning and applied case law in context a disposal for the purpose of the land sale rules means or requires a complete alienation of the land by the disposal. In other words, that person must get rid of the land.
And helpfully the Interpretation Statement includes a number of transactions as examples. Where there’s a change in the form co-ownership, where the proportional shares or notional shares do not change, that is not a disposal for the purposes of this land sale rules. On the other hand, if there is a transfer between co-owners where neither’s interest is fully alienated, but the proportional share or notional share of a co-owner is reduced. there would be a disposal for the purpose of the land sale rules by that person to the extent that interest is reduced.
Inland Revenue’s argument in support of this is that because, although they’ve not fully alienated the whole interest in that land, they have fully alienated a part interest in that land. And similarly, if there’s a transfer that adds a new owner, there must be a disposal involved for the purposes of the land sale rules to the extent that the share or notional share of an original owner or co-owners in that land have been reduced. Similarly, a transfer that removes the co-owner would also be disposal by that departing co-owner of their interest in land.
Now on the matter of a change in trustees of a trust that will not be a disposal for the purpose of the land sales. And that’s because the Income Tax Act treats all trustees of a trust as essentially a single person. And therefore, in this case, disposal does not include a transfer to yourself, i.e. in the same capacity. Trustee swaps out, new trustee comes in, the title has to be reregistered and that’s not a disposal. On this basis, I think most people generally thought that was the case. But it’s good to see Inland Revenue come out and make that position clear.
There’s a useful table in the Interpretation Statement setting out examples of the Inland Revenue conclusions on this. There’s also a handy fact sheet available.
Heads the IRD wins, tails you lose (because you will never be able to afford to challenge their decisions)
Moving on, last week I referred to an Inland Revenue Technical Decision Summary. Now these technical decision summaries are issued by Inland Revenue’s Tax Counsel Office following an adjudication in a dispute or as part of the private rulings process. As I mentioned, they’re interesting to see because although they’re not binding on the Commissioner of Inland Revenue, they do give an indication of the types of cases Inland Revenue is encountering, and their likely thinking on an issue.
How taxpayers and Inland Revenue resolve matters where they cannot agree is an important part of any tax system. Inland Revenue has just released an exposure draft of a revised standard practice statement on the operation of the disputes process. When finalised, this practice statement is intended to replace two previous practice statements, one which dealt with where a dispute resolution process has been commenced by Inland Revenue, and the other where the dispute resolution process is started by the taxpayer.
Inland Revenue has decided to merge the two into a single statement and include some updates to the process, taking into account some relatively minor legislative changes that have happened recently. These relate to the introduction of what’s termed “reportable income” and “qualifying taxpayers” as part of the auto calculation of assessments process. The dispute process has been tweaked to deal with the introduction of these terms concept.
This is fairly routine maintenance by Inland Revenue. However, I think it ought to have taken the opportunity to look at the dispute process much more closely and whether it works for well as everyone involved with it as it should.
It so happens this is something I looked at for the Tax Working Group back in 2018. And in researching the matter I came to the conclusion that there are quite a few issues with the present dispute regime. In particular it’s expensive, very time consuming, and its costs act as a barrier to all taxpayers, but particularly smaller taxpayers.
Inland Revenue’s Adjudication Unit is part of the disputes process. It gets involved after there has been the initial stages of a Notice of Proposed Adjustment, or NOPA, and then the Notice of Response (NOR). After those formal positions have been issued by the parties to the dispute they then try and resolve the matter through negotiation. And if they can’t, it can be referred to the Adjudication Unit and.
Geoffrey Clews QC was involved in making some minor changes to the dispute process, to improve it about ten years ago. He commented on his experience working with Inland Revenue officials “reinforced the impression that [Inland Revenue] is very conscious that it presides over a tax administration which is weighted in its favour. It is reluctant to see that change.”
This is perhaps not surprising, but it should also be a bit of an alarm bell.
And then separately, two Supreme Court justices, Justices Glazebrook and Young, raised concerns about whether the dispute process was deterring taxpayers. They both noted there’d been a significant decline of tax cases coming through the court system. It’s now down to maybe 10 or 12 a year.
Justice Glazebrook, who is a former tax lawyer commented further on the disputes process in a speech to the Chartered Accountants Australia and New Zealand Tax Conference in 2015.
“What is not so positive is the concern that the dispute resolution processes, even in simple cases, takes a lot of time, effort and therefore cost to complete. When this is coupled with the new penalty and interest regime, with its differential interest rates for taxpayers and the revenue, the concern is that taxpayers are ‘burnt off’ by the taxation disputes process. This means that taxpayers may be forced to settle legitimate tax disputes as they cannot afford the time or money necessary to continue court proceedings.”
