Is it time to increase the GST threshold?

Is it time to increase the GST threshold?

  • a GST trap for Airbnb providers
  • the Great Tax Debate on wealth taxes

As is well known, income tax thresholds have not been increased since October 2010. What also gets overlooked is that the GST threshold of $60,000 was last adjusted in April 2009. And this week, Stuff ran a story about Kristen Murray, who has petitioned Parliament to have the GST threshold increased to $75,000.

She argued in her petition that the lower threshold is crippling small businesses. Inland Revenue disagrees but Kristen has gained the support of BusinessNZ, who supports regular indexation of tax thresholds.

A BusinessNZ economist noted that the effect of inflation means that the $60,000 threshold set back in 1 April 2009 should now be roughly about $82,000. Now the driving principle of the GST system is a broad based, low-rate principal approach and a reasonably low threshold is consistent with that approach.

GST came into effect on the 1st of October 1986 and the threshold set then was $24,000.

Looking at the table above it has actually more or less kept pace with inflation based on where it started – until now.

Notwithstanding that, given that it’s now 14 years since it was last adjusted, some form of increase to the threshold is not unreasonable. And the number of businesses a threshold change could affect is quite significant.

According to Inland Revenue data supplied to Parliament’s Finance and Expenditure Committee in 2022 there were 264,457 taxpayers who are GST registered, but with turnover of $60,000 or less. There’s another 27,000 or so  with turnover between $60 and $75,000. So, as we said, increasing the GST threshold could take a large number of taxpayers theoretically out of the GST net.

But GST has an interesting effect and it’s also seen officially as a main pillar against tax evasion because of its comprehensive nature. Pretty much everyone finishes up paying GST somewhere along the line, even those within the cash economy. They still finish up paying GST when they’re purchasing supplies, food, petrol and the like. So, there would be a natural reluctance on the part of Inland Revenue to increase that threshold substantially. But to repeat an earlier point after 14 years, it’s not unreasonable.

By the way, Kristen’s suggested $75,000 threshold would actually bring it in line to the Australian threshold, which is A$75,000. I think one of the things they could also borrow from Australia is perhaps allow for quarterly GST returns.

There are therefore risks about the GST threshold being too high and the base being narrowed, but if they kept it too low then businesses may deliberately hold back from growing and crossing the GST registration threshold.

Over in the UK, where the equivalent of GST, value added tax or VAT, registration threshold is £85,000, there is in fact a very noticeable drop-off effect around that threshold.

The reason possibly might be because once you are VAT registered, you’re charging VAT at 20%, so businesses that can’t see themselves growing substantially quickly pass that threshold may be quite reluctant to effectively increase prices by 20%.

Now, I’m not aware of any such evidence here in New Zealand. And I think the issue, which Kristen pointed out, compliance is a bigger issue for micro-businesses. With compliance there comes a point where there is an irreducible minimum. Whether we’re at that point there know I don’t know. As I mentioned earlier, offering opportunities around quarterly reporting would perhaps help. And these days, the advent of software programs such as XeroMYOB, and Hnry do help micro-businesses manage their tax much more effectively.

But in terms of GST and tax administration, I think the next big step would be to zero rate all supplies between GST registered businesses. That would help put an end to the merry go round which goes on right now where a GST registered business charges another GST registered business GST, collects and pays that GST to Inland Revenue, while the GST registered business, which has just paid GST, then claims it back from Inland Revenue. Overall, there’s no net GST effect. I therefore think moving to zero rate such B2B transactions is a logical step. How far away that is, I don’t know. It doesn’t appear to be on Inland Revenue’s work programme at this point.

At the moment, we’re left with the only other adjustment that might help microbusinesses would be to increase the GST threshold. As I said, my view is something like that should happen soon, but we’ll have to just wait and see.

Airbnb, GST and unintended consequences

Moving on, and still on GST, I came across a case this week where a residential property owner couldn’t let the property so decided to change his approach and started letting it out as an Airbnb.  Airbnb letting represents taxable supplies for GST purposes. He was GST registered for another activity and he did include the Airbnb income in his GST returns.

The issue has now popped up that he wants to sell the property. And it looks like unless he is selling to a GST registered person when compulsory zero rating will apply, then he has inadvertently given himself a GST problem. If he sells the property, which remember was originally a residential property to a non-GST registered purchaser, the sale price the price will become GST inclusive, which basically will bite into his margin.

This is a good example of paying attention to what’s going on around your activities and that you should always seek advice when you propose to do something that may have GST implications. Tax is full of unintended consequences and for this particular taxpayer, I’m afraid there probably is a huge unintended consequence of basically surrendering the equivalent of 13% (the GST inclusive portion of the sale price) on a residential property sale. He was already carrying on a GST activity already and Airbnb just represented additional taxable supplies. So, for anyone thinking of switching from residential property letting to Airbnb that’s a trap to watch out for.

The Great Tax Debate – “Think of the consulting fees!”

And finally, on Friday night I was part of the Great Tax Debate organised by the Tax Policy Charitable Trust, where I and several other tax practitioners debated the proposition: A wealth tax is the best solution to wealth inequality.

I was the leader of the affirmative team, and I was ably assisted by Mat McKay of Bell Gully and Sladjana Freakley of EY. Opposing us were Robyn Walker of Deloitte, Simon Coosa of Minter Ellison, Rudd Watts and Jeremy Beckham of KPMG. Professor John Prebble, one of THE gurus of New Zealand tax, chaired the debate. We had a lot of fun on the topic including an interesting Q&A session where someone asked, “Has EY gone woke?” The answer, of course, is no.

In the end thanks mainly to some pretty shameless populism including an appeal to the base instinct of the tax consultants in the audience, “Think of the consulting fees!”, we in the affirmative team sneaked home. Before the debate started everyone was asked to register their position as a yay or nay. And then the net movement from that would determine the winner. And we managed to move the dial several points in our favour. But before the Green Party start jumping up and down celebrating “We told you people wanted a wealth tax”, over 60% were still against a wealth tax.

As I said, it was a lot of fun with plenty of laughs all around. The question about whether EY has gone woke raising one of the bigger laughs. I’d like to thank the organisers, the Tax Policy Charitable Trust, hosts Bell Gully, Professor Prebble, my team-mates, Mat and Sladjana and our opponents, Robyn, Simon and Jeremy together with the 80 plus attendees in the audience for a fun night. We hope to see more of these debates in the future.

That’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts.  Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day.

Dame Diana Crossan discusses her time as Retirement Commissioner

Dame Diana Crossan discusses her time as Retirement Commissioner

  • Plus big changes to the retirement landscape she helped initiate.
  • She also explains why she was one of the first of the 97 signatories on the Open Letter on Tax.

During her time as Retirement Commissioner, she also helped develop a national strategy for financial literacy that incorporated practical strategies such as the excellent sorted.org website, multimedia campaigns and education in schools.

More recently, Diana was the chief executive of the Wellington Free Ambulance and is presently chair of the Lifetime Retirement Income and several charities. She is also one of the initial 97 signatories of last month’s Open Letter on Tax.

