Tax News

Week in Tax Special on property taxation changes

Week in Tax Special on property taxation changes

24 Mar, 2021 | The Week in Tax

  • First look at extension of brightline test to 10 years and restriction of interest deductions for residential property investors

Transcript

The Government on Tuesday released details of its housing package and related tax proposals. The key changes here are that the brightline test will be extended to 10 years for properties acquired on or after this coming Saturday March 27.

The brightline test will remain at five years however for new builds. In addition, there will be changes to the main home exemption for the bright-line test and also restrictions on interest deductions for rental investment properties.

Speculation beforehand had focused on the extension of the bright-line test to 10 years. And that has been confirmed. So properties acquired on or after March 27 sold within 10 years will now be taxable.

Other tax advisors and myself were briefed beforehand by Inland Revenue and I asked a question about what additional revenue would be expected to come from the brightline test. The estimate is it will be about an extra $650 million per annum. Incidentally that’s more than the increase in the top income tax rate to 39% is expected to raise.

Separately the brightline test period will remain at five years for new builds acquired on or after 27 March. The idea here is to encourage some investment in new property.

There is another change in the brightline test rules which is potentially quite significant and that’s around the treatment of the main home exemption. Currently if 50% or more of the time a property is held, it is occupied as a main home, then it is completely exempt from taxation.  If it’s 49% tough! It’s going to be fully taxable. So, it was a little bit harsh, that arbitrary treatment.

The proposal is to change that for property acquired on or after 27 March – you’ll be taxed on the period it was not occupied as your main residence. So, for example, if it was your main home for 80% of the time then only 20% of the gain will be taxed, whereas currently for properties acquired prior to 27 March the rule will be that in that case it will be fully exempt.

So on one hand it means that some gains which would have been exempt would now become taxable, on the other hand some gains, say that 49% example, which were fully taxable, now become partly taxable. So, the Lord giveth and the Lord taketh on that one.

However, the big change which has been announced that’s generating quite a bit of commentary on social media is the proposal to restrict, in fact remove entirely over time, interest deductions on residential property income. And this kicks in from October 1.

For residential investment property acquired on or after 27 March no exemption will be allowed from 1 October. However, for properties acquired before 27 March interest deductions are still claimable but will be reduced over the next four income years until it’s completely phased out by 1 April.

Inland Revenue will be consulting on what happens to interest deductions in the event that the brightline test applies. In other words, if a property is sold during a period and the brightline test applies then some interest deduction could be allowed. We’ll wait to see what the proposals are around that.

Now this is obviously a significant change. I made a suggestion last year that maybe it was time to apply the thin capitalisation rules, but this has gone further than I expected. But it also reflects a measure that happens in the UK.

It will be interesting to see how this plays out. The obvious concern would be that landlords will increase rents. But on the other hand, if you are going to do a measure like this although there is never a perfect time for investors, interest rates having fallen so much means that the impact this time is probably significantly less for investors than it would have been say two/three years ago when interest rates were not 3% but 6% or even higher.

So there’s swings and roundabouts there, no doubt though the Government will be watching with some concern to see what happens about residential rental increases. And there is a measure, actually separate, which proposes to limit the number of increases in rent and it now does it per property rather than per tenant. The proposal is a landlord can only increase the rent once every 12 months per property rather than the current once per 12-month tenancy.

So, there’s a fair bit of detail and commentary going to happen around these proposals. The extension of the brightline test to 10 years was expected. It’s now getting to the point that because our land rules, as I’ve said, beforehand are very complicated, maybe it’s time for a comprehensive review.  Maybe even saying that all land sales within 10 years are taxable apart from main homes, and also farms and businesses.

Possibly also in that time it might be worth thinking about whether it is appropriate that the gain gets fully taxed. But for now, those are the rules in place.

The fiscal impact of the interest rate deductions will be quite interesting because that may mean the Government has a little bit of a tax windfall, obviously because it’s now getting more income tax because there’s fewer deductions. We’ll have to wait and see.

Anyway, that’s it for now, I’ll probably have more commentary on the fallout from these proposals in our next podcast.  Until then, 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 Friday Ka kite ano!

Inland Revenue fires a warning shot at real estate agents over claiming excessive deductions

22 Mar, 2021 | The Week in Tax

  • Inland Revenue fires a warning shot at real estate agents over claiming excessive deductions
  • The International Monetary Fund wades into the housing debate
  • Year end issues around overdrawn shareholder current accounts

Transcript

Last week Inland Revenue issued a press release warning real estate agents that this was an area that its analysis “suggests real estate salespeople/agents commonly claim a high level of expenses relative to their income. Inland Revenue believes the issue is widespread and we must act. People are claiming private expenditure, but not keeping logbooks or other business records to support the claim.”

