Tax News

Latest guidance from Inland Revenue on Covid-19 tax measures

29 Apr, 2020 | The Week in Tax

  • Latest guidance from Inland Revenue on Covid-19 tax measures
  • Draft guidance from Inland Revenue on tax implications of owning overseas rental property and application of financial arrangements rules
  • DIA ruling on AML-CFT

Transcript.

This week, the latest from Inland Revenue on its response to the Covid-19 pandemic. Inland Revenue releases draft guidance for consultation on the tax implications of owning overseas rental property, and the Department of Internal Affairs isn’t really helping.

Inland Revenue has been releasing updates on its interpretation of various tax issues arising out of the Covid-19 pandemic. The latest release on Wednesday was a public statement regarding residency issues.

In a previous podcast I raised the question of what is going to happen to people who may inadvertently become tax resident of New Zealand either because they fell sick or were unable to leave when they intended to because of border closures. Subsequently, they then become tax resident under the days present test, that is they’ve been present in New Zealand for more than 183 days in any twelve-month period.

In this instance what the Inland Revenue guidance says is that an individual will not become tax resident in New Zealand under the days present test just because they become stranded here. They will be treated as non-resident if they leave New Zealand within a “reasonable time after they are no longer practically restricted in travelling.  Then extra days when that person was unable to leave will be disregarded. The day tests are based on normal circumstances when people are free to move.”

Now this is good to hear. But I’d feel more comfortable advising clients on this if we had some form of statutory basis to this interpretation. As it stands this is at Inland Revenue’s discretion. And I do know of pre-Covid-19 instances where a person has been deemed to be tax resident even though they fell sick and were unable to travel. In my view there’s no difference between not being able to travel because of the Covid-19 pandemic and the resulting travel restrictions around that, and not being able to travel because you’re physically sick.

The United Kingdom has a specific clause in its legislation excluding days where someone is not able to travel because of sickness or ill health, either of themselves or of a relative.  I think it would ensure future clarity if a similar provision was actually legislated for, maybe later on in the year. But anyway, as a temporary measure, it’s good to see the Inland Revenue has taken this approach.

Next week we should see the legislation relating to the loss carry-back provisions. The general consensus forming around small business advisers and fellow tax agents is that although it’s a measure which is useful in the long term, right now because of the timing of how everything has happened, it’s probably not terribly significant for a lot of small businesses.

That said, people are considering tweaks to make it more user friendly for small businesses. One of the issues that’s being addressed during consultation with Inland Revenue, which is going on at the moment, is about possibly allowing shareholder-employee salaries to be reduced too.

At present if a shareholder has an overdrawn current account, i.e owes the company money, then interest of 5.77% is chargeable on the overdrawn balance.  The problem is, revising the shareholder-employee salary to utilise the loss carry-back rules may worsen the shareholder current account balance. So people have been suggesting if some sort of a workaround could be introduced to resolve that matter. We’ll see what comes out when the legislation is released on Tuesday or Wednesday next week.

Moving on, the normal everyday compliance matters and consultation programme for Inland Revenue still continue to run along, even though right now Inland Revenue policy resources are very much focused on producing answers to the Covid-19 pandemic. And so it’s easy to have overlooked a couple of draft Interpretation Statements which were released just before the country went into lockdown.

The first of these is an Interpretation Statement on tax issues arising from the ownership of overseas rental property. The Interpretation Statement begins with a reminder that New Zealand tax residents are taxed on their worldwide income and gives a quick overview of the residency rules.  It outlines the New Zealand principles about recognition of income and expenditure as these rules may differ from an overseas country. It goes on to explain what you can do if you are required to prepare tax returns in an overseas to jurisdiction to a balance date other than 31 March and how to calculate the conversion of foreign income into New Zealand dollars.

Apart from covering overseas rental income and income from the sale of the property, the Interpretation Statement also explains the very often frequently overlooked and horrendously complicated financial arrangement rules.  These relate to the foreign currency gains on a mortgage that may be taken out to purchase an overseas rental property.

Finally, the Interpretation Statement also covers off a taxpayer’s entitlement to foreign tax credits and the application of double tax agreements. Overall, it’s a very comprehensive document.  Submissions are due by the end of the month but given current circumstances, Inland Revenue will take submissions past that date.

A related Interpretation Statement has been issued on the application of the financial arrangements rules to foreign currency loans used to finance overseas rental property.

Regular readers will know that I have discussed these from time to time. These basically are the quantum physics of New Zealand tax. They are mind numbingly complicated and frankly were not, in my view, really intended to apply to Mum and Dad investors with an overseas property.

The Interpretation Statement itself goes into quite a bit of detail about the financial arrangement rules, which as I said previously, are horrendously complicated.  It also discusses applying some of the Determinations that Inland Revenue has issued to help interpret the application of the financial arrangements rules.

The Determinations are themselves very complicated and in many cases, some of these Determinations have not been revised to take effect of the updates to the Income Tax Act.  In fact, if you read some Determinations, they still refer to the Income Tax Act 1976, i.e. they go back to when the financial arrangements legislation was first introduced in the mid-80’s. It really is odd that such complicated provisions should apply to Mum and Dad investors.

One way that this could be resolved would be to raise the thresholds around the application of the rules and maybe rethink the policy intent and application. Who exactly should be covered by the financial arrangements rules and consequently face a quite hefty compliance burden?  The rules often result in an irony in some cases, where for New Zealand tax purposes, the sale of the property should not be taxable, but the redemption of the mortgage may trigger taxable income.

And finally, from the “You really aren’t helping” files, a ruling from the Ministry of Justice and the Department of Internal Affairs relating to their administration of the Anti-Money Laundering and Countering Financing of Terrorism Act.

