My guest this week is Matt Edwards, the CEO of tax pooling company Tax Management New Zealand (TMNZ). Morena Matt, welcome to the podcast.
Matt Good morning, Terry. Thanks for having me this morning.
TB Not at all, our pleasure. Now you’ve just celebrated your first year as CEO of TMNZ, but you have a quite an interesting background. Prior to joining TMNZ what were you doing and what insights did you gain from?
A 12-month OE which lasted 20 years…
Matt So it’s an interesting story, Terry. I was born in New Zealand and went to university in New Zealand and after I thought I I’d had had enough of small-town Wellington, which is where I grew up I got on an aeroplane and went over to the UK for a 12-month getaway I suppose you’d call it, and 20 years later I I came back, which is which is how it panned out.
I spent the majority of my career involved in what we call Fintech, so that’s basically the intersection of financial services and technology. During the time I was in the UK, I built a couple of fintech businesses, the biggest one was a marketing services business actually that connected financial advisors to customers. So that was a very fun journey and that was going back, gosh, we started that business in 2010, I think.
So that was a little while ago now. And this was when Internet and Internet services were not brand new but still emerging a little bit. So, we were kind of on the cutting edge of that.
I sold that business to private equity five years later or so and then I got involved in running and developing portfolio businesses for private equity. The last business I was involved in, in the UK was actually a life insurance business. We were reimagining the way life insurance is bought and sold and consumed by the end user.
So, yes, most of that time has been spent taking technology and putting it into legacy businesses and seeing how we can make those businesses more efficient. So now I’m finding myself involved in tax and tax pooling, which is arguably a legacy business, having been around for 20 years.
TB Yes, that’s the surprising thing about tax pooling. It seems relatively recent, but it’s now over 20 years old. Your career is interesting because you’re not coming from a tax background. On the other hand, TMNZ’s founder Ian Kuperus and its previous CEO, Chris Cunniffe both worked at Inland Revenue. But you’re coming with a different perspective, so I’d be interested to hear more about that and how you build on this legacy system. But just as a quick recap, what is tax pooling and how does it work?
What is tax pooling?
Matt What it fundamentally is, when you when you boil it down, it’s a pool of tax sitting within Inland Revenue that has obviously been paid in at particular day. It’s used for provisional tax payments, and what that pool allows us to do is essentially in very simple terms, move tax payments around.
So, if your business has overpaid on a provisional tax payment and another business that’s underpaid on that payment, we’re able to essentially swap those payments around. So, what that means is the business that has overpaid benefits from a slightly higher use of money interest rate on that. And the business that has underpaid avoids some penalties and use of money interest for the gap between the dates they’ve paid, and that pool is significant.
From a TMNZ point of view, our pool can be as high as $10 billion and there’s other competitors in the market that do tax pooling as well. So you’re talking about a significant amount of tax that operates under the pool. Well into the multiple billions of dollars, so that’s at a very high-level what tax pooling is or how it works. Once you get into the detail, it becomes some more complex obviously.
TB But just to clarify for listeners, you don’t actually hold that money, you and all the other tax pooling companies do not have $10 billion sitting in your bank accounts or accounts, and Inland Revenue gets notified that those payments are going across so they can see your balances and who has made payments.
Matt Yeah, that’s right. It operates under a trust arrangement, so TMNZ or other tax poolers don’t actually physically touch any of those funds. They go via a trust arrangement and then they go into the Inland Revenue pool. So no, unfortunately we don’t have $10 billion on our balance sheet, although that would be lovely if we did.
TB Indeed. Actually, a key point about it is, if you’ve paid into a tax pooling account, one of the other advantages is you can withdraw those funds at any time. You do not need Inland Revenue’s permission to withdraw the funds, so that gives a bit of flexibility.
The benefits of tax pooling
Matt Yes, while the money sits in the pool effectively you can think of that as quasi liquidity for the business. It can be withdrawn at any time and the interesting thing about it is there’s no cost implication other than perhaps a very minor bit of administration from a business to use the pool, whether they require tax pool and products on the end of that or not.
This is interesting because when you look into the market, you’d expect when you look at tax pooling that every single business in New Zealand would make all their tax payments via the tax pool, because there’s no downside. The interesting thing about it is for an industry that’s been around for 20 years. there are still thousands of businesses out there that are not using tax pooling and we’re not paying their tax via the via the pool, which is quite surprising when you consider that there’s absolutely no downside for a for a business to use it.
But you you’re quite right, you can pull that money back out of the pool at any time, and there’s various mechanisms for doing that. But if needs be, yes it can be drawn back down out of the pool.
TB Yes that is true. This sounds so completely strange. Why would we do that? And I think there’s always inertia. Well, you know, the old accounting matter, what did we do last year? Look at what we did last year, and we’ll do it again this year.
TMNZ was the original tax pooling company, but you have several competitors in there. Still from what you’re just saying, the market is not saturated so to speak, there’s plenty of scope.
So why doesn’t everyone use tax pooling?
Matt No, and what’s interesting about the tax pooling industry is when you explore the stakeholders that are involved – you’ve got your taxpayer, obviously you’ve got your tax filing company, which in my instance is TMNZ and you’ve got your accounting services, and you’ve got Inland Revenue – there’s absolutely no downside to any of those stakeholders in the process.
So, everybody is a winner, and I think you’re right, Terry. I think It’s inertia. “Hey, we’ve never done this. We’ve never paid through the tax pool. Why would we do this?”
It’s nuanced to sort of understand why would I do this? I have a tax bill. I pay that to Inland Revenue. That’s how it works. And I think the other challenge you have is quite often from an advisor if they’ve not been engaged to a level where they’re able to provide advice on using tax pooling or an efficient way of operating tax payment, they’re probably not telling their client that.
So it is an inertia thing and it’s really interesting because in my experience, typically by the time a business model gets to 20 years old, you know you’ve reached the top of the bell curve. At the moment, the market is not saturated and you’d expect that most people who it’s applicable to would be using it. And it’s just simply not the case with tax pooling. There’s still many, many businesses out there that aren’t using it. From my point of view, that’s super exciting, because it means there’s a great deal of market out there that’s to be captured.
Using tax pooling beyond provisional tax
TB Yes, indeed. Now primarily tax pooling developed around provisional and terminal tax, particularly. And as you said, the key thing to understand is this arbitrage between the use of money interest Inland Revenue will charge and late payment penalties which I think frankly is a little rude
But if you’re charging 9.89% interest on overdue debt, then for the largest taxpayers such as the banks or the New Zealand Superannuation Fund their cost of funds is way below 9.89% and so they have the real problem of saying “we underpay our tax, we get crippling interest, but if we overpay our tax, we have no access to the funds.”
So, those taxpayers are very keen users and probably in every sense of the word, your biggest customers. But tax pooling has developed beyond provisional and terminal tax, hasn’t it? You can actually use it for other taxes, including GST for example. In what circumstances can you use tax pooling for those other taxes?
Matt If you’ve got funds in the tax pool you can use those funds to pay any of your standard corporate taxes that typically wouldn’t be used to pay a social tax. But in a business context you can use pool funds to pay any kind of tax.
So, if you’ve got $100,000 sitting in the pool then you can use this to make a GST payment. Having said that, you can’t take advantage as you described it of the arbitrage or the advantage and penalties and interest payments with other tax types.
So, if you’ve missed a GST payment and you’re incurring a penalty and interest against that, then tax pooling and won’t help you in that situation unless it’s a reassessment.
Tax pooling and reassessments
Matt So under a reassessment (assuming that you’ve acted reasonably and responsibly, and you’ve filed your tax returns appropriately) because there’s been a mistake made, there’s a calculation error, an advice error – in that instance you can use tax pooling to mitigate what those penalties and interest payments would be under the under the reassessment situation. But generally speaking, the tax pooling regime is focused on income tax or provisional tax payments.
TB I’m just talking about reassessments; that’s quite an important thing because that’s happening all the time. For example, Inland Revenue just recently trumpeted how it has raised over $900 million through reassessments. That’s where it really comes in handy, and you’ve got tax going back for quite some time
Matt The truth is we’ve got tax going back to 2007/2008 and the tax pool, which is a fascinating thing, when you think about it, should fall into a reassessment situation going back considerable amounts of time when you consider the interest implications over the course of seven or eight years. This could be significant in those situations.
TMNZ’s unique selling proposition
Matt The big USP we have being the incumbent is because we have tax going back that far. It’s highly likely that we can do something should you fall into that kind of reassessment situation and that interest is compounding on what’s owed. Over time, it’s obviously becoming a big number.
These are obviously not everyday instances, but when they do occur, they can have significant impacts on savings for the businesses involved.
TB Can you put that in context back in 2007/8? I think use of money interest rates reached a peak of 14.24%. So, if you’ve got something from there, you’ve been a very naughty boy. But as you say the savings would amount to tens of thousands of dollars.
A surprising fact about TMNZ’s customers
Matt Yes, they can be hundreds of thousands of dollars depending on the circumstances.
That’s also what’s interesting, Terry. You may have been a naughty boy or a naughty girl of course. But you know, I reviewed the stats on reassessments and when you look at it, and don’t quote me directly on it, but 65% of reassessments through Inland Revenue come from technical mistakes. They don’t come from someone trying to game the system or not pay their tax.
A better way to put that is, it’s compliant taxpayers that have made a mistake. Either because of the advice they’ve been provided, or they’ve simply made a mistake.
In that situation, where you’ve got a compliant taxpayer, a mistake has been made that goes back a number of years, which has a large implication from a cost point of view on that business. It’s brilliant, then, to be able to save some money across it because they really don’t deserve to be aggressively penalised in that situation, I suppose.
TB Just quickly about compliant taxpayers, that’s 65% estimate figures out in my experience. Tax is complicated and I’m perennially advising clients on the question of how our Foreign Investment Fund regime operates, it is really quite an alien concept to people who come from Britain, for example, where there is a capital gains tax regime or the United States.
The Inland Revenue has the ability to charge shortfall penalties as well as interest. But typically, in my experience, if you come forward and said “oops, my bad” only use of money interest will be payable, which is when you come in and mitigate that.
