This week in tax:
- Inland Revenue’s three new rulings on taxing crypto-assets paid as salary and wages/bonuses
- New draft determination on using smartphone for business
- Is Inland Revenue audit activity on the decline?
This week, Inland Revenue with a world first. How much of that telecommunications tool expenditure is deductible and how much audit activity is Inland Revenue currently undertaking?
Paying employees with cryptos
This week Inland Revenue achieved what is thought to be a world first when it released three rulings regarding the treatment of crypto-assets provided to employees. Crypto assets more commonly have referred to as cryptocurrency have been around for about 12 years or so now, and have generated a lot of heat and excitement, particularly with the dramatic rise in the value of Bitcoin. And they’ve been around long enough that they’ve started to enter into mainstream business activities and questions have therefore arisen quite frequently about what’s the tax treatment of crypto currencies.
So Inland Revenue released a frequently asked questions on the treatment of crypto-assets a few months ago and now it’s gone one further with the release of three public rulings. These apply from 1st of September, setting out its views of the tax law that applies in three specific circumstances set out in these rulings.
This has created a great deal of excitement in the crypto-asset world because as far as can be told Inland Revenue is the first tax authority to go down that route. And it gives a lot of clarity to the treatment which is necessary as questions have arisen as businesses have been involved and the blockchain technology, crypto-assets have been expanding. They’re becoming used in different ways and tax issues are popping up all the time. And there’s still a lot of work to be done in this tax space.
But these are interesting steps forward. As I said it excited the crypto-asset community and I fielded inquiries from four journalists including one from the U S on what was the implications of this.
What Inland Revenue has done is issued three public rulings. Under the rulings process Inland Revenue comes across certain transactions and says, hey these transactions are happening, this our view of the tax treatment. These rulings are designed to give clarity of understanding to everyone involved in that.
And as the crypto-asset community and businesses that are in this field are expanding, for them, this is a big step forward because it acknowledges what the tax treatment is of payment of salaries to employees in crypto-assets which also will free up cashflow for them and help expand the business.
For those businesses in the crypto-asset sphere, this is very important, which one of the reasons that caused so much excitement. My Twitter feed has been full of commentary on the matter.
So what has Revenue actually done? There are three public rulings, 19/01, 19/02 and 19/03. 19/01 is the big one because it considers the income tax treatment of crypto-assets received by employees as part of their regular, that’s a key word, remuneration. The ruling commentary discusses when crypto-assets will be treated as part of an employee’s salary and wages and therefore be subject to PAYE, pay-as-you-earn. That’s of course for Inland Revenue is a very important part, because if these people are being paid in crypto, it wants to make sure it gets, its cut as soon as possible and then it talks about the implications of crypto-assets being subject to PAYE.
So for example, and this is not such good news for some if in fact you get paid in crypto does that affect your student loan repayments? What about Kiwisaver, working for families’ entitlements. It also explains that crypto-assets not subject to pay-as-you-earn would be treated as fringe benefits and subject to FBT.
Now you’ve noticed I referred to crypto-assets, now the rulings throughout, use the term crypto-assets to “cover digital assets that use cryptography and blockchain technology to regulate their generation and verify transfers”. Because as the rulings go into, there is more to crypto-assets than Bitcoin and Ether, although they’re the best known and people thinking of them as terms of a store of value. The ruling makes the point that there are the, these crypto-assets, the field crypto-assets covers Bitcoin yes, but other crypto-assets with different functions.
So very simply, the first binding ruling, the big one you could argue, 19/01 says that if you pay someone as part of the regular remuneration, then payments of crypto-assets would be subject to pay-as-you-earn. So as I mentioned a minute ago, Inland Revenue then is getting to clip its ticket on the matter of making sure the pay-as-you-earn is collected. Inland Revenue is always concerned about this, is that employees receive payments and may not either declare that “accidentally on purpose” or simply because they think it’s tax paid and Inland Revenue misses out on the tax. By treating the regular of regular payments with crypto-assets as remuneration and bringing it into PAYE pay-as-you-earn, Inland Revenue resolves a problem for it of compliance.
It is also, something that is extremely useful for employers because as they’re expanding and in this space they obviously burning a lot of cash. If they have the ability to play some or all of an employee’s remuneration in crypto-assets that actually frees up their cashflow and help business investment. I would expect that those businesses working in this space will look to make more use of this provision. It probably also to be fair, regularizes, something that may already be happening.
There is just one caveat I have about this position and that is the implications of the Wages Protection Act, something not covered in the Inland Revenue rulings. The Wages Protection Act 1983 says that wages are payable in money and then defines money “as in relation to any wages means any New Zealand coin or New Zealand bank notes or combination of both. The tender of which in respect of the payment of those wages is legal tender”. Now that dates back to 1983 and the world has moved on since then, quite considerably. So the question arises from a technical perspective, is crypto currency money for the purposes of wages? Is there an issue there? I imagined that crypto companies are looking at that.
But even if Inland Revenue possibly may have got ahead of the game there, it is, as I mentioned, dealing with something that it’s probably in practical terms seeing already. So, the basic position is that you pay someone crypto-assets, you’re up for PAYE on that, assuming it’s a regular payment. “Regular” is the key word, as mentioned earlier.