The release goes on to warn that if someone has over-claimed expenses in Inland Revenue’s view, “they will receive a letter from us requesting they prove the expenses claimed.”

Now, this is a little bit unusual from Inland Revenue because we haven’t heard anything in the grapevine that this was something they were looking at. But it is not entirely surprising because one thing that emerged from hearing the Commissioner of Inland Revenue speak at the excellent Accountants and Tax Agents Institute of New Zealand conference is that Inland Revenue has great faith in its Business Transformation systems. These give it the ability to analyse data and identify areas where it believes income is either being under declared or in this case, taxpayers are, shall we say, being overly generous in their calculation of the deduction available.

Although, as I mentioned, we haven’t previously had an indication Inland Revenue viewed this as an issue, it’s apparent from what they’ve said here, that they’ve done enough preliminary work to identify that expenses being claimed by real estate agents seem high relative to income.

In one way I think this is a positive development in that Inland Revenue by warning people what it can do, can clear out some of the chaff.

On the other hand, there’s a lack of specific detail in this press release which concerns me. It’s “We think there’s an issue, but we haven’t actually specified what particularly is concerning us”. And simply to say that people claim a high level of expenses relative to their income is to assume that that expenses automatically should follow income. It could well be that there is a fair amount of baseline expenditure that people would incur in this business, running around making phone calls, driving to see clients and the like sometimes without actually a great deal of success, as the real estate sector is largely commission only based.

And so one of the things that taxpayers perhaps should consider is the implications of Inland Revenue’s capability to do a great deal of analysis. One thing Inland Revenue could do is to start saying, “Well, here is a standard deduction. You can claim X amount which to we’re going to accept as deductible without the need to keep very detailed records because our indication is that is likely to be the level of expenditure you would incur in your business.”

Now, Inland Revenue will come straight back and say they don’t want to do that because people will abuse that. But on the other hand, you’ve got to wonder the benefit of the current approach when you consider the time and energy put in by people preparing their tax returns and also the effort Inland Revenue then spends investigating what may well turn out to be an entirely legitimate expenditure. Maybe just simplifying matters all around would be more efficient.

It could be yes, there could be some seepage around the edges under a different approach and Inland Revenue doesn’t get as much as it could do if the rules were applied correctly. But applying a so-called standard deductions approach deals with an issue in the tax system, in that compliance is particularly onerous for smaller businesses. The rules are written around the expectation that people have a good understanding of the law and have the systems to manage their accounting and recording income and expenditure. And with the advent of online accounting systems such as Xero and MYOB that’s largely true.

But not everyone wants or needs to spend money on accountants. And I have felt for some time that adopting a different approach to what we call micro businesses, that are businesses with a turnover of say, less than $100,000, dollars would actually benefit everyone. Make it easier to comply and encourage more people to comply.

Anyway, we’ll watch with interest to see how this plays out with Inland Revenue. As I said, I’d like to see some more specific examples of the abuse that they are clearly warning against. But until some cases hit the courts or Inland Revenue releases some more information on the matter, we’ll just have to wait and see. In the meantime, it’s a good warning for anyone involved in business that you have to keep accurate records of your business expenditure.

The IMF wants tax action on overheated housing market

Moving on, the IMF, the International Monetary Fund, has waded into the debate over housing by recommending the Government should introduce a stamp duty or a more comprehensive capital gains tax to help deal with the overheated property market.

This is part of a routine check on the New Zealand economy, what’s called the Article IV discussions. These happen periodically when IMF staff come down here, talk to Treasury and other officials and draw their own conclusions on the state of the New Zealand economy and areas for improvement.

But for those who’ve read Tax and Fairness, the book I co-wrote with Deborah Russell MP, you’ll know that in chapter four, we talked extensively about how the IMF is not the first organisation to have raised the need for a capital gains tax to deal with housing inflation. The OECD raised the idea way, way back at the start of the century in November 2000 and then again in 2011, and the IMF also made similar suggestions back in February 2016.

I was going to say it’s really quite remarkable how this issue keeps popping up, but actually it’s not because the issues around tax were identified decades ago but have not been addressed. And meantime, the pressure on the Government builds now that the housing market has accelerated again. And this week (Tuesday) the Government will announce some proposed disincentives for property investors to try and reduce demand in the sector together with some form of targeted incentives to encourage savings in other sectors.

Just a little note on this, way back in 2000 the OECD concluded there was substantial overinvesting in housing, maybe one and a half times greater than that of major OECD countries. Now, I imagine that number has actually become considerably worse. So, as I’ve said before, the capital gains tax debate is not going to go away.

And on that debate, this coming Thursday, March 25th, I’ll be on a panel alongside Geof Nightingale of PWC and the Tax Working Group and Paul Dunn of EY together with Craig Elliffe and Julie Cassidy from Auckland University. Our topic is “Taxation: the ticking time bomb of our generation. Four tax questions for 2021”. This is an event run by the New Zealand Centre for Law Business I have no doubt whatsoever we will be talking about the issue of capital taxation.