But I’ve yet to encounter many instances where shortfall penalties have also been thrown in there, and it leads on to what you’re seeing from Inland Revenue at the moment.
So obviously you get to deal with a lot of reassessments. Are you aware from Inland Revenue has the scale of those reassessments increased in the past few years?
Matt Bearing in mind that I’ve only been looking at it for the for the last 12 months, I don’t have a deep amount of data to look back into. Personally, I think the challenge for Inland Revenue now is growing tax debt.
The reason tax debt is growing is when you look at the cycle we’ve been through over the last five years – with COVID in particular that introduces a situation where businesses really don’t know what’s going to happen. There’s nothing you can compare that that to.
Inland Revenue’s post-COVID approach
Matt A huge amount of money then went into the economy to obviously booster the COVID situation which gave businesses a boom period. Really there were low interest rates and a huge amount of money sloshing around the economy.
We’ve gone straight from that to a very high-interest rate period – which let’s be honest – we haven’t experienced for decades, really. When you look at that run on very low interest rates for a long time, when you look at what those businesses have done, they’ve had COVID and then they’ve gone through this real boom period. Then it’s suddenly gone down. That’s impacted businesses, but of course they still have tax to pay from previous years.
The tax debt is growing, and I think the interesting challenge from Inland Revenue’s point of view is yes, they’ve been very clear both directly in the media and with our communications that they are in the market to collect more tax. They’re going to do more assessments. They are doing more reassessments, but they’re also juggling that against the fact that businesses are going through tough times now.
So, the challenge for them is determining between a business that’s just not being responsible, not paying their tax, and will never be able to pay their tax, and a viable business that’s just going through a difficult period and actually needs support through that period. And to be quite honest with you, with what I see, I think they have been and continue to be very good at trying to support those businesses to get them compliant again, to pay the tax and basically for it not to be a business ending event for them.
When you look at government expenditure and tax debt, or when you have a look at the budget that’s about to come out, there’s a big incentive to collect tax. I think that that IR’s approach is pragmatic Is probably what I would say there.
TB I totally agree with all of that. And just to repeat a point we often make on the podcast, if you get into trouble with Inland Revenue, talk to them. You’d be surprised at how reasonable they are prepared to be. Unless, as you say, the taxpayer has been grossly irresponsible.
Matt And I think you can separate those two categories relatively easily. But it’s surprising how many businesses are still reluctant to want to interact directly with Inland Revenue. If a number shows up on the phone, it’s Inland Revenue or it’s unknown and the reaction is “I’m not going to take that call.”
The interesting thing is though, if the number shows up on the phone and it’s TMNZ or a tax pooling solution, then the incentive to take that call and actually deal with the problem grows.
We can all play a part in this that delivers an outcome that’s best for everyone. So I think the days of super aggressive Inland Revenue – and you know some of the stories we heard in the past – those days have gone. But nevertheless, I think business owners still enjoy that friendly face of dealing with someone who isn’t ringing from Inland Revenue.
The impact of Inland Revenue’s Business Transformation
TB Yes, absolutely. COVID is a very interesting thing because looking back over this, I talked to your predecessor, Chris Cunniffe, five years ago in December 2019. Time flies but in that time, we’ve had two big events. The first being COVID, which we just talked about and clearly that’s having an impact.
But the other thing that was just happening when I last spoke to Chris in December 2019 was Inland Revenue’s Business Transformation programme. And that was, as you know, a huge project that was carried out and came in on time and under budget. How has Business Transformation played out from your perspective?
Matt Obviously, my perspective is slightly different coming in after that project was completed, I think Inland Revenue has done an incredible job of digital transformation when you frame that up under the context of the complexity that they’re dealing with and the legacy nature of tax collection. I think when you look at Inland Revenue they’ve done a great job with that.
But I think from my perspective, what’s very interesting with my interactions with them, they’re still extremely open minded and extremely motivated to continue to make their function, which is tax collection, essentially more and more efficient. And what’s super interesting about that is they very much see this now as an ecosystem place.
How do we make the tax system more efficient for everyone? And when you look at where the technology is going and our ability to connect directly with Inland Revenue and their ability to connect directly with us from a technology point of view, there is the potential to make the function of collecting tax easier, more efficient, less burdensome and costly for business.
The potential there is still significant and that excites me because that’s really what I do and what I enjoy doing. But what probably excites me more is Inland Revenue’s openness to actually pushing this further and further. And the fact that they accept that it is an ecosystem, especially from a technology point of view.
And if we work together on that, we can really make a more efficient system. Although the transformation project itself may be over, we continue to work with them on what I would argue is pretty exciting stuff from a technical point of view.
Liaising with Inland Revenue
TB This is where your experience in the fintech sector is absolutely crucial. You’re touching on that you would have regular contact with Inland Revenue. You’d actually be meeting the senior officials there and talking these matters through as well, because there’s a specifically dedicated unit within Inland Revenue that manages tax pooling. But apart from the people there, you’re also meeting the senior honchos.
Matt Yes.
TB And how frequent are those meetings, and what insights have you gained?
Matt Yes, we speak to the most senior officials and Inland Revenue on a regular basis. There are probably two angles that takes. One is more from a framework point of view. How can we take tax pooling and actually enhance what that’s doing for business and enhance what it’s doing for Inland Revenue?
Although I won’t go into details of that now, we’ve got some pretty interesting stuff that we’re working with now. To use tax pooling I suppose to try and help businesses through this period. I would argue that that touches closer to policy. So we speak to them regularly from a policy point of view which is very interesting.
And then we have a totally other side of the equation where we’re talking to them specifically about the technology the digital side. So, there’s two tranches there and you’re quite right, it’s quite interesting you know, without naming names, the people we speak to are the top people at Inland Rrevenue. So there’s good communication channels there, direct access and they’re very open to that, which means we can do cool stuff.
Comparisons with the UK
TB How does that compare with your experience in the UK? Did you have, or need to have such interactions with HM Revenue and Customs?
Matt No, that’s very interesting. The chances of sitting down with the executive team at HRMC in the UK and discussing this stuff from the UK context would be very, very unlikely. So, one of the cool things about New Zealand is that I can pick up the phone and speak to the Commissioner of Inland Revenue if I need to. It also means that we can do cool stuff. So that’s completely different to the environment that you had in the UK.
So yes, it’s a real upside that New Zealand has right. As a smaller country we all sort of quasi know each other which is quite an interesting difference between things in the UK and New Zealand.
TB Yes. Mind you, I think I’d take a call if I knew that person was holding $10 billion in tax.
Matt Well, that’s probably not the way we sell it, but yes, I know.
Looking ahead
TB You’ve now had 12 months under the under the hood looking around, and you’ve come from this background and clearly you’ve got things in progress. Without revealing any state secrets or anything, what improvements or changes do you think you you’d like to see?
Matt It’s an interesting perspective. Obviously I’ve come into this with completely different eyes to the people that have traditionally been running tax pooling. You know Chris and I’m sure you’ve met Ian before; you know these guys are very experienced career tax people.
I’ve come in from completely the other angle. The big challenge that I’ve thrown down is, as I said earlier in our conversation, why are all businesses not using tax pooling? Even if that is simply just paying their tax into the tax pool and then transferring that tax to Inland Revenue.
There really is no reason that all businesses shouldn’t be doing that. The fact is, when you look at it, I roughly think, 40 or 50% of New Zealand business still don’t use tax pooling in in any way.
It’s also probably worth saying that I’m agnostic as to whether they use TMNZ or another tax pooling company from a high level. I just want every business to use tax pooling because of the benefits.
So when I ask myself “well, how do I address that challenge?” This gets into the strategy off running the business. How do I help all businesses to use tax pooling. When you stand back and look at it there’s inertia in a lot of instances to actually using tax pooling.
Some of that’s technology, some of it’s a reliance on a tax advisor or an accountant being able to advise on how your business can use it. And you know there’s two things there as well. That advisor needs to be able to charge for their advice, obviously. But they also need to have the knowledge themselves, and it’s quite interesting when you look into the market. I think of tax pooling all day, so I assume everyone understands it to the level that I do.
Making tax pooling accessible
Matt That’s simply not true, even within the accounting fraternity. So the real challenge is how do we make this accessible and simple to all New Zealand businesses so they can all use it.
Now if we want to look for an analogy, if you consider a credit card, a mortgage, an overdraft facility or a bank account or insurance. Most people don’t understand the intricacies that go on behind providing those financial services. Almost nobody is going to read their hundred-page mortgage contract from end to end and analyse every point in that although maybe perhaps they should,
I don’t think we’ve got to that stage with tax pooling. From my point of view, it’s a case of how can we bring this product to market in an easy-to-understand way, where you don’t need to understand it, just like you don’t need to understand the intricacies of how a credit agreement behind a credit card actually works.
I think at the moment that’s the piece that’s missing. How do I make it easier for an advisor to take tax pooling to their client? How do I make it easier for a client to understand how tax pooling works? How do we make this more transactional? Probably what I’m saying is, I think if we can answer that question, I think we’ll rapidly see higher adoption through New Zealand businesses using tax pooling and obviously there can only be a win for business and for Inland Revenue.
Tax pooling an essential cash flow tool
TB I totally agree with that and to reiterate here, because of the flexibility tax pooling provides, it is an essential cash flow tool.
Matt It is and interestingly, when you get into it, and this is I guess, where we diverge between the way I think about it and the way I view the industry, and the way perhaps the tax advisor would view the industry, this is our cash flow smoothing tool, that’s essentially what it is.
You can almost dismiss the tax element to a level and say, “hey, you’ve got an obligation to pay money at a certain date that’s not aligning perfectly with your business model.” And let’s be honest, if you look at provisional tax payments, they’re set up under a model where you pay three times a year. There you go. Your business matches that. The reality is that there’s businesses out there that in extreme circumstances make all their revenue within two weeks. That sort of pay tax model versus the reality of your business model.
The chances of those aligning perfectly are quite slim, so it isn’t really about tax from that point of view, it’s about cash flow smoothing.