Ki Ora Diana, welcome to the podcast. Thank you for joining us.

Diana Crossan
Ki Ora Terry, thank you for having me.

TB
Oh, not at all. Enormous privilege and thank you. I’m really fascinated. You’ve got an incredibly distinguished career there. But I’m most fascinated by your time as Retirement Commissioner. Because when I was researching/writing Tax and Fairness and looking at the superannuation savings regime, as it was in 2002, prior to when you took over, it was pretty much ground zero. There was practically little or no incentives to save.

And we know that the numbers of superannuation schemes had basically collapsed from where the numbers that prior to the removal of insane tax incentives in 1988, they had fallen quite dramatically, to I think  barely 13% of the workforce was covered about 2002.

So, you come onto the scene, you’re appointed Retirement Commissioner. It must have been quite daunting. What were your thoughts when you volunteered for that?

Diana Crossan
You’re right, it was a bit overwhelming initially. And I was the second Retirement Commissioner, the first one was Colin Blair, who was a tax specialist. So, when the government set up the retirement commission, they thought that they were helping the nation. Hopefully they were because we had a superannuation, or a retirement savings system that was very different from the rest of the world, or the OECD world really.

We had New Zealand super, which is of course brilliant, and should be protected and we had private saving. The Retirement Commissioner was supposed to be there to help people understand that they needed to save for their own retirement. That was why it was set up.

And what we discovered – the Retirement Commission was just on to this when I arrived – was that the advertisements and the encouragement and all of the messages they were sending out to people were getting to people who were already looking for it. It was preaching to the converted, really.

And the average age of people they were talking to at that point was about 45 to 50, and the Retirement Commission recognised that that wasn’t going to work. That starting to save at that late stage in your career didn’t work. So that’s how it came about. The recognition that maybe in the 2000s at the beginning of this century, we had to do something very different.

So, they stopped all paper brochures and television interviews and things that focussed on brochures. And the team introduced Sorted https://sorted.org.nz/ and I came in just at that time. And so the focus on financial literacy and on getting to people earlier was the most important thing I picked up when I first arrived.

TB
 And that’s been a huge transformation there, I take.

Diana Crossan
Yes, absolutely. We started off by thinking, how do we do this? You know, this is new.  I thought it was very brave of the group just before I arrived. You talked about the national strategy for Financial Literacy.

We were one of the first countries to do that because we recognised that if the government was (and we kept talking to government about other things as well) going to stick with this policy of having a New Zealand super, which was very basic as we know, somewhere between 30 and 40% of New Zealand population live on New Zealand super alone. So first of all, it was that and then it was up to you to say we needed to find ways of talking to people about what to save, how to save, how safe is it. All of the issues in our trustworthy financial services sector, we needed to talk about that. We need to talk about government policy that didn’t get in the way.

So until KiwiSaver came along, we were different from the rest of the world. The countries that we tend to look up to like Australia, Canada, US – well, the US is unusual – the UK and parts of Europe because we didn’t have the middle pillar which is about supported saving by government.

TB
Yes, some countries do that by means of very generous tax incentives which were abolished under Roger Douglas in late 1988. So, you were closely involved in the development of KiwiSaver?

Diana Crossan
Yes, Michael Cullen approached me to join the team. So, it was an interesting group of people from a variety of government organisations and his statement was “We are going to have a savings scheme. I don’t want this group to come back and say it’s not a good idea because we’re going to have it while I’m in government. What I do want you to do is tell me how to develop that.”

And just before I came into the Retirement Commission role, I had been funded by a businessman and business family in Auckland who asked me to look at how we could help New Zealanders go to university and polytechnic, tertiary education. There were high fees and high interest rates for university students at that time.

So, we had done four years of work about a children’s savings scheme. Therefore, when I was asked to join the KiwiSaver group by Michael Cullen, I was able to take all that work to that. So that included the kick start and included thinking about other ways of doing things.

TB
Yes, it’s been enormously successful. Even the FMA Financial Market Authority’s June 2022 report now says that we have $90 billion in KiwiSaver as of 30th June 2022 and over 3.17 million members. And that’s not even 20 years. It’s 15 years max. It’s been transformative.

Diana Crossan
It is, however, there are issues with that. As you know, there are a lot of people who don’t know where their money goes or know what kind of fund they’re in. And they might be young and in a fund that’s quite conservative and they could do better to be in the balanced or growth funds, and they don’t understand that.

So that’s what the financial literacy was about. Also, many of them have very low savings in KiwiSaver. And while it will be helpful when they get to retirement, we want people to put more in now so that they have a better retirement when they retire.

TB
How do we achieve that? The Tax Working Group in 2018 made a number of recommendations around that. It was suggesting that perhaps we should increase for example, a KiwiSaver member on parental leave would receive a maximum member tax credit even if they didn’t make the full $1042 contributions. And we saw something in the last month’s Budget for that alongside that.  But that’s not enough, is it really?

Diana Crossan
No. And one of the recommendations I would have made, which was too bold, I think, is that if we want women to have children, and I think we do, and if we want women to have equal opportunity through their career and their retirement, that we do, then maybe we should be thinking about how we help women to keep their KiwiSaver going. We do it with ACC. We keep it going at 80%, so what about keeping KiwiSaver going?

You know, there’s lots of ways of thinking about it, but I think we have to be quite bold in that area because not only are women having time out to have children, but they’re also earning less on average. And so we need to find ways to reduce both of those things. And one would be while you’re on parental leave, your KiwiSaver is put in by the government to even things out. And the other one would be let’s keep pushing for equal pay.

TB
Absolutely.

Diana Crossan
It makes a difference in retirement.

TB
Well, yes, because the thing about retirement is a dollar saved 20 years ago is worth exponentially much more than one saved with ten years to go to retirement. It’s that sort of thing. It’s just volume of savings steadily each year, year in, year out.

Diana Crossan
So we’re not good at this, though, because we had a government – I think it closed in 1991 I think – a government savings scheme, a superannuation scheme for its staff. And what was interesting was of course women had unequal pay until the 1960s and some of those women who had unequal pay, when equal pay came in, there was no adjustment in the super.

So they lived out their lives on those savings that were made in relation to the pay at the time. And there was an attempt to tell government that this was completely unfair. Other countries, when they made equal pay rules and legislation, changed the super at the same time so that the women who’d retired by that stage got a better income.

TB
Yes, that is still a perennial problem, and it shouldn’t be. As you say, equal pay is closing that gap, which is, what, 13% now?

Diana Crossan
Yes, about that.

TB
Give or take. Still, closing that gap is vitally important. And we all hear plenty of stories about the shortage of workers and experience. So I think, “Well, guys, we need to address those issues and retirement issues.” And looking at the Tax Working Group, what I liked about what it said in relation to proposal tax incentives, was they were focussed on the lower end.

Because to pick up your point earlier on when you became Retirement Commissioner, the people who should be saving knew they should be saving, were saving anyway. It was getting to those people who weren’t as aware as they needed to be about what they could do.

