16 Mar, 2020 | The Week in Tax
- What is Inland Revenue’s response so far to the COVID-19 pandemic compared with Italy, the UK and Australia?
- New Zealand trustees should be aware of potential Australian tax implications
- Year end tax planning tips
Transcript
They say a week is a long time in politics, but the pace of change over the past week as the global response to the Covid-19 pandemic ramps up has been astonishing in its rapidity. On Tuesday, as Italy went into self isolation, the Italian government announced an initial €12 billion stimulus package. This includes loans to small and medium sized companies, compensation for firms whose turnover has plunged more than 25% and apparently some form of moratorium for business and personal mortgage repayments.
On Wednesday night, the British Budget, which was actually scheduled at that time, included a further £12 billion of Coronavirus measures, including a new temporary Coronavirus business interruption loan scheme and support for taxpayers with their payments through H.M. Revenue and Customs time to pay service. In fact, HMRC has now set up a dedicated Covid-19 helpline for advice and support.
Finally, Australia announced an A$17.6 billion dollar package which will mean 6.5 million lower income Australians will receive a one off payment of A$750. This is apparently a repeat of something that happened in the wake of the Global Financial Crisis. But of great interest to a lot of business owners is the fact that small and medium sized businesses will receive up to $25,000 to cover the costs of the employee wages and salaries. And that will be paid by the Australian Taxation Office based on the tax withheld. So after you pay PAYE they’ll then give you a refund.
Here in New Zealand, the response has been more muted to date. But given the turmoil in the markets, I think we can expect to see more concrete proposals come in the next few days. Inland Revenue has given some guidance for anyone affected by the Covid-19 outbreak so far, but most of this involves basically asking Inland Revenue if you want to delay payment of tax or enter into an instalment arrangement to pay your tax. As far as I can sit, tell the use of money interest on unpaid tax of 8.35% will still apply.
As I said, we should expect to see something more concrete coming out in the next few days. But here’s just a few ideas Inland Revenue and government might want to consider. Inland Revenue should automatically allow anyone owing say under $50,000 of tax to enter into an instalment arrangement with it over say a three year period. Inland Revenue should also cancel all late payment penalties for the foreseeable future and then also lower the use of money interest rate from the current 8.35% to maybe the FBT prescribed interest rate of 5.26%. And as I said a few minutes ago, a measure similar to the Australian proposal for small and medium sized businesses would be hugely welcome.
Aussie tax grab
Speaking of Australia, I’m currently dealing with three separate cases in relation to the issue of Australian tax residents receiving distributions from New Zealand complying trusts.
There are about 600,000 Kiwis in Australia. And the very valuable temporary migrant temporary residence exemption is available to many of them. Unsurprisingly, quite a few trusts have been making distributions to beneficiaries resident in Australia. But the Australian tax treatment depends on the immigration status of the Kiwis resident in Australia.
And in one or two cases I’ve come across, the intended beneficiaries actually are married to Australian citizens because they arrived prior to 2001 when the current set of rules were largely implemented. They have returning residence visas so they don’t qualify for the temporary resident’s exemption.
What’s also become apparent is a few of these trusts in New Zealand have, as I said, beneficiaries who have been resident in Australia for some time. And in some cases people have been extremely careless, and these persons may still be trustees of a New Zealand Zealand Complying Trust – in which case under Australian law, the trust is deemed to be tax resident in Australia. So that’s a massive headache for all the trustees.
But the other power that I’ve noticed come in, in at least one example is that an Australian resident holds the power of appointment of trustees. They’re not actually a trustee, but they still held a power of appointment. For Australian tax purposes holding the power of appointment of trustees effectively gives you control and management of the trust. Under the Australian Tax Office’s view, the trust is therefore tax resident in Australia.
Now, none of that is good news. And what it means in particular where distributions of capital are to be made to an Australian tax resident, there is a very real risk that what is thought to be a capital gain and tax free for New Zealand tax purposes actually turns out to be a capital gain taxable at the full 45% rate in Australia.
So this is a real issue and what I’ve encountered is a mixture of people wanting to make distributions to Australian residents or suddenly realising that one of the Australian residents actually has retained a power of appointment over a New Zealand settled trust. And I expect we’ll see more of this.
I’ve mentioned in a previous podcast that we have a new Trusts Act coming into force in January next year. So I would suggest that as part of the review in preparation for the implementation of the Trusts Act, people should be looking at where the beneficiaries are located and what what powers, if any, they retain in relation to the trust and what distributions are being considered to be made.
