- Provisional tax is due so watch out for changes to the use of money interest rates and rules
- Is it time for a residential land value tax?
- More on the looming shortfall in the National Land Transport Fund
The first instalment of Provisional tax for the March 2023 income year is due on Monday. Now, as most people know, if provisional tax is not paid on time, late payment penalties and use of money interest will apply. The interest rate on underpaid tax will increase from Tuesday 30th August from 7.28% to 7.96%. On the face of it, there’s a lot of incentive to make sure your payment is made on time. The rate, incidentally, for overpaid tax which has been zero for quite some time now, will rise to 1.22%.
There’s been consistent tweaking of the use of money interest rules to try and make it easier for businesses, particularly smaller businesses. The rules are different where the provisional tax exceeds $60,000 for the year.
And the last changes in 2017 were designed so that if taxpayers made the payments they were required to make, then use of money interest would not apply until terminal tax date, which for most taxpayers is 7th February following the end of the tax year in question, or the following 7th April if they are on a tax agent’s listing.
The requirement was that they had to make the payment in full and on time, and this actually led to a few problems because taxpayers sometimes missed their payments by one or two days or even might be out by $10 or so. What has emerged since 2017 is that the number of taxpayers who unintentionally paid short or late was underestimated by Inland Revenue at the time the changes were brought in. Consequently, a large number of taxpayers had to pay use of money interest and late payment penalties.
What Inland Revenue have determined is “in these circumstances, the application of use of money, interest and late payment penalties is not proportionate to the offence committed.” It considers it is “appropriate” to allow taxpayers to retain the safe harbour concession for use of money interest even if they miss a payment. So, the interest rules have been changed rules again with effect from the start of the current tax year.
What the change means is you won’t suffer use of any interest if you miss a payment or there’s a short fall on your tax payment. You won’t be charged 7.96% on the underpaid tax until your terminal tax payment date. However, late payment penalties will still apply. These are 1% of the underpayment immediately and a further 4% if the tax has still not been seven days later for a maximum 5% penalty. (Inland Revenue has now done away with the monthly 1% late payment penalty on top of the initial penalties).
It’s been pointed out to me that there’s probably an opportunity for someone to play a few games and arbitrage their funds by accepting the late payment penalty charge but avoiding the high use of money interest charge. No doubt some taxpayers will do that.
We don’t actually know how much use of money interest the Inland Revenue charges, but pretty substantial amounts are involved. We know, for example, that Covid-19 related interest write offs over a two-year period amounted to $104 million. At a rough guess taxpayers could be paying $100 million or more in use of money interest annually. Measures that help them relieve that charge ought to be to be welcomed.
The case for a residential land value tax
Moving on, last week I discussed the report on housing from the Housing Technical Working Group, a combination of the Treasury, Ministry of Housing and Urban Development and the Reserve Bank of New Zealand. The report raised the question of the role our tax settings may have played in house price inflation. This generated quite a bit of interest and commentary and thank you to everyone who contributed.
But as I said last week, the issue around how our tax settings work in relation to property isn’t going to go away. It’s an issue that sooner or later has to be grasped. And this week, Bernard Hickey who has an excellent Substack, The Kaka, did a very detailed post on the whole question of our lack of training and productivity, our need for substantial numbers of. migrant workers and how that intersected with the under taxation of residential land.
Bernard’s post pulled together a lot of conclusions I’d reached during my time in the Government’s Small Business Council between 2018 and 2019. I grew quite concerned at the lack of training, particularly among small businesses and the extensive need for migrant workers coming in. What is well established is that Aotearoa-New Zealand has the highest use of temporary migrant labour in the OECD and simultaneously it also has one of the highest diasporas in the OECD. In other words, our skilled people are moving overseas and we’re bringing in relatively low skilled people and this is causing a whole number of tensions.