And so helping that group was what I liked about the Tax Working Group’s suggestions. For example, removing the employer superannuation tax charge on employer contributions below the $48,000 threshold at the moment.  What do you think about the tax treatment of KiwiSaver and savings?

Diana Crossan
I’m not a tax expert as I said earlier I think. It’s not something I have spent a lot of time on. I think my reason for signing up to the letter was much more about getting more tax, rather than tinkering with what we’ve got at the moment.

You might think, paying women when they’re on parental leave is tinkering. But it’s dear to my heart.

TB
I don’t think it’s tinkering. I think it’s something we should be doing.

Diana Crossan
In terms of why I signed up and why I’m interested in this issue, is I just don’t think we’ve got enough money. And I know it’s as basic as that. We have one of the lowest tax rates, as you know, in the OECD. Why do we do that? Why don’t we tax? We want the same schools, the same health services. We want housing for everybody. We want the same services as they have in France or as they have in Germany or Canada or Australia. But we all pay less tax. That’s just madness to me.

TB
As I heard someone put it “We want Scandinavian levels of [‘free’] service, but American levels of tax” and the two are incompatible.

Diana Crossan
There is strong evidence that investing in health and education outcomes leads to productivity and economic well-being. There’s strong evidence that if you focus on health and education in a nation that there will be an increase in productivity and an increase in economic well-being. Why don’t we do it?

TB
Well, yes, because the way I do see it as an economic issue. Because if we have poor outcomes for lower income groups and Pasifika and Māori etc., that’s an economic anchor on the rest of us. We pay more for our health care.

And I know from my time when I was coaching rugby in South Auckland, players didn’t get the ACC treatment that we wanted them to get to have the injuries looked after because they couldn’t afford the little surcharge. That was only $5/$10. Some people, I think $5/ $10, that’s nothing. When you’re on minimum income, it’s a lot. And so you could see players, you could see from their injuries, that had never been properly treated, that there’s a shortage of funds there. And so longer-term health issues develop from that.

Diana Crossan
And you’ll be aware that we’ve had underspend for a long time, so it is catch up time and that’s why I signed this letter. Yes, let’s get out there and say for those who can afford it, and we’re not talking about the stinking rich, we’re talking about people who could pay a little bit more. I mean, if we went to Australia, we’d be paying 45% and we’re paying 39% at the top and mostly 33%.

TB
Yes, our tax rates are not high by world standards. To me, the big issue that we have in our tax system when we talk about income tax rates, is that low to middle income earners pay a lot more, the $48,000 threshold which it goes from 17% to 30% has not been lifted since 2010.

And how that’s been allowed to develop – politicians then come along and like snake oil salesman said, ‘Oh, we’re giving you a tax cut’. And I’m thinking, ‘No, you’re just simply restoring a position that shouldn’t have existed in the first place.’

So, there’s enormous pressure there, and then we’re on to the question of wealth. Last week, when I talked about how the Greens tax proposal for a wealth tax caused a lot of conniptions amongst people. So politically I think it’s going to be a hard push. But we have this aversion, it seems, to taxing capital, which I’m not sure where that’s developed. Is that something you’ve seen over time? Has it come up in discussions about broadening the tax base?

Diana Crossan
What I’ve seen, Terry, I think there’s two things. One is people get nervous. It’s almost NIMBY, isn’t it? Let’s find a way of doing it in somebody else’s backyard but don’t let me pay more, let others do it somehow.

And I think there’s a lot of ignorance about what capital gains or wealth tax might be and that people are concerned they’re going to pay millions somehow. Yet not paying capital gains seems blatantly unfair. I would say if we could have a poll, I think we’d find more people would be for capital gains tax than those who are against it. And they were hoping that this government, when it had its huge mandate, would have done that. Maybe the ones against it are more vocal. But I think overall the people I meet, the ordinary people, understand that it’s fairer.

TB
There’s an awful lot of misinformation that goes on around this now and watching the debate at the time. It was certainly the squeaky wheel squeaking a lot back in 2018/2019, happened to be those that would have been most affected by it.

Naturally someone who sits on substantial unrealised capital gains and property or whatever, of course they’re going to say, ‘Well, this is going to hurt, so I don’t want it’. And I don’t have a problem with people saying that. I know we need to look at the bigger picture.

Diana Crossan
If you have enough money to get into the property market and you manage it well, you can make quite a lot of money.

TB
On leveraging the gains, when you look at how generous our tax system was until this current Labour government came in, it was extraordinary generous. You could offset your losses against your other income, you’re able to leverage it. And one of the key parts of the return, the capital gain was untaxed, until the changes around Brightline tested all yanked that scenario.

So now we have a de facto capital gains tax applicable to one asset class, a residential property. You know, for me I have great fun explaining to people who want to migrate here from overseas. “Yes, we’ve got about five different tax treatments because we don’t have a general capital gains tax.” Now that keeps me in work, but I can hear the brains whirring away trying to understand the intricacies of the various regimes in place, thinking what is the problem here? Broadening the base means we can lower the tax rates. We may not need a 45% tax rate if we broaden the base.

Diana Crossan
I’m not suggesting a 45%. Even if we went to 40%. My understanding is that the tax take brings in $113 billion. And if we had another $20 to 30 billion, we would be able to do the things we need to do in housing and health. And I can also hear people who might be listening saying “We can be more efficient, we waste money”. Well, my understanding is that yes, we can be more efficient, but we can’t make $20 to 30 billion out of efficiencies.

TB
Yes, that’s the key issue. What was surprising, the Greens were proposing $10 to $12 billion of tax increase, a 10% tax increase to tackle it. That is a substantial tax increase. But it gives you an idea of the scale of the problem. But no one’s really talking about that. They were focussed on this wealth tax, which was probably the most ambitious part of the proposal and the least likely to actually come into force. Because that would require a lot of political balls to drop in the right place for that to happen.

Diana Crossan
I think one of the things about the TOP party and the Green Party is their tax proposals didn’t increase the tax take a lot because they also were dealing with supporting the low income. That was more about making it fairer. I’m all for making it fairer too. But I think, we need more money. I know we need more money.

TB
I keep harking on about the climate change costs. 700 properties were rendered unliveable by Cyclone Gabriel. That is probably the thick end of a billion dollars. And that’s just this year. 400 are in Auckland. Another 300 are along the Hastings, Napier, Tairawhiti-Gisborne and Wairoa districts, none of whom by the way have the funds. You can see from their rating base. So, it’s a communal responsibility.

Climate change doesn’t distinguish between postcodes. It’s coming and we’re dealing with it right now. And I think the crunch point will be the insurers. They’re already starting to say, “Well, we’re not going to insure you if you build there. We’re not going to give you that.”

Last week I got a call from someone who was down in Christchurch and they’re still arguing with the insurers over the earthquakes. We don’t want that scenario repeated across the whole of the country in relation to climate change.

Diana Crossan
We certainly don’t. And while I’ve focussed on housing, education, child poverty and health – the whole issue of being prepared for what’s coming – we’ve had a taste of it and it’s not going to go away quickly.