End of year prep

And finally, more on one specific issue which will require action before 31st of March, and that is the question of overdrawn shareholder current accounts.

Now, this happens when a director or a shareholder of a company takes out more in cash from the company during the year. This is traditionally treated as drawings. So, prior to year-end, we take a look to see what we can do. And most times we deal with this issue by either paying a dividend before year-end (a particularly important thing to do this year before tax rates increase on 1st April) or voting a shareholder employee’s salary.

But in some cases, that is not enough. And in those situations, a company is required to charge interest using the FBT prescribed rate of interest. Now this rate is regularly adjusted and generally reflects what’s going on elsewhere in the market. Until 30th June 2020, the rate was 5.26%. It was then reduced to 4.5%, the lowest rate I can recall. This is the rate that should apply from 1st July 2020 right through until 31st March 2021.

But from 1st April the rate increases to 5.77%, something that has slipped under the radar and possibly reflects Inland Revenue unease about the use of current accounts to get around higher tax rates. On the face of it a rate increase in this low interest economy seems anomalous.

But as I said, I think it reflects Inland Revenue concern about the use of an overdrawn current account to get around income being taxed at either 33%, or from 1st of April, 39%. In some other jurisdictions the amount of an overdrawn current account is treated as a dividend. Our rules treat only require charging of interest. So if you’ve got an overdrawn current account of $100,000 in Australia, that’s going to be taxed as income of $100,000. Here we apply the FBT prescribed rate of interest of 4.5% so the taxable income is just $4,500.

So you can see there is some form of incentive to make use of overdrawn current accounts. In fact Inland Revenue has started paying a lot more attention to this issue and this small but quite subtle and unnoticed rate increase in the prescribed rate of interest is probably a clue it is planning to take greater action on the matter.

Well, that’s it for today, 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 week Ka kite ano!

Business loss continuity test and tax loss carry back

15 Mar, 2021 | The Week in Tax

  • Business loss continuity test and tax loss carry back
  • A review of working for families is underway and how abatement levels impact beneficiaries
  • Pre 31st March tax planning tips

Transcript

Last week, I discussed the Government’s new proposed business continuity test for losses. Subsequently, a reader from Inland Revenue kindly got in touch to confirm that the new test would indeed be retrospectively applicable from the start of the current tax year, 1st April for most taxpayers.

He also pointed out that the new regime will allow losses from the 2013-2014 year to be carried forward. So that means the losses that were occurred in those years, they can continued to be used if there’s a change of shareholding, resulting in a breach of continuity and you wish to use the business continuity test to preserve those losses. So, thank you very much for that, Barry.

But in the spirit of the Lord giveth and the Lord taketh, we’ve also heard that the Government has decided not to proceed with a permanent iteration of the temporary loss carry back scheme introduced last year as part of its initial response to Covid-19. That’s disappointing news as it would have been a useful addition to the loss regime.

These regimes exist in other jurisdictions. And ironically, the British Budget, which I also discussed last week, included a measure relating to its carryback regime, temporarily extending the loss carryback period from one to three years.

Now, the official reason for the decision to not proceed with the permanent iteration of the scheme is the potential fiscal cost. That’s perhaps understandable, but it would be good to see the decision revisited sometime in the future, because I think this is an important measure to have as part of the loss regime.

A poverty benefit trap

Moving on, it emerged this week that the Government is undertaking a review of the Working for Families regime. This is a quite significant undertaking because Working for Families pays out approximately $3 billion a year. And this came out as part of a decision to increase main benefit abatement thresholds from 1st April.

Now, something which is not generally well known and appreciated is the real problem with the interaction between tax and the social welfare system and the impact of abatement thresholds. Basically, and understandably, as a person’s income increases, then the need for social assistance is reduced. And what we have is an abatement threshold above which benefits are abated.

These formulas vary quite significantly and can be actually quite savage. The decision that the Cabinet made related to the Minimum Family Tax Credit. Now, the abatement here is once you cross the threshold, you lose a dollar of credit for every dollar above the threshold. This means that the effective marginal tax rate for people who cross the threshold is effectively greater than 100%. (The dollar of income is taxed AND a dollar of benefit is lost).

And this is an area that’s always problematic because Governments must choose the threshold at which it kicks in and what abatement rate applies.  The Working for Families abatement rate is currently 25% for family income above $42,700.  And one of the other problems that this paper indicated is that the amount beneficiaries can earn before their benefit reduces has declined substantially over time because benefit abatement thresholds have not been increased in line with wage growth.