A matter of interpretation for some time was whether the use of tax pooling arrangements such as those made through companies such as Tax Management New Zealand would be subject to these rules.

Apparently on April 20th, the Ministry of Justice advised the Chartered Accountants Australia and New Zealand that it would deny an application for an the exemption because there was a “medium risk” of money laundering and terrorism financing being associated with tax transfers.

I really cannot express how mind numbingly exasperating this decision is. It’s going to affect a lot of taxpayers going forward. As a result of what’s going on right now with the Covid-19 pandemic  tax transfers are going to become quite important. So basically, we have Inland Revenue doing its best to try and make matters as easy as possible and the Government’s general policy trying to assist taxpayers through this pandemic.

And then we have the Ministry of Justice and the Department of Internal Affairs taking a very juristic approach to the matter and completely contrary to the wider policy going on. I really can’t express how frustrating this decision is. This was something that really should have been sorted out way, way before. Accountants have been subject to the AML legislation since 1st of October 2018, and 18 months on we are only just getting a decision like this.

I said way back that I thought the DIA and the Police Financial Intelligence Units were under-resourced. I consider the whole AML approach was needlessly bureaucratic with a lot of duplication and frankly, probably not really achieving very much. And in a nutshell, this decision actually exemplifies all those points.

Anyway, that’s it for this week. I’m Terry Baucher and you can find his podcast on my website. www.baucher.tax or wherever you get your podcasts, please send me your feedback and tell your friends and clients. And until next time Kia Kaha stay strong and be kind.

New temporary loss carry-back regime – will it help small businesses?

20 Apr, 2020 | The Week in Tax

  • New temporary loss carry-back regime –  will it help small businesses?
  • The inherent flaw in the foreign investment fund regime; and
  • The rules around claiming deductions for working at home

Transcript

In today’s podcast, will the latest government tax measures help small businesses? The inherent flaw in the foreign investment fund regime. And we look at claiming deductions for working at home.

The temporary loss carry-back scheme announced by the Government last Wednesday was one of the most significant tax measures yet.

It enables businesses that were expecting to make a loss in either the 19/20 income year or the 20/21 income year to estimate the loss and use it to offset profits in the previous tax year. In other words, they could carry the loss back one year.

Now, this is a measure I’ve seen before and used when I was working in the United Kingdom. That measure was introduced in the wake of a fairly severe recession in the late 80s, early 90s. It’s a promising measure which is expected to cost up to about $3.1 billion over a two-year period.

However, my tax agent colleagues are concerned that we’ve only just ended the year end 31 March 2020. And right up until 1st March, everything was running reasonably smoothly before the effects of Covid-19 landed with a big thump. Companies with a standard balance date of 31st March 2020 won’t actually have been significantly affected by the Covid-19 pandemic, but it’s quite likely that in the year to 31 March 2021 they will be.

The issue we have is that that’s a long way out to be predicting losses. And what if we get those estimates wrong?  The position is that use of money interest would still apply.  Although the temptation would be to make a guess at an estimated loss for the coming financial year and then carry that back to the 2020 tax year, it comes with the caveat that use of money interest – currently 8.35% – will apply on any underpaid tax. It’s a very much a dual-edged sword.

So, the main concern that my colleagues have about the loss carry-back proposal is that it’s really not terribly helpful for small businesses that have a standard 31 March balance date because they’re being asked to predict too far ahead and with too many variables.

The better option is, as I’ve said previously, would be to postpone or cancel the 7 May provisional tax payment coming up, let things settle down a bit and then work forward from that.

The loss carry-back measure is going to be introduced as a permanent feature with effect from the start of the 2021/2022 income year and the Government will take consultation later this year on the proposal. It is a measure that I’ve thought for some time would be useful.

The problem is its timing is not terribly convenient for many small businesses right now. And this points to a dichotomy in our tax legislation and tax policy.

The majority of taxpayers and small businesses prepare their financial statements, their tax returns to 31 March. But the majority of provisional tax, however, is paid by bigger companies, and many of those have different balance dates.  The Government SOEs have a 30 June balance date and then overseas companies might have a 31 December or 30 September balance date.

Now, if you’ve got a 31 December balance date, you’ve got to wait a bit of time ahead, but you’ll probably get a better handle on what’s going to be happening. That’s even truer of those with a 30 September balance date because this has happened halfway through their tax year.

So larger businesses are probably going to be the primary beneficiaries of this measure. It’s not to say it’s of little use to small businesses. It’s just that they’re going to need to proceed with caution because the use of money interest provisions will apply.

I think that this measure will need to be fine-tuned. As I said earlier, I do wonder whether it might just be easier to simply say forget about paying provisional tax on 7 May.

Alternatively, maybe do as the Canadians have done. They’ve introduced a measure where a business can borrow up to 40,000 Canadian dollars from the Government, and if they repay it by 31 December 2022, 25% of the amount borrowed will be written off.  Such a measure will help companies with their cash flow, which is the critical matter for small business at the moment.

But still this loss carry-back measure is going to be of use. It’s something that will become part of the tax landscape and we should never look a gift horse in the mouth.

There’s a couple of other things the Government measures announced as well, which are also important for small businesses. One is the changes to tax loss continuity rules.

Currently, if you have a tax loss and you want to continue to carry forward that loss, you must maintain 49% of the same shareholders, what we call the shareholder continuity rule. What has been an issue for some time for growing businesses is that a significant investor wants to come onboard and they want to have more than 51% of the company, maybe a 60- 70% stake. If they do that, then under the current rules, the losses accumulated to that point are forfeited.

