This week the ninth edition of the OECD’s Tax Policy Reforms was released. This is an annual publication that provides comparative information on tax reforms across countries and tracks policy developments over time. This edition covers tax reforms in 2023 for the 90 member jurisdictions of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting.
Reversing the trend
It’s a fascinating document which tracks trends of what’s happening around the tax world at both a macro and micro level. The report has three parts: a macroeconomic background, then a tax revenue context, and then part three is the guts of the report with details of tax policy reforms around the world.
There is an enormous amount in here to consider and the executive summary lays out the ‘balancing act’ issues pretty clearly.
“Policymakers are tasked with raising additional domestic resources while simultaneously extending or enhancing tax relief to alleviate the cost-of-living crisis… On the one hand, governments further protected and broadened their domestic tax bases, increased rates, or phased out existing tax relief. On the other hand, reforms also kept or expanded personal income tax relief to households, temporary VAT [GST] reductions, or cuts to environmentally related excise taxes.”
A key observation for 2023 was a trend towards reversing the responses to the COVID-19 pandemic. Instead, as the report notes “2023 has seen a relative decrease in rate cuts and base narrowing measures in in favour of rate increases and base broadening initiatives across most tax types.”
“A notable shift”
This includes “A notable shift occurred in the taxation of business, where the trend in corporate income tax rate cuts seems to have halted with far more jurisdictions implementing rate increases than decreases for the first time since the first edition of the Tax Policy Reforms report in 2015.”
This is a pretty significant change. I think actually when you consider last week’s speech by Dominick Stephens of Treasury, it was setting out the context for why having got over the crisis of responding to the pandemic, countries are realising they’ve got to deal with the demographic issues of ageing populations and funding superannuation.
Climate considerations
Beyond these concerns, there is the immediate impact of climate change and its growing effects. The executive summary picks up on this issue:
“Climate considerations are also increasingly influencing the design and use of tax incentives, with more jurisdictions implementing generous base narrowing measures to promote clean investments and facilitate the transition towards less carbon intensive capital.”
And on that point, I hope all the listeners and readers down in Dunedin and Otago are safe and well at the moment.
Paying for superannuation
The other thing picked up is that in referencing that point I made a few minutes ago about population ageing. There has been a growing trend amongst countries to increase Social Security contribution taxes. Alongside Australia, and to a lesser extent Denmark, we are unique in that we don’t have social security contributions. However, elsewhere in the OECD social security contributions raise increasingly significant amounts of revenue.
The report begins with a macroeconomic background. It notes that for the OECD as a whole in 2023 government debt rose by about nine percentage points, reaching 113% of GDP. For context, New Zealand’s debt-to-GDP ratio is just over 50%.
As the macroeconomic summary notes after generally decreasing in 2022 Government deficits increased again in 2023 following the energy crisis triggered by the war in Ukraine. Consequently,
“As debts and interest rates increased, interest payments have started to rise as a share of GDP. Even so, in 2023 they mostly remained below the average over 2010 to 2019, except notably for Australia, Hungary, New Zealand, the United Kingdom, and the United States.”
In short, we definitely have issues to deal with in terms of debt management and rising costs.
Responding to growing deficits
The report then notes that responses to growing deficits have been to start at increasing taxes. In general tax revenue terms,
“From 2020 to 2021, the tax-to-GDP ratio rose in 85 economies with available data for 2021, fell in 38, and stayed the same in one. In more than half of these economies, the change in the tax-to-GDP ratio was under one percentage point, whereas 22 economies saw shifts greater than two percentage points in their tax-to-GDP ratio.”
Denmark saw the most significant drop of 5.5 percentage points, with New Zealand’s tax-to-GDP ratio falling by three-quarters of a percentage point, well above the OECD average fall of .147 percentage points. (Norway’s dramatic corporate income tax take increase of 8.775% is the result of “extraordinary profits in the energy sector”.)
Composition of tax base
With regards to the composition of tax, 18 OECD countries (including New Zealand) primarily generate their revenues from income taxes, including both corporate and personal taxes. Ten OECD countries relied most heavily on Social Security contributions, and another 10 derived the majority of the revenues from consumption taxes, including VAT, (GST). Notably, taxes on property and payroll taxes contributed less significantly to the overall tax revenue mix in OECD countries during 2021.
Drilling into the detail
Part 3, of the report looks at the detail of the tax policy reforms adopted during 2023. This part has an introduction, then looks at five separate categories of taxes beginning with personal income tax and Social Security contributions, followed by corporate income tax and other corporate taxes, taxes on goods and services, environmentally related taxes and finally taxes on property.
As I mentioned previously, there was “a marked increase in the number of jurisdictions that broadened their Social Security contribution bases and raised rates”. Generally speaking, for high income countries personal income tax and social security contributions represent 49% of total tax revenue. Across the OECD personal income tax represented 24% and social security contributions 26% on average.
Here about 40% of all tax revenue comes from personal income tax. That’s one of the higher proportions around. Around the globe there was a bit of tinkering around personal income tax reforms mainly targeting lower income earners. This is an area where I think we need to focus any future reforms.
We have just (partly) adjusted thresholds for inflation and interestingly, I see that during 2023 quite a few jurisdictions did increase thresholds for inflation. For example, Austria updated its automatic inflation adjustment mechanism to counteract inflation, pushing workers into higher brackets. Meanwhile Australia increased its threshold for its Medicare levy to ensure low income households continue to be exempt, given that inflation has led to higher normal wages.
Corporate income tax rates are on the rise
Substantially more corporate income tax rate increases and decreases were announced or legislated by jurisdictions in 2023. Six jurisdictions increased their corporate tax,four of those did so by at least two percentage points. Türkiye increased all its corporate tax rates by five percentage points.
Whenever there are discussions about reforming our tax system, the issue of reducing our corporate tax rates will come up. With a 28% rate we are at the higher end of the corporate tax rate scale. There is potentially some scope, but as economist Cameron Bagrie has noted any such decrease needs to be part of a broader range of changes.
An example of such a change was the introduction of a general capital gains tax by Malaysia for all companies, limited liability partnerships, cooperatives and trusts from 2024.
Picking out of the details something which I know businesses here would look at with a certain amount of envy is more generous depreciation allowances. The UK, for example, has permanent full expensing for main rate capital assets as it’s called and a 50% first year allowance for special rate assets. Australia has also increased its thresholds for effectively fully expensing items for small businesses. Around the world there’s a whole range of incentives for R&D and environmental initiatives.
We have just limited the limits for residential interest deductions but it’s interesting to see that Italy abolished its allowance for corporate equity provision. Meantime Canada has new restrictions on net interest and financing expenditure claimed by companies and trusts.
Taxes on goods and services (VAT/GST)
In the VAT/GST space, in terms of revenue from taxes on goods, although we have one of the most comprehensive GST systems in the world, New Zealand was only twelfth in the OECD for the percentage of tax revenue from goods and services as a percentage of total tax revenues. GST raises just over 30% of total tax revenue here, whereas Chile raises over 50%. This is quite interesting given how comprehensive our GST system is. It might mean that there is scope to expand the the rates of GST further. (Six countries including Estonia, Switzerland and Türkiye did so in 2023). But any government doing so should do so as part of a total tax switch package.
We discussed GST registration thresholds a couple of weeks back. During 2023 seven countries increased or planned to increase their VAT registration threshold. I was very interested to discover that Ireland has a split VAT registration threshold treatment: the registration threshold for the sale of goods is €80,000. But for the provision of services, it’s €40,000. I’ve not seen this split before. Meanwhile Brazil is undertaking the introduction of VAT/GST, which is a huge step forward.
A stable tax policy or just less tax activism?
There’s a lot to consider in this report more than can be easily covered here. Overall, it’s incredibly interesting to see what’s going on around the world. Many of the reforms discussed here involve threshold adjustments but there are plenty of new exemptions and incentives introduced. We generally don’t get into this space, that’s possibly a reflection of a very stable tax policy environment, but also perhaps a less activist philosophy by New Zealand governments which hope market incentives will work. Whatever, the approaches it’s interesting to see what’s going on around the world and I recommend having a look at this very interesting report.