The Baby Boomer generation is dying off and that is going to result in one of the greatest wealth transfers in history as that generation passes its wealth down to Gen Z, Gen X and Millennials. And that’s going to trigger a whole pile of tax implications. Particularly since as I said, there are 600,000 Kiwis in Australia, 60,000 in Britain, and many thousands more scattered all around the globe. All of them will face some very interesting tax challenges. So if you’re thinking about distributions, you should think very carefully about the tax implications of what you’re proposing.
End of tax year tips
The March 31st tax year end is fast approaching. So here’s a quick reminder of some of the matters you should be thinking about before the year end happens.
Firstly, have a look at your trading stock and either dispose of the obsolescent stock or revalue it at the current market value. Now, if you’re writing down the value of stock, you need to be able to substantiate that value in case Inland Revenue challenges you.
Similarly, if you’re a professional services firm, review work in progress and either invoice it or write it off by March 31st.
Obviously at this time you may have some debts outstanding and bad debt deductions can only be claimed if the debt is actually written off by March 31st. So now is the time you need to be ruthless with your aged debtors. Either call in the debt collectors or simply accept that it’s going to be gone and write it off.
Now if you’re thinking about paying a dividend before tax year end, just remember that there’s a 10% penalty if your imputation credit account is in debit (negative) balance. So check what the balance of your imputation credit account is. Check the tax payments have been properly recorded as well as resident withholding tax deductions. And also just be sure that if any shareholding changes have happened during the year, you have factored in the possible impact of those changes.
Remember that in order for imputation credits to be carried forward for use against future distributions, there must be 66% of the same shareholders from the date the imputation credit arose (i.e. a tax payment was made) to the date of distribution.
This is a trap that some people fall into, but you have until March 31st to fix it. If that means paying a terminal tax a little earlier or making a payment through tax pooling, get to it.
More on cheques
And finally, on the long running issue of Inland Revenue’s decision to stop accepting cheques, I have actually received replies this last week from both the Minister of Revenue and the Commissioner of Inland Revenue’s office.
Both letters basically repeated the position that it’s going to change. Both noted that Inland Revenue’s mechanism for processing cheques in house will soon become obsolete and they believe it’s not economic for it to upgrade that technology. The Commissioner’s Office commented
“We are firmly discouraging use of cheques because we are confident for most customers the alternative options will meet their needs, so tax obligations are easily met”.
I’m not so sure about how easily met they are for some clients, but that’s the view they’ve taken.
The Minister just noted that there’s been a steady decline in the use of cheques over the past four years, and only now only 5% of any payments made to Inland Revenue are made by cheque. Interestingly, the Minister also noted that after the announcement was made last September that cheques would no longer be accepted, the number of cheques received immediately dropped by between 41 and 48% compared with the same month the previous year [2018]. So obviously in Inland Revenue’s mind that justifies their move because there were probably a number of taxpayers who could have paid electronically but kept paying by cheque until they reached a position where they had to change.
I’m still not satisfied by this. This position is driven from a business perspective for the Inland Revenue and not from the fact that we are required by law to meet our tax obligations. We don’t have any alternative about that, and there’s going to be a significant group of elderly people in particular who are uncomfortable using internet payments or do not have access to those online. So, I think Inland Revenue is still sliding round that issue and shouldn’t duck it. We have to pay our taxes required by law and that’s just tough. What I resent is as a small business, we get those costs passed on to us to try and sort out. But thanks to something called anti-money laundering, it’s actually procedurally for us a little bit more complex than Inland Revenue perhaps appreciates.
Anyway, that’s it for the week in tax. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Please send me your feedback and tell your friends and clients until next time. Have a great week. Ka kite āno.
10 Mar, 2020 | Tax News
A big surprise for Terry at the ATAINZ annual conference, to be presented with the President’s Award in recognition of service and commitment to ATAINZ at an exceptional level.
Terry Baucher ATAINZ Presidents Award
9 Mar, 2020 | The Week in Tax
- GST issues paper proposes change in GST treatment of crypto-assets
- Retrospective change to treatment of donation tax credits
- More on Inland Revenue’s decision to stop accepting cheques
Transcript
Early last week Inland Revenue released a GST policy issues paper.
The paper “covers a number of issues which have been identified where the legislation produces an outcome that does not reflect the underlying policy intent. The paper is designed to address those issues and maintain and in doing so, maintain the certainty and efficiency and fairness of the tax system”. And so what the paper does is outline technical issues that have arisen in the GST area and then suggesting potential policy options and solutions to those issues.
There’s a whole number of issues covered in here. For example, the paper starts off by talking about tax invoice requirements. Then there’s a discussion on the apportionment and adjustment rules which are complex and difficult to apply, and they’re looking to see how they can improve those set of rules. The apportionment and adjustment rules do cause headaches in the GST area. So another look at that area is always welcome.