And so a poverty benefit trap has emerged because the financial incentives to enter the labour market and work part time are substantially reduced. To give you an idea how bad that has become, a person currently receiving the Jobseeker Support for being unemployed could work about 11.8 hours on minimum wage in 1997 before their benefit was abated. By 2019, that had reduced to around 4.5 hours on the minimum wage.

These problems exist across all of the social welfare network and one of the Welfare Expert Advisory Group’s recommendations was it needed serious overhaul.  There’s always been talk about perhaps integrating a tax and welfare systems with a universal basic income seen as a solution to this particular issue. So anyway, there’s going to be a lot of work going on in that space and it will be very interesting to see what comes out of it.

And finally, this week, the tax year end is fast approaching. So here’s a few ideas which may require action before 31st of March.

A big one, obviously, for businesses is to write off any bad debts before 31st of March. Take a good look at your debtor ledger and be realistic. And if those debts are written off before the 31st of March, you can claim a deduction for those bad debts.

Similarly, look to see what stock is obsolete, write it down to market value. Fixed assets which are no longer in use should be scrapped or otherwise disposed of to ensure you can have any available deductions. At the same time, you might want to accelerate certain types of expenditure, such as repairs and maintenance.

And one thing important to take note of is that the temporary increase in the low value assets to $5,000 ends tomorrow (Tuesday, 16th March). From Wednesday, 17th March, it will be $1,000. So now is the time to take a quick look at your fixed assets and think, do I need a new laptop, new computers, any any matters like that? And if so, try and take advantage of this $5,000 concession now.

There’s a lot of matters to think through at year-end, and I’ll come back to a few of these next week as well. One important one, which is tied into the increase to the 39% tax rate, which will take effect from 1st of April, is to look at imputation credit account balances. Make sure that all imputation credits are correctly recorded and perhaps consider paying a year-end dividend before March 31st particularly if you are likely to be affected by that 39% threshold change.

If you’re considering entering or leaving the look-through company regime, you need to have made the election before the start of the new tax year. So again, review your position there and make sure the relevant election is filed by March 31st.

By the way, I wouldn’t say Inland Revenue is a huge fan of the look through company regime, but it seems to want to direct individuals into that regime. There’s been one or two things I’ve seen going on, which has made me wonder that there may be a change of policy towards the use of look-through companies coming.

A very important thing to consider is to review whether the shareholders in a company have overdrawn current accounts. If so, look to take steps to either bring the current accounts into credit or charge interest on those overdrawn current accounts. And similarly, if companies have made loan advances to other related companies, then consider charging interest on those loans.

And finally, the last GST return for the tax year is also called the adjustment period for GST, such as change of use adjustments. And that’s when you need to calculate the impact of the change of use for GST purposes and account for this to Inland Revenue. So, for example, this would affect people that may have changed their Airbnb properties, to long term residential accommodation because there’s no tourists now.

They may have claimed an input tax credit and now they have to do a change of use adjustment and that obviously can cause some cashflow issues. So this is the period you need to think carefully about whether you want to do that and then look to make sure the calculation is filed in time. This is an area where I’m seeing quite a bit more work coming through as it is not well known and trips up a lot of people.

Well that’s it for today, 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 week Ka kite āno and go Team New Zealand!

Government announces a new business loss continuity rule

8 Mar, 2021 | The Week in Tax

  • Government announces a new business loss continuity rule
  • US drops ‘safe harbour’ demand as progress made on new international tax framework
  • UK Budget has inheritance tax and capital gains tax implications for Kiwis and includes surprise Corporation Tax increase

Transcript

At last week’s International Fiscal Association conference, Revenue Minister David Parker announced that the Government would be proceeding with a new business continuity test to enable tax losses to be carried forward. The general rule is that for tax losses to be carried forward, at least 49% of the shareholding in the company must remain the same between the date the losses arise and when the losses are to be used.

Now, this is regarded as one of the most stringent loss continuity tests in the world, and it has been seen as an impediment for businesses trying to obtain capital in order to innovate and grow their growth.

Companies in their early stages may rack up a lot of losses, but if they want to attract capital and investors shareholding changes may mean a loss of accumulated tax losses. So there’s been pressure for some time to think about easing these restrictions and adding a what we call business continuity test.

The Government announced as part of its initial Covid-19 response last year that they wanted to have a new regime in place. And work has been going on in the background since April last year. They’re now saying that the legislation will be introduced later this month in a supplementary order paper for the tax bill currently going before Parliament, the Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill.

The idea is a similar business test will now be able to apply, and even if the 49% threshold might have been breached, the company may continue to carry its losses forward after a change in ownership as long as the underlying business continues. Now, similar tests apply in Britain and in Australia, and the Australian test has been used for the purposes of designing our legislation.

The principle is that losses will be carried forward unless there’s a major change in the nature of the company’s business activities.

In determining this, you’d look at the assets used and other relevant factors, such as business processes, users, suppliers, market supply to and the type of product or services supplied.