Now, this draft statement of practice doesn’t address these issues. It’s not designed to because it’s intended to be just a largely restatement of the existing system. However, I think Inland Revenue should not be afraid to have a further look at think about how the dispute process currently works. It’s been ten years or more since we last looked at it. As I said things that’s notable is there isn’t a lot of activity going through the courts. Although everyone’s right now waiting to hear what the Supreme Court’s going to be saying about tax avoidance in the Frucor court judgement.
According to data supplied to me by Inland Revenue back in 2018, the average number per year of NOPAs and NORs i.e. matters in dispute over a seven-year period was 517. Now, in the context of nearly 5 million active taxpayers on a pretty controversial topic where people’s opinions and interpretations differ quite markedly, 517 disputes a year seems incredibly low.
The counterargument would be the process is working properly and the issues are being resolved much earlier. To be fair, that’s certainly true to an extent. But a cynic might also say Inland Revenue is not picking up enough of this stuff either. That may come down to a question of resourcing. Inland Revenue believes it’s fully resourced, properly resourced but looking from the outside I’m not quite so sure.
Although it’s always good to see Inland Revenue clarifying matters and updating its statements of practice, I think there is a major point still to be addressed about whether the disputes process is working as it should and if it’s not, what can we do to improve it?
Tax, cannabis, and gangs
And finally, this week, a quirky story coming out of Christchurch caught my eye. Brendan Crocker appeared in a district court this week charged with cultivating cannabis and for possessing a Class C drug for the purpose of selling In the course of his hearing it emerged that he admitted to starting a company so he could pay tax on his sales. That’s one of the more unusual excuses involving tax I’ve seen, too. Crocker claims he gave away about 80% of his cannabis candy in order to help people in pain and was only selling the rest to cover the cost of making it.
Gangs are currently in the news and there’s plenty of concern about the increase in gang violence in and around Auckland. Now it’s well known that one of the things that fuels gangs and gang tension is the trade in illegal drugs. This is where tax comes into play. Why not legalise or decriminalise cannabis? By doing so, we’d take control of the supply away from gangs, and hopefully therefore reducing their influence. Many countries have done this with Thailand one of the latest, and quite a few states in the United States have done it as well.
Once the sale of cannabis is decriminalised, it can become a useful source of tax revenue. And of course, that tax revenue can be used to deal with the problem of gangs and drugs. As I see it, it’s a win-win.
Colorado in the US. has a population of about 5.8 million, roughly comparable to ourselves. It legalised cannabis way back in 2014 and it publishes monthly records of its marijuana tax take. Currently it’s around US$19 million per month, which is roughly NZ$30 million, give or take, which equates to around about $350 to $360 million a year.
To put that in context, that tax revenue is probably more than what is going to come from the Pillar 1 and Pillar 2 international tax reforms that I discussed last week. Now they are a big deal for international tax, but the actual cash benefit for New Zealand is probably not as significant as many people might think.
On the other hand, cannabis, illegal drugs, gangs and the accompanying violence and threats is a problem as well as great cost to us. So that’s a proposal for someone serious to consider. Legalise cannabis, get some useful tax revenue. And then use that to help deal with the problem of drugs and gangs.
And on that note, that’s all for this week. ’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!
13 Jun, 2022 | The Week in Tax
- Inland Revenue backs away temporarily from controversial proposals targeting tax avoidance
- Tax and the first Emissions Reduction Plan
- Delays mount for the OECD’s ambitious tax plan
Transcript
The big news this week is the decision by Inland Revenue and the Government to pause implementation of two controversial proposals aimed at tackling potential tax avoidance around the 39% tax rate.
The first proposal was to treat sales of shares in the company, which had large amount of undistributed tax paid income as a dividend rather than a tax-free capital gain.
The second proposal was looking at the provision of personal services through interposed entities such as companies and trusts. Here Inland Revenue was proposing to broaden the range of situations where the income of the interposed entity would be deemed to be that of the individual actually providing the services. Now this proposal was criticised as going far too far and unfairly targeting tradespeople and independent contractors in particular.
Initially both proposals were to be part of legislation to be introduced in August and would have come into force from 1st April next year. But in the face of some robust criticism that the proposals went too far and concerns about unintended consequences they’ve been withdrawn for further consultation.
I think this is a wise move by the Government. Yes, the proposals were unpopular, but the Issues Paper seemed rushed and there were many concerns voiced by myself and many others that the scope of the paper went too far and there were bound to be unintended consequences.