ACC crackdown
Moving on, ACC has been in the news when it emerged that it has been chasing thousands of New Zealanders for levies on income they earned while working overseas.
According to the RNZ report, ACC sent 4,300 Levy invoices for the 2023 tax year to New Zealand tax residents who had declared foreign employment or service income in their tax return. The issue is that the person was often overseas at the time the income was earned and in some cases the the person has probably incorrectly reported the income in their return.
It’s an interesting issue and coincidentally, it so happens that I’ve just come across a couple of similar instances. My initial view is there seems to a bit of a mismatch between the relevant income tax legislation and the legislation within the Accident Compensation Act 2001. Watch this space on this one because I’m not sure the matter is entirely as cut and dried as ACC considers.
Inland Revenue responds to social media criticisms
A couple of weeks back, we covered criticism of Inland Revenue for providing the details of hundreds and thousands of taxpayers to social media platforms. It had done so as part of various marketing campaigns targeting people who owed taxes and Student Loan debt in particular.
Inland Revenue has now responded by putting up a dedicated page on its website, referring to customer audience lists.
In its words “social media is just one channel we use to reach customers. It is very effective at reaching people where they are.” As I said in the podcast Inland Revenue’s dilemma is it has to go to where the people are which is on the social media websites. In order to reach out to them it’s going to have to provide certain data. To reassure people the new page explains how it uses custom audience lists and what data is provided.
They do upload a list of identifiers such as name and e-mail addresses, which is then ‘hashed’ within Inland Revenue’s browser before being uploaded to the social media platform. This is where I think the tech specialists have raised concerns that the hash technique is not as secure as Inland Revenue thinks.
Australia – the Lucky Country again
And finally, an interesting story from Australia about tax refunds. A research team at the Australian National University’s Tax and Transfer Policy Institute discovered a “striking” number of returns generating round number refunds (basically any digit ending in zero). The unit examined 27 years of de-identified individual tax files and found far more refunds of exactly $1,000 than of $999 or $995.
The unit concluded these returns are more likely to be driven by efforts to evade and minimise tax and are costly for the Australian Tax Office to audit such as work related expense deductions. Unlike New Zealanders, Australians can claim deductions on their tax returns. Somewhat concerning to me as a professional is that zeros in tax returns prepared by agents were twice as common as those prepared by taxpayers.
What this article is driving at is that some of the complexity of the Australian system results in the system getting gamed. Back in February you may recall Tracey Lloyd, Service Leader, Compliance Strategy and Innovation at Inland Revenue was a guest on the podcast. Based on our discussion and my own observation I would have confidence that Inland Revenue would not get caught out the same way thanks to the Business Transformation programme. As Tracy recounted, Inland Revenue can track live changes and they can see people just trying to square the return off to what they regard as an acceptable number.
Anyway, it’s an interesting story. It shows the differences between our tax system and that of Australia, but it does seem a little rich that not only can you earn more in Australia, but you get bigger refunds.
And on that note, that’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day.
In the same week as Public Service Minister Nicola Willis directed department bosses to tighten up on working from home arrangements, it’s a little ironic to see Inland Revenue release a draft consultation on the topics of deductions for expenditure and travel by motor vehicle between home and work and when an employer provided motor vehicle is subject to fringe benefit tax (FBT) for travel between home and work.
These were released alongside some interesting commentary from Inland Revenue that it is currently reviewing FBT, so what is set out in the draft consultations may change, but as Inland Revenue note, it gets a lot of questions on the topic. With regard to this FBT review my understanding is we may see something relatively soon. I think given the outcome of the Inland Revenue’s regulatory stewardship review of FBT and what the Minister of Revenue has said previously, it’s likely this review with look at simplification measures.
There are actually two consultations which will replace the previous interpretation statement IS3448. The topic is quite involved, because the two draft consultations run to 111 pages of commentary and examples. Fortunately, as is now the common practise, each draft consultation is accompanied by fact sheets, each containing a very useful flow chart to help people work their way through the maze.
The deductibility of motor-vehicle travel between home and work
The first draft interpretation statement deals with the question of deductibility of travel by motor vehicle between home and work which is set out in Subpart DE of the Income Tax Act 2007. What that subpart does is limit deductions for motor vehicle expenditure to the business proportion of the expenditure. It generally applies to self-employed taxpayers and partners in partnerships, but it can also apply in some circumstances to close companies and look through companies.
The basic position is that a journey is deductible if it’s a business journey, but to be a business journey and deductible, the whole journey must be undertaken for the purpose of deriving income. This is actually slightly different from the general deductibility provision for tax, which allow deductions quote to the extent to which they are incurred in deriving gross income. By contrast, this the provisions in Subpart DE are very specific it’s got to be a business journey if it is to be deductible.
Four exceptions
Generally speaking, and it’s probably no surprise here, travel between home and work is viewed as private. But there are four exceptions as a result of case law. Firstly, where the vehicle is necessary for the taxpayer to transport goods and equipment that are essential for their work between their home and workplace and for use both at home and in their workplace.
Now secondly, the taxpayers work is itinerant, which means that the taxpayer works at different locations during the workday and the sequence of where they work and how much time they spend is unpredictable and varies. It’s therefore not practicable for them to carry out their work without the use of a vehicle.
The third case is where a taxpayer is responding to emergency call outs and does so from home. And finally, and this is increasingly relevant, the taxpayer’s home is a workplace or base of operations for the purposes of travel to and from work.
This latter point is where we’ll probably see a lot of discussions and arguments. In order for a home to be treated as a workplace or base of operations the role requires a significant proportion of a person’s work to be spent working at home. I think it’s most likely to apply to owners of businesses who may be working between two places, but senior employees who might be required to make international calls in the evening, they may will be covered.
What’s a business journey?
A business journey is one primarily carried out for business purposes. Case law allows an overall journey to be treated as two journeys if there is a stop in between. It’s possible that one part represents a business journey, and the other part is private.
Furthermore, case law also said that some incidental private use does not mean a journey is prevented from being a business journey. Under the draft Inland Revenue consider that insignificant private use can’t exceed either approximately 5% of the total journey and approximately two kilometres.
The consultation also deals with the issue of what if vehicles are taken home for security purposes or, as is now more common, it’s an electric vehicle taken home to be recharged. Either of those circumstances are not sufficient in themselves to make the relevant journey between home and work a business journey. There have to be other factors at play, such as the exceptions we’ve previously mentioned or that home represents a workplace.
When does a fringe benefit arise?
The second interpretation statement and supporting fact sheet considers the question of when a fringe benefit arises when an employer provided motor vehicle is used for travel between home and work. The position is pretty straightforward: if a vehicle has been provided for private use, FBT will apply. In this context private use would include the use of the vehicle for travel between work and home and work. If a employee has a employer provided vehicle and travels to between home and work in that, then fringe benefit will apply.
There are three statutory exclusions from FBT which would cover travel between home would work. These exclusions apply to work related vehicles (a topic the subject of a whole another interpretation statement;
Emergency calls affecting health, life or the operation of essential machinery and services; and
business trips of more than 24 hours.
If any of these exclusions apply the whole day is excluded from the calculation of FBT.
As noted above Inland Revenue is in the course of reviewing FBT, so maybe some of this might change within the next couple of years or so. In the meantime, it’s good to have this draft guidance. Consultation on this is open until 6th November.
Meanwhile progress on the international tax deal continues
Moving on, we’ve talked regularly about the G20/OECD international tax agreements on base erosion and profit sharing. This week, several jurisdictions signed a multilateral treaty which will to help the Pillar Two subject to tax rule. But the other thing that’s important which was concluded in the last few days, was a Model Competent Authority Agreement on the Application of the Simplified and Streamlined Approach to Amount B of Pillar One. This agreement will provide a framework to enable jurisdictions to comply with what’s expected to be the final format of the rule of the Pillar One and Pillar Two agreements.