There is an expectation that the test will run for the time from the ownership change, which brought about a 49% breach of shareholding continuity, as we call it, until the earliest of the end of the income year in which tax losses are utilised or at the end of the income year, five years after the ownership change. This is subject to one or two exceptions as well as a specific anti avoidance measure to prevent possible manipulation of the rule.

The rule would appear to be retrospectively applicable from the start of the current tax year or 1st April, 2020 for most businesses. But that’s not absolutely specifically spelt out, but is implied by the commentary we’ve received. We’ll know for sure when we see the final legislation in the next week or so.

This is a very positive measure. It’s been one that businesses have been asking for for some time, particularly those in their high growth tech sector, where they rack up a lot of losses during  development before switching to substantial profitability. But they’ve been unable to attract or had difficulty attracting investors because of the existing loss continuity rules.

The fiscal cost is actually quite modest. It’s estimated to be about $60 million per annum, which still does beg the question that perhaps this could have been addressed much sooner. It’s certainly been on the wish list for a lot of investors for some time and was a matter we raised on the Small Business Council.  It’s a good development and I imagine that it will be taken up with some enthusiasm.

The US changes its tune

Moving on, I’ve recently discussed the issues around the taxation of digital companies, particularly in relation to Facebook’s stoush with the Australian government. The OECD, as I mentioned in previous podcasts, has been working through what it called a new global framework and two options to this Pillar One and Pillar Two.

This week, there was a major development with the US Treasury Secretary, Janet Yellen, (the equivalent of the finance minister), telling G20 officials that Washington was going to drop the Trump administration’s proposal to allow some companies to opt out of the new global digital tax rules. And this was clearly seen as an impediment to getting these rules through. But the fact that these have now been dropped and that the US is no longer advocating for a safe harbour in relation to Pillar One is very important.

So that’s a very positive development. As I said, in relation to the Facebook and Australia stoush, some form of taxation probably would have been a better approach to the matter than what has been proposed by the Australian government.

UK Budget implications

And finally, on Wednesday night, our time, the UK Budget for 2021 was released. Now, this is of more importance to Kiwis than people might realise because of the global reach of UK capital gains tax and inheritance tax in particular.

To recap, anyone who owns property, commercial or residential in the UK is subject to capital gains tax on a disposal of that property.  So this would affect the some 300,000 Britons or people of British descent like myself who live here in New Zealand. But it also affects Kiwis who come back from their OE but have retained a property for whatever reason in the UK.

The other significant UK tax issue, which I’m seeing a lot more of, is Inheritance Tax. And this applies globally to anyone who has a UK domicile (which is a different concept from tax residency) or assets situated in the UK. Inheritance Tax applies at a rate of 40% on the value of an estate greater than £325,000 (what we call the Nil Rate Band).

But the UK budget has frozen the Inheritance Tax nil rate band at £325,000 right through until 2026. The annual capital gains allowance is also going to be frozen for a further five year period.

One of the things that is perhaps not really appreciated is anyone who is deemed to have a UK domicile are taxed for Inheritance Tax purposes on their global assets. And with the fall in the value of sterling to below two dollars to the pound, combined with the incredible rise in the value of New Zealand property, what I’m seeing is that people now have potentially significant Inheritance Tax issues. Property prices in the UK have not accelerated anywhere near to the fashion that has happened here. To give you an example, I came across this week a client with a London property valued in April 2015 at £775 ,000. Its current value is just £765,000 pounds. In other words, over six years it’s gone backwards. Compare that with what’s going on in the New Zealand market.

So there’s an increasing number of New Zealanders and Britons who have potentially Inheritance Tax liabilities. And they also will face capital gains tax if they decide to dispose of those properties.  One of the things that’s also increasingly coming into play will be the information sharing under the Common Reporting Standards and The Automatic Exchange of Information. This means the UK HM Revenue & Customs and Inland Revenue here will have a greater understanding of who owns property in which jurisdiction.

So, as I said, this British budget may seem far away, but it’s actually incredibly important to a significantly greater number of people than you might imagine.

There’s also one other thing that’s come into play, which has been a surprise to the tax community and that is the British Government have signalled an increase in the corporation tax rate from its current rate of 19% to 25% for businesses with net profit in excess of £250,000 from 1st of April 2023. That’s a very significant increase. The other thing that the British have also kept in place is what they call a diverted profits tax, of which remains at 6%. This is an anti-avoidance measure aimed at multinationals.

Incidentally if Grant Robertson and Treasury are looking for ideas the UK also has a bank corporation tax surcharge of 8%. This is something which if introduced here would probably be quite popular.

The proposed increase in corporation tax rates is a surprise. But I think this is something that’s gradually become inevitable.  In the wake of both the GFC and Covid-19, government budgets are so badly shot that they need to restore them with significant tax increases at some point. Whether any such increases flow through here to the extent of what’s just happened in the UK remains to be seen. But as always, we’ll keep you abreast of developments.

