- Inland Revenue guidance on the deductibility for income tax purposes of costs incurred due to COVID-19
- Inland Revenue releases an issues paper on the future of tax administration in a digital world
- The tax perils of not taking advice before migrating.
We’re now in the third year of the pandemic which over the past two-and a-bit years has resulted in an enormous amount of upheaval, both socially and for businesses. Plenty of unusual situations have arisen as a result, and the tax treatment of those situations needs clarification.
Inland Revenue has therefore released some draft guidance for consultation on the tax deductibility of costs which have specifically arisen because of COVID-19. What the paper notes is that businesses have suffered significant disruption as a result of the pandemic, and many have had to incur additional costs that would normally be regarded as unusual or abnormal, which have only arisen because of the pandemic. In addition, businesses are continuing to incur holding costs such as interest and depreciation for assets which they can’t use at the moment, either because of COVID-19 restrictions or because they’ve temporarily downsized the business.
This paper is designed to give guidance around the income tax deductibility of expenditure in those circumstances. It looks at a number of particular situations that obviously Inland Revenue have seen or have been asked to advise on. For example, what about the costs of bringing employees into New Zealand or retaining teams who are unable to work? What about providing accommodation to keep teams housed together in a bubble during a particular set of COVID-19 restrictions?
Other scenarios include what’s the tax deductibility of giving employees vouchers or incentive payments? And then what about redundancy payments – are they deductible if they were a result of COVID-19? What about costs of terminating contracts and related legal fees?
Repairs and maintenance and depreciation on assets and equipment that aren’t being used because of the pandemic – are they deductible? And then premises costs such as lease break fees and other costs such as keeping people appropriately distanced in a workplace. As you can see, there’s a lot of scenarios considered in the paper.
The general rule for deductibility is in Section DA 1 of the Income Tax Act. For a cost to be deductible there must be a nexus between the cost and the person’s income earning process. Now that’s always a matter of fact and degree and what must be kept in mind is that the cost to be deductible doesn’t need to be linked to a particular item of income and the income doesn’t need to be produced in the same year as the cost was incurred. The cost must be incurred in general terms as part of the business’s income earning operations. That means you can take longer term objectives about why you’re incurring expenditure.
The paper then matches these basic principles to the scenarios that I set out before with a series of good examples. These scenarios involve a hotel chain, a café, a construction company, a tourism business, and an office. I recommend reading the paper if you’ve encountered some of these unusual situations. Consultation, as I said, is open now and continues until 31st March.
Incidentally, talking about consultation, submissions close at the end of this month on an Inland Revenue consultation regarding charities and donee organisations. I covered this consultation in early December and the question of the charitable status of a few organisations has been in the news lately. So, here’s your opportunity to make submissions to Inland Revenue.
Tax in a digital world
Moving on, in my first podcast of the year, I suggested that Inland Revenue will be looking to move forward the process of tax administration now it’s completed its Business Transformation. And I recommended looking at a paper prepared by Business New Zealand on the future of tax administration.
Inland Revenue has now released an official issues paper on tax administration in a digital world. And this, I think, is a very important development for tax administration and for tax agents and intermediaries, or anyone involved in the tax system. As the paper outlines, businesses are moving online, and this is shaping Inland Revenue’s thinking about the future world in which the tax system will operate.
The paper runs to 25 pages and there is a lot to consider so I could rabbit on for quite some time. It picks up many of the principles or ideas that were set out by the Business New Zealand paper, but probably at a higher level. Inland Revenue believes that there are four pillars that set out the core framework for tax administration and social policy administration to function well. That is fairness and integrity, efficiency and effectiveness. And the paper discusses what is the impact of technology on all of those.
As Inland Revenue sees it, key features of the digital world are likely to be businesses operating in a digital ecosystem. That is, connected digitally to their suppliers and customers. The Administration of tax and social policy payments will be integrated to broader economic systems. That means, for example, individuals or businesses can use a common digital identity across a range of services. That is something I think that’s happened with COVID-19. The pandemic will accelerate that trend because it just makes life so much easier for everybody. You’re not having to deal with providing repeat information to different agencies.
Tax administration processes are going to become embedded into business systems that businesses are using. In other words, they’ll use systems that fit their business rather than tax obligations. And then, this is a key one, digital processes will enable data to flow in real time.
This is a point I keep coming back to – the amount of data that’s flying around and Inland Revenue’s access to that data, is increasing all the time. And the speed with which that data is being received and processed is also accelerating. Which means, as I’ve said repeatedly, there are fewer and fewer places to hide from Inland Revenue.
And so this paper looks at what that future might look like and it sets out some frameworks, and sets the scene in the shift to digital. There’s a very important chapter for tax agents, intermediaries and other people who work with Inland Revenue about how it sees these relationships developing. The paper considers the issue of data, how it’s collected, how it’s shared and what statistical data is to be made available on an anonymous basis.
You will know at the moment there’s a lot of controversy going on regarding a high wealth project where Inland Revenue is asking a group of about 400 New Zealanders for detailed information about their wealth. In my view, one of the weaknesses in the New Zealand system for some time has been that we haven’t actually collated a lot of data when we file tax returns. And so compared with other jurisdictions we don’t really have good data on many parts of economic wealth. That project, controversial as it is, addresses this issue. In the future because data can be found and supplied more easily, I think the data requests from agencies and particularly from Inland Revenue will increase.
There’s also talk about publishing debt data. In other words, if someone’s been a bad boy – and by the way, it is invariably boys in my experience – Inland Revenue may share that data and may develop a number of tools for enforcement.
Then the final chapter talks about general simplification process, how tax laws are written, simplifying the tax year end position and payments around the tax system.
The issues of data sharing and data protection are very, very important. In my view Inland Revenue does have a good reputation and processes for not leaking data, and its data is secure. But as it changes its role to interact more with intermediaries such as tax agents, there’s an obvious risk of leakage.
The paper therefore suggests the current process by which a person can become a tax agent needs to change. Actually within the tax agent industry I think there is a recognition that does need to change even if that reflects a certain amount, you might say of self-interest by the professional bodies. It is quite true and not an apocryphal story that a prisoner registered as a tax agent with Inland Revenue when he was in jail. He was able to do so because he had 10 clients who had to file tax returns.
If data is now going to be shared more freely and Inland Revenue is not directly controlling so much of the process, it needs to be certain that the people it’s granting access to its systems or data are trustworthy. So that’s a big issue to consider. As I said, the paper is a fascinating one. It’s a big topic, but it’s only 25 pages, and an easy read. Submissions are now open and continue until 31st March.
The tax consequences of emigrating
And finally, this week, according to the latest statistics New Zealand figures, more people continue to leave New Zealand on a permanent long-term basis than are arriving long term. In 2021, there was a net annual loss of three 3,915 people. Now at the risk of sounding like a broken record, one thing I regularly encounter is this issue of people migrating offshore, usually to Australia, sometimes to Britain or America, and overseas migrants from other countries coming to New Zealand.
It is quite astonishing the number of people who move overseas without looking through and considering all the tax implications of their move. In particular, if they are a trustee of a trust. As I have recounted a number of times, particularly in relation to Australia, the consequences of becoming resident in Australia can be quite disastrous. But I still keep encountering this issue. In fact, at the moment I’ve got three cases on the go involving variations on that theme.
So just a reminder to anyone who’s thinking about moving to Australia or moving overseas. Just remember to get tax advice before you go. You may be missing an opportunity. You may also be giving yourself a significant tax headache, which nobody wants.
Well that’s it for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients.
Until next time kia pai te wiki, have a great week!