This is something we in the Small Business Council recommended be reviewed. It’s therefore good to see this proposal. With effect from this income year – 1 April for most people – if you can show that you’re continuing to carry on a same or similar business as that prior to the change of shareholding, you can continue to carry forward losses. This is a test modelled on what happens in Australia. It’s a welcome move for fast growing companies who want to attract capital but don’t want to lose the value of the tax losses.

The other tax measure announced gives Inland Revenue discretion to temporarily change due dates and other procedural requirements outlined in the various Inland Revenue acts. This is for businesses and individuals affected by Covid-19.  This will enable Inland Revenue to extend the filing date for elections and filing tax returns or defer the due date for payment of tax.

This is a good move. It gives Inland Revenue flexibility, which it probably should’ve always had, but it never really managed to see a need for such a measure beforehand. That said, I still think there’s one or two other things that legislative changes will be needed around. For example, accidental overstayers becoming tax resident. But on the whole, this proposal is a good move, and we’ll look forward to seeing that in operation very quickly.

KiwiSaver and the Foreign Investment Fund regime rules

Moving on, the foreign investment fund regime was introduced with effect from 1 April 2007. Those who know this rule should also know it applies to KiwiSaver account holders if their KiwiSaver fund is invested overseas.

Basically, the rules say that for KiwiSaver funds, the income to be determined is calculated using what is called a fair dividend rate, that is 5% of the portfolio’s opening market value at the start of the tax year.

Now for individuals, they have the option to take the actual accrued gains/losses over the tax year. And that means that when there was a significant fall in the markets, individuals are protected against that and don’t have to pay tax on a portfolio which has just suddenly depreciated in value.

But unfortunately for KiwiSaver accounts, they don’t have an alternative. And this is also a big problem for the New Zealand Superannuation Fund, the country’s largest taxpayer, because it has a huge portfolio of overseas investments.

Now, the FIF regime has been in place, as I said, for 13 years now. And Covid-19 is the second such financial crisis to have hit financial markets since the regime was introduced. The flaw in the regime is it’s predicated on markets continually going up or being stable.

Events such as we are seeing right now and in the Global Financial Crisis are anomalies which the FIF regime really doesn’t manage well. Particularly if portfolios are significantly devalued for a period of time to come, and if you look at the overall economic return, sometimes too much tax will be paid.

The Tax Working Group recommended reviewing the 5% fair dividend rate and possibly reducing it perhaps to maybe 3 or 4%. And I think that’s something the Government really need to look at. But – there’s always a but – it’s going to need the revenue going forward. So, whether in fact that measure, which I believe is needed and the Tax Working Group recommended, will actually come to pass, we’ll have to wait and see.

Home office deductions

And finally, many listeners and readers will be working from home and will continue to do so when we go to alert Level 3. So what are the rules around claiming expenses for working from home? Well, I did an article on this. The basic rules are as an employee, you can’t claim a deduction.

Instead you are able to be reimbursed by your employer who can make a reasonable estimate of the amount that you should be claiming based on a number of factors such as area of the place you’re working in – your home office – rates, power, Internet usage, etc. A reimbursement based on this is tax free to the employee and deductible to the employer.

If the employer decides to simply pay a flat rate, it might in fact be more than what is actually a reasonable calculation of expenses. Instead, PAYE will apply.

What was interesting to see about that article was the reaction to it – several employers are applying the rules clearly. Others are completely oblivious to it, and others are simply ignoring the fact that their employees have an expense and are just simply expecting them to bear the costs. It will be interesting to see how this shakes down.  All employers will need to be looking at this matter and determining some form of allowance to help their employees.

Well, that’s it for this week. Thank you for listening. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you find your podcasts. Please send me your feedback and tell your friends and clients. Until next time Kia Kaha. Stay strong and be kind.

More on Inland Revenue’s criteria for relief as a result of the COVID-19 Pandemic

14 Apr, 2020 | The Week in Tax

  • More on Inland Revenue’s criteria for relief as a result of the COVID-19 Pandemic
  • The fringe benefit tax lesson from David Clark’s misadventures
  • The pros and cons of a Financial Transactions Tax

Transcript

This week, Inland Revenue has been updating its guidance as to the measures that have been introduced by the Government to help in the short term and longer term with the response to the Covid-19 pandemic.

In particular, Inland Revenue has given more guidance about what its position is around the remission of late filing penalties and use of money interest for tax that is paid late.

The position that has been set out and circulated in some detail to tax agents is as follows. In order to be eligible for remittance, customers – that deathly phrase – must meet the following criteria. They have tax that is due on or after 14 February 2020, and their ability to pay by the due date – either physically or financially – has been significantly affected by Covid-19.

They will be expected to contact the Commissioner “as soon as practicable” to request relief and will also be required to pay the outstanding tax as soon as practicable.

As to what “significantly affected” means, Inland Revenue’s view is this is where their income or revenue has been reduced as a consequence of Covid-19, and as a result of that reduction in income or revenue, the person is unable to pay their taxes in full and on time.

Now a couple of things to think about here.

“As soon as practicable” will be determined on the facts of each case according to Inland Revenue. So that as long as the taxpayer applies at the earliest opportunity and then agrees to an arrangement that will see the outstanding tax paid at the earliest opportunity or be paid over the most reasonable period given their specific circumstances, then that test will be met.

However, what you also need to know is that this is very much on a case by case basis, so that if Inland Revenue thinks you’re trying to pull a fast one, they will deny remission and you will be up for the late filing penalties and use of money interest.

Now, in terms of applying for remission of use of money interest, Inland Revenue is saying it would try and minimise the amount of information it normally asks to be provided, accepting that these are unusual times. But they want people to continue to file their GST returns. So in other words, you may not be able to pay your GST on the regular time, but you should still file it, so that gives them information as to what’s going on.