However, progress has slowed right down since October 2021 when 135 jurisdictions announced that they were accepting the two-pillar solution. With tax, the devil is in the detail and there is a lot of detail and devil to work through.
I think the other thing that should be kept in mind is that the US Presidential and Congressional elections happening in November will determine how much further progress will happen. As previously noted, the likes of Meta and Alphabet are none too keen on what’s proposed here and their lobbyists have the ears of plenty within Congress. We’ll just have to wait and see. But in the meantime, the deal seems to be inching forward.
“The time has arrived for a capital gains tax”
Last week I covered the report from Victoria University of Wellington about comparing tax rates between New Zealanders and taxpayers in nine other jurisdictions. This week things got spicier than I would expect in this sort of debate after the CEO of ANZ Bank Antonia Watson said in the course of her RNZ interview with Guyon Espiner “the time has arrived for a capital gains tax.” This in turn provoked a strong response from both the Prime Minister and the Minister of Finance. I found this a little surprising. I would have thought they’d just let Ms Watson make her comments and move on, but it certainly adds to the headlines.
CGT the most likely option
Following on from Antonia Watson’s remarks, I spoke to RNZ’s The Panel on Wednesday evening about the question of a capital gains tax. Put on the spot I said I could see it happening. To expand on my answer, it seems to me that a CGT is the most likely option if we do expand the tax base, because CGTs are common in other jurisdictions and the concepts are broadly well understood. And as Antonia Watson also noted, wealth taxes on unrealised gains are deeply unpopular with those that would be affected.
The interview with Antonia Watson is well worth listening to. One of the things I found quite interesting was that a couple of times she mentioned the impact of adverse weather effects. This wasn’t anything to do with tax, but she was explaining that our vulnerability to such events was a factor in why we have higher interest rates than Australia.
This circles back to the point that I made last week and again on The Panel, that the discussion around the question of capital gains tax or expanding the taxation of capital base is really around the question of how do we pay for the forthcoming costs of climate change and an ageing population? Are we raising enough tax revenue right now? If not, what are the options on the table?
What does Inland Revenue think?
Inland Revenue currently have their proposed long-term insights briefing for next year out for consultation. Susan Edmunds of RNZ picked up on this in a story on Thursday. The consultation finishes Friday 4th October, and I really do recommend reading and submitting on it.
On the question of the forthcoming actual fiscal pressures, Dominick Stephens, the chief economic adviser for the New Zealand Treasury (and former chief economist for Westpac), delivered a speech on Wednesday titled Longevity and the Public Purse, which I’d recommend reading. It includes plenty of graphs illustrating the difficulty that we are facing. Our population is ageing, which is well known and the median old age dependency ratio is rising, although as the speech notes thanks to strong population growth it’s not as bad as other jurisdictions which means we are at the lower end of that range.
There’s a particularly telling graph about the average government tax and transfer by age group in New Zealand, for the year ended 31 March 2019
As can be seen above for the 65 and over age groups the transfers from Government rise significantly. These are the age groups which is where the debate about sustainability arise, as Dominick Stephens comments:
“Since 2006, the Treasury’s Long-term Fiscal Statements have repeated the message that our fiscal settings are not sustainable over the long run given the impact of population ageing.”
Over the period since 2006 some interesting developments have somewhat ameliorated the potential impact. Interest rates, for example, have been lower than were predicted in 2006, while population growth has been higher.
One of the more extraordinary developments since 2006 is labour force participation for 65 plus age groups has dramatically increased. Consequently, we’ve gone from being amongst the lower labour force participation rates to one of the highest.
All things being considered, there are difficult choices to be made and the question of whether more revenue is necessary is a question which isn’t going to go away.
“There is no silver bullet: none of the policy options we modelled in 2021 was large enough to stabilise debt on its own. This means that governments will need to likely draw on multiple expenditure and revenue changes to close the fiscal gap.
Some savings can be made from a greater preventative focus and reducing inefficiencies but making substantive savings is likely to require some tough choices around entitlements. This would have come with trade-offs, particularly for groups of the population who already face challenges accessing health services.”
Governments could also choose to raise additional revenue, in fact as Dominick remarked “successive increases in taxes over time would be required unless actions were also taken to manage demographic expenditure pressures.”
So tough fiscal choices ahead. I note in the comments on last week’s transcript some noted ‘well, wait a minute, why don’t we try and reduce expenditure?’ That’s certainly a driver for the current Government. But I think what Dominick Stephens and Treasury are saying, addressing the fiscal pressures will be a two-part process. We will need to both reduce costs and raise revenue. So, this debate over capital taxation isn’t going to go away soon and will continue. I expect I’ll be asked plenty more times to comment.
And on that note, that’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day.
Is the current GST threshold holding back small businesses?
More evidence of Inland Revenue’s crackdown on non-compliance and new research fuels the debate about taxing capital.
Last week was Te Wiki o te Reo Māori, Māori language week, and coincidentally, one of the papers at the recent excellent New Zealand Law Society Tax Conference covered taxation and Māori business.
One of the more fascinating papers prepared for the last Tax Working Group was about considering the tax system from our Māori perspective.
It was therefore quite opportune and appropriate in Te Wiki o te Reo Māori, for the New Zealand Law Society Conference to cover the question of taxation and Māori business. As a supporting paper noted, in 2018, the Māori economy was estimated to have an asset base of nearly $70 billion, and it’s projected to reach $100 billion by 2030. So this is something we’re more likely to encounter as the Māori economy grows.
The presentation gave a fascinating background into what structures are developed as part of a settlement agreement between the Crown, and these post settlement government entities or PGSEs can be a very unusual mix of trusts, companies, limited partnerships and Māori authorities.
Māori authorities – a template for a difficult tax issue?
Māori authorities in particular, have very specific tax treatments and one of those includes the ability to distribute capital gains without liquidation. Which, as a presenter suggested, could perhaps be a model for companies as this is presently quite a difficult tax area. At present if a company has realised a gain then, unless it’s a look through company, you would have to liquidate the company in order to extract the gain without triggering an immediate some form of tax liability. As I said, it’s an interesting area of growing relevance. I think if you can get hold of the paper, do so.
Time to raise the GST threshold?
The accounting service provider Hnry released a poll which indicated that almost a third of sole traders in the country are choosing to earn below the median income to avoid passing on costs, because otherwise they would cross the GST threshold of $60,000 and have to register.
Their concern was that the 15% that they would have to apply to their pricing at that point was a cost they simply could not pass on.
This has sparked a debate about whether the threshold is presently too low. It was set at $60,000 with effect from 1st April 2009. Given that’s now 15 years ago, an increase seems logical and based on CPI for example, it should be closer to $87,000. It’s not unreasonable to consider an increase. As I’ve said in other episodes, we seem to have an inbuilt reluctance to regularly look at thresholds and increase them for inflation. That leads to all sorts of difficult issues cropping up within the tax system.
On the face of it, an increase in the GST threshold is not unreasonable. I think somewhere around the point where the income tax rate goes from 30 to 33%, which is now $78,100 would be appropriate and is also around the median income.
But maybe not?
But there is a counter argument, and a very interesting one too, in that perhaps if we want to have a broad base, we should be lowering the GST threshold. A good example for this counterargument comes from the UK, where they have a very high threshold of £85,000, about $180,000.
According to the UK Office for Budget Responsibility, approximately 44,000 UK businesses will deliberately not grow revenue to avoid registering for Value Added Tax (VAT), the UK equivalent of GST, and which has a standard rate of 20%.
An obvious answer is to raise the threshold, but the counter suggestion made by Dan Neidle of Tax Policy Associates is perhaps it should be lowered. He notes that in Europe the thresholds are much lower, around the €30,000 to €35,000 mark, which is around $50,000 to $55,000 here.