My understanding is now we are likely to see a revamped issues paper for more consultation probably later this year. But notwithstanding the fact that there’s been a pause put on these proposals, taxpayers should still be careful around attempts to minimise tax, either through share sales to related parties such as a trust, (I had no issues with the Government’s dividend proposals in that regard), or to try and use a trust or another interposed entity to try and minimise income taxed at 33 or 39%.
An idea of some of the issues that are involved in this has come out in a recent Inland Revenue Technical Decision Summary. Inland Revenue has recently begun releasing technical decision summaries from its Adjudication Unit which gets involved when there are formal disputes between Inland Revenue and taxpayers. Although these technical decision summaries are not formally binding on Inland Revenue, they give people an indication of what might be Inland Revenue’s view on a matter.
And this particular adjudication decision summary involved income tax controlled foreign company issues and double tax agreement. It appears that at the heart of it was an attempt by a taxpayer to minimise the taxation of personal income through a pair of associated companies.
The taxpayer in question was a citizen of the United States and therefore is automatically deemed resident of the United States. As people may be aware US citizens have to file tax returns in the United States regardless of where they might actually reside. This particular person was employed as a CEO of a New Zealand company under an employment agreement. However, the taxpayer provided these CEO services through a US company (US Co) and another New Zealand company (NZ Co). The taxpayer was the sole director and shareholder of both US Co and NZ Co. There were various service agreements involved. Quite a bit going on here.
Inland Revenue investigated this arrangement and concluded that large withdrawals from a NZ Co bank account represented taxable income. It also saw similar withdrawals from US Co together with a series of deposits into US Co’s bank accounts. Inland Revenue considered the US Co expenditure to be private and non-deductible. It also considered the payments going to US Co as remuneration under a service agreement.
Inland Revenue ultimately held that US Co was a controlled foreign company and therefore the taxpayer had controlled foreign company income from that company. Furthermore, although the taxpayer as a US citizen had to file a US tax return, under the double tax agreement with the United States he was a New Zealand tax resident. This meant New Zealand had the sole right to tax the disputed payments.
The taxpayer lost every counterargument and for good measure, Inland Revenue slapped him with a gross carelessness shortfall penalty, which can be up to 40% of the tax involved in relation to the payments that were deemed to be remuneration and the attributed control foreign company income.
It’s quite an interesting case because we don’t often see decisions involving the double tax agreement in relation to the United States. It’s also interesting to see the sort of arrangements that Inland Revenue is keen to stamp out and will definitely be targeted in any revised proposals. I think it’s quite possible, although it’s not mentioned here, that the existing rules may have applied.
Anyway, this technical decision summary is a warning that Inland Revenue may have withdrawn some proposals, but it is still looking at these issues. You therefore need to have your ducks well lined up if you if it decides to investigate further.
Tax as a environmental change motivator
Moving on, the Government’s first Emissions Reduction Plan was released in the run up to last month’s Budget. The release was overshadowed by the Budget, but now we’re past the Budget it’s interesting to take a look at the document.
The Tax Working Group spent some time talking about environmental taxation. But in the midst of the focus on the capital gains issue its commentary on environmental taxation was largely ignored.
The Tax Working Group’s conclusion was “there is significant scope for the tax system to play a large greater role in sustaining and enhancing New Zealand’s natural capital”. Against that background it’s interesting to see what was in the Emissions Reduction Plan about the potential role of tax. And the answer would be at this stage, not much.
The full plan as published runs to 348 pages of the document. Tax is mentioned just four times, three of which are in passing. The only specific tax proposal is within Action 10.2.1 accelerating the uptake of low emissions vehicle which proposes investigating ‘how the tax system can support clean transport options to ensure low emissions target transport options are not disadvantaged.” And one of these areas would be the tax treatment of employers providing free public transport.
Given that the Tax Working Group put some emphasis on environmental taxation this is a surprisingly light approach. It is definitely worthwhile investigating what the tax system could do about not penalising clean transport options. But in my view, the Emissions Reduction Plan could have gone much further in and be more specific about particular tax actions.
For example, could we adopt the approach in Ireland and in the UK where fringe benefit tax on company vehicles is determined by the level of emissions? With regards to FBT it could be worth looking at how the work-related vehicle exemption is actually operating in practice and whether through people’s misunderstanding it’s accidentally led to the proliferation of high-emission twin-cab utes. Tightening the application of FBT around the provisions of car parks could be another option. There’s plenty to consider in this space.