So, if you have an obligation and I can say to you, “ Terry, you can simply pay X amount per month and your obligation is settled. Or pay nothing for this quarter or pay nothing for next quarter depending on what you need.”
So that is the real USP. Save money on use of money interest, save money on penalties. These things are fundamental to what we’re doing. But at the end of the day, this this is a cash flow smoothing tool and it’s a source in certain instances of capital for business or capital at a rate that’s in most circumstances, especially in SME, that’s significantly cheaper than the cost of accessing other types of capital.
TB That’s a really significant point. How our provisional tax filing dates developed is a whole other story but the long and the short of it, it was driven very much by the big end of town and that that’s they wanted the payments to align.
Matt Yes.
TB And fair enough for you are paying 80-90% of the tax. That’s not an unreasonable suggestion to make. The thing is, you’re only 10% of the businesses and the rest of us are all in this position.
Like you said, there are businesses that have two weeks to make their money and then there are businesses where things go quiet and suddenly, ”oh, January, I’ve been on holiday. Oh, I’ve got a provisional tax payment.”
I’d be interested to know if you see a lot of requests around the January 15th payment, the provisional tax and GST is quite a quite a thump.
The problems with paying tax in January and how TMNZ can help
Matt For want of a better example let’s pick an industry. Let’s assume you’re in retail and Christmas is an important time for you. So ,you’ve just gone through that Christmas period and done a lot of trading. You’ve got a big GST payment coming up and then you’ve also got a provisional tax date sitting there. So in January it’s rough times, right?
Business has been falling through the floor because you’re through Christmas and suddenly you’ve got these two big tax payments coming, or May 7 could be another example of this.
So this is where the creativity and the ease of access is important. You’ve got GST and you’ve got a provisional tax payment owing on the back of that. So pay your GST that’s important. Always pay your GST because, and fair enough to GST, as a tax you’ve collected it’s not your money essentially, it’s Inland Revenues.
TB Always pay your GST, folks.
Matt Finance your provisional tax The rate that you pay on net finance for most businesses apart from the very top end of town is going to be significantly less than what you can use in your overdraft or short-term funding facility or however you’re funding your business. There’s a way we can smooth out that that cash flow quite significantly, and can do it at a rate that’s very, very competitive. From a business cash flow perspective, it’s perfect, instead of exiting all of that cash out of your business at one time. You remain a compliant taxpayer; and you pay a rate on that that’s very competitive compared to the other cost of capital.
But one of one of the frustrating things about the industry is what I’ve just described there. If we go out into the street and ask how many people are aware of this, the gulf is big and the number of businesses sitting out there that will using an overdraft facility that they could be paying 12/13/14/15% interest, to do this is significant.
When you think of the implications of that, in New Zealand we need economic growth. We’ve got a structure of problems in the country; we need to invest money into New Zealand. There’s a massive piece of capital that potentially goes back into the market that grows that business. The business gets bigger and employs more people, who pay more tax in the long run, so it’s a real win/win situation. That’s what excites me about it. It’s not necessarily about the provisional tax payment element of it, it’s about what this can actually do for New Zealand business.
What are the potential savings?
TB Alright. That sounds fantastic and I totally agree with that strategy. It’s sometimes a difficult sell because you’re up against inertia. But potentially what sort of savings could we be seeing by adopting that approach?
Matt It’s greatly circumstantial, Terry, obviously, so it’s very difficult to say “hey, X is the savings.” So you can’t really take it from that point of view. If you consider a very basic situation, “ hey, look, I’ve fallen behind an income tax, I’ve got some income tax owing, and I want a solution for that.”
Depending on the amount of tax, you could be saving anywhere between 15 or 25% on what the cost implication would be if you choose not to use tax pooling. If, as we discussed earlier, you’re looking at a long-term reassessment situation then, obviously those savings could be considerably and materially higher. You know you may be getting into 30 or even 40% saving on what it’s otherwise going to cost you.
The other thing as well that’s worth pointing out when we talk about savings is you’ll save money, and you know I’m a businessman. And if I save a dollar, I think that that’s a job well done.
Saving money and staying compliant
Matt So the savings will always be there. But I think the other thing that we shouldn’t lose sight over is that you also remain a compliant taxpayer. That’s a thing that we don’t focus on enough. So you save money, and you remain a compliant taxpayer. I think that’s an important thing for the business, and I also think it’s a very important thing for the people advising that business to ensure that they remain in that category.
TB I couldn’t agree more with you on that point. Often, I’ve come across situations where I’ve explained to clients “Well, this is the scenario, and this is the tax due.” We’re not tactical magicians who wave a wand and the tax bill goes away. It doesn’t. What we’re often doing is we’re mitigating the impact, explaining and bringing taxpayers up to date. More frequently than people might realise, I’m told “Well, that’s just a huge load off my mind.” People want to be compliant and they’re worried if they’re not compliant. When they hear A – we can make you compliant and B – this is nowhere near as bad as you thought it was, there’s a huge relief you can see, and the strain lifts. Particularly in the SME sector, where it’s bloody tough.
Matt And you know, let’s be honest about it, you’re involved in tax every day. I’m involved in tax every day. So we think that the whole world revolves around tax, and of course, doesn’t.
But you know, particularly in SME land, the people running those businesses, they want to focus on running their businesses. And providing whatever goods or services those businesses provide at the highest level that that they can. And that’s what they should be doing.
Access to expertise
Matt They shouldn’t be sitting at home at night worrying about death and taxes as you say. And you know, to be able to provide a service to them that takes them away from that, I think it’s tremendously valuable. And the other thing, I don’t want to plug TMNZ services too much, I think it is worth the mention that ( I don’t count myself among these people) but the people we have working at TMNZ are tax experts. So often what looks like a very complex and very difficult situation can be worked through to a very advantageous outcome for the taxpayer or for the business owners.
That’s another thing that you get as a periphery benefit of using the tax pooling regime – you get access to those skills and that knowledge as part of the service, which again I think is something that along with remaining compliant, shouldn’t be lost sight of when we when we actually look at the service that we provide.
TB Yes, you’re dealing with provisional tax regime, and even for an experienced practitioners like myself, we’re always thinking “wait, what? Oh, hang on, that’s over $60,000. Oops.” It’s fantastic to be able to talk to your team and they’ll come back and show different ways of dealing with the issue.
That seems a good place to leave it there. This has been a very enjoyable and very insightful conversation. Thank you so much for taking the time to join us. Any final thoughts?
Matt No, it’s been my pleasure, Terry. Thank you for having me on. I know that my point of view is going to probably be quite a different to what you’re used to on the tax podcast. So, thank you for giving me the opportunity. It’s also been very fun from my point of view as well.
TB Excellent. That’s been great. Well, my guest today has been Matt Edwards, CEO of tax pooling company Tax Management New Zealand.
And on that note, that’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.taxor wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā.
And reveals results of increased audit activities.
Is GST really a tariff?
It’s been a busy week in tax. Right at the start of the tax year, Inland Revenue has launched a public consultation on a review of the fringe benefit tax regime which is now 40 years old. The 75 page issues paper titled Fringe benefit tax – options for change reviews the current status of FBT, focusing on issues Inland Revenue has identified. It puts forward a number of proposals aimed at simplification of these rules and a reduction in compliance costs, a long standing issue with major employers. There’s plenty to digest here but there’s a summary of the proposals on pages 6-8 of the paper if you want to get a quick handle on the proposals.
Reimagining FBT
The paper also addresses the separate issue of general compliance with the regime. A particular source of grief amongst compliant taxpayers is the treatment of the ubiquitous twin cab ute and the application of the work related vehicle exemption. Overall, the purpose of the paper is to
“…to review how FBT is assessed now, highlight current issues we are aware of with FBT and then outline some new concepts for how we could think about a reimagined FBT regime that is less complex and more targeted…”
The paper has 12 chapters, beginning with an introductory chapter, with Chapter 2 setting out the aims of the review. Chapter 3 explains how FBT is currently assessed. Chapter 4 picks up the FBT regulatory stewardship review from August 2022 which is really one of the initiators of this project. Chapter 5 then provides some comparisons with international FBT regimes.
Chapter 6 has an interesting discussion about FBT’s connection with remuneration. We tend to forget FBT was mainly introduced to ensure that all types of remuneration were brought into scope. Back in the 1980s, before FBT was introduced and the top personal tax rate was 66% it was common practice to give employees non-cash benefits such as company vehicles. Countering this was a key driver behind the introduction of the FBT rules in 1985.
Chapters 7 and 8 look at FBT and motor vehicles and considers options for change. Chapter 9 considers one of the areas of complexity, the treatment unclassified benefits. Chapter 10 discusses the option of applying FBT on entertainment expenditure, a proposal which will probably surprise a few people. The paper notes that entertainment regime also attracts a great deal of controversy and complaints about the compliance costs involved. Finally, chapter 11 looks at miscellaneous issues before Chapter 12 looks at data filing and integrity.
Why such a tight submission deadline?
There’s a lot to consider in this paper but submissions are due by 5th May, which means between Easter and Anzac Day there’s barely 4 weeks in total to review the paper and make submissions. The Minister of Revenue, Simon Watts, has repeatedly expressed a wish to simplify the FBT rules so he is keen to get this moving. My understanding the reason for the tight timeline is a desire to have the relevant legislation ready to be part of this year’s main tax bill, which will be introduced around late August or early September.
Proposed changes to FBT on motor vehicles
I expect many will focus on the proposals for motor vehicles. An interesting proposal is to increase the weight limit for vehicles subject to FBT from 3,500 kg to 4,500. Given the weight limit for a person with a full individual drivers’ license is 6,000 kg, my view is the FBT limit should tie into that threshold. Another proposal is to exempt vehicles that are used for providing emergency services.
A key change is removing the tax book value based option for calculating the fringe benefit value of a vehicle. Something worth considering is the suggestion for an optional valuation basis based on the fuel source for the vehicle i.e. electric, hybrid or petrol and diesel.