In Dan’s view the registration threshold creates a ‘fiscal cliff’ that some businesses find difficult to hurdle because you aren’t able to make a significantly big increase in your turnover to get past the effect on the customers because they cannot bear the cost. He suggests maybe a lower VAT rate might be one solution.
He also notes broader base for GST is important for competitiveness, because if there are people who are deliberately under-pricing themselves because they are not GST registered (as opposed to those who are) then there is a competitiveness issue. Dealing with that is going to be difficult.
I thought it was an interesting counter argument that Dan raised, but it still doesn’t get past the issue that a threshold that has not been adjusted for 15 years perhaps should be. On the other hand, comments from Inland Revenue indicate there is no desire to do so at this point. The Minister of Revenue, Simon Watts, has also said it’s not really on their agenda. So, these issues will still remain.
Going underground?
There’s one other question I think that does come to mind though. If people are deliberately limiting their income to below the GST threshold, how are they maintaining their lifestyles? Is there a cash economy and tax evasion going on here with jobs being done for cash, which won’t go through books. Now I’m not saying it’s true for every business below the GST threshold. But given that the median wage is above $60,000, you’ve got to wonder if there is some element of that going on. We shall see.
Inland Revenue ramping up its investigation activities
That leads us nicely on to another paper from the New Zealand Law Society Conference, which was opened by the Minister of Revenue, Simon Watts. He continues to impress as having a command of his brief and understanding the detail. This is not totally unsurprising, given that he used to be an accountant and began his career as a tax consultant.
Reform of FBT definitely appears to be on the agenda. Inland Revenue are focusing a lot on the near $13 billion of total tax debt that’s outstanding across various taxes (including Student Loans) at the moment. There’s a focus on what’s called high risk debt, particularly in the construction industry. Inland Revenue would be putting more resources into the hidden economy, and the Minister also mentioned the work of the Tax Debt Task Force, which is about 40 people within Inland Revenue, which is now collecting about $4 million per week of outstanding debt.
Interesting to hear this from the Minister and his comments about Inland Revenue’s enhanced enforcement activities was also supported by a presentation from Inland Revenue policy officials. The officials were referencing the search powers of Inland Revenue and two new drafts for consultation which have recently been released.
“Knock, knock”
One is in relation to what are called Section 17B notices, which are issued under section 17B of the Tax Administration Act 1994. These are information demands and they’re part of Inland Revenue’s information gathering powers. The more important one is a draft operational statement on Inland Revenue’s search powers.
Now Inland Revenue’s search powers are incredibly extensive. To give you an example, there’s a Court of Appeal case from 2012 – Tauber v Commissioner of Inland Revenue – where Inland Revenue raided six premises simultaneously. Officials obtained search warrants for these raids, but under Section 17 of the Tax Administration Act 1994 Inland Revenue officials don’t need to obtain a warrant to access property or documents. Documents in this case can include your smartphone.
And this is where we perhaps should be starting to pay a bit more attention, because, as the paper noted, Inland Revenue’s search activity dropped off because of the COVID pandemic. Information obtained under the Official Information Act gives an extent of how this had happened.
From these stats it’s very apparent Inland Revenue is currently amping up its investigative activities. According to the presentation, officers have “hundreds of unannounced visits planned” for liquor stores.
There are over 100 audits of property developers going on at the moment and another 50 investigations underway in relation to electronic sales suppression software.
Now, as previously noted and emphasised by the Minister, Inland Revenue has had a significant funding increase given to it over the next four years. All of this shows that we can expect to see a large amount of increased activity in investigations from Inland Revenue. And we’ll also see them taking probably a far harder line in relation to collection of tax debt.
I want to repeat what I’ve said before, and which was also brought up at the conference. If you run into difficulties with tax debt, approach Inland Revenue immediately. Don’t put your head in the sand. It’s always best to front foot it and contact Inland Revenue. If you’ve got a realistic approach to getting out of your tax debt, it will be prepared to put together a plan that enables that to happen.
High earner tax rates – New Zealand in context
The debate around the taxation of capital continues with a RNZ report involving a Victoria University study, commissioned by Tax Justice Aotearoa, which looked at how much tax someone earning five times the average New Zealand wage (that’s roughly $330,000) would pay in nine comparable nations. Those nations include Australia, Canada, the US, the United Kingdom and five European countries – Belgium, Germany, Norway, Spain and Denmark. The study found that there was a quite significant difference between the tax payable in New Zealand and that payable overseas, particularly in when considering capital gains.
Tax Justice Aotearoa are using this data as a counterargument to fears there would be mass capital flight if we introduced some form of wealth taxes. When I was interviewed on RNZ’s Morning Report about the story I agreed with the basic premise of this counterargument. That’s not to say there won’t be capital flight. There will because people’s capital is mobile and there will be people with the resources to migrate into tax havens where there are very low rates of income tax and little or no capital taxes
But not all capital is mobile. Any property they held in New Zealand would still be subject to any form of taxation because the rule around the world is that property is always taxable in the country in which it is situated even if it is owned by a non-tax resident.
A false debate premise?
I also told Morning Report that the premise of the debate seemed slightly off in that if we have a capital gains tax or form some form of taxing capital, we will therefore have capital flight, so we shouldn’t do that. In my view this is incorrect, the reason we’re having the debate about taxing capital is not because other jurisdictions have such taxes so why don’t we? This frames it as a question of equity and fairness.
The issue is the coming demographic crunch and also the more immediate crises we’re now seeing regularly of the impact of climate change. How do we have the funds to deal with an ageing population, the associated health costs with that, and the impact of climate change. Last year’s Cyclone Gabrielle and the Auckland floods were incredibly expensive events, so this debate isn’t going to go anywhere because it fundamentally revolves around the question “We have costs building up. How are we going to fund those?” And that’s a debate which will continue.
There isn’t a magic bullet here in terms of one tax is superior to all others in my mind. We just have to look at all the options and then decide how we will move forward. But I think it’s false to say, well, we can’t do anything because people’s capital will flee. That’s doesn’t say much, by the way, for the many citizens of New Zealand who built their livelihoods and have long-standing roots here, but as I said also seems to sidestep the issue as to why we’re having the debate in the first place.
And on that note, that’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day.
Should the New Zealand Superannuation Fund become tax exempt? Inland Revenue is under scrutiny for its use of social media.
A bad week for Apple and Google in the European courts.
Inland Revenue releases an intriguing consultation on GST and management services supplied to managed funds.
In the past few weeks, the question of taxing capital has reappeared on the agenda featuring across a number of news stories. It probably kicked off initially when Inland Revenue’s long term insights briefing consultation document raised the question of whether the tax base should be expanded to meet what is the anticipated growing fiscal costs of superannuation, health and climate change.
“New ways of generating revenue”
Then a couple of weeks back, the outgoing chief executive and Secretary to the Treasury, Caralee McLiesh, commented to the New Zealand Herald that New Zealand needs new ways of generating revenue and cutting expenditure. She suggested a capital gains tax and a more efficient superannuation scheme.
Labour leader Chris Hipkins has been in the news talking about the Labour Party’s internal discussions around the question of taxing capital. And then at the start of the week, Bruce Plested billionaire co-founder of Mainfreight, raised the idea of wealth tax. Understandably he caveated it with a question around whether the funds raised would be spent wisely.
But the point is, across the whole spectrum the question of taxing capital is back on the agenda. It never actually goes away to be perfectly honest. Like spring it comes around at least once every year. Anyway, it’s interesting to see this debate carried on. I think a driving factor is a growing recognition that the present tax base probably isn’t sufficient to meet the coming demands of rising superannuation, rising health costs and climate change. Sure, managing government expenditure more efficiently will help, but it will only go so far.
The Treasury has talked about a structural deficit of 2% of GDP which is $8 billion. That’s a fairly sizable sum, and with the best will in the world, cuts in government spending aren’t going to fill that gap. So, a discussion has to be had on how this gap is to be filled.