That’s it for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts.  Thank you for listening and please send me your feedback and tell your friends and clients. Until next week Ka kite ano!

Observations on the International Fiscal Association conference

2 Mar, 2021 | The Week in Tax

  • Observations on the International Fiscal Association conference
  • Covid Resurgence Support Payments applications go live
  • Inland Revenue/Treasury analysis of wealth in New Zealand causes a stir

Transcript

Last week I was in Queenstown at the International Fiscal Association’s annual conference. This is probably the most attended tax conference in New Zealand for anyone interested in tax policy.

Traditionally, the conference is opened by the Minister of Revenue, and the Commissioner of Inland Revenue Naomi Ferguson attends together with many of the most senior Inland Revenue policy officials, many of whom make presentations on matters of tax policy.

The conference is held under Chatham House rules, which means I can’t actually say too much about what was said in some presentations, but that does mean there’s a fairly open and robust debate about tax policy, and that is helpful.

Topics on the first day included the implications of the new 39% tax rate, Inland Revenue’s compliance programme (which actually referenced last year’s podcast episode with Andrea Black on the topic), the Taxation of Property, Digital Services Tax, and Anti Avoidance.

Now, last week I said I foresaw issues around actions being taken ahead of the increase in the 39% tax rate. And what was said at the conference has reinforced my concerns.

For example, people will need to look ahead and consider carefully how a change in a shareholder employee’s salary will look to Inland Revenue.

The general consensus, by the way, was that paying dividends before the 31st March year-end should be OK. But I was one of the sceptics because my view is Inland Revenue might ask “You paid a very large dividend last year. Why didn’t you pay a very big dividend this year when you could.”  So all that remains to be seen.

But there’s also a point I hadn’t previously considered. There’s also potentially going to be some very adverse FBT implications if employers are not careful.

This is because the FBT rate will also increase from 49.25% to 63.93% for those receiving benefits who are earning more than $100,000, actually some $132,000.

There’s a risk, therefore, that an employer may apply the new rate to all employees with vehicles rather than just those earning above the threshold. What that means is, there could potentially be some quite significant overpayments of FBT. The problem is managing FBT is very complicated. There’s the matter we’ve talked about previously about what is a work-related vehicle, for example.

But leaving that aside, how you actually go about applying the relevant rates of FBT is complicated. The FBT rules have been around relatively unchanged now for 30 odd years, so as one presenter said it’s probably time to have a closer look at these rules apply and operate.

Inland Revenue intervenes earlier

Moving on, applications for the COVID-19 resurgence payment went live on February 23rd. Now as of 7.30 Thursday morning, 9,500 applications for a total of $28 million had already been received and Inland Revenue had disbursed $6 million. The Commissioner of Inland Revenue and the Minister of Revenue in his opening remarks, both praised the efficiency of the new Business Transformation programme, which has enabled them to deliver very quickly things like the COVID-19 Resurgence Support Payment.

Now, I don’t think the Commissioner will mind me revealing that Inland Revenue had also already picked up what they considered a number of clearly fraudulent applications for the COVID-19 resurgence payment. So clearly the real time data enables them to deal with these applications very quickly, but also identify much more quickly where there’s something wrong.

Inland Revenue looks at ‘wealth’

The new Minister of Revenue, David Parker is also the Associate Minister of Finance, a continuing role from the last Government. Last year in his role as Associate Minister of Finance, he asked Inland Revenue and Treasury to undertake an analysis of wealth in New Zealand. And the report that was prepared for him in August 2020 was released as part of a story on Thursday.

The headline in the paper was that the wealthiest New Zealanders’ average tax rate was 12% on their total income. For this purpose income means all economic gains, including for example untaxed capital gains.  Inland Revenue and Treasury’s definition of the wealthiest New Zealanders means anyone with net wealth exceeding $50 million dollars or more. The report noted that once you included all economic gains then 42% of this group were paying a lower tax rate than the 10.5% starting income tax rate on the first $14,000 of income.

Now, there’s quite a lot to digest in this report and the related fallout is already quite widespread. On Thursday I finished up speaking to Radio New Zealand’s The Panel on that matter and also to Stuff about it. This is just another instance of the ongoing debate around the taxation of capital. Now, the taxation of capital wasn’t a topic that appeared on the International Fiscal Association’s conference this year, but I imagine it will be at some point.

There was a paper on property taxation presented by Young IFA (one of the presenters of which included another previous guest of this podcast, Nigel Jemson.)The presenters were basically saying the taxation of property is an issue we’re going to need to think about changing, and offering up some options.