As part of re-connecting FBT with remuneration the paper suggests the FBT value of the motor vehicle could be calculated by reference to external sources such as remuneration consultations or maybe the AA calculations of vehicle running costs. The paper suggests regular revaluations, maybe every four years. One of the reasons why the tax book value option was introduced was that if people are not changing their vehicles regularly, then there’s an issue that the vehicle may be overvalued for FBT purposes. The proposal would address this issue.
However, the Lord giveth, and the Lord taketh. The paper proposes the following new rates for calculating the fringe benefit value of a vehicle based on its cost:
standard rate: 26% annual or 6.5% quarterly
hybrid vehicles: 22.4% annual or 5.6% quarterly, and
electric vehicles: 19.4% annual or 4.8% quarterly.
Availability vs actual use
As part of the intention to simplify FBT, the suggestion is to no longer require taxpayers to maintain logbooks to determine the days the vehicle is available for private use. Instead, the focus will shift towards the actual extent of private use the vehicle is available for (for example, is it limited to home to work travel?).
The paper suggests the following categories of vehicle use:
As part of this change, the paper proposes excluding “incidental travel” to ensure that one-off private use of a vehicle can be ignored for FBT purposes. Behind this idea is a “close enough is good enough” approach.
A key proposal is to remove the current work-related vehicle exemption which as the paper says, is a “most misunderstood” exemption. The changes should address the issue of double-cab utes supposedly qualifying for the work related vehicle exemption and avoiding FBT entirely.
Changes to the entertainment regime
The other major proposal of note is integrating the entertainment regime into the FBT regime. Again, the idea behind this is to simplify quite a number of issues that currently exist in relation to the entertainment rules which have never been very popular and compliance is also a problem. As the paper notes many employers are taking a close enough is good enough approach to entertainment expenditure.
The interaction of the entertainment and FBT regimes can be confusing. For example, if an employer takes an employee out to a restaurant that is subject to entertainment rules. However, if the employer gives a voucher for that restaurant to an employee to use whenever they want, then that’s subject to FBT. Another example one would be if an employer pays for employees to participate in a front run, and then then provides a BBQ for staff staff at the finish line. Is the cost of the fun run subject to FBT but the BBQ represents entertainment? Integration of the two regimes is intended to address these issues.
Overall, this is a welcome review and as previously noted pretty timely given it’s now 40 years since FBT was introduced. Just remember you’ve got to get your skates on to submit by the deadline of 5th May.
Inland Revenue ramps up its audit activities with good results
At the start of last week Inland Revenue announced some of the results of its “noticeably increased” compliance activity. For the period from 1st July to 31st December 2024, it opened 3,600 audits 50% up on the same period in 2023. According to Inland Revenue’s Segment Lead for Significant Enterprises, Tony Morris, “Inland Revenue has found $600 million of additional tax that should have been declared.”
Morris went on to add “We’ve had a strong focus on the largest businesses in New Zealand and it’s worth noting that half of that additional tax came from less than 10 audits.” In other words 10 audits yielded $300 million.
Furthermore, Inland Revenue screened over three million returns as part of its annual year-end auto-assessment process. 30,000 of those, or about 1% were selected for review which resulted in a further $859 million of tax revenue. That’s a pretty good bang for buck on the additional funding it got in last year’s Budget.
Inland Revenue has also been focusing on debt and I thought this particular comment was of interest
“We’ve been in touch with 200 business owners and told them we know they have multiple properties – some in a company name, some in trusts, some personally. We believe they should be able to refinance to pay their debts to us and told them so.
“…These 200 people had $14 million of debt between them, but within a month more than $10 million had been paid or put under arrangement.”
Inland Revenue’s data gathering around property transactions is second to none and people would be wise to not underestimate this. It has been identifying transactions in this area for quite some time. A colleague recently told me of an audit that he was involved in where the client was saying, ‘Oh well, a number of property transactions were simply renovations of my main home’. That is until Inland Revenue investigators presented a “ream sized folder” full of property transactions for this taxpayer. From that point, the question wasn’t about rebutting Inland Revenue’s proposition that he was actually a property trader but trying to mitigate the damage. You have been warned.
“This is Baycorp calling on behalf of Inland Revenue”
However, something that does concern me is Inland Revenue’s announcement on 10th April it would be “running a six month pilot program in partnership with Baycorp to improve our debt collection process.”
Inland Revenue warned taxpayers that during this pilot, “you may be collected, may be contacted by representatives from Baycorp. Please be assured that these contacts are legitimate and part of our authorised programme.”
That’s as may be, but I’m not so sure given everyone’s growing concern about scams, not too many people are going to accept calls from Baycorp saying ‘you own Inland Revenue money pay up.’ I therefore doubt the pilot is actually going to be as effective as hoped even if Baycorp show the taxpayer incontrovertible proof that they have a debt due to Inland Revenue.
This is just the latest push by Inland Revenue to improving debt collection. As we noted in our last podcast given the rise in GST debt in particular, it’s basically no surprise that Inland Revenue is putting resources into debt collection. And as I’ve said previously, I expect there will be more funding given to it in next month’s Budget.
Is GST a tariff?
Meanwhile, around the world there has been large scale turmoil in the financial markets as everyone tries to work out what exactly is happening with the tariffs proposed by President Trump’s administration. As part of this he has indicated that value added tax (VAT) is now seen as a tariff. There’s been a huge pushback against this with the basic counterargument being that tariffs are only imposed on imported goods and services, whereas GST/VAT applies regardless of source of the goods or services
If you want more a bit more detailed analysis of why GST/VAT isn’t a tariff, I suggest this interesting post by Dan Neidle of Tax Policy Associates. He considers the issue using the example of beer, which is always handy, and the implications of the policy.
Removing GST from fruit and veg – “a well-known solution to every human problem”
The American writer HL Mencken was the source of the quote “There is always a well-known solution to every human problem – neat, plausible and wrong.” This often comes to mind in relation to the frequent proposal to remove GST from fruit and vegetables. It so happened the Prime Minister was asked about this suggestion on TV1’s Breakfast Show. He responded that it was far more complex than people imagined.
I subsequently appeared on Wednesday’s show to discuss the issues involved in removing GST from fruit and veg. To be fair following Mencken’s dictum about the policy being ‘wrong’ would be a bit harsh. This is an extremely well meant suggestion based on the precept if you wanted to try and help people struggling with the cost of living then removing GST is an option or step and no doubt would provide some assistance.
But as I explained it is complex and definitional issues lead to extreme examples such as the UK Mega-Marshmallows which enabled me to sneak in a reference to The Princess Bride. Furthermore, well-meant though it is, the proposal is not perhaps the right solution for the problem you’re trying to deal with, which is people with low income who are struggling with rising costs. A targeted response is more appropriate.
The Tax Working Group’s view
This was also the analysis of the 2018-19 Tax Working Group which also addressed a key complaint about GST, that it’s seen as regressive for those on low incomes. In response to addressing regressivity by perhaps reducing the rate of GST or introducing a GST exception for food the TWG commented “there are more effective ways to increase progressivity than a reduction in the rate of GST.”
Instead, the Tax Working Group suggested
“…increases in welfare transfers would have a greater impact on low income households. Changes to personal income tax can also have a greater impact on low and middle income earners. GST exceptions are complex, poorly targeted for achieving distributional goals and generate significant compliance costs, and furthermore, it is not clear whether the benefit of specific GST exceptions are passed on to customers.”
I agree with that analysis. It’s also supported by research carried out by Tax Policy Associates on the impact of VAT(GST) changes in the UK, where VAT has been removed from several products again for very well meant reasons. Examples include a reduction in the VAT rate for tampons and other menstrual products and the zero-rating of e-books. In both cases, the analysis carried out by Tax Policy Associates identified little or no benefit going to final consumers. In fact, in the case of e-books, no benefit passed through to consumers, costing the UK £200 million.
A complex and ineffective solution
In sum removing GST from fresh fruit and veg is complex and leads to boundary definitional issues. UK cases such as Mega-Marshmallows or the older Jaffa cake case involving the UK’s zero-rating of food are very, very good examples of the sometimes absurd distinctions that arise. Even although accounting systems are much improved the fact remains there are irreducible minimum compliance costs involved. These will fall most heavily on smaller operators such as dairy owners who already have a fairly heavy compliance burden with GST.
Much as I can see why people would want to suggest zero-rating fresh fruit and vegetables, ultimately, you’d have to consider whether the benefit of such a change is actually going to flow through to those who you want to benefit? Remember, if you do apply an exception, everyone benefits from it. As the Tax Working Group noted wealthier deciles spend more on food and fresh fruit and vegetables so would probably benefit disproportionately.
This isn’t a matter that’s going to go away. My view remains in line with that of the Tax Working Group. Look at what the real issue is, and it’s some families don’t have enough income. The best approach is therefore to give them more income. But we’ve got an election coming up next year and no doubt the proposal together with other well-meaning but inefficient ideas will be put forward.
And on that note, that’s all for this week, we’ll take a short break for Easter and be back for the ANZAC Day weekend. In the meantime I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day and Happy Easter.
The debate over international taxation and the so-called Two Pillar proposals has been driven largely by the G20 and the Organisation for Economic Cooperation and Development, (the OECD). But in recent years the United Nations has started to flex its muscles in this space. This is unsurprising, because the UN represents the wider world view outside the 40-odd countries which make up the G20/OECD.
All of this is behind the story that RNZ ran at the start of the week about the United Nations Committee on Economic, Social and Cultural Rights statement on tax policy. The RNZ ran this statement under the banner headline “UN Report questions fairness of GST”, in which it pointed out that GST can be regressive for low-income earners.
In fact, the UN Committee statement went much further than GST. It noted the terms of reference to the United Nations Framework Convention on International Tax Cooperation, which had been adopted by the General Assembly,
“This development represents an important opportunity to create global tax governance that enables state parties to adopt fair, inclusive and effective tax systems and combat related illicit financial flows.”