We need to work hard for ourselves, but we can’t stop it all, so we’re going to have, I think we all agree, having weather we’ve never had before, and we’re going to have more weather we’ve never had before. And so we need more money. I just keep saying we need more money.

TB
And a little a lot goes a long way.

Diana Crossan
And people have asked why the signatories of the letter don’t just put their hands in their pockets and pay up and give more to education and health and poverty.

And what I know, of course, is that quite a few people I knew who signed the letter are already doing that. But some of them, of course, rightly said, “I’d be much happier if everybody was doing it and it was fairer across the board so that it wasn’t just philanthropists. We weren’t just relying on charity.”

TB
Yes, that was my philosophy as well. And we are actually a generous nation in that. And what’s notable is often it is relatively low-income people are very generous, as a proportion of income given to charities.

Diana Crossan
When I was working at Wellington Free Ambulance, it was collecting in the street. It was always very interesting who gave money, and it was people who you would think wouldn’t be able to afford to. But people are generous and that’s good. But I think it’s so much better for housing, health, even ambulance, I believe, should be part of our government funded services. And that’s what we want. And we just need to pay more even if I sound like a broken record, Terry.

TB
Well, Dame Diana Crossan, that seems to be a very good place to leave it, broken record or not. I think it’s something we need to be hearing.

Thank you so much for being part of this podcast. It has been fascinating to talk to you and hearing the story of your back involvement with the Retirement Commission and the changing landscape, which has changed considerably for the better. Thanks for your efforts. It’s been a pleasure having you on the podcast. Thank you so much.

Diana Crossan
Sure. Thank you for having me.

TB
That’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts.  Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day.

Greens wealth tax bombshell

Greens wealth tax bombshell

  • IMF suggest a CGT
  • Crypto-asset reporting
  • Auckland’s budget

The Greens announced their tax proposals a week ago, last Sunday.

 And my reaction was, “These are very bold.” They proposed major tax cuts at the lower end, meaning 95% of taxpayers will be better off under the Greens. Those cuts are paid for by increasing the top tax rate to 45% and increasing the 33% tax rate to 35% as well. These increases are part of the trade-off for the proposed nil rate band of $10,000, which no doubt will be very popular. As is well known, many other jurisdictions have something similar and given the fact that nothing has been done in relation to indexation of thresholds for well-nigh 13years now, it’s unsurprising that the pressure is built up, particularly at the lower end, to change the tax rates.

But most of that got swept away by the Greens controversial wealth tax proposal. In summary, there are two parts to it. Any individual whose net assets, net of mortgages for example, exceed $2 million will be subject to a wealth tax of 2.5% on the excess. For family trusts there is no nil rate band or threshold at all. It’s a flat 1.5% which is a deliberate anti-avoidance mechanism.

Latest Inland Revenue data on trusts

Trusts were used to avoid the impact of estate and gift duties in the past and are used in other jurisdictions to mitigate the impact of wealth and estate duties. So, the Greens have targeted this avoidance. Coincidentally, last Saturday the New Zealand Herald published a piece including details of the trust tax return filings made to Inland Revenue for the year end 31st March 2022 which indicated the value of assets held in trusts. The net assets of the 201,100 trusts which reported, was just over $300 billion. So at 1.5%, theoretically that’s $4.5 billion dollars straight up there.

Incidentally, what that Inland Revenue report doesn’t show is the non-reporting trusts, those are likely to be quite significant. We really don’t know how many trusts there are in New Zealand, the best estimates are somewhere between 500,000 and 600,000. Many of the non-reporting trusts don’t do so because they have no income, but they hold assets such as the family home. So, family homes that have been held in trusts may now be subject to the Greens’ proposal.

Now this kicked off quite a storm, which I watched with a little bemusement because the Greens first of all have to put themselves in a position of such leverage that its coalition partners, almost certainly Labour and Te Pati Māori, agree to the proposal. And then somehow between 14th October, the date of the election, and 1st April next year, the legislation to introduce all of this is drafted and passed through Parliament. So ,it’s a big challenge ahead.

But it caused quite a stir, and I fielded several calls from people concerned about what they saw here, trying to get an understanding about it and my views on it. At our Accountants and Tax Agents Institute New Zealand’s regional meeting on Tuesday we had a very lively debate around the question of this wealth tax.  Normally, a lot of the time we’re talking about what’s in the legislation and whether Inland Revenue ever answer their phones again. All this I think shows the impact of the proposals, even though in theory they affect only a small group of people, the top 1%.

But there is substantial wealth locked up in property. We know that from digging around the official figures. For example, Auckland Council estimates the rateable value for all property within the Auckland Council region will be over one trillion dollars as of 30th June. Obviously, not all of those would be subject to a wealth tax.

What’s being suggested by other parties?

But I thought it was interesting that people are taking the Green’s proposals very seriously. The income tax shift to 45% on income over $180,000 won’t be terribly popular. But at present, the proposals that they’ve put out for the income tax cuts would affect many more people and benefit many more people, all those earning under $125,000, which is something like just over 4 million people. This has a broader impact than either National or Act’s proposals.

It’s quite interesting now as the election comes ever closer, we can start to see the tax policies of the various parties taking shape. The Greens are raising a substantial amount of tax to deal with poverty. Act is proposing tax cuts and it’s taking the ideologically opposite approach of substantial cuts to spending in order to achieve its top rate of 28%.

TOP, The Opportunities Party, are putting out a policy which has a land value tax, and they also propose tax increases at the higher end together a nil rate band and also substantial tax cuts at the lower end.

We haven’t yet heard from Labour on what they would do.  Over on Twitter @binkenstein put together a graph comparing the various parties’ proposals so far.

So, the debate has ramped up quite a bit. Obviously, the Greens wealth tax is the most controversial part of it, but the other part which really got very little commentary but is equally controversial, was a proposal to raise the income tax rate for companies from 28% to 33%. More than most of the Greens’ proposals, that would probably produce a certain frisson of tension amongst multinationals. They may look and think “Maybe we might not increase our activities in New Zealand” or they may ramp up what they try and do under profit shifting.

Anyway, it all made for a very lively discussion all round. As I told people, wait and see. But it is interesting to see the pressure point for those are likely to be affected around a wealth tax.

What does the IMF think?

With almost impeccable timing, the IMF, the International Monetary Fund, were in town and it suggested that maybe it was time for a capital gains tax.

The Concluding Statement of the 2023 Article IV Mission noted:

Well-designed tax reform could allow for lower corporate and personal income tax rates by broadening the tax base to other more progressive sources, such as comprehensive capital gains and land taxes, while also addressing fiscal drag and improving efficiency.

It’s not the first time the IMF has suggested changing the tax system. They did so in 2021. In fact, there’s a regular pattern of the IMF and/or the OECD coming here looking around saying, “Well, guys, the country is in good shape, generally government policy is pretty sound, but you need to do something about capital gains taxes.”  Regardless of whichever party is in power the Government’s reaction is quite funny. They like the bit about everything being under control. But at the mention of capital gains tax, they all throw up their hands in horror. And yet, as we know all around the world, capital gains taxes are a common feature of tax policy.