As Bernard notes we really need to rethink the matter of how we deal with this approach because this long term, it is not economically prosperous for us all. As he concluded:
“All roads were always going to lead back to changing those investment incentives through a new tax that gives the Government the resources to invest in productivity-enhancing physical and social infrastructure. That tax would also radically change the incentives for businesses and individual investors….
In my view, a Capital Gains Tax would be too politically toxic, complicated and slow to break the log jam. The case for a residential land value tax, a much simpler, faster and more politically possible option is a simple and very-low-rate infrastructure levy or tax on residentially-zoned land values that is calculated annually from land value measures in council-maintained databases.”
This, by the way, is very similar to what Susan St John and I have been promoting for some time, the Fair Economic Return, and we and Bernard are coming at it from pretty much the same place.
Bernard then puts some detailed numbers around this. He estimates a 0.5% tax on residential land values would raise an extra $6 billion and effectively increase the Government’s tax take from 30% of GDP to 32% of GDP. Bernard also considers the revenue raised from such a tax should be
“hypothecated into a housing and climate infrastructure fund jointly administered on a region-by-region basis by central Government and councils, with the aim of using those funds to achieve affordable housing and net zero transport and housing emissions by 2050. affordable housing in net zero transport and housing emissions by 2050.”
I support this approach. We’ve just seen the flood damage in Nelson which is after about $80 to $85 million of damage from last year’s flooding. This year’s event is even bigger, and the damage is estimated to be well over $100 million. We could also be looking at similar events on a regular basis. Those sums are way too big for homeowners and local councils to manage by themselves. Central government is going to have to get involved.
Climate change is happening right now. It is no longer something in the distance and we need to start addressing those changes. Local councils cannot afford to be incurring $100 million in repairs each year. That is simply not sustainable. Bear in mind the chief executive of the country’s largest insurer has recently said premiums in higher risk areas will become incredibly expensive to the fact they become unaffordable.
A whole number of issues are starting to coalesce around climate change and around the taxation of capital. These will force a change on how we approach our current taxation system. What Bernard is proposing ties in with the Fair Economic Return Susan St John and I are promoting. In our view it is a fairer approach as it widens our tax base and as Bernard points out, starts to remove distortions to how we currently approach investment.
A $1 bln shortfall
Also related to the question of climate change, there was a report in the Herald this week about the Ministry of Transport’s forecast that the National Land Transport Fund is likely to have a shortfall of $926 million over the next three years. The shortfall is mainly as a result of the Government’s decision to cut fuel taxes and road user charges. However, there’s also a decline in driving going on as well, which may be related to the pandemic. Those figures were prepared in April and didn’t take into account the extension of the cuts to January. This shortfall will be made up out of general taxation.
The Government has taken a short-term decision to help the cost of living, but inadvertently it points to something that’s fundamentally flawed about how the National Land Transport Fund is presently funded. The reliance on fuel taxes encourages more driving which until we get to a fully electric vehicle fleet, that is not helpful, as transport emissions are one of the biggest chunks of our carbon emissions.
Transport is also one of the areas where we probably can do something quite quickly with the right incentives to encourage switching away from using internal combustion engines to hybrids and electric vehicles obviously, public transport, walking, cycling, scooters. All those alternatives are available now in the urban environment and could make a huge difference.
This is another area where governments have kicked the can down the road, but now they need to address the issue of how we fund the National Land Transport Fund because it’s how the maintenance of our roads is funded. We have to devise a new means of funding it, probably as readers have suggested higher road user charges on all vehicles including electric vehicles. Here’s another example of change in our tax system being driven by a number of factors, including the climate.
Finally, I mentioned earlier my time on the Government’s Small Business Council in 2018-19. Our chair was Tenby Powell who is a Colonel in the New Zealand Army. He is currently in Ukraine delivering humanitarian aid and helping to evacuate people from the most dangerous areas in the Russian occupied South and East of the country. Tenby has established Kiwi K.A.R.E. (Kiwi Aid & Refugee Evacuation) to fund this aid. Here’s a link to the funding page for Kiwi K.A.R.E.
Well, 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 te wiki, have a great week!