“regressive and ineffective tax policies”
The key paragraph to the UN Committee statement is paragraph 4, which refers to “regressive and ineffective tax policies”, having
“…a disproportionate impact on low-income households, women, and disadvantaged groups. One such example is a tax policy that maintains low personal and corporate income taxes without adequately addressing high income inequalities. In addition, consumption taxes such as value added tax can have adverse effects on disadvantaged groups such as low-income families and single parent households, which typically spend a higher percentage of their income on everyday goods and services. In this context, the Committee has called upon States Parties to design and implement tax policies that are effective, adequate, progressive and socially just.”
It’s the reference to consumption taxes that was picked up by RNZ. The regressivity of GST is well known and was noted by the last Tax Working Group. The general approach we’ve taken here to that issue is to try and ameliorate the impact by benefits or transfer payments such as Working for Families and Accommodation Supplement to lower income families.
The thing is though, as Alan Bullôt, of Deloitte noted in the RNZ story, GST is a very effective tool for the government to raise a large amount of money relatively easy. In fact, GST represents about 25% of all tax revenue a point I repeated when I discussed the whole story on RNZ’s The Panel last Monday.
Principles of a well-designed tax system
But the Committee statement is interesting beyond the GST issue because it goes on in paragraph 6 to set out what it regards as the principles of a well-designed tax system. It suggests, for example,
“…ensuring that those with higher income and wealth, in particular those at the top of the income and wealth spectrums, are subject to a proportionate and appropriate tax burden.”
That can be clearly interpreted as a call for a capital gains tax or some form of capital taxation, a point I made to The Panel.
The Committee also fires a few shots over international tax, stating
“The Committee has observed situations in some States where low effective corporate tax rates, wasteful tax incentives, weak oversight and enforcement against illicit financial flows, tax evasion and tax avoidance, and the permitting of tax havens and financial secrecy drive a race to the bottom, depriving other States of significant resources for public services such as health, education and housing and for social security and environmental policies.”
That clearly targets tax havens, but it’s also a shot across the likes of Ireland, for example, with its low corporate tax rate.
A global minimum tax
The Committee also calls for a “global minimum tax on the profits of large multinational enterprises across all jurisdictions where they operate and to explore the possibility of taxing those enterprises as single firms based on the total global profits, with the tax then apportioned fairly among all the countries in which they undertake their activities.”
That’s quite the statement even if probably forlorn given the Trump administration’s recent declarations. It’s probably what the less developed world is after, because they’re quite concerned they’re losers under the current system. This is going to lead to wider clashes over the G20/ OECD proposal, which I think to be frank, is probably dead. In any case, I thought it was always noteworthy that Pakistan, the World’s fifth most populous country and Nigeria, the sixth most populus country and also Africa’s largest economy, both refused to sign up for Two Pillars.
Now economically, that was not highly significant because the economies are small relative to the giant economies of the developed world. However, I think this refusal points to existing issues and this statement underlines there’s global tensions ahead on this question of international tax.
As I said, the Trump administration basically is saying no go. But I think you will see countries attempting to find ways of taxing what they regard as their part of the international multinationals’ income. So, plenty ahead in this space.
Rising GST debt
Now moving on, another RNZ report picked up that there had been a substantial growth in GST debt. Allan Bullôt, of Deloitte raised a concern this could be creating zombie companies. In particular he noted the amount of GST collected but not paid to the Government, has risen from $1.9 billion in March 2023 to $2.6 billion by March 2024.
As mentioned earlier, GST represents 25% of tax revenue. It also represents just under 40% of all tax debt and has been rising sharply. That’s a reflection of the economic slowdown and the cash flow crunch that’s happening to a lot of businesses.
Even so, this is a matter where Inland Revenue has a number of resources it can deploy, and one Alan mentioned is the power to notify credit reporting agencies about tax debt. According to the Inland Revenue, it only did that three times in the year ended 20 June 2024 and not at all during the June 2023 year.
This means that people were trading and doing business with companies without realising the potential risk. What that might mean is that you provide services to a company which is struggling with GST debt, and lo and behold, you suddenly find you’ve got a bad debt on your hand.
Creating zombie companies?
This is a major issue and as Allan put it,
“That’s grown and grown. I get very nervous we’re creating zombie companies … if you’re three or four GST returns behind, it’s incredibly unlikely if you’re a retail or service business that you’ll ever come back. If you’re three of four GST payments behind, it’s incredibly unlikely that your retail or service business will ever come back.
Maybe if you’re a property developer who’s got big assets that you sell and settle your debt. But if you’re a normal business, a restaurant or something like that, you go belly up.”
This is an area where Inland Revenue has information which is not available to the general public and maybe it should be making that more widely available. There’s a question here to my mind, of what proportion of debt you would report. The Inland Revenue I think has every right to say this person owes X amount of GST, or is behind on GST, but bear in mind in some cases the debt is inflated by interest and penalties. Or in some cases there may have been estimated assessments.
Notwithstanding this Allan is right to raise concerns and I expect we will see more money being granted to Inland Revenue in this year’s Budget to chase this debt.
Meanwhile, jam tomorrow in the Australian Budget
It was the Australian budget on Tuesday night our time in which the ruling Australian Labor Party promised modest tax cuts starting in July 2026, with a further round in July 2027. Under the proposed cuts, a worker on average earnings of A$79,000 per year (about NZ$86,800) will receive A$268 in the first year and that will rise to A$536 in the second year. In addition, there will be a A$150 energy rebate payable in A$75 instalments.
Otherwise, there weren’t many other tax measures to report. That was hardly surprising because two days later, Prime Minister Anthony Albanese announced that the Federal Election would be held on 3rd May. The Budget was therefore what you might call a typical pre-election budget, promising jam tomorrow if you vote for the ALP.
One tax measure of note was that the Australian Tax Office is getting further funding for dealing with tax avoidance and tax evasion. I think that’s a pretty standard pattern we’re seeing around the world. The British had what they call their Spring Statement this week, the half yearly report by the Chancellor of the Exchequer or Finance Minister.
No new tax measures were announced. But like the ATO, HM Revenue and Customs was allocated more money to target tax evasion, with the expectation that it would achieve about a billion pounds a year in additional revenue, which seems very light given the scale of the UK economy.
Mega Marshmallows food or confectionery?
Finally, this week, a couple of years back, we discussed the Mega Marshmallows Value Added Tax (VAT) case from the United Kingdom. Basically, it involved the VAT treatment of large marshmallows. If deemed to be food they would be zero-rated for VAT purposes, but if they were confectionery, they would be standard rated which at 20% means quite a significant sum is at stake.
I will cite this and its very well-known predecessor the ‘Max Jaffa’ case involving Jaffa Cakes from the 1990s, when people make suggestions about maybe reducing the GST on food to help with the cost of living, particularly for lower-income families. It’s a well-meant policy except the practical issues you run across lead to absurdities at the margins. My view on this topic is if you want to assist people at the lower end of the income scale, it’s better give them income rather than try and fiddle with the GST system because there are unintended consequences, and this mega marshmallow case is a classic example.
The case involves unusually large marshmallows. The recommendation by the manufacturer is that they should be roasted as they’re marketed as part of the North American tradition of roasting marshmallows over an open fire. Except it’s not clear in fact, if that actually happens.
The story so far is that after HM Revenue and Customs lost in the First-Tier Tribunal, it appealed to the Upper-Tier Tribunal which basically said, “Nope, we’re not hearing it.” So HMRC appealed again to the Court of Appeal which has now issued its ruling. The Court of Appeals determined it was not absolutely clear whether in fact these marshmallows can only be eaten if they are cooked, in which case they must be food, or they can be eaten with the fingers, in which case they are confectionery.
Accordingly, the key issue is whether they are normally eaten with the fingers. This is a question of fact about which the first-tier tribunal has not made a finding. In some cases, it will be obvious from the nature of the product whether it is normally eaten with the fingers or in some other way. But that is not clear with this particular product.
The Court of Appeals therefore sent the case back to the First-Tier Tribunal to decide on this question of fact. Are these mega marshmallows mostly eaten with the fingers? If so they’re confectionery and subject to VAT at 20%. Alternatively, are they mostly cooked as supposedly intended, and therefore zero-rated food.
Time for the UK to apply VAT to food?
This case came to my attention through the UK tax thinktank Tax Policy Associates which is run by the estimable Dan Neidle, a former tax partner at the mega law firm Clifford Chance. Commenting on the Court of Appeal’s decision, he pointed out the sheer absurdity and costs involved and questioned why this was so. “Why do we have a horribly complicated set of rules that mostly benefit people on high incomes (because they spend more on food)? “
His solution – scrap zero-rating on food, in other words, adopt the approach we have here in New Zealand and tax everything. He estimates that would raise about £25 billion which could be used to reduce the standard rate of VAT from 20% to 17%.
Warming to his theme Dan thinks a better idea would be “Cut the rate to 18% and use the remaining [money] in benefit increases and tax cuts targeting those on low incomes, so they’re not out of pocket from the loss of the 0% rate.”
It’s the first time I can recall a British commentator suggest this. I doubt it will happen, but it’s just a reminder that although our GST is highly comprehensive, we don’t have these absurd but entertaining cases involving marshmallows of unusual size.
But a comprehensive GST is regressive, and I think a better approach is to address that by means of transfers to lower incomes rather than tinkering with exemptions. You never know, there may be something in this space in the Budget, we’ll find out next month.
And on that note, that’s all for this week, I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day
Lessons from the largest known GST fraudster – could it happen again?
Corporate tax cuts – who benefits and what does the public think?
The tax year-end of 31st of March is fast approaching and at this time of year tax agents are busy with the last year’s tax returns and also giving a heads up to clients about what actions they need to take ahead of 31st March. It’s always an incredibly busy period and it’s often easy to overlook some important matters amidst the rush and the mayhem. So, here’s a quick reminder of key issues that that you should be considering as the tax year ends.
GST and Airbnb
First up, a GST election is running out in respect of being able to take assets out of the GST net. We discussed this a few weeks back. To quickly recap, this could particularly affect Airbnb operators that may have bought a residential property, rented it out and then realised that Airbnb produces a better return. They’ve therefore signed up to Airbnb or other apps and then registered for GST either voluntarily or because they’ve exceeded the $60,000 registration threshold.