But one of the things that this survey highlighted is something that I’ve mentioned previously, and that’s we don’t actually have a lot of very good data in this area. The work that was done did included extrapolating data from the NBR’s Rich List along with data from held by the Reserve Bank of New Zealand and income included in tax returns.

There’s an ongoing controversy about the level of taxation paid by the wealthy.  This is slightly distorted by the fact that the wealthy have investments in companies both listed and in their own trading companies. Now, those companies have paid tax imputation credits, but they haven’t distributed them. So there’s a latent amount of taxes which has already been paid and a second layer of tax representing the difference between the company tax rate of 28% and the personal rate will then kick in when the dividends are paid out. An interesting point of note is the top one percent in New Zealand apparently owns close to 70% of all listed companies on the stock market. Their portfolios are obviously much more diverse.

A distorting differential

And this differential emerging between the company income tax rate of 28% and the top individual tax rate of 39% was something that was discussed at the IFA conference. But another presenter pointed out something that has been going on for a long time, and that is if you look at the distribution of taxable income and what you do see is a bell curve with two big spikes and those spikes are around $48,000 of income, which is when the tax rate goes from 17.5% to 30% and around $70,000 when it goes from 30% to 33%.  What’s more these have been in the system for some time.

And it was this which prompted me to say that there does appear to be some income manipulation going on in the self-employed sector. There’s one estimate provided recently to the Tax Working Group which said that the self-employed may be paying 20% less on average relative to someone earning income subject to PAYE.

So there’s going to be an ongoing debate around the taxation of wealth. There’ll be focus, obviously, on the extremely wealthy and we need to know more about what wealth they hold and how it is held.

But we might also see Inland Revenue start to look at this issue of who is reporting income around the $70,000 threshold. It’s quite conceivable, in fact, that people will not do too much around the increase to 39% for income above the $180,000 threshold because it’s obviously going to draw attention.  However, the evidence seems to be that some manipulation has been going on at lower levels of income without attracting too much attention from Inland Revenue and that may change.

And on that note, that’s it for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts.  Thank you for listening and please send me your feedback and tell your friends and clients. Until next week Ka kite ano!

An overview of the new Covid Resurgence Support Payment

23 Feb, 2021 | The Week in Tax

  • An overview of the new Covid Resurgence Support Payment
  • What could be the implications of Facebook’s actions in Australia
  • Pre-31st March year end tax planning

Transcript

On Wednesday, the Government passed under urgency, the Resurgence Support Payments bill.

This was introduced in the wake of the move to level three and then level two lockdowns in the Auckland region. This had been in the works for some time, but then just got pushed through under urgency following what we might call the Valentine’s Day mini outbreak.

Resurgence supports payments may be applied for if there is an increase in the alert levels from Level 1 to Level 2 or higher and the alert level remains higher than Level 1 for seven days or more.

It’s going to be available to all businesses in New Zealand each time it activates. So even though Auckland went into a Level 3 Lockdown and then back down to Level 2, because a lot of tourism is currently dependent on tourists from Auckland, the resurgent supports payments will apply nationally.  This is a wise move, which cuts down a lot of administration, but also reflects the fact that Auckland is a prime source of tourism for the very weakened tourist industry.

Businesses are able to apply if they’ve experienced a revenue decrease or a decrease in capital raising ability of at least 30% due to the increase in the alert level. And they need to measure their revenue for that 30% fall over a continuous seven-day period where the first day is on or after the first day of the increased alert level. All seven days must be within the period of the increased alert level. The affected revenue period then needs to be compared against a regular seven-day revenue period that starts and ends in the six weeks prior to the increased alert level.

This scheme is going to be administered by Inland Revenue rather than the Ministry of Social Development as happened with the wage subsidies. Applications should be made through myIR and Inland Revenue is expecting that people receive the resurgence support payment within five working days of their application.

The payment must be used to cover business expenses such as wages and fixed costs. Note that this isn’t a wage subsidy per se, it’s a support payment. And that possibly explains the slightly unusual change from the previous wage subsidy in that this payment is subject to GST now.

Although no income tax deduction will be available for expenditure relating to use of the resurgence support payment, GST registered businesses will be able to claim input tax deductions for any expenditure funded by the resurgence support payment. In other words, if you pay the rent using the resurgence support payment, you won’t get an income tax deduction for it, but you will still be able to claim a GST input tax credit.

The payment consists of a base amount of $1,500 dollars per applicant, plus $400 per full time equivalent employee, up to a cap of 50 full time employees. Although payments are capped at 50 full time employees, businesses with more than 50 full time employees may still apply.

There is a further cap in that the amount an applicant may receive will be the lower of the base amount and four times the amount their revenue has declined, as declared by the applicant as part of the application. And I can see Inland Revenue having a bit of work going on in years for larger scale applications here.