Given we will need to find extra revenue, taxation of capital is the obvious point. We should be considering whether it’s a wealth tax, land tax, capital gains tax or even restoration of estate and gift duties, which were once quite a substantial part of the New Zealand tax base. It could be a combination of all or some of those, but the debate isn’t going away.
Time to make the New Zealand Superannuation Fund tax exempt?
Moving on, and talking about the rising cost of superannuation, the New Zealand Superannuation Fund (NZSF) was established more than 20 years ago by Michael Cullen, to help smooth the cost of superannuation. It has been an enormous success. The NZSF has now grown to well over $70 billion and along the way it has been paying tax.
This is quite unusual for sovereign wealth funds because most are tax exempt. New Zealand has two other sovereign wealth funds, ACC and the Reserve Bank of New Zealand, and neither of those are taxed. They have between them another $60 billion of assets. But when the NZSF was established back in 2003, the decision was taken that it would pay tax. Part of the reason for doing so was to provide a commercial incentive so the NZSF made decisions around investments on strong commercial grounds, rather than because of a tax-exempt status.
But this has created a sort of slightly odd money-go-round. The government would contribute capital to it based on a formula, and then the NZSF would then pay part of that back in the form of tax. This is before its designated drawdown date, which is coming up towards the latter part of this decade, when it’s expected that regular withdrawals will be made to start funding superannuation.
For the period to June 2024, the Super Fund received contributions of roughly $1.6 billion overall and paid nearly $1.5 billion in tax. It is by far and away the largest single taxpayer in the country, a reflection, by the way of our Foreign Investment Fund regime rules. Finance Minister Nicola Willis is now seeking advice as to whether in fact it should become tax exempt, on the basis now that its tax bill is beginning to outgrow crown contributions.
Now that the Government has contributed $16.9 billion after accounting for $9.6 billion in tax paid since the fund was set up, the Finance Minister will be thinking whether it’s now time the Government can wind back the contribution. Ultimately, this should have the same effect as also removing its taxable status. We shall see how this develops, but it’s interesting to see the discussions in this space, which are also a by-product of the question of how do we fund superannuation?
Inland Revenue under fire
Moving on, Inland Revenue is in a little bit of hot water after it emerged that it’s giving hundreds of thousands of taxpayers’ details to social media platforms as part of its various marketing campaigns. These campaigns are intended to target taxpayers who might owe taxes.
Unpaid student loans are one particular area that that pops up here. The controversy revolves around the anonymisation tool which is used to ensure that whatever information the social media companies get, the details are minimised as far as possible to protect the privacy of the taxpayers involved.
The question has been raised as to whether that tool is sufficient.
The horns of a dilemma
There are two issues here. One is the technical question about how effective is the anonymisation tool. But the bigger question is whether Inland Revenue should be doing that. It faces a problem that if it wants to reach out to the general public – or certain sectors of the public – to remind them about their tax obligations. The best outreach method is through social media platforms. Inland Revenue is on the horns of a dilemma.
I will say this, that in my 20-30 years’ experience watching and working with Inland Revenue, it has an exemplary record around disclosure of private details. It has strong processes in place, and I cannot recall over that time a data breach scenario similar to those we’ve seen with both ACC and MSD where private data of taxpayers has been emailed to persons outside the agency.
Notwithstanding Inland Revenue’s record, the practice seems questionable because of the fact that social media sites are constantly under attack from hackers. Supplying private information to social media companies, no matter how laudable the intentions, puts that data at risk. It would be interesting to hear from the Privacy Commissioner on this.
Then there is the huge irony that these social media companies are amongst the most aggressive exponents of tax planning in in the world. For the year ended 31st December 2023 Facebook New Zealand, for example, reported taxable income of $9.1 million, but we know from its accounts that it paid over $157 million offshore to related entities. And Google’s numbers are even bigger. The extent of the advertising now going offshore has absolutely gutted local media and the implications of this loss of revenue for our media landscape are still being worked through.
Inland Revenue has to work through the dilemma as to how far it should go with providing information to social media companies. Ideally, you’d say it should not. But if you want to reach out to taxpayers about their obligations, you have to go where you might find those taxpayers. And at the moment that’s the social media companies.
Apple and Google lose bigly in Europe
Speaking of the big tech companies, over in Europe, Google and Apple had a week to forget. The European Union’s top court the Supreme Court of the European Court of Justice (the ECJ) ruled that Google must pay a €2.4 billion fine for abusing its market dominance of its shopping comparison service. This fine had been levied by the European Commission in 2017, and Google has been fighting it since then but has now lost in the ECJ, the highest court in Europe.
But that news was overshadowed by a major tax decision by the ECJ the same day, ordering Apple to pay Ireland €13 billion. That’s an eye watering $23.3 billion the equivalent of just over 12. 5% of Ireland’s total tax revenue for 2023.
What’s particularly interesting about this case is that Ireland was also a defendant alongside Apple. Ireland had been accused by the European Commission of having given Apple illegal tax advantages in the form of state support. The European Commission ruled the state support was illegal in 2016. Apple appealed and won in the lower court of the ECJ in 2020. But now the ECJ’s Supreme Court Justice has ruled that there was illegal state support which must be repaid.
A major transfer pricing decision
This is going to be a key transfer pricing case which will be analysed for many years to come because it revolves around the way profits generated by two Apple subsidiaries based in Ireland were treated for tax purposes. The ECJ ruled these arrangements were illegal because only Apple was able to benefit from them. Other companies based in Ireland could not.
This is just the latest instalment of the general crackdown that Europe is going through right now about transfer pricing and other profit shifting mechanisms led by the European Commission. The decision is an enormously important case in the transfer pricing world.
It actually leaves Ireland in a little bit of an embarrassing case because, as I said, it’s an enormous sum of money, so people will be naturally saying, well, what are we going to do with this? The Irish Treasury has warned against using this for anything other than perhaps a one-off major capital project or debt repayment.
But the Irish also appear to be quite concerned about how their low tax regime (they have a corporate tax rate of 12.5%) will be perceived by other companies who would like to invest in Ireland which has pursued a long-term policy of attracting investment. Its industrial strategy was shaped in the late 50s, but really only started to come to fruition once Ireland joined the European Economic Community in 1973.
I would be very interested to see how this massive decision plays out in other jurisdictions and what lessons are taken by transfer price practitioners.
GST and managed funds – round two?
Finally this week, Inland Revenue has been busy releasing a number of draft consultations on a range of subjects, including Commissioner of Inland Revenue’s search and information gathering powers, the income tax treatment of short stay accommodation, arrangements involving tax losses carried forward under the business continuity rules, and a big paper on the income tax company amalgamation rules.
However, the one that’s got me a little bit intrigued because of its back story is a consultation on the GST treatment of fees paid in relation to managed funds. If you recall back in August 2022, the then Labour government introduced a tax bill which included a measure which would impose GST on management services supplied to managed funds.
According to the supporting Regulatory Impact Statement that measure was to tidy up an anomaly that had been identified by a GST issues paper released by Inland Revenue In February 2020, just before COVID arrived. It was projected to bring in an estimated $225 million a year starting from 1 April 2026.
A furore erupted after the same regulatory impact statement noted that was according to modelling by the Financial Markets Authority, the impact of imposing GST on management fees would mean that the amount available for KiwiSaver investors would be reduced by an estimated $103 billion by 2070. For context, it’s worth pointing out that the KiwiSaver funds were projected to be valued at nearly $2.2 trillion. In an unprecedented move, Labour backed down and withdrew the bill within 24 hours.
Against that background, it’s interesting to see Inland Revenue’s final consultation on the same topic. And this is where I’m intrigued to know a little bit more about what’s changed. Basically, it seems that Inland Revenue is going back to a default position where manager fees are treated as exempt, but investment manager fees become subject to 15%. The proposal in 2022 was all fees become subject to GST at 15%.
An intriguing counter-factual
What intrigues me is that the 2022 Regulatory Impact Statement noted as the counterfactual that this would probably result in something like an overall increase in GST collectible of approximately $135 million per annum from 1 April 2026 onwards. That’s not an insignificant sum of money.