Subsequently, the taxpayer may have claimed an input tax credit on the property but now realise that they could be liable for a substantial GST bill on any subsequent sale of the property. That obviously is a big shock.
To address this issue, a transitional rule was introduced under section 91 of the Goods and Services Tax Act with effect from 1st April 2023. The rule enables a person to elect to take an asset out of the GST if the following four criteria are met:
the asset was acquired before 1st of April 2023; and
it was not acquired for the principal purpose of making taxable supplies; and
it was not used for the principal purpose of making taxable supplies; and
a GST input tax credit was previously claimed, or the asset was acquired as part of a zero-rated supply.
If all those criteria apply, then the person can elect to take the asset out of the GST net and pay back the GST that was claimed on the original input tax. In other words, they don’t pay GST on the increase in value. A good example here would be a bach or family holiday home which was subsequently rented out for short stay accommodation.
The key thing is this election expires as of 1st April 2025, by which time you must have notified Inland Revenue of your election. You don’t necessarily have to pay the GST; you can do so as part of your GST return to 31st March, but you must have notified Inland Revenue in a satisfactory manner. I would recommend using the MyIR message service to do so.
Other year-end matters
There are a number of elections relating to whether or not a taxpayer wants to adopt or leave a tax regime. A classic example would be companies entering or leaving the look-through company regime. Another, lesser known one would be entry or exit into the little known, and apparently little used, Consolidation regime.
Another matter that pops up regularly around year-end is checking your bad debts ledger. Bad debts are only deductible for income tax purposes if they are fully written off by 31st March so make sure this happens. Then there is the year-end fringe benefit tax returns where taxpayers should check to see whether they are making full use of any available exemptions.
A very important one for companies is to ensure their imputation credit account, either is in credit or has a nil balance. If there’s a debit (negative) balance on 31st March, that will result in a 10% penalty. It may be possible in some cases to make use of tax pooling to rectify some of these issues.
Finally, if you’re registered with a tax agent, your tax return for the 2024 income year must be filed by 31st March otherwise late filing penalties may apply. Possibly more critically, the so-called “time-bar” period during which Inland Revenue may review and amend already filed tax returns is extended by another year.
Lessons from the country’s biggest known GST fraud
Moving on, an interesting story has popped up in relation to what was then the largest known GST fraud. Gisborne farmer John Bracken was jailed in May 2021 after he was found guilty of 39 charges of GST fraud. He had run a scam through his company, creating false invoices totalling more than $133 million between August 2014 and July 2018 which resulted in receiving GST refunds totalling $17.4 million to which he wasn’t entitled. He was jailed and is currently out on parole.
At the time he was sentenced Inland Revenue and the police issued restraining orders and are trying to make an application for an asset forfeiture. In other words, assets subject to the forfeiture order were acquired through fraud and should be forfeited and handed to the Crown.
Now naturally Mr. Bracken and his family, including his wife and his parents and his son, are all fighting back on this because they stand potentially to lose assets that may be subject to the restraining order and subsequent forfeiture. The interesting part of this is the sheer scale of what went on and how it went undetected for four years before an employee got suspicious, notified the Serious Fraud Office, who then tipped off Inland Revenue.
At the time the frauds were committed, Inland Revenue was at the start of its Business Transformation project, upgrading all its systems. Until it got tipped off It had no idea of the extent of the fraud. Mr. Bracken appeared to have covered his tracks reasonably well, although once uncovered it was a fairly simple GST fraud. He just submitted fraudulent GST invoices, but he was careful to get them from actual companies with whom he had established some form of trading relationship.
Obviously the concern is now twofold. The Crown will be wanting to recover as many assets as possible to the value of the $17 million that it was defrauded, but also, can this happen again?
I’d like to think “No”. Certainly, Inland Revenue feels that its new systems have enhanced its capabilities greatly and that would appear anecdotally to be the case. There was a GST fraud scheme spread by TikTok influencers which caught the Australian Tax Office completely off guard and was worth tens of millions of dollars. Inland Revenue feels that that sort of fraud could not happen here. Mr Bracken’s release on parole and the ongoing forfeiture case is a reminder that Inland Revenue has to be vigilant all the time.
But sometimes it comes down to a conscientious person, an employee usually, tipping off the authorities. But it shouldn’t always come down to that. Inland Revenue and other authorities should be able to pick up signs of these frauds. As I said, I have confidence they do, but I would also hope that confidence is not tested too much.
Corporate tax cuts – a possibility or just flying a kite?
In recent weeks there’s been some chatter or hints from the Government and Finance Minister Nicola Willis about a potential corporate tax cut. She made the not unreasonable point that our corporate tax rate is high by world standards. This prompted comments from the former Deputy Commissioner of Inland Revenue Robin Oliver that tinkering around the edges by reducing it from 28% to 25% might not achieve much. If the Government wanted to attract investment, they’d have to go big, maybe nine or ten percentage points cut. Robin was sceptical the Government could afford to do so because of the loss of revenue. And I agreed with that assessment.
I do wonder whether this idea might be something of a bit of a red herring. Some comments I’ve heard seemed to suggest that maybe the Government was just flying a kite to see the reaction.
Anyway, this week a poll run by Stuff which suggested that very few would support a corporate tax cut, or rather that the population was pretty lukewarm about the idea. The poll carried out by Horizon Research, found only 9% of adults supported lowering the corporate tax rate, while 25% actually wanted it increased. There were a few other interesting results:
Who would benefit from a corporate tax cut?
Craig Renney (the chief economist for the Council of Trade Unions) and researcher Edward Miller also looked at who would benefit from a drop in the New Zealand company tax rate. They concluded the main beneficiaries of a corporate tax cut would probably be overseas shareholders. In terms of attracting greater foreign direct investment, they saw little evidence that corporate tax cuts would be likely to achieve that.
As they noted,
“…company taxation is only one aspect of a decision by a company or fund to invest in New Zealand. In addition to the company tax rate, there is the R&D tax incentive, the lack of a capital gains tax, and the lack of substantial payroll taxes. These taxes affect the actual tax paid by corporates in comparison with other countries when considering investing in New Zealand.”
Renney and Miller’s modelling suggested that a tax cut would not result in further investment but would just simply increase the funds flowing offshore. In particular they saw the Big Four Australian banks as being prime beneficiaries. The pair estimated that a cut from 28% to 20% would have increased the annual income to offshore shore shareholders by up to $1.3 billion.
There’s always a lot of debate around the benefit of corporate tax cuts, whether they do drive investment, or they simply put money into the back pockets of the shareholders. That debate has gone on for a long time and continues again. But it’s interesting to marry that along with the public’s general lack of enthusiasm for such a cut.
Yeah, but what about the IMF?
I think it was also noticeable that the International Monetary Fund in its recent Concluding Statement for its 2025 Article IV Mission suggested “judicious adjustments to the corporate income tax regime.” So maybe it too isn’t entirely sold on corporate tax cuts as a key driver for investment.
No doubt more will be revealed in May’s Budget. And until that time speculation will mount, but we will find out on the day and as always, we will bring you the news when it emerges.
And on that note, that’s all for this week, I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day
Every year, the International Monetary Fund (IMF) undertake an official staff visit or mission to New Zealand as part of regular consultations under Article IV of the IMF Articles of Association. Each IMF mission speak with the Minister of Finance, Treasury officials and other persons – economists, academics and the like about the state of New Zealand’s economy and related issues. At the end of the visit the Mission then issues a short concluding statement of its preliminary findings.
The IMF will then prepare a lengthier report setting out its findings in more detail which we can expect to see in a couple of months time.
“A window of opportunity”
After noting it expects real GDP growth to rise to 1.4% for this year and then to 2.7% in 2026 the Mission noted:
“The macroeconomic environment provides a window of opportunity for New Zealand to consider broad based reforms needed to address medium- and long-term challenges, including to secure fiscal sustainability, boost productivity, address persistent infrastructure and housing supply gaps, and initiate early dialogue on population aging.”
“A comprehensive capital gains tax”
My understanding of the IMF submission is that each Mission has a different focus. This year, I understand the Mission was looking at the question of funding the future cost of New Zealand Superannuation and therefore the tax policies required. This led the Mission to call for some tax policy reforms
“Tax policy can support a more growth-friendly fiscal consolidation, and reforms aimed at improving the tax mix can help increase the efficiency of the income tax system while reducing the cost of capital to incentivize investment and foster productivity growth. Options include a comprehensive capital gains tax, a land value tax, and judicious adjustments to the corporate income tax regime.”
I expect we’ll hear a lot more about this when we see the final report.
“Initiate early dialogue”
It’s not the first time the IMF have suggested a comprehensive capital gains tax, and the Organisation for Economic Cooperation and Development has also frequently made a similar suggestion. Generally speaking, the government of the day just responds, “Yeah, but, nah”. However, the issues prompting the suggestion still don’t go away. In this particular case, the IMF suggests we need to start transitioning into a new system to cope with the rising cost of New Zealand superannuation.
“It is essential to initiate early dialogue among all stakeholders regarding comprehensive reform options that can help mitigate these challenges and other long term spending pressures from healthcare and aged care care needs with a fair burden sharing across generations. This can be further supported by KiwiSaver reforms aimed at achieving greater private savings retirement savings.”
The IMF is echoing comments myself and others have repeatedly made. We have rising costs in relation to aged healthcare and superannuation and we need to start thinking seriously about how we’re going to address those. This is a multi-generational impact. One of the unusual points about New Zealand Superannuation is it is a fully funded universal pay as you go system.
An intergenerational issue
In other words, it’s available to everyone, but it’s funded out of current taxation. I think there’s a widespread perception that some part of your tax pays for your future superannuation. It doesn’t. Tax paid by working people below the age of retirement is used to fund the current superannuation of those who have retired. The funding of superannuation is therefore a major intergenerational issue but one rarely discussed. Hence the IMF’s call to initiate early dialogue. I’ll have more on this when the IMF releases its final report.