Obviously, if things have really dived into a hole for a taxpayer, filing a GST return may be a means of getting a refund. Although if you owe tax to the Inland Revenue, that would simply be swallowed up and applied to any arrears.

But in terms of information, Inland Revenue are saying they would expect to see at least three months of bank statements and a credit card statement, any management accounting information and a list of aged creditors and debtors. Inland Revenue goes on, we may not ask for that all that information in every case, but it should be available if we do ask for it.

For businesses, they will be looking to see and to understand what your plan is to sustain your business. You may not be able to get all that information to them; they’ll work around that. So, they’re clearly trying to be as flexible as possible.

Obviously some people were already in trouble before 14 February, so they can ask to renegotiate their existing instalment arrangement with Inland Revenue. Very simply,what will happen is that you enter into an arrangement with Inland Revenue that you’re going to pay X amount at a regular time to meet your liabilities. Inland Revenue have said in some cases they will accept a deferred payment start date.

They may partially write off some of the debt because of serious hardship but expect the remainder to be met by instalment or a lump sum. They may also even write it off completely due to serious hardship. It’s all going to be done on a case by case basis. So that’s the most important takeaway.

Inland Revenue’s communications around remission of late payment penalties and use of money interest are a little confusing, in that it seems to say that anyone paying late will be able to get remission of use of money interest on late payment penalties. That is not the case. It must be Covid-19 related and you must demonstrate that.

As it is being done on a case by case basis, be aware that if you don’t meet the standards that Inland Revenue are expecting to see, they won’t grant you the remission. So that’s the key take away at the moment.

Now, in previous podcasts I have raised the possibility of the 7th May provisional tax and GST payments being postponed. The problem is that Inland Revenue doesn’t have the authority to do that, even though it sounds like a great idea. With Parliament essentially in recess, it’s not something that can be done quickly either. So that’s probably something that longer-term legislation may need to be introduced to give Inland Revenue the flexibility to deal with unexpected events.

It probably felt it had enough flexibility to manage the situation in the wake of the Canterbury earthquakes, but as this Covid-19 pandemic has shown, when it happens nationally, not just regionally, then extra powers or extra flexibility may need to be granted statutorily.

A quick note on Inland Revenue. Remember that it is closing all online and telephone services and their offices as of 3p.m. today. This is to finalise Release Four of their Business Transformation Program. As I said in last week’s podcast, I agree they should continue to do this. They’ve probably put a lot of work in place beforehand, and it’s going to be more disruptive for them to postpone it. So at a time when productivity does fall away a little bit – it’s after the 31 March year end and it’s around Easter – this is as good a time as they’ll ever get to do it. Services will be back up and running from 8a.m. next Thursday.

Just a final quick note on that – remember, if you’ve got a return or e-file in draft or any draft messages in your MyIR account, those will be deleted. So you should complete and submit them before 3p.m. today.

FBT surveillance

Moving on, there’s a useful little tax lesson from David Clark’s – the Minister of Health – misadventures, and it’s in relation to the photograph that’s been widely circulated of his van sitting isolated in a mountain bike park.

We’re going to see more of Inland Revenue going through social media and picking up signage on vehicles and then matching that signage to its records about fringe benefit tax.

What happened there, someone obviously saw David Clark’s van which had his name and face written all over it and passed it on to a journalist and the story ran from there.

That already happens to some extent with Inland Revenue already looking at people’s use of work-related vehicles. In particular, the twin cab use, which I’ve mentioned before, is something that I know Inland Revenue is now starting to look more closely at in terms of FBT compliance.

You get chatting to Inland Revenue officials and investigators and they’ll have some great stories about how taxpayers have accidentally dobbed themselves in by driving their work-related vehicle towing their boat to, say, a wharf opposite the Inland Revenue office in Gisborne was one story I heard.

So David Clark’s misadventures should be a highlight that if you’ve got a sign written vehicle and you are claiming a work related vehicle exemption, don’t be surprised if Inland Revenue starts matching up your Facebook profile, for example, with your FBT returns and asks questions. This is part of the brave new tax world we live in and is something we will see a lot more of.

Financial transactions tax

Finally for this week, I mentioned  in last week’s podcast I did a Top Five on what I saw as the possible future tax trends post Covid-19. One of the things I talked about was greater use of artificial intelligence and data mining and information sharing by Inland Revenue – just referencing back to my previous comment by David Clark and FBT.

I also discussed the likelihood of new taxes coming in. And one of the taxes I commented on was a financial transactions tax and that perhaps that it’s time might come.

But the drawback, as I saw it for a financial transactions tax, is that it needs to be applied globally. And one of the readers asked the following question

“Why does a FTT need to be universal? In the context of your article, I read global as meaning why can’t the New Zealand government apply for all transactions in New Zealand, especially for money leaving the country?”

It’s a good question and so I dug around a bit more on the topic. A financial transactions tax sometimes also called a Tobin tax after the economist who first mooted it, is a tax on the purchase, sale or transfer of financial instruments.

So as the Tax Working Group’s interim report said, a financial transactions tax or FTT could be considered a tax on consumption of financial services.

And FTTs have been thought of as an answer to what is seen as excessive activity in the financial services industry such as swaps and the myriad of very complex financial instruments. Some people consider many of these as just driving purely speculative behaviour and a FTT could be something that would actually help smooth some of the wild fluctuations we sometimes see in the financial markets.

Now, the Tax Working Group’s interim report thought the revenue potential of a financial transactions tax in New Zealand was likely to be limited “due to the ease with which the tax could be avoided by relocating activity to Australian financial markets.”