The Crypto-Asset Reporting Framework, the latest expansion of the Common Reporting Standards

Now, the Greens wealth tax proposal will probably be music to the ears of the French economist Thomas Piketty, who has proposed a global wealth tax, as one of the core points of his monumental work, Capital in the 21st Century. And at the time of publication in 2014, the opportunities for that global wealth tax to ever eventuate were probably just about zero or maybe marginally above zero.

But since then, we’ve had the introduction of the Common Reporting Standards which I think is actually revolutionising the tax world quietly because an enormous amount of information sharing is now happening on. We know from what’s been reported under the Automatic Exchange of Information that there’s something like €11 trillion held in offshore bank accounts. The Americans have got their FATCA, the Foreign Account Tax Compliance Act, and as a result of that, they know that American citizens have got maybe US$4 trillion held offshore.

Now, the latest part of the Common Reporting Standards is extending the framework to crypto-assets and I talked about this last year when the proposals first came out. Those proposals have now been finalised and the Crypto-Asset Reporting Framework is now in place. There have also been some amendments to the Common Reporting Standards. I’m going to cover all these changes in a separate podcast because I think they’re worth looking at in a bit more detail.

The tightening noose of information exchange

But the key trend in international taxation that’s going on, which I think is going to have a long-term impact around the world, and particularly for tax havens, is this growing interconnectedness, the sharing of information that goes on between tax authorities through mechanisms such as the Common Reporting Standards. I asked Inland Revenue about what information they had been supplied under the CRS in relation to the numbers of taxpayers and the amounts held in overseas bank accounts. Inland Revenue turned down my Official Information Act request on the basis that much of this is obviously confidential, but also would be compromising to the principles under which the information is shared.

Now, I’m not entirely sure about that. I think the more openness we have about what is being shared, the better the likelihood of tax enforcement once people cotton on to what’s happening. They will not think “Yeah, well, I’m just going to leave it over in the UK or the US or wherever, and Inland Revenue will never find out.” My view, as I tell my clients, is they always find out and they know much, much more than you can imagine.

And outside of the CRS there appears to be a regular exchange of information about property purchases between the United States Internal Revenue Service and Inland Revenue here. So be advised, the Crypto-Asset Reporting Framework is just the latest in a building block of international information exchange.

The Auckland Budget – what about climate change?

And finally, the Auckland budget got signed off last week. I’ve been in the press disagreeing with the sale of any part of the Auckland airport shares, and I still stand by that. I think it’s a short-term fix for a long-term problem, but that’s now done and we move on.

What I did think was quite surprising as you delve into the budget is some of the numbers that come out. As I mentioned earlier, the rating base for Auckland and according to the Auckland Council’s documents is over $1 trillion.

But the thing that really surprises me, which wasn’t addressed in the budget so we’re going to have to address it next year, is the question of climate change. Towards the end of the process, the Government announced that in the wake of Cyclone Gabrielle 700 homes around the country are too risky to rebuild. The Government and councils will offer a buyout option to those property owners.

400 of those are in the Auckland region and apparently it doesn’t also take into account what is going to have to happen out at Muriwai because of the slips and the dangerous cliffs over there. As Deputy Mayor Desley Simpson pointed out, “If you say it’s 400 [Auckland homes] times $1.2 million, give-or-take just like the average house price, you’re talking half a billion dollars.”

The question arises how is that split between Auckland ratepayers and the rest of the country? Yet there was nothing in the Auckland budget about this, and that’s just this year’s damage. What happens if we get another Cyclone Gabrielle, next year?

We’ve got an interesting scenario developing where we’re talking about reducing emissions and we’ve got a distant horizon 2030 or whatever farmers and other parties want to extend it to. But in the meantime, we are picking up the bill now for increased damage and we don’t seem to be thinking in terms of how does that affect our taxes and rates? And this is going to be an ongoing issue. So, the question of paying for that, whether it’s a wealth tax, capital gains tax, whatever, is going to become ever more present, in my view.

That’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts.  Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day.

Due date for submissions on the Tax Principles Reporting Bill

Due date for submissions on the Tax Principles Reporting Bill

  • Australian Tax Office ruling on residency – time for a clearer statutory definition?
  • Applying for Australian citizenship? Watch out for the sting in the tail.

Submissions closed Friday on the Tax Principles Reporting Bill. Now for a bill that doesn’t actually increase the tax rates this has been a surprisingly controversial bill, mainly because it’s actually perceived as being highly political in its ambit in introducing reporting on tax principles. The speed with which with which it has been rushed through is also controversial because normally tax legislation is developed through what we call the generic tax policy process (GTPP). The GTPP is very well regarded around the world.

But every so often, for whatever reason, the process is bypassed. Sometimes as during the COVID emergency because things need to be done immediately. It’s a framework through which New Zealand tax policy has operated for the better part of nearly 30 years. And it means changes of tax policy and of the particular tax treatment of certain items are developed over time through consultation.

Controversy around the Tax Principles Reporting Bill

In this case, the Tax Principles Reporting Bill came out of left field. There’s been very little consultation about it. In fact, we’ve only had barely three weeks between its introduction alongside the Budget and today. So that’s part of the controversy around it.

The other question is what it really is setting out to do. I think most objections will centre around this question of why is this here? The idea of setting out some ideas about what tax principles might be is not unreasonable in itself. But criticism of the Bill is focusing on whether it’s very clear about what it’s trying to do. For example, Inland Revenue is required to report on certain effective principles and whether there are inconsistencies in the tax system with these principles. But then, as several tax advisors have asked, what action will be taken at that point. There is also no acknowledgement that tax policy ultimately involves trade-offs between principles and politics. To be frank, tax is politics.

I’ve seen one or two interesting comments about which agency should be reporting under the Bill. Inland Revenue or maybe Treasury?  There are a whole heap of things to consider about the Bill. Although it comes into effect on 1st July, if there is a change of government, it will almost certainly be repealed.

It’s an interesting Bill because it’s attempting to clarify the basis on which we design and operate a tax system.  But it’s also flawed because I don’t think it’s has actually achieved that. We’ll see plenty of pushback and I’ll be interested to read the submissions on the bill. (Shortly after the podcast was recorded, John Cantin published his submission).

Australian tax residency

Moving on, I frequently deal with issues of tax residency. It’s a core part of what I do because tax residency determines what sources of income will be taxed in Aoteaora-New Zealand. There are also rules set out in double tax agreements, and one pretty basic principle wherever you go in the world is that if you have property situated in the country, that country gets what we call the primary taxing rights to it.

But individual tax residency is a matter of great practical importance. If a person is resident in the country, then that country can tax them on their world-wide income, and that can have quite significant implications.

The Australian Tax Office (ATO) has just updated and released a tax ruling TR 2023/1, on income tax residency tests for individuals.  Australia deems a person to be tax resident in Australia if they reside in Australia under what they call the ‘ordinary concepts’ test, and that includes a person whose domicile in Australia, unless they’re satisfied that they have a permanent place of abode outside Australia.