Still on the environment, earlier this week the primary sector climate action partnership He Waka Eke Noa released its proposals for reducing emissions in the agricultural sector and how agricultural emissions should be priced.
It’s proposing a farm-level-split-gas levy, which requires each farm to calculate the long- and short-lived gas emissions. This will then determine a levy cost for that particular farm. This split gas approach will apply different levy rates to long- and short-lived gas emissions. And if there is on farm sequestration going on, that will then that will be recognised and would offset the cost of the emissions levy.
Wisely in my view the levy revenue is to be invested in research and development. There’s also going to be a dedicated fund for Māori landowners. My view around environmental taxation is whatever is raised should be reinvested to help drive down emissions rather than fund general government expenditure. Anyway, there’s some interesting stuff in these proposals. Listeners may recall I spoke to John Lohrentz a couple of years back about his proposal for a progressive tax on biogenic methane emissions. This seems to go somewhere along those lines.
The taxation of agricultural emission is highly controversial and there are already calls that what’s proposed doesn’t go far enough. I certainly think this is a topic which is not going to go away. The Tax Working Group was right to suggest tax could be used as a tool much more than it is currently. We should expect to see much more investment in this area and into exploring what the role of tax can be in helping reduce emissions.
BEPS reform stumbles in the US and EU
And finally, this week, a little bit more about the progress on the OECD’s ambitious international tax agreement. Tax fundamentally is politics, and it appears that politics is, as I expected would happen, starting to come into play and delay moving this forward.
Inevitably part of this involves the United States although interestingly it appears the problem in the United States is the necessary legislation is getting held up because it’s tied to spending proposals as part of the U.S. Government’s budget. The tax proposals do not appear to be the issue. What particularly catches my eye at this point is it appears the Republicans are not doing anything to move it forward, but they’re not actively doing too much to stop it at this stage. In other words, they seem to be prepared to help to allow these proposals to move through. You can imagine, though, that the likes of the companies affected, such as Google and Meta, the owner of Facebook, are certainly lobbying fiercely in the background.
Over in Europe the other political headache that’s emerged involves Poland. Initially, the big objection was likely to happen there with the European Union obtaining the unanimous approval of its members would have been Ireland pushing back at the proposed minimum corporate tax rate of 15% as it is above its current rate of 12.5%. However, Ireland appears to have come round on that matter. Instead, it appears that Poland have decided to throw up objections. But these appear to be the Poles basically looking to use their objections as leverage in a dispute with the EU over receiving pandemic aid money.
Hopefully these matters will be worked through, and the deal will proceed because it is important for international tax. It certainly won’t happen as quickly as next year as originally was hoped. I always thought that was ambitious, given the scale of these proposals and the requirement for 130 jurisdictions to get all the legislation lined up and ready to go by 2023.
And on that note, that’s all for this week. ’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!
7 Jun, 2022 | The Week in Tax
- New details around the Cost of Living Payment, wealth taxes and windfall profits taxes
- Car travel reimbursement rates
- Longer-term perils of cheating on GST transactions
Transcript
Inland Revenue has now released more details about the requirements for receiving the Cost of Living Payment and how it will be administered.
Firstly, there is no need to apply for the payment. It will be made automated automatically if a person is eligible. The key thing is to make sure that Inland Revenue does have your correct bank account into which the payments can be made. Apparently, Inland Revenue only has records for just over 79% of potentially eligible people
As previously advised, they were going to be three payments, which will be made on the 1st of August, 1st of September, on the 3rd of October, the first working day of that month. Each payment will be made after a check of a person’s eligibility.
To summarise, a person is going to be eligible to receive this payment if:
- they earned $70,000 or less for the year ended 31 March 2022;
- are not eligible to receive the winter energy payment which means they are either receiving New Zealand super or a qualifying benefit;
- they’re aged 18 or over;
- are both a New Zealand tax resident and present here and are not in prison or deceased.
People receiving student allowances will get the payment if they meet the other eligibility requirements.
So the key thing, as previously advised, is to have had your income tax assessment made for the year to March 2022. So that means either Inland Revenue has auto-assessed it or you have filed an individual tax return which has been processed.
Eligibility is measured before each payment, so it’s quite possible that a person may not be eligible for one payment, but becomes eligible for a subsequent payment. For example, the person turns 18 after 1st of August, so will be eligible to receive the second and third payments. Alternatively, the person receives one payment but then starts receiving New Zealand Super, in which case they’re no longer eligible to receive the second and third payments.