In the meantime, whenever the IMF or OECD calls for tax reforms, the Minister of Finance of the day usually responds, sometimes in quite snippy terms. Sir Michael Cullen was wont to do so as did Nicola Willis last year. This year the Finance Minister hasn’t publicly responded to the IMF concluding statement, possibly because her attention was on this week’s Infrastructure Investment Summit in Auckland.
Foreign Investment Fund changes announced
As part of the summit, the Minister of Revenue Simon Watts has announced that there will be changes to the current Foreign Investment Fund, or FIF regime. The Government has very heavily signalled that it would do something in this space, so this is no surprise.
The proposed changes to the FIF rules include the addition of a new method to calculate a person’s taxable FIF income, the revenue account method, in other words taxing capital gains. According to the Minister;
“This will allow new migrants to be taxed on the realisation basis for their FIF interests that are not easily disposable and acquired before they came to New Zealand. For migrants who risk being double taxed due to their continuing citizenship tax obligations, this method can apply to all their FIF interests.”
This last point is of particular interest to United States citizens who face this double taxation issue, and which is turning people away. Furthermore, these changes will apply to migrants who became New Zealand tax residents on or after 1st April 2024.
More detail needed and further changes ahead?
This is a very good move but there’s a bit more detail still required. Does the reference to new residents arriving on or after 1st April 2024 mean those new residents are able to make use of this provision in the current tax year? One of the other key issues is if you do opt to be taxed on the revenue account method, what tax rate would apply? From discussions with Inland Revenue policy officials, they seem to be intending that it should be at the person’s marginal rate. Which for those on the 39% bracket would not be terribly welcome. So that’s a key design point.
The other thing of note is that Mr Watts added the Government will also be looking at how the rules impact New Zealand residents and will have more to say later in 2025. That’s interesting, because for me, the rules are quite a compliance burden in terms of calculations and have huge impact for everyone who has a KiwiSaver with overseas investments.
How to pay for New Zealand Superannuation
As noted above the IMF are looking very closely at the question of the fiscal cost of superannuation and aged healthcare which they suggest mean reforms to the tax system are needed to address those growing costs.
Coincidentally, Assistant Professor Susan St John of Auckland Business School’s Economic Policy Centre Pensions and Intergenerational Equity Hub released a working paper on New Zealand Superannuation as a basic income. This is an interesting proposal, which I know Susan has been working on for some time with the assistance of Treasury modelling.
The idea is that New Zealand Superannuation is changed into a universal basic income and treated as a grant. This allows an effective claw back mechanism to operate through the tax system. The proposal is that this claw back would generate additional revenue to help meet the cost of pensions and aged care.
The paper begins by setting out the background to the issue, the increasing demographic strains that we’re seeing. It notes that Treasury has been raising this issue for some time now, such as in its 2021 Long Term Fiscal Statement, He Tirohanga Mokopuna and speeches last year by Dominic Stephens of Treasury on the fiscal projections and costs.
Demography and migration
One of the interesting points the paper makes is although we face some financial strains ahead, because of our demographics the cost of New Zealand Superannuation will not be as high as what some nations are currently dealing with.
Incidentally, as part of their concluding statement, the IMF made a number of presentations illustrating certain areas they’re examining in more depth. One was the question of demographic pressures of superannuation, and it made the point that migration is not going to be the magic bullet some policymakers seem to think.
What about means testing?
After setting out the background Susan St John discusses the option of using means testing as a means of addressing costs. The paper looks at what happens in Australia and our own experience when New Zealand Superannuation was means tested for a while – right up until Winston Peters and New Zealand First became part of the first MMP Parliament in 1996. One of the conditions of that coalition agreement was the abolition of the New Zealand Superannuation Surcharge.
Australia tests income and assets but it’s highly complex and achieves a fiscal objective of managing the cost. On the other hand, Australia has a much more well developed long running compulsory private saving scheme, which makes what they call the Age Pension (the equivalent of New Zealand Superannuation) more of a backstop. The paper also notes that the private pension savings in Australia are more generously state subsidised than KiwiSaver.
The Australian means testing approach is very comprehensive and frankly a nightmare. The paper notes our surcharge which operated between 1985 and 1998 was highly unpopular, but it did deliver useful savings. In short, surcharges or means testing helps mitigate superannuation costs. But they are unpopular and like the Australian approach complicated to run. Furthermore, they encourage attempts to mitigate their effect.
Making New Zealand Superannuation a universal basic income
Instead, Susan proposes turning New Zealand Superannuation into a basic income, the New Zealand Superannuation Grant (the NZSG). She also suggests equalising the current different rates which currently apply depending on whether a person is in a relationship or living together, so it becomes a universal basic income for those who’ve reached the superannuation age.
As a basic income the NZSG would no longer be taxable. Instead, when a recipient earns additional income, it’s taxed under a progressive tax regime, so the tax system does the work of providing a claw back of the universal grant for high income people. The effect would be that above a certain point a person decides it’s simply not worth their while taking the NZSG.
For example with a flat tax of 40% on all other income, above $160,150 it would not be worthwhile taking the NZSG.
Another alternative would be a two-tiered rate of 17.5% for the first $15,000 of other income, and 43% on each dollar above. In this case the breakeven point becomes $151,885. A third scenario has a two-tiered rate, 20% for the first $20,000 earned and then 45% above that level. Under this scenario, the income cut out point drops to $135,000. Treasury has helped Susan with the modelling for this paper and its methodology is explained in the appendices to the paper.
15-20% savings possible?
Under Susan’s approach up to 5% of all eligible super annuitants will not apply for the NZSG because there’s no gain in it. She estimates savings could be between $2.8 billion and $3.8 billion or between 15% and 20%.
This is an interesting proposal which seems preferable to reintroducing the New Zealand Superannuation Surcharge or adopting the Australian means testing approach. I think it’s worth considering but the key thing is, as the IMF said, this is an issue we really need to start discussing now because these costs are starting to accelerate as baby boomers age.
It also seems fairer than raising the age of eligibility, which is unfair on Māori and Pasifika. There’s already a seven-year life expectancy gap between Māori and non-Māori so raising the age of eligibility for superannuation is politically difficult particularly as the proportion of the Māori population grows because of those changing demographics.
This is a worthwhile proposal which merits serious consideration as part of the ongoing debate.
This is an edited transcript of the podcast episode recorded on 14th March – it has been edited for clarity and length.
And on that note, that’s all for this week, I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day
Inland Revenue consults on not-for-profit sector and more.
It’s been an extremely busy week in tax – just as we were planning to go to air, Parliament’s Finance and Expenditure Select Committee (“the FEC”) released its report on the Taxation, Annual Rates for 2024-25 Emergency Response and Remedial Measures Bill initially introduced last August.
We covered the bill’s main initiatives when it was initially released, and now the FEC is reporting back on submissions it received, what’s been amended and why, together with Inland Revenue’s accompanying report on submissions. There’s also a supporting report from the independent adviser to the Select Committee, John Cantin, a former guest of this podcast. Overall, there are no major real changes to the legislation. There are minor amendments resulting from issues brought to the attention of the FEC which is how the submission and Select Committee process is meant to operate.
Tax relief for future emergency events
The Officials’ Report on submissions had some interesting submissions on the issue of procedures to manage tax relief for any future emergency events.
The measure was uniformly supported but several submissions proposed making ready to go after a trigger event some of the measures that were brought in and employed relatively successfully during the initial COVID response in 2020, such as carry back of losses, accelerated depreciation, or cashing out of losses. In most cases the submissions were noted or declined.
I thought it was interesting to see that the main submitters involved the Big Four accounting firms, Chartered Accountants of Australia and New Zealand, and the Corporate Taxpayers’ Group. I think these submissions were prompted by our experience during COVID in 2020, where a lot of policy had to be devised and implemented on the hoof, with frantic consultation going on between Inland Revenue and various parties.
I was involved in some of those consultations, and I think it’s not unreasonable to have these measures ready to go if needed. On the other hand, I can see why Inland Revenue and the Government might be a little reluctant to have the ambit of the bill expanded.
Transferring UK pensions to New Zealand
Moving on, one of the measures I was interested in was the proposal for what they call a scheme pays measure in relation to Qualifying Recognised Overseas Pension Schemes or QROPS. These are schemes that are able to receive transfers of pensions from the United Kingdom.
There’s been some debate around this, as under our rules those transfers are taxable, and it has been a long-standing issue that in many cases this triggered a tax bill which taxpayers could not pay as the funds were locked up in the transferred funds.
One suggestion that had been made was this scheme pays proposal, where transfers are made into a scheme. The scheme may make a payment on behalf of the transferring taxpayer and that will be done at a flat rate of 28%, a “transfer scheme withholding tax”. There’s been a bit of tinkering with the proposal mainly about reporting requirements. Otherwise, the regime looks all set to go ahead with effect from 1st April 2026.
It’s a measure I feel ambivalent about. I was part of a group which lobbied for this change so it’s good to see it finally in place. On the other hand, as I’ve said previously, I do think that we ought to be thinking harder about why we’re taxed. (I also think taxing people years ahead of when they could access the funds is technically questionable – what if they died before reaching the required age?)
Crypto-Asset Reporting Framework
The other thing of note is that this Bill also introduced the legislation for the Crypto-Asset Reporting Framework. No amendments have been made to that regime. So that will be coming into force with effect from 1st April 2026. From that date New Zealand-based reporting crypto-asset service providers would be required to collect information on the transactions of reportable users that operate through them and report it to Inland Revenue by 30 June 2027. Inland Revenue would exchange this information with other tax authorities (to the extent it related to reportable persons resident in that other jurisdiction) by 30 September 2027.
Taxation and the not-for-profit sector
Moving on Inland Revenue has now released for consultation an Officials Issues Paper Taxation and the not-for-profit sector. This consultation is something that has been telegraphed for some time, there’s what might be termed unease around the exemption for the charitable sector and the merits of some entities apparently making use of the exemption. For example, the involvement of Destiny Church in the recent events at the Te Atatu library prompted calls for its charitable status being withdrawn.