And this is what I meant by saying a FTT had to apply globally. If you’re going to have a financial transactions tax, you need to have it as widely spread as possible across as many jurisdictions. Otherwise, you’ll get displacement activity.

Now, it so happens I’m looking at Thomas Piketty’s Capital in the Twenty First Century, and he had an interesting point to make about a FTT. And that is that it is actually a behavioural tax, because, as he has put it, its purpose is to dry up its source. In other words, think of it like a tobacco tax. The intention there is not just to raise revenue, its primary function is to discourage smoking.

So a financial transactions tax has the same effect. It drives down behaviour that you don’t want while raising money. But the fact it is driving down transactions means that its role as a significant producer of income for the Government is limited.

Piketty suggests its likely revenue could be little more than 0.5 percent of GDP. The European Union when it was considering a FTT of 0.1% thought it might raise the equivalent of somewhere between 0.4% and 0.5% percent of GDP. (about EUR 30-35 billion annually in 2013 Euros). 0.5% of GDP in a New Zealand context would be maybe $1.5 billion. Not to be ignored, but still not a hugely significant tax.

The other issue that the Tax Working Group were concerned about – and I think this is something that we really want to think about in the wider non-tax context – is that any relocation to Australia, for example, would reduce the size of New Zealand capital markets.

And I think this is a long-term structural issue in the New Zealand economy we ought to be considering more seriously – in the wake of what comes out of the initial response when Covid-19 pandemic ends, how the economy looks going forward. This will be one of the issues to look at.

Well, that’s it for this week. I’m Terry Baucher and you can find this podcast on my website, www.baucher.tax  or wherever you get your podcasts. Please send me your feedback and tell your friends and clients until next time. Happy Easter and stay safe and be kind. Kia Kaha.

More on Inland Revenue’s response to COVID-19

6 Apr, 2020 | The Week in Tax

  • More on Inland Revenue’s response to COVID-19
  • Inland Revenue is closing down next week
  • How might COVID-19 affect tax in the future?

Transcript

In today’s article, more on Inland Revenue’s response to the Covid-19 pandemic. Inland Revenue is closing down, but only temporarily, and what lies ahead in the tax world.

Inland Revenue grudging guidance on late filed tax returns

This week has been the first full week of the lockdown. So, we’re all settling down into some sort of routine and Inland Revenue has provided further guidance around the application of the time bar rule and its right to review tax returns after they have been filed.

The guidance that has been issued has not, as I had hoped last week, given a blanket extension of time for filing the March 2019 tax returns, which were due by March 31st. Instead they set aside some criteria where in four years time Inland Revenue might be considering a review of a tax return and the scenario where it would not do so because the return had been filed late as a result of the 2020 Covid-19 Pandemic. Basically, these rules will apply if the return was due before 31 March, but instead is filed by 31 May.

The criteria are relatively specific in that if in four years time, 31 March 2024, Inland Revenue will close any review or compliance activity for any March 2019 tax return, which was filed after 31 March 2020, but before 31 May 2020, has no other exclusions from the standard time bar rule, that is, there’s no fraud or willful omission or income which should’ve been declared has been omitted. There’s no dispute going on, it does not involve tax avoidance, and doesn’t have tax in dispute of greater than $200 million. A very specific set of criteria there. I can tell you that that last one is rather redundant because anyone who was dealing with a tax

return of that size would have made damn sure it was filed by 31st  March so there was never any issue around the time bar applying.

This concession does read a little like the sign in a bar which says credit will only be extended to anyone over 85 who is accompanied by both their parents. I find it rather grudging. I think it just stores up issues for arguments three or four years down the track, which are unnecessary.

This is a highly unusual situation. Inland Revenue has rather glided right past the fact that we have been ordered to shut down by the government.  For a government agency to still be insisting that filing deadlines should be continued to be met as if nothing was happening, is frankly a little unrealistic.

I’d still like Inland Revenue to come out and give a flat concession, saying that they would extend the basic times for filing elections and tax returns to, say, 30th April, if not as far as 31st May.

Just as an aside, I noticed that for large multinationals, they are required to file a Basic Compliance Package and Inland Revenue, in the same notification I just referred to – talking about late filing dates – told the multinationals that a decision has been made to extend the timeframe for filing Basic Compliance Package to 30th June 2020.

I’m trying to understand why it is that small businesses get no such concessions when we’re not always as well resourced, while larger multinational organisations who have access to the best tax advice, get a three-month extension of time. That’s a sort of left hand not talking to the right hand and not thinking about what they’re doing.

Thinking of rorting the wage subsidy – don’t

There has been quite a lot of discussion amongst tax agents about the wage subsidies and eligibility for the wage subsidy, which does apply to shareholder employees and also to independent contractors. But several agents in discussions have been wondering whether, in fact, some of the applications they’re receiving, are shall we say, gilding the lily.

This scheme is quite generous, it is designed to help everyone through the Pandemic and there’s no doubt that everyone has taken a massive hit to their business. It could be accused of being overgenerous, but that said, I would caution people about trying to push the boundaries on this one. I think the general backlash against businesses that are seen to have rorted this system will be quite strong. And the Finance Minister made it clear that people who made false declarations would be prosecuted.

Use of money interest and late payments

We’ve still not heard anything about a reduction in the use of money interest rates. Rather amusingly, an article in the April edition of the Tax Information Bulletin noted that an Order in Council has been made to ensure that the Commissioner’s use of money interest paying rate cannot be set at a negative rate. In other words, they had to pay something. Rather redundant in the current circumstances.

The position is that Inland Revenue has said that it will be effectively wiping interest and penalties. But these are only on Covid related circumstances that caused the late payment, and it has essentially reserved itself the right to look at everything on a case by case basis. Again, we’re still waiting to hear if they’re going to delay the 7 May provisional tax and GST payments, something I think should be done as a matter of course.