A person is also resident if they have actually been in Australia continuously or intermittently during more than half of the year of income, unless they’re satisfied that they have a usual place of abode outside Australia and they do not intend to take up residency in Australia. There’s also another series of tests, which I’ve not come across, relating whether or not they’re a member of a superannuation scheme or are covered under the Commonwealth Fund.

When you look at these tests you can see there are quite a few value judgements involved. And so there have been calls for the Australian tax residency test to be put on a more statutorily defined basis, most notably by the Australian Board of Taxation. “The Board’s core finding is that the current individual tax residency rules are no longer appropriate and require modernisation and simplification.”

Now it’s of interest here obviously for people going across to Australia, but also because our own residency test is twofold. The primary test, and this is often forgotten, is a person is tax resident in New Zealand if they have a permanent place of abode in New Zealand. You’ll note that phrase, “permanent place of abode” is actually also used in Australia.

Failing that, there’s the days present test where a person is deemed to be resident in New Zealand if they are physically present in New Zealand for more than 183 days in any 12-month period. There’s a subtle difference there between our days present test and many other jurisdictions in that it is based on a rolling 12-month period rather than a tax year. On the other hand, when you get down to defining a permanent place of abode, that involves quite a number of value judgements.  

The current residency test is now over 30 years old. As noted above the Australian Board of Taxation suggested that really the Australian test perhaps should be more clearly defined in statutory legislation. And I’m coming around to the view that maybe that’s what we need to do in New Zealand as well. I’ve seen at least one academic article in the past year that’s picked up on this point.

“You can check out any time, but you can never leave”

Now, why we don’t do that is explained in the Inland Revenue Interpretation Statement on residency. Right now the permanent place of abode test does make it easy for someone to be defined as tax resident, but difficult to lose that.

Notably, the Interpretation Statement does not have an example of a time period of how many years must a person be overseas before Inland Revenue would consider that someone has lost their permanent place of abode.

So, this makes residency a very open-ended issue, which is not terribly good in terms of certainty for taxpayers. It’s become more of an issue in the past 30 years since we introduced the permanent place of abode test in 1989 because as we have seen in the last three or four years, the world’s got a lot more mobile with people moving and working around the world.

This issue of being tax resident here, perhaps inadvertently, is actually something that individuals are concerned about. They obviously want to minimise their tax obligations as far as legally possible. On the other hand, governments know that if you set out very specific tests then people will play to the letter of those rules by watching carefully the number of days present in a country.

A British alternative?

The British residency test, the statutory residence test, actually deals with this day count issue pretty well by specifying what it calls “ties”. Depending on how many ties to the UK you have, whether you’ve been tax resident beforehand and how many days you spent in the previous tax years, then the number of days you can spend in a in the UK in a tax year before you become resident drops.

It’s therefore not as simple as you can spend 182 days and then you’re okay. Each year it drops off quite dramatically and basically at its tightest definition you can only spend 16 days in the UK. Obviously, people will still try and manipulate their timing within these limits but the UK test is much more specific and it gives a great deal of clarity.

And I think in our case, just as the Australian Board of Taxation considers, it’s not an unreasonable objective to be looking at a statutory definition of residency which addresses the concerns Inland Revenue rightly has about people trying to game the system, but it provides certainty for people.  

Becoming an Australian citizen – beware the potential tax trap

Still on Australia, there was good news recently that there’s now a pathway for Australia and New Zealanders who live in Australia to become citizens. This is very important for the huge numbers of New Zealanders over there, well over half a million. There is, however, a potential sting in the tail.

People will be aware that New Zealand has what we call a transitional residents exemption, which applies to new migrants or people who have returned to here and have not been tax resident for ten years. Under this exemption their non-New Zealand sourced investment income for the first 48 months is generally not taxable here.

Australia has a similar test if it applies to what they call temporary residents and it applies to most New Zealanders living in Australia. The sting in the tail is that if you apply for citizenship in Australia, you are no longer a temporary resident. What that means in particular is your New Zealand assets here become subject to Australian tax, including capital gains tax. The impact of Australian capital gains tax on New Zealand assets is often overlooked. It’s an issue I deal with regularly.

So that’s the trade off on Australian citizenship. Overall, it’s a good news and it puts people who have contributed significantly to the Australian economy on a level footing. But there is a wee sting in the tail for some. So, approach with caution.

That’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts.  Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day.

This week Inland Revenue clarifies its position on trusts and tax avoidance and indicates further work on tax rate misalignment is needed

This week Inland Revenue clarifies its position on trusts and tax avoidance and indicates further work on tax rate misalignment is needed

  • Facebook and Google’s results indicate scale of BEPS issue
  • Is the just announced Government voluntary buyout of 700 unliveable homes a harbinger of things to come?

Last week when discussing the new tax bill, which includes the proposal to lift the trust income tax rate to 39%, I mentioned that Example 20 in the accompanying commentary had raised a number of concerns amongst tax agents and advisers. It seemed to be endorsing the option of trusts distributing income to beneficiaries with lower tax rates, leaving us all wondering, is that really correct?

It transpires Inland Revenue picked up on those concerns and then released the following statement.

“We are also aware that one of the examples used in the Bill commentary and factsheet has caused some confusion. The example noted that trustees could distribute income to a beneficiary, who may then decide to resettle it on the trust. We agree that there is some uncertainty under existing law about the tax treatment of such a settlement and we will be undertaking consultation on this. To avoid creating that doubt we have changed the example in those documents.”

The accompanying commentary has been updated and re-released. This shows the area is not as cut and dried as people might imagine. Obviously, Inland Revenue and advisers alike would like to have as much certainty as possible. So, it’s good that Inland Revenue picked up on this issue. But you do wonder how it managed to slip into the commentary in the first place without someone realising it might actually be a bit of an issue.

Rate misalignment problem solved? Not quite

Separately another advisor (Aman Chand of Bentleys Chartered Accountants) has picked up an interesting comment in the Regulatory Impact Statements (“RIAs”) which are issued alongside new legislation. RIAs discuss the purpose of this legislation, the alternative options and which one was chosen and why.

The issue the increase in the trustee tax rate to 39% addresses is one of rate misalignment between trustee income being taxed at 33% and individual personal income being taxed at a top rate of 39%. This issue was well understood at the time of the introduction of the reintroduction of the 39% tax rate in 2021. In fact, Inland Revenue and Treasury both said the trustee rate should rise to 39% at the same time. And now that’s what’s happening.

But for some time, there’s also been a rate misalignment between the corporate tax rate of 28%, the portfolio investment entity (“PIE”) rate, which is also 28%, and the then top individual personal rate of 33%. Inland Revenue had been looking at this for some time and had noted that there was starting to be a steady accumulation of undistributed income in companies. This rate misalignment issue was something that had been on its radar which it had started to make moves towards addressing.