Quite surprisingly, given the scale of the topic, the Issues Paper is a reasonably short paper running to just 24 pages in all. It covers three main topics. Firstly, a review of the issues involved in the charity business income tax exemption including the rationale for providing such an exemption, and then what potential policy design issues would need to be considered if that exemption was to be removed.
The second topic is donor-controlled charities, which is probably where the most controversy is emerging. It considers the integrity issues that arise from the absence of specific rules for donor-controlled charities in New Zealand, and again looks at possible design issues, including how other countries treat such entities.
And finally, the paper considers a number of integrity and simplification issues to protect against tax avoidance.
The charity business income tax exemption
Apparently, there are over 29,000 charities registered under the Charities Act. Many raise funds through business activities ranging from small op-shops to significant commercial enterprises. There’s been long-standing grumbling about how charities which run a business and have an exemption have an unfair advantage. So, it’s interesting to read the background behind this exemption which has been in place since 1940.
Para 2.3 of the Paper sets out the scope of the review:
“Some tax-exempt business activities directly relate to charitable purposes, such as a charity school or charity hospital. Other tax-exempt business activities are unrelated to charitable purposes, such as a dairy farm or food and beverage manufacturer. It is the unrelated business activities that are the focus of this review.”
“…an international outlier”
According to the Paper “The current tax policy settings make New Zealand an international outlier”. According to a 2020 OECD study Taxation and Philanthropy most countries have either restricted the commercial activities that charitable entity can engage in, or they tax charity business income if the business income is unrelated to charitable purpose activities. As the Paper notes
“These countries have typically been concerned with a loss of tax revenue from businesses if a broader tax exemption was applied, unfair competition claims, a desire to separate risk from a charity’s assets, and a desire to encourage charities to direct profits to their specified charitable purpose.”
New Zealand’s exemption is based on the “destination of income approach.” This means that income earned by registered charities is exempt because it would ultimately be destined for a charitable purpose. But, and this is again one of the key concerns that’s emerged over time, this approach allows income to be accumulated tax free for many years within a charity’s registered business subsidiaries before the public receives any benefit.
What competitive advantage?
Paras 2.7 to 2.14 of the paper look at the question of the exemption providing a competitive advantage because they don’t pay tax. This is an allegation I’ve seen repeatedly raised. As the Paper notes not paying tax means
“One element of a firm’s normal cost structure, income tax, is not present in the case of charity run trading operation. It is argued that this “lower” cost could be used by a large-scale entity to undercut its competitors, to improve its market share, or to deter new entrants.”
The Paper does not accept this argument stating:
“Although the exemption does provide a tax advantage, it does not provide a competitive advantage. Any one type of cost can be looked at in isolation.”
The reasoning for this conclusion is:
[2.9] “Because the tax-exempt entity can generally earn tax free returns from all forms of investment, the “after tax” return it expects from a trading activity is correspondingly higher than that of its tax competitors. Therefore, an income tax exempt entity cannot rationally afford to lower its profit margins on a trading activity because alternative forms of investments would then become relatively more attractive.
[2.10] On this basis, the tax exempt entity will charge the same price as its competitors. The tax exemption merely translates to higher profits and hence higher potential distributions to the relevant charitable purpose. Consequently, funding the charitable activity from trading activities is no more distortion than sourcing it from passive investments such as interest on bank deposits or from direct fund raising.”
What about predatory pricing?
The Paper also discusses whether a charity has a greater ability to use predatory pricing to gain an advantage. Again, that’s dismissed because “the value of tax losses for taxable businesses mitigates this advantage. Taxable businesses can carry forward losses to offset future profits.” That said, if the taxable company goes bust then it has no use for those losses so maybe that is an actual advantage.
“Second order imperfections”
On the other hand, the Paper acknowledges that there are “various ‘second order’ imperfections in the income tax system that may need to be taken into account.” One is that charitable trading entities do not face compliance costs associated with meeting their tax obligations. This lowers their relative costs of doing business.
Another is the non-refundability of losses for taxable businesses and can result in a disadvantage for such businesses relative to tax exempt business resulting in a higher relative rate of return for non-tax paying entities when there has been a loss in one year.
A third is the costs associated with raising external capital such as negotiating with investors or banks can be significant. These costs often make retained earnings the most cost effective form of financing. Because charities retained earnings are higher, this may give them lower costs for raising capital. On the other hand, charities can’t raise equity capital because private investors cannot receive a return.
How much is ‘significant’?
Interestingly, the Paper describes the fiscal cost of not taxing charity business income unrelated to charitable purposes as “significant and is likely to increase.” But no numbers are given and I’m curious to know exactly what is the cost of this particular concession?
The Paper asks submitters to consider what are the most compelling reasons to tax or not tax charity business income before it analyses the potential implications and design issues involved. A major issue will be distinguishing between related and unrelated business activities which could prove difficult in practice without clear legislation and guidance.
There’s more detail about the trading activities of charities. According to the Paper 11,700 of New Zealand’s 29,000 registered charities reported business income in their published 2024 financial accounts.
These four defined tiers follow the reporting requirements within the Charities Act.
A de minimis exemption?
Based on this initial analysis the Paper suggests a de minimis exemption for charities within Tiers 3 and 4. This would take 10,400 charities out of scope with only 1,300 subject to any policy change. Part of any policy change would involve the treatment of accumulated surpluses and whether there should be minimum distribution requirement.
According to the Paper a donor-controlled charity is any “charity registered under the Charities Act that is controlled by the donor, the donor’s family or their associates.” The current issue that there’s no distinction between donor-controlled charities and any other charitable organisations. The concern is growing that this can enable tax avoidance and raised compliance concerns “because of the control the donor or their associates can exercise over the use of charity funds.”
The Paper gives a few examples of potential abuse such as ‘circular arrangements’ when the donor gifts money to a charity they control, claim a donation tax credit or gift deduction, and the charity immediately invests the money back into the businesses controlled by the donor or their associates.
Also of concern with donor-controlled charities there can be a significant lag between the time of tax concessions for the donor and the charity, and the time of ultimate public benefit. This occurs because funds are accumulated and no or very minimal charitable distributions are made.
Another issue arises when donor-controlled charities purchase assets, or goods and services from the donor or their associates, at prices exceeding what would normally be paid by unrelated parties. These acquisitions are often made on terms that would not normally exist between unrelated parties.
Defining donor-controlled charities
This is the nub of the matter what criteria should be used to define a donor-controlled charity? The funds contributed and level of control a founder has. In Canada for example a charity is considered a private foundation if it is controlled by a majority (more than 50%) of directors, trustees, or like officials that do not deal with each other at arm’s length, or more than 50% of capital is contributed by a person, or a group of persons, not dealing with each other at arm’s length and who are involved with the private foundation.
The Paper suggests that transactions between donor-controlled charities and their associates could be required to be on arm’s length terms or prohibited outright noting in para 3.13:
“This approach was supported by the Tax Working Group in 2019, which found that the rules were private charitable foundations in New Zealand appeared to be unusually loose. The group recommended that the government considering removing tax concessions for private controlled foundations or trusts that do not have arm’s length, governance or distribution policies.”
Apart from citing the Canadian approach the Paper considers the approach to this issue in Australia, the United Kingdom and the United States. It suggests there should be a minimum distribution rule to deal with the question of the time lag between the charity and a donor claiming a benefit and the actual public benefit accruing from the distribution.
Taxing membership fees?
Chapter 4 considers integrity and simplification. This section has already attracted some media comment because it raises the possibility of taxing membership fees which could affect as many as 9,000 not-for-profit organisations.
At issue is the concept of mutuality and member transactions. Generally speaking, most not-for-profit organisations are treated as mutual associations. That includes many clubs, societies, trade associations, professional regulatory bodies.
Up until the early 2000s Inland Revenue’s guidance was that mutual associations were not liable for income tax from transactions with their members, including membership subscriptions and levies. Inland Revenue has withdrawn that advice and has drafted a replacement operational statement which will be released pending what feedback it receives on this Issues Paper.
The impact of Inland Revenue’s revised position would be that trading and other normally taxable transactions with members, including some subscriptions, would be deemed to be taxable income regardless of whether the common law principle of mutuality would apply. The Paper notes that most not-for-profits would not qualify for mutual treatment anyway, because their constitutions will prohibit distribution of surpluses to members including on winding up. This prevents the necessary degree of mutuality required.
Fringe Benefit Tax exemption under review
Finally, the paper touches on the FBT exemption for charities, which has been available since 1985. The paper notes “there are weak efficiency grounds for continuing this exemption” which “lacks coherence”. Inland Revenue is currently reviewing FBT generally and these comments suggest the FBT not-for-profits exemption is likely to go.
Submissions are open on the Issues Paper now, and close on the very unhelpful date it has to be said, of 31st March, when we’re all rather tied up with tax year-end issues. Notwithstanding that I expect there will be plenty of submissions particularly around the potential impact of taxing membership transactions.
Meanwhile in America…
Finally, a quick update on last week’s comments in relation to my concerns about potential leaks coming out of the US Internal Revenue Service (“the IRS”), following the Department of Government Efficiency (DOGE) trawling through the IRS and every other U.S. government agency.
The update I’ve had is that the DOGE people are looking more at IRS internal processes and nothing to do with any data that the IRS has received from Inland Revenue, or any other agency. There are a number of international obligations that the US has still to meet, but no doubt some concerns will have been raised.
But as I said at the time, which I believe is almost certainly the case, IRS officials will be highly professional in making sure that that information shared by other tax authorities is not leaked, accidentally or otherwise, to outside parties.
An interesting choice…
On the other hand, the IRS is getting a new Commissioner. The nominee is William Hollis Long II, or Billy Long, who is a former Republican House of Representatives member from Missouri.
He’s a controversial pick to say the least. He’s not a tax professional, and of particular note is that he was a co-sponsor of a bill in 2015 that would have abolished the IRS and introduced a national sales tax. He is also long-time supporter of a flat income tax for the US system. It’ll be interesting to see how this plays out, and as always, we will bring you developments as they emerge.
And on that note, that’s all for this week, I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day