Inland Revenue shutdown for Release Four

Moving on, Inland Revenue is about to close for seven days, from 3pm next Thursday 9th April, and will reopen on 8am, Thursday 16th April.

This is part of Release Four of its Business Transformation programme.

It’s a good time for it to be done over Easter. This was well planned in advance and will probably take the strain off their systems because clearly Inland Revenue is still trying to sort out the working remotely thing out, as we all are.

A few things to note about the Inland Revenue shutdown is that the MyIR online services will also be unavailable, as well as the offices being shut, the phone lines will be closed. And there is something else. If you’re thinking about filing your tax return in early because you think you’re due a refund, you should make sure you have filed it by 3pm on 9th April.  Otherwise if you have a return or e-file in draft or any draft messages in a myIR account, these will be deleted as part of the upgrade.  So, if you’re filing returns, or sending messages through the MyIR portal, get it done before Thursday.

What lies ahead – the future of tax

And finally, what lies ahead in the tax world as a result of the Covid-19 pandemic? Well, my Top Five looks at the fallout of the Covid-19 pandemic. I put forward five tax changes I think we will see over the coming years. Here’s a quick teaser.

I think in the short term, tax rates will rise. We will see the re-emergence of a very strong debate over the taxation of capital. And that means capital gains tax will be back on the table. Environmental taxes will rise in importance. The corporate tax rate around the world will rise and the OECD BEPS initiatives will come through very quickly. And finally, the power and reach of tax authorities will increase – the stuff we see with FATCA and the Common Reporting Standards – we’re going to see more of that.

Here’s the whole article.

So 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. Please send me your feedback and tell your friends and clients. Until next time, Kia Kaha, stay strong.

More on the COVID-19 measures, unintended consequences and what next?

30 Mar, 2020 | The Week in Tax

  • Explaining some of the detail about the Government’s COVID-19 package
  • Inland Revenue discretion about waiving use of money interest
  • Tax residency and unintended consequences of COVID-19
  • Time to defer 7th May provisional tax and GST payments

Transcript

Mike Tyson once said everybody’s got a plan until they get a punch in the mouth, and it’s fair to say that we’ve all taken one tremendous sledgehammer to the mouth in the past few weeks. The pace of the developments is extraordinary. As are the government’s attempts to keep up and get ahead of the issues.

Inevitably, that means that some of the detail perhaps isn’t as tidy as Inland Revenue, the Government and tax agents and taxpayers would like. But we can work through these issues. And that’s what’s happening. So, to clarify a position in relation to the government’s wage subsidy and payments subsidy no GST applies to these payments. A specific Order in Council has been passed to clarify that position and incorporate the payments in the exempt part of the GST Act.

As for the income tax treatment it is excluded income under Section CX47 of the Income Tax Act 2007 – but the payments which are passed through to the employees will be subject to PAYE. The portion of a salary that represents the wage subsidy, i.e. the maximum $585 per week for full time employee is not a deduction for the employer. So just to clarify that it’s not income on the way in when the employer receives it and it’s not a deduction on the way out.

Now, that will mean that people will need to make sure their accounting packages can deal with that properly. Otherwise, there’s a potential for a double deduction to incur when the salary gets deducted as well as the portion which represents a wage subsidy. And of course, the worst-case scenario the other way is that the wage subsidy might accidentally be counted as income.

Separately, I’m seeing some discussion about the treatment of a wage subsidy paid to a shareholder employee. Now, for those who don’t know, shareholder employees are shareholders in a company and they’re also an employee. They are usually within the provisional tax regime and not taxed under PAYE. And the advantage they have is that the salary that can be allocated to them for a tax year can be done after the end of the tax year before the return is filed. So, for example, right now, tax agents with clients linked to their tax agency will have until 31 March 2020 to file the tax returns for 31 March 2019.

And so accountants will be looking at this and saying, all right, we can allocate you this amount of the company’s income to you as a shareholder-employee salary for the year ended 31 March 2019, so people are working through that. And the question people are obviously looking at is what do we do for shareholder-employees for the 2020 year? I don’t know yet. It’s an interesting question. I suspect it’s possible that a shareholder-employee may not be eligible, in that case, for the subsidy. [CLARIFICATION, the latest thinking is they are eligible.]

These issues are a good example of how moving rapidly and without the normal processes of putting it through consultation does throw up these anomalous questions and other issues. It’s worth keeping in mind that the proposals for the wage subsidies were announced on March 17th, barely nine days ago. And so it’s not surprising we’re still working through some of the detail.

It might point to perhaps that small business involvement earlier on might have helped. But to be truthful, everything is moving so quickly at this stage, it’s inevitable that sometimes some detail slips through the cracks.

Meantime the tax measures announced at the same time as the wage subsidies – such as restoring building depreciation, increasing the value of the low value asset write off for assets to $1,000, allowing the waiving of use of money interest and allowing wider access to the in-work tax credit have now gone through and received the Royal Assent.

That’s actually a reflection of how quickly things can be done when required in a Westminster style democracy.

Now, one measure which is generally being welcomed but could actually be storing up a headache for Inland Revenue further down the track, is its decision to waive/suspend late payment penalties and use of money interest on late paid tax. At this point, it appears its being done on a case by case process, but on 25 March, just two days ago, Inland Revenue released a further update on what it was doing which read as follows.

If your business is unable to pay its taxes on time due to the impact of COVID-19, we understand, you don’t need to contact us right now.

Get in touch with us when you can, and we’ll write-off any penalties and interest.

It would help if you continue to file however, as the information is used to make correct payments to people, and to help the Government continue to respond to what is happening in the economy.