One of the rulings, binding ruling 19/02 deals with the question of bonuses being paid in crypto-assets and that makes it clear that it’s a PAYE income payment and subject to the pay-as-you-earn rules. Pretty straight forward, no controversy there.
The third ruling deals with question of irregular payments which are maybe not part of salary wages and not part of bonuses. Instead the employer passes crypto-assets to an employee for example, an Initial Coin Offering, Initial Exchange Offering, Security Token Offering or Token Generating Event, all of which are happening right now. This is an amazingly complicated field. Fascinating to work with at the time and moving very, very quickly.
It really should not be understated that Inland Revenue have done well here to get ahead of the game.
These rulings last for three years and over time they may evolve. Certainly, I’d expect in three years’ time that it will have another closer look at them again. But the point is they’re bringing certainty to an industry which wants some certainty around what it can do in this space. And as I said, in doing so it’s actually freed up investment into that.
Now you may have a view as to whether you think blockchain technology and Bitcoin, are just speculative froth, but the point is it’s real. They’re here and so the tax authorities have to deal with what’s happening in the real here and now. So, praise to Inland Revenue for doing so.
To quickly summarise, the crypto-assets that aren’t provided as part of salary and wages or as bonus, they broadly speaking would generally be treated as a fringe benefit and the value of the fringe benefit will be the value at the time that crypto-assets are provided to the employee. Market value is determined by the employer itself when it’s selling them or on the open market value. So that’s a really interesting point.
Watch this space as I said it got the crypto-asset community extremely excited. It is putting Inland Revenue in a world first and will be interesting to see how this develops.
Apportioning rules for private use of mobile phones
Moving on, Inland Revenue also released a determination on the employee use of telecommunication tools and personal use appointment. This is actually a draft ruling, it’s just setting out some rules around this, one of these things that happens in the background.
What this particular determination is talking about is where employees may use their own telecommunications tools, smartphones generally in employment, but they also have a private use proportion to them. This determination sets out a suggested apportionment.
It breaks it down into of three classes, class A, class B and the de minimis class. Class A, which covers quite a range of things, employers can treat 75% of the amount paid as a means of a reimbursement and therefore exempt income of the employee and then the other 25% is taxable. If the employer, for example just says pay 75% of the bill as an allowance for reimbursement, then the whole bill is paid is exempt. The allowance paid may also involve an amount to cover depreciation.
Then class B, where the employee, with a slightly different set of circumstances, provides their own phone and they pay for their own plan, but they are required to use it for work. Again, 25% of the amount repaid, by reimbursement is exempt income for the employee, but the balance is 75% is taxable.
Finally, in the de minimis class is if there’s a payment of no more than $5 a week, no more than $265 a year as a reimbursement for business use, then that is exempt income.
So that’s a draft determination that they’ve issued for commentary. When that feedback on that has been reviewed it will probably be finalised later this year, but in the meantime feedback is open until 20th September.
IRD audit watch
Now what is Inland Revenue up to in the investigation space? This is always something of interest to, to us as practitioners to just know how busy is Inland Revenue in this space? What can we expect? It’s a useful tool for tax agents because it reminds clients that they can’t just simply push the envelope thinking that nothing’s going on. They’ve got to be aware that part of the buttressing the whole integrity of the tax system is the risk of investigations.
So, what’s going on? There’s been some debate amongst the tax community and mutterings amongst each other that investigation activity seems to have dropped off a bit and we wonder how much of that is the effect of Business Transformation.
Those whispers appear to have reached the ear of Andrew Bayly, the MP for Hunua, who has fired off a whole series of questions to the Minister of Revenue.
Some of those responses were released this week and they make very interesting reading. Just one, there’s a whole heap of them here, but this one in particular caught my eye.
“How many hours in total, if any, have IRD assigned staff spent on investigations on a monthly basis since September 2017?”
For the period from 1 September 2017 to 30 June 2019 Inland Revenue advised that its staff spent a total of 1,096,000 hours on investigations related activities. That’s fine. It’s a big number.
What really catches your eye is the monthly breakdown on that.
In September 2017 the number of hours spent in investigations was 67,445. In June,2019 it was 19,421 a quarter of the effort of what was going on 18 months previously. And that is a bit of a concern to be honest because if they’re perception emerges that Inland Revenue isn’t paying attention on this, then people will take more chances and Gresham’s law starts to apply. In effect the bad will drive out the good. So Inland Revenue and the Minister ought to be concerned that this activity has dropped off.
The explanation offered is “I’m advised Inland Revenue plan carefully for its Business Transformation by devoting as many staff as possible to handling customer queries, including some staff who normally undertake investigations activity from the period of April 29 when the new income tax system went live through to June 2019.”
I’m not sure that during Business Transformation, it was wise to have actually relied on its introduction to take key frontline staff off investigation work and put them on the phones. They have the skills for that, but you would’ve thought that Inland Revenue should have those skills across all the lines. Either that or maybe the Business Transformation should have been phased in. Anyway, there’s a lot more in this space from Andrew Bayly’s questions. I’ll probably come back to them later and I understand the redoubtable Andrea Black might well have something to say about this.
Obviously, I’ve been watching this with interest. So next week I’m going to be joined by journalist and author Max Rushbrooke to talk about this and his suggestion for a wealth tax to address inequality. So, tune in next week for what should be a very interesting session.