Although Inland Revenue’s job is to provide interpretation and guidance, my thoughts on this are if this is a sum that’s going to potentially raise $135 million dollars of tax annually, maybe that’s something that Parliament should legislate.
There is also a subsidiary issue here which is a long-standing issue in our tax system at the moment. It is surprising, given that this was a controversial point, that this issue had not reached the courts, or that no one has taken a test case.
So, although Inland Revenue is doing its job, given the sums apparently involved I think that is something that should be put into legislation and go through the Select Committee process. But for the moment though, Inland Revenue is consulting on the issue until 25th October. As always, we will bring you any news and developments as they emerge.
And on that note, that’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day.
My guest this week is Claudia Siriwardena one of the four finalists for this year’s Tax Policy Charitable Trusts Scholarship.
We discuss her proposal for a simplified fringe benefit tax regime for small businesses.
My guest this week is Claudia Siriwardena, a tax consultant with Deloitte and another of the four finalists for this year’s Tax Policy Charitable Trust Scholarship competition. The Tax Policy Charitable Trust was established by Tax Management New Zealand and its founder Ian Kuperus to encourage future tax policy leaders and support leading tax policy thinking in Aotearoa.
Claudia is suggesting a simplified fringe benefit tax regime for small businesses. I should make it clear here that everything in Claudia’s proposal and what is in this podcast represents her views and not those of Deloitte. Kia ora Claudia, welcome to the podcast. Thank you for joining us.
Claudia Hi, Terry. Thanks very much for inviting me on.
Terry Fringe benefit tax is a very controversial tax and one where there based on anecdote people seem to be shall we say, pushing the envelope. I think the main controversy around fringe benefit tax is around the charge that’s that payable for the private use of public company vehicles.
That’s by far and away probably the largest single component of FBT’s and the advent of the twin cab ute, with people thinking that it qualifies for a work-related vehicle seems to have magnified the issues here. There was an Inland Revenue Stewardship Review of FBT a couple of years back and that had a lot of interesting stuff.
What caught your eye about FBT into thinking “Oh there’s something here to consider.”?
Claudia Yes, like you say, Terry, it can be a very complex regime. There’s a lot of rules that that go into it and my initial inspiration for this simplified FBT regime came through my personal experience of undertaking tax due diligence. A common topic of discussion throughout tax due diligence is FBT, but particularly the FBT rules regarding motor vehicles provided to employees for private use.
I was thinking about ideas for the tax policy competition so I took that personal experience and I thought there was a real opportunity here to simplify these rules and to increase compliance. And aside from that, I think like you’ve said, there is a commonly held view that the FBT rules are relatively complicated and hard to understand. And that was something that was discussed in that Stewardship Review that you mentioned, and also a 2003 government discussion document. So what my proposal is intended to do is to simplify these rules and make it understandable.
A tax with a lot of non-compliance?
Terry Yes, that Stewardship Review was very interesting, one of the numbers that interested me was that it raised $592 million for the 2019-20 year. But there are only 21,885 filers
When you think there’s several hundred thousand companies around, that does point to a seeming mismatch. I think also, like the old 80/20 rule, the majority of FBT is paid by a few groups. When you look at it like that, you think, gosh, that does point to something of an inconsistency? You can put it like that.
Claudia Yes, totally agree. And I think throughout that sort of report, there’s a lot of comments in there from interviewees around non-compliance, or this perception that there is a lot of non-compliance.
Terry Yes, because that undermines the integrity of the tax system because people feel that they’re complying with the rules, but others aren’t. Then the incentive to keep complying is diminished.
It wasn’t in the Stewardship Review, but I had seen other somewhat offhand comments from Inland Revenue along the lines of “Well, we don’t know if it’s worth our while doing that.” And I always thought that’s not necessarily why you enforce the rules for collection purposes. It’s also about maintaining the integrity of the tax system.
And just to digress slightly, FBT is one of those regimes that was introduced to encourage compliance because with the high income tax rates in the early 80s, people were being provided with vehicles instead. And that was thought to bypass the high tax rates and that was why FBT was introduced in 1985.
How do you propose addressing these issues?
Claudia The cornerstone of my proposal is introducing a default private use percentage for motor vehicles based on 175 days of private use. And the idea of this is essentially if employers apply this default private use percentage, they can use that to calculate the FBT liability. And then what it means is they don’t then have to go and track the actual days of private use. We can sort of cut down time and costs having to actually track all of that, because for a lot of small employers, that is quite a large exercise. So what my proposal does is set a fixed percentage and apply that as the filing position.
And then obviously if people said, well, that’s not good enough for us, we want more accuracy because our use is lesser. They would then have to produce evidence or file on that basis. Inland Revenue would know they’ve moved off the 175 day default basis and then could ask for an explanation.
Terry Just coming back to those 175 days, how did you arrive at that?
Claudia So, the 175 days is calculated by treating Friday to Sunday of regular working weeks, the statutory annual leave entitlement and annual public holidays, as available for private use. Which in another way is essentially saying that Monday to Friday is treated as not being available for private use, and what I’ve done again for simply. What that does is it assumes that the Friday to Sunday of regular working weeks, your annual leave annual public holidays will typically confer a greater private benefit to employees then use on Monday to Thursday.
Terry Thanks. But you wouldn’t change the basis of how FBT is calculated. To recap , quickly on a car, it’s 20% of the GST inclusive value of the vehicle when new or when acquired. Alternatively, you can use 36% of the depreciated tax book value.
Claudia No, I don’t propose changing the basis of calculating FBT.
Terry The availability of alternative calculations reinforces your point about the complexity of FBT. If you’re a small business, it’s another compliance headache.
Eligibility thresholds
Terry Your proposal would not be available to all employers as you’re targeting smaller businesses. What are the relevant thresholds?
Claudia I’ve got three main criteria. So firstly, the business has to employ less than 50 full time equivalent employees. The business has got to have an annual turnover of the preceding income year of less than $10 million. And the company also is providing fewer than 10 motor vehicles to employees, which were available for private use.
My thinking in terms of that criteria, is that the small businesses, the compliance costs that they incur, are typically out of proportion to the larger businesses. So, what this is doing is focusing on smaller businesses who can actually get the most benefit from this, and who may not have sort of the processes in place or the scale of resources available to larger enterprises.
You’ve got to find some sort of threshold or middle ground. So, these criteria are where I landed in terms of deciding who falls in and out, because when we are considering revenue integrity and maintaining that. And what I don’t want is my proposal to then decrease revenue integrity by allowing, say, a lot more businesses than desirable into sort of this regime.
Increased Inland Revenue activity & the integrity of the tax system
Terry You see your proposal as encouraging compliance, but you also expect Inland Revenue to increase its activity in this field?
Claudia Yes, when you look at the Stewardship Review together with recent comments from the Minister of Revenue around FBT and you put that together with the increased funding that Inland Revenue have recently received in terms of audit activity, then I don’t really think anything is off the table in terms of looking at FBT. Especially when there is this common view that there is potentially non-compliance either intentionally or because of the complexity.
Terry Yes, this is the thing it is all about. Protecting the integrity of the tax system always matters but I think FBT is an area where I would have said a risk has developed. there. Do we know about how many companies that could be affected in your proposal?
Claudia No, no, I haven’t come across that detail, which then also makes it quite hard to quantify potential impacts. But I think a lot of it this also goes back to the recent Inland Revenue Improvement Performance review which talks a bit about the tax gap. It doesn’t analyse what that FBT tax gap might be, which can make the benefit of this proposal quite hard to quantify.
Terry That’s a very interesting point. One of the things I took away from the Performance Improvement Review was commentary that although Inland Revenue, is a high performing organisation it probably could be doing a lot better for small and micro businesses.