That’s helpful, but it also may be giving Inland Revenue a problem because it basically appears to be saying we’re going to write off all penalties and interest if you’ve paid late. That opens the door for, shall we say, some unscrupulous taxpayers who can decide to simply not pay and hold out until Inland Revenue comes around and bangs on the door. So Inland Revenue might have given itself a headache by doing that. But we do know it is on a case by case basis.

And there’s another issue that anyone who’s thinking about trying to pull a fast one needs to consider. The measure applies to provisional tax, GST and PAYE. In relation to GST and PAYE it’s worth remembering that Inland Revenue regards these as payments made on trust, that is, you’re withholding and paying tax on account of other people.

In that situation if Inland Revenue concludes you’re deliberately withholding payments, prosecution will probably follow, if it emerges you were in a position to pay it. So watch that space.

Cashflow is obviously tight for people and a lot of taxpayers will be in a position where the difference between the time they triggered the PAYE or GST liability and the actual due date of payment, everything has just run into a brick wall.

Waiving of use of money, interest and penalties is designed to help in that circumstance. But there will be other taxpayers who’ve got cash in the bank and could pay and should pay but decide they don’t want to pay and just play the game. I foresee that once Inland Revenue is back up to speed, we’ll hear more about those employers.

Moving on. There are going to be plenty of unintended tax consequences that will come out of this lockdown. And I’ve already encountered one interesting case. And it’s in relation to people who are holidaying here and can’t leave the country because the borders have been shut. So they’re stuck here because they can’t get back to where they come from, because the transit area countries have just shut down all connecting flights.

So what happens with their tax residency? In New Zealand, tax residency is determined in one of two ways. Either you have a permanent place of abode in New Zealand, which is the main test, or you spend more than 183 days in any 12-month period in New Zealand. And it’s that latter test that is going to trigger the accidental unintended consequences for taxpayers. There’ll be people who holiday here for, say, four, maybe five months of the year and then go back to somewhere in the northern hemisphere. I see quite a bit of that. They’ve already got some interesting tax issues they’ve got to be mindful of.

Moving on, what next? We’re in very uncertain times here. And we’re right up against the end of the tax year for those with a 31 March balance date, which is most people.

This event has happened at practically the worst time for them because they will have derived most of their income for the year. And then suddenly, wham, Covid-19 arrives, followed by lockdown and business comes to a shuddering halt, and what I’m hearing is cash flow has just dried up.

There are two tax payments coming up for those taxpayers with a 31 March balance date. On 7th of April, those who had a tax agent will have to pay their terminal tax for the year ended 31 March 2019. Now to go back to what I said a few minutes ago those who have the cash should pay it, but there’ll be those that may need to use Inland Revenue’s discretion. And most people would have been aware before the lockdown happened that they had that 7th April terminal tax liability coming up.

The bigger issue in my mind is what to do about the 7 May provisional tax payment, which is the final provisional tax payment for the March 2020 balance date.

There are two issues here. One, have you got the funds to pay it? And in the middle of a lockdown, which won’t end until April 26th or 27th April, how is it possible for accountants and clients to work out the GST liability for the period ended 31 March. So there’s real practical difficulties and in my view, Inland Revenue should postpone the 7th May provisional tax payment and GST collection dates by at least a month, possibly even two months, to let everyone catch up. Effectively, it’s doing that by that blanket measure I spoke about a few minutes ago when it apparently said “look we will waive interest and penalties on late paid tax”.

So why not take the pressure off taxpayers and itself?  Because Inland Revenue will be affected here by the lockdown. It won’t have all its staff in the right places. And it’s also trying to to integrate the next part of its business transformation package. So I think that a deferral of the 7 May provisional tax and GST payment dates would actually be good for everybody involved, even though it would be a cashflow hit to the government.

Also, as to the question of 31 March year end, we’ve not heard anything from Inland Revenue on this, so we’re assuming carry on as normal. But these are extraordinary times. We’re trying to get hold of people, and ensure final elections are filed on time all with restricted communications.  Although we have the ability to have people sign forms and get things done remotely, we still have a practical issue of being up against a deadline at a time when the whole country is in lockdown.

And I just wonder whether the government should think about saying, “Right, all elections that would have been due to be filed by 31 March, we will be extending the filing date as a one off measure to say 30 April or maybe a little bit later, say 31 May, depending on how the lockdown goes”.

There’s precedent for this around the world. In the US, the Internal Revenue Service’s due date for filing your 31st December 2019 Federal tax returns is 15 April and they come down hard if you haven’t filed by then. They’ve just extended that by three months to 15th July recognising the impact of Coronavirus. So if the IRS, the tax authority for the largest economy in the world, can take that measure I think Inland Revenue can probably cut us and itself some slack.

There are provisions within the Income Tax Act and Tax Administration Act to extend the time for late filing. So, I’d say to Inland Revenue “Save yourself a lot of bother and apply a blanket discretion and just simply extend the filing dates by one month, two months, whatever.” These are exceptional times. They require exceptional measures.

Perhaps Inland Revenue, which rightly or wrongly feels that if it does things like that, taxpayers will rip it off, should park its paranoia for a little while. Let’s just get things moving properly and then you can sweep up who actually was screwing around and who was actually genuinely caught up by this pandemic?

Well, that’s it for the week in tax. I’m Terry Baucher and you can find his podcast on my website. www.baucher.tax or wherever get your podcasts. Please send me your feedback and tell your friends and clients. Until next time, Kia Kaha. Stay strong.