Anyway, the measure is now in place and fortunately everyone within the Auckland region, because they are still in level two, will be able to apply for this because they have been at an Alert Level higher than Level 1 for the required seven-day period. I imagine there will be further tweaks to the scheme as we go forward in the event of further outbreaks.

Facebook gives Australia the fingers

Moving on, yesterday across the Ditch, Facebook announced that …

“due to new laws in Australia from today, we will reluctantly restrict publishers and people in Australia from sharing or viewing Australian and international news content on Facebook.”

And with that, it stopped any sharing of Australian news media sites and indirectly, some New Zealand sites could be affected as well.

Now, this stoush has been brewing for some time. The Australian Government is trying to force Google, Facebook and other tech giants to pay more for the media content. Google has played along with this proposal. Microsoft, which runs the Bing search software, is also playing along. But Facebook has pushed back very hard and decided to go very hardball with this move.

Now, barely two years ago, Facebook literally made blood money about live streaming the Christchurch massacre and then wrung its hand about the difficulties of taking down such abominations. But yesterday it basically was able to switch off all of Australia’s major media sites on Facebook just like that. And I’m sure there will be a few pointed comments made about that.

I can’t see how such outrageous behaviour will not draw a strong response. And this is where I think from a tax perspective, things may go. The Australian government has previously been lukewarm about a Digital Services Tax, but Facebook’s actions might prompt a rethink. The Australian Tax Office has done some work on this, and there might be a bill lying around which could be introduced at the drop of a hat in effect saying, “Here, stick this up you”.

Incidentally, during this whole run up to this stoush erupting, at least one tech commentator suggested that a DST would be a better approach instead of what the Australian government was trying to do. We’ll see how this all plays out and it’s going to be very interesting to watch. Facebook just lifted the stakes considerably.

There are, according to the OECD, about 40 countries either with an active DST or considering introducing one. Maybe Australia is about to become number 41.

KiwiSaver makeup

Now, briefly following up from last week’s podcast, Inland Revenue is to pay approximately $6.6 million to compensate over 640,000 KiwiSaver members whose employer contributions were delayed in getting to the providers. Now, this happened last April, when Inland Revenue moved KiwiSaver to its new Business Transformation START platform. And for some reason there was a delay in passing on employer contributions to people’s KiwiSaver accounts.

This story reports delays of as much as six months or more. So people lost out on investment performance over that time. And during that time, the use of money interest rate paid by Inland Revenue dropped to zero which would have been the usual way of compensating for the delay.

Instead, what’s going to happen is Inland Revenue has been given approval to make ex gratia payments of about $6.6 million in total. This is a slight bit of a disappointment for Inland Revenue because as I said, by and large, the Business Transformation programme, controversial as it is, has worked relatively smoothly and improved processes. It’s certainly not a Novopay scale disaster, but it’s just another sign that sometimes with IT projects things go wrong.

End of year planning

And finally, the 31st March tax year end is fast approaching. So it’s time to start thinking about what steps could be done in advance of that. Now, there’s a couple of things in particular people might pay attention to.

Firstly, you have until 16th March to make use of the $5,000 threshold for “low value assets”. Under this you get a full write off for assets up to the value of $5,000 acquired on or before 16th March.

This is an emergency measure introduced a year ago as part of the Government’s initial response to Covid-19. So now’s a good time to see if there’s equipment you want to replace or upgrade and take a full write off.

For assets purchased on or after 17th March, that threshold of $5,000 will be reduced to $1,000 going forward.

Now, the other thing to think about is tied in with the forthcoming increase in the personal tax rate to 39%. And the suggestion would be that companies might want to think about paying dividends out to use imputation credits prior to that date so that the shareholders are taxed at 33% rather than 39%.

Sometimes you might pay a year-end dividend anyway because that’s just part of the regular distribution pattern. But you might also do so because the shareholders might have an overdrawn current account which you want to get into credit.

The thing that complicates matters this year is whether such a move might represent tax avoidance. I don’t believe so. But one thing people must keep in mind is that as part of the increase in the tax rate to 39%, trusts have to provide more information about distributions they’ve made in prior years. So as the commentary on the tax bill said, “this is expected to assist in understanding and monitoring the changes in the use of structures and entities by trustees in response to new 39% rate.”

And that’s what gives me pause for concern about paying large dividends before 31st of March. If there isn’t a regular pattern of large dividends before the increase and then a large dividend isn’t repeated after the rate increase, Inland Revenue may look to argue tax avoidance and effectively tax retained earnings. So approach that one with caution.

I think this is a point where Inland Revenue really needs to come out and be very clear about what is going to happen with dividends paid by companies to trust shareholders, which aren’t then distributed.  I think you’ll have a problem if the pattern was previously such dividends were distributed by the trust, maybe less so if that wasn’t the case. Again it’s a question of watching this space. And we’ll bring you developments as and when they happen.

Well that’s it for today, 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 week Ka kite ano!