What Aman spotted is that the RIA on the increase in the trustee rate does discuss this existing misalignment issue. The RIA notes Ministers have decided to progress increasing the trustee tax rate to 39% “while considering PIE and company shareholder misalignment issues on a longer timeframe”. Even if the trustee tax rate is aligned to the top personal tax rate, there will continue to be opportunities to circumvent that rate by substituting trusts with companies or PIEs. This is something that is going is obviously has been on the Inland Revenue’s radar and will remain so.

And even if there’s a change of government following the election in October as a result of which the top rate, 39% rate will no longer apply, the issue of a current rate misalignment between 28 and 33%, assuming that remains the top personal tax rate, will remain. Inland Revenue is working on this, and the RIA has some interesting details about potential options.

Don’t be banking on a change of Government

Accordingly, people hanging their hat on a change of government to defer this particular issue of a trustee income tax rate increase to 39% should still be aware that it’s likely that Inland Revenue may well introduce or recommend the introduction of other type of tax avoidance rules to tackle rate misalignment in the future. The issue is on their radar, and it still may well be something we will encounter regardless of whoever forms the government after the election.

Facebook, Google and BEPS

Last week I mentioned Facebook. New Zealand had released its results for the year ended 31st December 2022. And coincidentally last week we also covered the Government’s proposals for the global anti base erosion rules, the Pillar two proposals which are designed to help tackle the issue of base erosion and profit shifting (BEPS), where the New Zealand tax base is being eroded by profits shifting out of here to lower tax jurisdictions.

Facebook reported gross advertising revenue of over $154 million, but its net profit before tax was $3.3 million. And that’s because over $149 million was paid to a related company Meta Platform Ireland Ltd for the purchase of services during the year. Ireland’s corporate income tax rate is 12.5%, compared with ours at 28%. Withholding tax may be applied to some of these payments if they are treated as royalties, but you still have an idea of the scale of the issue.

It so happens that last Friday, after we recorded the podcast, Google New Zealand released its results for the year ended 31st December 2022. And in this case, it paid over $870 million in service fees to offshore affiliates. Mostly, it appears to the Singapore based Google Asia Pacific Pte Ltd. You shouldn’t be surprised to hear Singapore has a preferential tax regime. Incidentally, MasterCard and Visa New Zealand appear to route their payments through Singapore.

To put everything in context about the scale of the issue being faced by ourselves and other countries, if you look at Facebook and Google New Zealand’s 2022 results they paid more than $1 billion in service fees to overseas affiliates for the year. In theory, at a corporate income tax rate of 28%, that represents over $319 million in potential tax.

So, the Government and other governments are keen to see Pillar Two and Pillar One hopefully come into play and deal with this issue of tax and profit shifting. But as the commentary to the bill which introduced the Pillar Two legislation notes the benefit is likely to be about $40 million annually.

The impact of the GloBE rules is therefore not terribly significant. The issue of profit shifting still remains. It will always be there, by the way, because it is only appropriate that the tech companies charge for the use of their valuable IP in New Zealand. So, it’s not a question of we’re just going to disallow $1.1 billion of deductions and bingo, we’ve got $319 million. That is never going to happen.

But the difficulty with transfer pricing is really determining the value on that and just how much of it can be kept in New Zealand. And that’s going to be an ongoing struggle, whether or not Pillar One and Pillar Two actually proceed.

Cheque please

Finally, this week the government announced that in the wake of Cyclone Gabrielle, 700 homes around the country are considered unlivable.

And so homeowners will be offered a voluntary buyout through a funding arrangement between the Government and councils. Apparently, another 10,000 homes will require investment in flood mitigation around them so they can be protected when the next severe weather event hits. Note the word “when”, I think we are now in the midst of climate change.

I mention this because it reinforces the point we’ve been hammering away at for some time. Climate change is here and it’s going to have an impact on homeowners all around the country. It doesn’t differentiate between suburbs. The likelihood is that we are going to have to start thinking seriously in some cases about managed retreat, that there will be more and more houses that are unlivable. The insurers are already pricing it in, so some houses may become uninsurable over time.

The question really coming to the forefront now is who’s going to pay for this buyout and managed retreat? Councils, for example, may have allowed properties to be built in areas where they should not have been built. Auckland Mayor Wayne Browne has already spoken about this. By the way 400 of those 700 unlivable properties are in the Auckland region.

At a time when next year’s Auckland Council budget is going through a very controversial process, having to fund in some way the buyout of people from 400 properties at a time when the average price house price in Auckland is $1,000,000 is quite a significant hit to the bottom line even if the Government chips in.  

This all reinforces what I’ve been saying for some time; the impact of climate change plus the demographic changes that are happening with the ageing population means that we really do have to think a lot harder about how much tax we are going to need. Either that, or what services we’re going to reduce. And the question of the taxation of capital is going to become ever more important. The politicians keep kicking it down the road, hoping it just will go away. It won’t.

The climate change bills are now starting to come in and will continue to mount. We will wait and watch to see who of the politicians in the main parties is going to grasp that nettle and say, “Hey, guys, this is this is the deal. If you want us to help you mitigate the impact of climate change, we have to spread the tax burden wider.”

In the meantime, I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts.  Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day.

Government introduces the legislation to implement the proposed Pillar Two global minimum tax

Government introduces the legislation to implement the proposed Pillar Two global minimum tax

  • More on the proposed trustee tax rate increase
  • A long-standing over-taxation issue is resolved
  • A new tax principles act.

One of the odd things about the budget process for me is that tax really doesn’t feature very much. In fact, I know some very experienced tax practitioners who don’t go to the Budget Lockup because of this. Most of the Budget and the accompanying analysis focuses on the exciting stuff – where the money being spent and the winners and losers from that funding. The source which provides most of that spending is almost an afterthought unless as in 2010 and again in 2017 tax cuts are a centre piece of the Budget mix. 

In part, that’s because, unlike Australia and the United Kingdom, the legislation relating to various technical amendments to the Taxes Act is usually introduced separately. It was therefore a bit of a surprise last week when after the budget lockup period ended at 2 p.m., I discovered that there had been not one, but two tax bills published. Other than the announcement of the increase in the trustee tax rate to 39% the budget documents had not indicated there would be many significant measures.

In fact, as the bill’s title explains, The Taxation (Annual Rates for 2023–24, Multinational Tax, and Remedial Matters) Bill, it primarily relates to the introduction of the relevant legislation to support the OECD’s Pillar Two global minimum tax proposal. You may recall the Australian Budget two weeks ago included similar measures. It would have been surprising if we had not followed Australia’s lead although neither the Revenue Minister nor the Finance Minister made much reference to the proposals last week.

Introducing the global minimum tax rate

The intention behind Pillar Two is to impose a global minimum tax of 15% for all those multinationals with annual revenue exceeding €750 million, these are the so-called global anti base erosion (“GloBE”) rules. The legislation and commentary include a heap of new tax acronyms including DIIR (Domestic Income Inclusion Rule), POPE (Partially Owned Parent Entity) and QDMTT (Qualified Domestic Minimum Top-up Tax), which a rather cynical overseas tax advisor has suggested should be pronounced Q-Dammit. 