Special edition looks at the tax measures in today’s $12.1 billion stimulus package

23 Mar, 2020 | The Week in Tax

  • Depreciation on buildings restored
  • Low value asset write-off limit increased to $5,000
  • Residual income tax threshold raised to $5,000
  • Inland Revenue to have discretion to write off use of money interest

Transcript

The Government has released details of its COVID-19 support package and I’m here to discuss the four specific tax measures which form part of that response.

These measures are a mixture of giving immediate relief to taxpayers, who are going to be feeling the pain right now. They are also hoping to encourage investment activity going forward as the eventual recovery takes place.

There were a few surprises in this with the big surprise being the reintroduction of depreciation on commercial and industrial buildings. And this includes hotels and motels. So clearly this is of interest to a sector, the tourism sector, which is going to take a very significant hit as this COVID-19 pandemic continues.

The proposal is that depreciation will be reinstated for those buildings, and a diminishing value rate of 2% is proposed. (They’re working on the straight-line rate and hadn’t yet finished the actuarial calculations on this).

And quite apart from this welcome measure for industrial buildings it also means the capital cost of seismic strengthening will now be depreciable. This has been a sore point for many building owners for quite some time. And in my view, it is a matter that it should have been addressed some time ago.

But leaving that aside, it is an incredibly welcome move to see the depreciation restored in general for commercial industrial buildings and acknowledging that this would include the capital cost of seismic strengthening. It’s worth noting as well that this was one of the recommendations of the Tax Working Group. They suggested that they couldn’t really see any valid reason to continue the policy adopted in 2011 of stopping depreciation on industrial and commercial buildings.

Looking back on the papers from that 2011 Budget, the impression I gained was that that measure was one which was designed to actually balance the books and wasn’t really driven by anything around the fact that there was no economic depreciation going on. Quite clearly buildings depreciate and need replacing. That was true then and it’s true now so it’s simply great to see such a measure.

It’s an expensive measure, estimated to cost $2.1 billion over the forecast period to the 2023/24 fiscal year. I know from business owners and those with property investments in this sector that this will be very, very welcome. The legislation will obviously be rushed through shortly and it is intended to take effect from the start of the 2020/21 tax year, which for most people is April 1.

Also extremely welcome for taxpayers is the proposal to increase the low value asset 100% write off. This is something the small business sector has frequently requested.

This measure contained a surprise in that the level will be increased from $500 to $5,000 for the 2020/21 tax year before falling back to a new increased level of $1,000 with effect from the start of the 2021/22 income year and going forward.

The current $500 threshold has been in place since 2005 if memory serves right. So it was long overdue for an increase. The one-off increase to $5,000 follows a measure the Australians did a couple of years back. This is again extremely welcome. It will encourage investment, but it also greatly simplifies small businesses’ compliance costs.

The measure is estimated over a four-year period to cost $667 million. That’s not as much as I had thought, given that Inland Revenue and Treasury had been previously reluctant to increase the threshold. Again, a very welcome measure. The $5,000 is a bit of a surprise, but again, it’s a good opportunity for businesses once they come through what is going to be frankly, a pretty rough few months. No one’s sugarcoating that but looking ahead they may take the opportunity to upgrade their equipment and invest in new plant and machinery.

Small businesses and individual contractors and the like will welcome the decision to increase the provisional residual income tax threshold from $2,500 to $5,000. And that means with effect from the 2020/21 tax year that basically enables those taxpayers who meet that threshold will be able to defer paying their tax for the coming tax year to basically February 7, 2022.

The final specific tax related measure gives the Commissioner of Inland Revenue discretion to write off and waive interest on late tax payments for taxpayers who’ve had the ability to pay tax “adversely affected” by the COVID-19 outbreak.

Now the use of money interest rate is currently 8.35% and surprisingly, no announcement was made about reducing that rate. I think officials were of the view that that can wait till the regular review, which must happen now in the wake of the OCR cut we had on Monday. So, we probably will see very shortly the use of money interest rate on unpaid tax come down and that will be of help to taxpayers as well.

This is actually applicable from February 14 and it covers all tax payments, which includes provisional tax, PAYE and GST due on or after that date. Taxpayers who are struggling to meet those payments will be able to apply to Inland Revenue and say, ‘we are struggling here as a result of the COVID-19 outbreak’. The requirement is for a “significant” fall which is defined as approximately 30%.

This initiative is going to last for two years from the date of enactment of the announcement unless it’s extended by an Order in Council. So that’s good news. I’ve already had a few inquiries from clients about what do we do when we’re struggling to meet payments. And this is a very welcome relief.

Incidentally, although not specifically mentioned in the announcements, by implication, the late payment penalties and late filing penalties are already going to be suspended as part of this measure to help businesses. Again, a good measure. My longstanding view is that the late payments system does not work and should just simply be scrapped. Hopefully we’ll see something major on this later this year. For the immediate time, suspending use of money interest is a very welcome step.

Just briefly on the other announcements, obviously the leave and self-isolation support and the wage subsidy schemes for small businesses, are going to be very welcome. These schemes apply to independent contractors, so that’s going to be a great deal of relief and take off some of the pressure for them. And for all small businesses, we’ll be looking at the question of what do we do about self-isolation if key staff were taken out of work. This will help considerably.

Interesting point which has also happened and has gone a bit under the radar, is that for working for families, there is an in-work tax credit, which is a means tested cash payment of $72.50 per week. This was only available to families that who are normally working at least 20 hours a week if they were sole parents, or 30 hours a week if couples. The hours test has now been removed, so about 19,000 low income families are going to benefit from that change. And I know the advocates of Child Poverty Action Group, they’re very pleased at what’s in this package with the help for low income families and beneficiaries.

I’ll have more on this week’s tax events with my regular podcast on Friday. But in the meantime, that’s it for this special edition of the Week in Tax.

I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. Until next Friday have a great week. Ka kite āno.