There’s a proposal dealing with the treatment of GST and courier business practices where part of an international delivery is subcontracted. There’s an interesting proposal relating to business conferences and staff training. The paper points out that for overseas businesses it’s impractical for them to register for GST to claim a GST refund for a one off expense of sending their staff to a conference or training course in New Zealand. This is something we’ve encountered from time to time. And it’s a deterrent to businesses who might want to come here for a tax conference or any other conference, actually, because if they don’t manage it correctly, then their costs go up by 15 percent. And from the perspective of a New Zealand conference centre this is also an issue for them because they may not be getting business they could otherwise expect.
The proposal here is to zero-rate conference and staff training services supplied to non-resident businesses. That’s a good initiative. It is also actually conceptually logical because if the conference is being carried out for business purposes, then a GST registered business would be able to recover the GST on that. So this proposal is sort of short circuiting that process.
There’s also commentary on managed funds, insurance payouts to third parties, some tweaking of the rules in relation to compulsory zero rating of land and various other remedial issues.
But the issue that’s caught my eye and is quite welcome is in relation to the GST treatment of crypto assets. Now, what the paper notes is that at present there are over 5,000 crypto-assets and the total global market value of all such assets is in excess now of over 300 billion U.S. dollars. But the GST treatment is very inconsistent.
GST was originally designed by the French way back in the 1950s as part of the forerunner of the European Union, the European Economic Community. The designers of GST didn’t ever contemplate crypto-assets and nor did our legislation which dates from 1985. And as the paper points out, crypto-assets have a very different GST treatment to either money or financial services. It’s not clear, for example, whether the supply of crypto-assets could either be an exempt financial service, subject to 15 per cent GST or it’s a zero rated supply to a non-resident. So there’s a lot of confusion on this.
And it’s a matter that we have been discussing with Inland Revenue and clients. Work arounds have been established, but there’s always a level of uncertainty. So we were looking for guidance from Inland Revenue from on the matter and this paper gives that by proposing to exclude crypto currencies from GST and the financial arrangements rules.
Now, the financial arrangements rules, as regular listeners will know, are a minefield for most taxpayers. It would certainly be a big problem for crypto-asset investors if Inland Revenue had decided that crypto-assets could be within the financial arrangements regime, because, given the volatility, many investors would probably be subject to being taxed on an unrealised basis. So good to hear they’re planning to clarify that this won’t be the case which is a big win for crypto currencies.
There’s another little win as well in that GST registered businesses raising funds through issuing security tokens or crypto assets, which, quote, “have features that are similar to debt or equity” such as a right to share of the profits of a project, should also be able to claim input tax credits on their capital raising costs. This is a good move, and it means that crypto-asset businesses are not disadvantaged if they wanted to try and raise capital through issuing crypto-assets which are a substitute for debt or equity. That’s a good clear rule and also good to see this.
The paper also points out, inevitably, that income tax rules still continue to apply to crypto assets. These changes only relate to GST. The income tax rules set out in the Frequently Asked Questions issued last year will still apply.
Submissions on this issues paper close on 9th of April. If everything progresses as usual, you might see these proposals included in an omnibus tax bill released towards the end of this year. This means that all of this could possibly be in law by 1st of April 2021. Or maybe a little later than that if the omnibus bill is delayed, perhaps because of the election. Still this paper is good news for crypto-asset investors.
Moving on. As many tax practitioners will know, in dealing with Inland Revenue it’s often the case that it’s “Heads they win. Tails you lose.” And this can emerge where Inland Revenue, for example, loses a case in court and then promptly changes the law to what it thought should have been the result.
And this is about to happen. Late last year, the Court of Appeal ruled in the case of Commissioner of Inland Revenue vs. Roberts that a gift of forgiveness of debt made to a charitable trust which was progressively forgiven and donation tax credits claimed, represented money and therefore qualified for the donations tax credit.
In the case in question, Mr and Mrs. Roberts had transferred $1.7 million to a trust by way of loan and then started executing deeds of gift, releasing the trust from the liability to repay specified amounts of that loan and the trust then claimed a tax credit on the basis that the forgiveness of debt was a charitable gift. And the High Court said, “Yes that’s acceptable” and the Court of Appeal upheld that decision on the 17th of December. Immediately Inland Revenue said we’re going to change the law so it’s only gifts of cash that can be eligible for the donation tax credit.
And this week, the Government has released a Supplementary Order Paper to a tax bill going through Parliament right now, which addresses that matter.