Just to tie up this point about non-compliance is I think twin cab utes have been in the top 10 selling new vehicles in New Zealand for several years now. I must admit when I see a web company advertising on a twin cab ute, I’m thinking “Don’t be trying to tell me you’re a work-related vehicle.” So yes, I’d be wanting to focus resources on that.
The pros and cons of simplifying the tax system
Earlier we talked about how you calculate the FBT and straight away we got into a lot of detail. I guess there’s got to be scope as well for perhaps thinking further about can we how can we make this easier?
But Inland Revenue is reluctant to create options that people might use for simplification, for fear that it might be abused. I would point to the accounting income method as an example of a good idea made over-complicated. It means that the same standard of compliance is imposed on a small company with two or three employees and one or two vehicles as for a District Health Board. What’s your thoughts on that? About maybe simplifying the regime further on the grounds of integrity and maybe compliance?
Claudia I think general simplification of regimes is an interesting question and it definitely is the core of my proposal. I think what can be good with simplified tax regimes is it just makes it understandable; it makes it simple which I think is really important for ensuring taxpayer compliance and maintaining that revenue integrity.
I think, for example, I’m not too sure how many clients respond positively when we start discussing the FBT rules, and we need to review this and that because it’s complicated. On the other hand, a critique could be that you will lose revenue. Often with a simplified regime you sort of can strip back the detail, which is sort of what my default private use percentage is doing. But that potentially introduces is an under reporting or under collection of potential revenue.
But how I’ve sort of approached this, especially in the context of FBT and motor vehicles, is well, when you consider the current non-simplified regime is that actually losing revenue itself because of its complexity, because of people not complying? It’s a tricky one to balance and my proposal is definitely hoping that by simplifying the regime we increase compliance. I think it has its place in certain in certain regimes.
Terry That’s very well put. I think sometimes the perfect is the enemy of the good. Everyone should comply, but what is making it difficult for everyone to comply is because for small businesses it’s an enormously expensive compliance burden. With compliance there is an irreducible minimum requirement which I think we’ve reached in many cases. But that’s still a lot for small businesses and, micro businesses in particular.
I think a lot more support could be made available to businesses turning over between $3 and $30 million, and it would pay off in terms of increased compliance.
I come from Britain and the fringe benefit tax regime there, the value of the benefits, is included in an employee’s income at the end of the year and then taxed that way. When I came here and saw how New Zealand taxed fringe benefits I thought the approach here was much sounder in terms of revenue collection.
When you think that with a 39% personal income tax rate FBT is now 63.93% on the value of the benefit unless you get into calculating it in more detail. Have we reached a point that a better alternative for, say, larger companies to apply the fringe benefit to employees and tax it through PAYE rather than the company taking the hit. What’s your thoughts on that?
Claudia Yes, when I was going through my initial process of brainstorming FBT issues and potential proposal ideas, I did consider the case of whether employees should bear different benefit tax costs through PAYE.
I think like you say, times have sort of moved on and they continue to, but based on some initial research that I found, it actually appeared that it was questionable whether making such a change would simplify the FBT regime and reduce compliance costs, which was my key focus.
I mentioned earlier the government discussion document from 2003. It noted that changing who pays the tax is unlikely to result in any material compliance savings for employers and may in fact actually increase compliance costs on employers.
Which for my proposal and just in general, that’s not something that I would want to put forward. So, in this respect, who pays the tax doesn’t necessarily remove the issues that are associated with the FBT rules at present. So yes, noting that it was 2003, that’s probably still my view at the moment, based on that initial research.
Terry I think that’s a good point to leave it there for now, Claudia. What’s next for you in terms of the scholarship?
Claudia I’ve got my final 4000-word submission in a few weeks on the 16th of September. So over the next few weeks, refining my idea, sort of fleshing it out, answering my key points and then down to Wellington last week of October to do a 10 or 11 minute presentation to an audience and answer a few questions.
Terry That sounds quite intimidating.
Claudia Yes, but excited by it. It’ll be good fun.
Terry Well, good luck and thank you so much for coming along. It’s been great to have you on the podcast. It’s a very interesting proposal, full of merit in a space which I think needs initiatives like this.
And on that note, that’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day.
The one thing that wasn’t in there, which I was expecting, was a move by Inland Revenue to restrict the use of portfolio investment entities with a maximum rate of 28%. These are increasingly being used by trusts and individuals subject to the 39% top tax rate. I’ve had a feeling for some time that this might be something that Inland Revenue was looking at, and maybe this bill would see some action on that part. But nothing, so far.
Preparing for emergency events
Instead, there’s a number of key initiatives and a lot of remedial measures. The first key measure relates to developing a generic response to emergency events. This sounds pretty mundane but what’s intended here is to enable Inland Revenue to be quicker in responding to provide tax relief following any emergency events.
What’s proposed is to build in tax relief measures into the legislation, which then can be activated by an Order in Council. This has been something that Inland Revenue has had to do rather a lot recently. As the commentary to the bill notes there have been three national emergencies declared in the last 15 years, where Inland Revenue’s basically had to apply some discretion to provide some measures of tax relief. Those were the February 2011 Christchurch earthquake, the COVID-19 pandemic and then the flooding in the wake of Cyclone Gabrielle last year. Cyclone Gabrielle came hot on the heels of the Auckland Anniversary weekend flood. Then there was also a huge earthquake in Hironori Kaikoura in 2016, which was a local emergency.
This bill proposes to introduce primary legislation which will enable Inland Revenue in the wake of an emergency event to use an Order in Council to activate these measures so it can respond to the emergency event.
I think it’s a good move. The COVID response in particular, showed that there was a need for greater discretion for Inland Revenue in certain areas, and in fact the Finance and Expenditure committee suggested last year that some form of this measure was needed.
It’s a fact of the times that we need such a measure, and incidentally also supports my long-standing view that it’s climate change which is going to hit the balance sheets first, and we need to be responding to that.
Crypto-asset reporting framework
The Bill also introduces the legislation required to implement the Crypto-Asset Reporting Framework (CARF), an OECD initiative, which is planned to take effect from 1st of April 2026. From that date New Zealand-based reporting crypto-asset service providers would be required to collect information on the transactions of reportable users that operate through them. The providers would then need to report any information for the year ended 31st March 2027 to Inland Revenue by 30th of June 2027. And then Inland Revenue would exchange this information with other tax authorities to the extent that it did come across information that a user of a platform in in New Zealand was actually resident elsewhere.
(Example of information reporting required)
As the commentary to the Bill notes, the market for crypto assets has grown enormously and there are now more than 22,000 crypto assets with a total market capitalisation of that is now close to NZ$4 trillion. This is up from barely US$17 billion back in 2017. According to the commentary between 6% and 10% of New Zealanders own some crypto-currency and Inland Revenue analytics show that 80% of crypto-asset activity by New Zealanders is undertaken through offshore exchanges.
There are some interesting notes in the accompanying Regulatory Impact Statement that once this is all up and running, Inland Revenue expects to be gathering about $50 million a year from it. In the meantime, a colleague has told me about a client who was using the Binance platform who has received some queries from Inland Revenue. The CARF initiative once implemented will boost Inland Revenue’s audit activities in this area.
Foreign superannuation scheme transfers – a good fix for a bad policy?
The next couple of measures relating to foreign superannuation scheme transfers and the Approved Issuer Levy are good to see, but also raise some interesting policy questions.
Under our current foreign superannuation scheme rules, if you transfer a foreign superannuation scheme into New Zealand or withdraw funds from the scheme (the money doesn’t necessarily have to reach New Zealand), you trigger a liability.
What has been an issue all along, particularly for Britons, is if they transfer their overseas scheme into a Qualifying Recognised Overseas Pension Scheme – or QROPS – they trigger a tax liability but may have no access to the funds, because they’ve not reached the age in which they’re allowed to do so under UK pension law. Any attempt to do so would trigger what’s called an unauthorised payments charge which could be up to 55%.