The commentary to the tax bill explains the legislation will only take effect once a “critical mass of countries” has adopted the GloBE rules. This is thought to be “very likely, though is not certain”. If that critical mass is reached, then the rules will be phased in starting from 1 January 2024.

Assuming Pillar Two does proceed then how much will it raise? Not much. According to the Regulatory Impact Statement (RIS) released with the tax bill the GloBE proposals should be worth $25 million annually with another $16 million coming from taxes on amounts which would have otherwise been shifted to lower tax jurisdictions. The RIS explains this “modest amount” is because of a number of factors including that only 20-25 multinationals will be affected.

Now earlier this week. Facebook’s New Zealand’s accounts were public. And despite earning gross advertising revenue over $154 million its reported profit before tax was just $3.3 million, and it just ended up paying just over $1,000,000 in tax. That’s because it paid over $149 million for the purchase of services to a related company, Meta Platform Ireland Ltd. The GloBE rules are intended to counter this. But don’t expect that they will raise significant sums of money.

Raising the Trustee tax rate to 39%

The headline measure and tax measure in the budget was the proposed increase in the trustee tax rate to 39%, with effect from 1st April next year. Now, this is a conceptually logical move, and as noted last week was one that both Treasury and Inland Revenue recommended should have happened when the personal income tax rate was increased to 39% on 1st April 2021.

The commentary for the tax bill provides some more detail around the introduction of the measure, and a couple of points stand out. One of Inland Revenue’s examples appears to suggest that it would not automatically see allocation of beneficiary income by a trust to someone whose tax rate was below 39% as constituting tax avoidance. At least this appears to be implication from example 20 in the commentary, and that’s caused a few comments from other tax advisers as to whether Inland Revenue is signing off on tax avoidance.

Example 20: Mitigating over-taxation

Amy (an air traffic controller) and Anthony (a builder with his own company) have settled some income-generating assets on a discretionary family trust for the benefit of themselves, their children (both minors under the age of 16) and future grandchildren. Amy, Anthony and their accountant are the trustees.

2024–25 income year

Anthony has personal income of $70,000 and Amy has personal income of $180,000. Their trust has income of $40,000.

If the income is retained as trustee income, it will be taxed at the proposed 39% trustee tax rate. Any income allocated to their children as beneficiary income will also be taxed at 39% under the minor beneficiary rule.

However, by allocating the income to Anthony as beneficiary income, it can be taxed at his personal tax rate. This amount can be credited to Anthony’s current account, available to be called upon at any time, or he can settle it on the trust if he wishes to do so.

2025–26 income year

Barry, the older of Amy and Anthony’s children, has turned 16, so he is no longer a minor. Barry has no personal income. Anthony again has personal income of $70,000, and Amy has personal income of $180,000, while the trust has income of $50,000.

Since Bary is no longer a minor, he is not subject to the minor beneficiary rule. Income can be allocated to Barry as beneficiary income and taxed at his personal tax rate (for example, up to $14,000 at 10.5%, over $14,000 and up to $48,000 at 17.5%).

If the trustees do not want to distribute this income to Barry, it can be credited to his current account, available to be called upon at any time, or a sub-trust arrangement can be set up so that Barry’s interest in a portion of the trust assets is recognised and protected.

On the other hand the legislation specifically counters attempts to distribute income to certain corporate beneficiaries. The benefit here obviously being that instead of trustee income being taxed at 39% it would be taxed at the corporate income tax rate of 28%. The bill aims to negate potential distributions being made to closely controlled family companies.

The bill will not apply to deceased estates but only in respect of trustee income derived within 12 months of the deceased persons date of death.  Based on personal experience and discussions with lawyers that 12-month period is too short, 18 to 24 months seems more appropriate

There is also an exemption for disabled beneficiary trusts which are defined as having only one beneficiary other than any residual beneficiaries who may benefit on the death of the disabled person. Critically the trustee must not allow any further beneficiaries apart from residual beneficiaries to be added.  I expect that this may mean a number of existing trusts may have to be amended or be re-settled in order to comply.

A end to over-taxation of ACC lump sums

Moving on and some good news. I’ve previously covered the situation where Accident Claims Compensation Corporation has paid a backdated lump sum, representing several years compensation after the claim was initially denied before being accepted on appeal. Now, as I was explained in the past, such payments often result in over taxation relative to the tax that would have been payable if the payments had been made at the correct time.  The commentary gives an example of this where the claimant would have an additional tax liability of $26,040 as a result.

The Bill proposes to change this by allowing a tax rate to be used when a backdated lump sum payment is paid to be based on the recipient’s average tax rate for the four years prior to the tax year in which they receive the backdated lump sum payment.

There will also be provisions relating to lump sum payments made paid by the Ministry of Social Developments and those will eliminate any potential further tax liability for recipients.

According to the accompanying regulatory impact statement, the effect of this over taxation is roughly about $9 million a year. This is great news, and one I’m personally pleased about because I’ve been lobbying in the background for Inland Revenue for some time to make this change.

These new rules will take effect from 1st April 2024. Personally, I’d like to see them in effect, from 1st April this year, and I’ll submit on that. But don’t hold your breath on that one.

There’s a number of other measures in the bill, including a proposal for the Government to pay a 3% KiwiSaver contribution on the amount of paid parental leave received by a KiwiSaver member. The this will be made providing the recipient also pays the 3% employee contribution. The idea is to help increase the KiwiSaver balances of paid parental leave recipients, many of whom are women and whose ability to save has been disrupted because they take time out of the workforce to raise children. This is a welcome measure.

As usual there’s a whole heap of technical amendments as well. Submissions on the Bill are now open and the closing date is 30th of June.

A taxation principles bill – putting the politics into tax?

Now, the other bill, which was a big surprise, was the Taxation Principles Reporting Bill. This bill is intended to “increase the public’s understanding of the tax system and promote informed debate and discussion about its future”. The Bill does this by proposing a set of generally accepted tax principles and then requires the Commissioner of Inland Revenue to report on how the tax system is tracking against those principles.

The idea is that “regular reporting will help the public better understand how our tax system is performing and over time, informed public consultation process on tax policy proposals.” The hope is tax policy is developed in line with “values which society considers desirable in a tax system.”

The tax principles set out in the bill such as horizontal and vertical equity efficiency, revenue, integrity, certainty and predictability, flexibility and adaptability and compliance and administration costs, are all well accepted principles, and they’ve been used in various tax reviews, both here and abroad.

There’s a framework by which Inland Revenue will be reporting annually then every three years it will provide a more thorough review. And the implication would appear to be that the Inland Revenue would be expected to be doing regular surveys of the type that just was carried out on the high wealth individuals. That at least is one interpretation of these reviews.

The Bill will take effect from 1st July this year, which means that there’s going to be little time for consultation. In fact, the closing date submissions will be 9th June, just two weeks ahead. This is an incredibly political bill – is it a harbinger of a wealth tax, capital gains tax, whatever? We shall see. It will be interesting to see how this plays out and of course, its future will be very dependent on the Election.

In the meantime, I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts.  Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day.