The payment is not taxed and does not count as income for:
- child support
- Working for Families
- student loans
- benefits and payments from Work and Income.
Inland Revenue has also said it will not use the payment to pay off any debt a person may have with it, which is a welcome step.
Inland Revenue will keep checking eligibility until 31st of March 2023, although you will have until 31st March 2024 to provide bank account details to Inland Revenue. The Inland Revenue website has some useful examples of when persons are eligible and how they will administer it.
Travel claims by car
Briefly, Inland Revenue have also published the kilometer reimbursement rates for the 2021-2022 income year for business motor vehicle expenditure claims.
These rates may be used by businesses and self-employed to calculate the available tax deductions for the business use of a vehicle. They’re also often used by employers to reimburse employees for use of their own car for work purposes.
As you might expect rates have been increased but not significantly from previous years the tier one rate is now $0.83 per kilometer for the business portion of the first 14,000 kilometres traveled by the car including private use travel (an often-overlooked point).
Incidentally, the difference between the Tier 1 and Tier 2 rates is because the Tier 1 rate is a combination of the vehicle’s fixed and running costs and the Tier 2 rate is for running costs only.
Windfall profits taxes? Wealth taxes?
Talking about cost of living payments, over in the UK the government there has also announced some cost of living support measures. The interesting thing is that to pay for the £15 billion package it’s announced a 25% energy profits levy on the profits of oil and gas companies operating in the UK and on the UK continental shelf.
This windfall tax will apply to profits arising on or after 26th May this year. It’s a temporary levy which will be phased out when oil and gas prices return to “historically more normal levels” with the expectation that the tax will lapse after 31st December 2025.
The UK actually has a history of windfall taxes: that well-known tax cutter Margaret Thatcher imposed one on banks back in 1981 (I dare say a similar tax here would be popular) and in 1997 Tony Blair’s newly elected Labour government raised £5.2 billion on the increased values of previously privatised companies to fund a welfare-to-work scheme.
The idea of a windfall tax here in New Zealand has never been seriously discussed in recent years but it crossed my mind when the issue of the taxation of billionaires came up following the release of the NBR rich list earlier this week. There are now 14 billionaires in New Zealand with an estimated aggregate wealth of around $38 billion. Inevitably the question of how much tax they pay was raised. I repeated my longstanding view that some change to our tax mix to include greater taxation of capital is both necessary and inevitable.
Talking about it with The Panel on RNZ, Max Harris asked about a wealth tax. My favoured response is the Fair Economic Return Professor Susan St John and I have suggested. But there’s possibly an argument for a one-off wealth tax to capture the huge largely untaxed growth in property values over the past two years as a result of the Government’s initiatives around COVID.
If something like that happened, my belief is that any funds raised there should be used to speed up the transition to a low emissions economy, for example, by providing greater subsidies for lower emission vehicles and assisting communities to relocate from areas threatened by climate change. This is something I think we were going to see a lot more of, and particularly once (not if) insurers start withdrawing cover.
In the UK, a Wealth Tax Commission suggested in December 2020 that a one-off wealth tax was feasible. That proposal was for a one-off wealth tax payable on all individual wealth above £500,000, which at 1% a year for five years would raise £260 billion. The tax by the way, was to help restore the UK government’s finances in the wake of the COVID 19 pandemic. The proposal hasn’t gone anywhere at the moment, but it is an example of some of the current thinking we’re seeing around the topic of taxing wealth.
As I’ve said before the debate around taxing wealth will continue to run. In my view when you examine Treasury’s 2021 He Tirohanga Mokopuna statement on the long term fiscal position, tax increases of some sort seem inevitable.
The perils of tax short cuts
And finally, this week, another reminder about the perils of taking short cuts around tax. I got a call from a somewhat alarmed tax agent trying to unwind a GST scenario. This appears to have arisen because someone tried to avoid being GST registered in relation to a lease of land to a related party. At the same time that related party claimed GST in respect of a school building from which it runs a school. The issue has now boiled over because the school business is up for sale and it’s not clear who owns the building the school will operate out of, whether a proper lease is in place for those buildings and if so, what is the annual value of that lease? The result is that the potential sale of the business may not proceed.
I’ve seen similar impacts where a business hasn’t booked cash sales to evade GST & income tax, only to find that either when the business is up for sale, purchasers don’t have a true picture and the sale price disappoints. Alternatively, the owner applies for lending but because they have been suppressing their income, they haven’t got the necessary level of income. The lesson in all these cases is the same. Short term decisions to avoid tax consequences can often have longer term and much more adverse implications.
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 te wiki, have a great week!