This was a problem that was identified with the legislation when it was first proposed back in 2013. Thanks in part to COVID, it’s taken this long to come up with a workable solution which is to kick in from 1st April 2026. From that date there will be a “Scheme Pays” option, under which the receiving scheme will calculate the tax due and pay that on behalf of the transferring client. The receiving scheme will do so at a flat rate of 28%, which is the prescribed investor rate. Transferring clients will have the option to fund the tax liability out of their own pockets, presumably because their marginal tax rate is 10.5% or 17.5%.
As I said, it’s a solution to a long standing problem. I am not a fan of the foreign superannuation scheme rules. It seems to me that we are taxing the importation of capital. People are bringing capital into the country and yes, they have benefited from an overseas tax regime. Conceptually, what we do ties in with our tax policy and in particular, the Foreign Investment Fund regime.
A ‘highly problematic’ regime?
But those of you who have been reading Dr Andrew Coleman’s recent articles will know our tax regime in relation to the taxation of savings is quite unique. I think in this area it’s highly problematic. People are bringing overseas savings and currency, into the country and we are essentially taxing them for that. Now looking at the bigger macroeconomic picture, that doesn’t seem to make a lot of sense to me. It’s conceptually correct from our taxation perspective, but it seems nonsense. This has always been my view, and I’ve still not received a satisfactory explanation other than “Well, that just fits in with our tax regime.”
My second point here is with the proposal for schemes to apply the prescribed investor rate at 28%. The Regulatory Impact Statement notes that on average the tax rate transfers is about 29%. Now the reason we tax foreign superannuation scheme transfers is so that people who have overseas pension schemes don’t have an advantage relative to their New Zealand counterparts, who would be in KiwiSaver funds, which as prescribed portfolio investment entities have a maximum prescribed investment rate of 28%.
Over taxation of transfers?
This begs the question as to why these transfers have been taxed at a person’s marginal tax rate which in some cases would be 39%. Surely if we are saying we’re looking to try and prevent a disadvantage, the top rate that should have been applied was 28%. That’s not discussed in the commentary or the Regulatory Impact Statement. But I will raise it in my submission to the Finance and Expenditures Committee and see what develops of it.
I was also interested to see the numbers of people that are affected by this seem to have been dropping off. According to the Regulatory Impact Statement, 2,700 individuals reported a foreign superannuation scheme withdrawal or transfer in the 2022 income year. For 2023 the number was 458 with 113 reporting the amount was mainly sourced from the UK. That’s quite a drop off.
The “Schemes Pay” solution has taken a long time to get here. I’ve been involved as part of the group that’s worked with Inland Revenue on this policy measure, so I’ll give it a qualified pass. But I still think the bigger issue as to why we are taxing these transfers in the first place really should be addressed properly.
Changes to the Approved Issuer Levy – fixing a problem but not addressing the cause?
Another good measure which also resolves a long-standing issue, involves the Approved Issuer Levy regime. Where a person pays interest to a non-resident lender, the payer is required to withhold non-resident withholding tax (NRWT). Alternatively, if the interest payments are being made to non-associated lenders, then you can register to apply to register the loan and instead deduct the 2% Approved Issuer Levy (AIL) and that’s what most people do.
According to the Regulatory Impact Statement about 1200 taxpayers are filing AIL returns paying AIL totalling $153 million for the year ended 30th June 2023. This represents annual interest of approximately $7.7 billion subject to the 2% AIL.
But some people haven’t registered the loan for AIL and the current rules are that they can’t register for AIL until they’ve paid the NRWT. The loan cannot be registered retrospectively. There’s an example in the Regulatory Impact Statement that one borrower had to pay $2 million in NRWT as a result. The proposal is to enable Inland Revenue to allow retrospective registrations.
Paying withholding tax on your mortgage interest
What has also emerged as an issue is that there are a number of individuals with overseas mortgages. They have moved here, but they’ve kept their overseas property and usually rented it. The UK and Australia are the two most common examples I’ve encountered. These persons are paying interest to the UK/Australian located banks on UK/Australian located properties because they have mortgages. These payments are also subject to AIL and NRWT but practically speaking it’s very hard to explain why AIL/NRWT is payable particularly when the payments are being made from an account situated in the UK/Australia.
This AIL proposal will deal with some of the problems around retrospective registration. But the question has not been asked as to whether in fact individuals in those circumstances that I’ve just described should in fact be within the scope of the regime, because that’s not why the AIL scheme was introduced.
It’s intended to help lower the cost of capital for New Zealand borrowers. As mentioned above in my view taxing foreign superannuation schemes seems to be taxing the importation of capital. This is contradictory to the purpose of the AIL regime. Both those positions can’t be correct in my view if we want to make it easier to access capital. In my view we should be changing the approach in relation to foreign superannuation schemes.
Rant aside, allowing retrospective AIL registration is actually a welcome move. The bigger question still remains as to whether in fact individuals with overseas mortgages should be within the regime. As the Regulatory Impact Statement notes, we don’t really know what’s the impact for individuals. It’s pretty near minuscule overall and there’s probably more non-compliance than the Regulatory Impact Statements acknowledge.
A hefty dose of remedials…
Another policy measure is to increase the exempt employee share scheme threshold. The maximum value of market shares that can be offered will be increased from $5,000 to $7,500 with effect from 1 April 2024. Finally, there are a large number of remedial measures relating to GST, trustee tax rate changes, partnerships, land tax rules, international tax and sundries. These often pop up in tax bills, just tidying up inconsistencies in legislation.
Submissions are now open and close on 18th October.
Insights from ten years of Inland Revenue’s transfer pricing questionnaires
Every year Inland Revenue issues an international questionnaire designed to collect key information about financing debt and transfer pricing issues in regard to foreign owned businesses in New Zealand. The data request for 2023 was sent out in February 2024 and responses were required by 15th April 2024. These questionnaires generally target foreign owned groups with turnover exceeding NZ$30 million.
What’s happened is Inland Revenue’s now published a summary of the answers it received covering the10 years from 2014 to 2023 inclusive. There are some interesting little details in here. In both 2014 and 2023 years, the three countries with the highest ultimate ownership were Australia, Japan and the United States. In 2014 there were 292 foreign owned groups (excluding banks and insurers), 77 had ultimate ownership in Australia, 55 in the USA and 39 in Japan.
Flip forward to 2023 and there are now 802 groups. The top three were still the same, but the order has changed. In that now the United States with 178 groups is the country with the highest ultimate ownership Australia has 144 and Japan 71.
There’s also questions about how many groups are subject to our thin capitalisation rules which kick in where the debt to asset ratio exceeds 60%. In 2023, nine percent of the groups – that’s about 75 – would be subject to some form of interest restriction.
Back in 2014, that was much smaller. Only 14 of the 198 groups that had net finance costs were subject to thin capitalisation. That’s quite interesting because it shows that more debt has been taken on board by foreign owned groups over the ten year period.
I’m always interested to see data like this from Inland Revenue as it gives us insights into the shape of our economy.
“Who’s that knocking on the door?”
And finally, this week a reminder that Inland Revenue has upped the ante in terms of debt collection and just general enforcement across the board. I mentioned earlier on about the taxpayer who had received an inquiry in relation to their Binance account. This week RNZ ran a story about instances where Inland Revenue have actually been out door-knocking and making physical visits to people who owe them debt. It’s something we haven’t seen for about five years. Inland Revenue seemed to have dropped off using this practise prior to COVID and obviously COVID then had a huge operational impact.
Inland Revenue re-engaging in this process is to be honest welcome. You do get the sense that certain taxpayers just push the envelope and think they’ll get away with it. So, it probably was a big shock for them that Inland Revenue can actually turn up on their doorstep and say “Hey, we’d like to talk to you about your debt.” As I’ve said before we’re going to see more of this increased enforcement.
Coincidentally, but I haven’t time to cover it this week, Inland Revenue also released drafts for consultation, updating its operational statements in relation to the use of its (very) extensive search powers. That’s probably something maybe I’ll get a chance to cover later, but for now, 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.