And it makes it very clear that only gifts of cash will qualify for the donations tax credit and the 33% rebate back in cash from Inland Revenue.
Now, it’s arguable that what Mr and Mrs. Roberts did was pushing the envelope a little bit. But the question of the treatment of gifts in kind is a live one. I encountered one such case recently where a charity was saying, well, what if the building owner was to give us the use of the property rent free? Is that eligible for the donations tax credit? And I said “No it has to be in cash.”
So this is a matter that does pop up from time to time. There’s also some GST rules around this which are a little unclear. So, on the one hand, some clarity around this rule is to be welcomed. But I can’t help but wonder if Inland Revenue are just taking an overly draconian approach here, because as I said, there are other alternatives where gifts are being made in kind and maybe the donors should be getting a tax credit for that, perhaps you might want to go for a reduced tax credit.
But there’s a second issue here, which is also of concern, and that is because this is a Supplementary Order Paper to an existing tax bill, opportunities to submit on the bill are therefore basically being sidestepped. Now this happens from time to time in our legislative process. But it’s not the first time this has happened in this Parliament. And I’m personally not in favour of seeing stuff like this happen because these are issues that Inland Revenue probably knew about anyway and probably should have raised beforehand.
Obviously, Inland Revenue was expecting its appeal would be successful and therefore wouldn’t have necessarily put something forward. But maybe it should have done so to bring these issues out for discussion. As it is, it’s lost a case and has then decided, “Well, we’re not going to have that because it’s arguably a threat to the integrity of the tax base. But it’s also not what we consider to be the underlying policy’s intent”. Maybe it’s Parliament’s job to determine what the underlying policy intent is and as such, in a democracy, maybe we should have got more input into that matter.
And finally, speaking of getting some input into the matter. The decision by Inland Revenue and other agencies such as ACC, to stop accepting cheques in payment as of first of March is still rumbling on. And a couple of things happened this past week in relation to that.
Firstly, I got contacted by an international website, Tax Notes International, which is based in the United States. The journalist, in fact, was in New Hampshire and he expressed quite a bit of surprise at what was going on about that money. He pointed out, not unreasonably, that the fact that 424,000 cheques were received during the year to 30th of June 2019 is not an insignificant number in relation to a population of five million. He thought Inland Revenue’s action was quite offhand in that respect.
But he had also sought some feedback from Inland Revenue on the issue who and they said that it has received 160 requests for exceptions to this rule so far. It has accepted 76, turned down 22 and are in the process of reviewing the other 62 requests.
Then Andrew Bayly, the National MP for Hunua and a member of the Finance and Expenditure Committee, made the opening address at the Accountants and Tax Agents Institute of New Zealand’s annual conference last Friday in Taupo. (Excellent conference by the way).
He raised this issue and he has begun a petition to overturn the decision by Inland Revenue and other government departments on the matter.
I’m supportive of that. I don’t agree with the decision. I think the use of cheques will peter out anyway. But government agencies are imposing arbitrary costs on their “customers” when we have no choice in the matter. We can’t exactly go to the Australian Tax Office or the US Internal Revenue Service and use them instead. Inland Revenue is actually kicking the costs across to ourselves as tax agents and the taxpayers and just for its administrative convenience, and that’s unacceptable.
So keeping the pressure up, I have written to the Minister of Revenue and the Commissioner of Inland Revenue on the matter. Don’t hold your breath, but I think we need to keep pressing away at that. It could be that Inland Revenue may decide to relax the rules around the requests for exceptions. But let’s watch this space and see.
Finally, on a personal note, I was very honoured and frankly humbled to receive this year’s President’s Award at the Accountants and Tax Agents Institute of New Zealand’s (ATAINZ) Annual Conference. It is a huge honour and I’d like to thank the ATAINZ Board and all its members for their support of my activities over the past few years. I’d also like to thank my wife Tina and my colleagues here at Baucher Consulting Ltd, Eric, Judith and Darryn, without whom this wouldn’t have been possible. Thank you all very much.
And on that note, I’m Terry Baucher and this has been the week in tax. You can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. Until next time have a great week. Ka kite āno.
3 Mar, 2020 | The Week in Tax
This week Nigel Jemson the winner of the 2019 Tax Policy Charitable Trust talks about his proposed Trusted Taxpayer Regime – in many ways a new and improved accounting income method
It offers a 10% tax credit for small businesses (turnover below $5million) and no annual filing obligation in return for quarterly filing and Inland Revenue access to data
Transcript
The Tax Policy Charitable Trust aims to promote broader tax thinking and positive tax policy. As part of this it runs a biannual scholarship competition open to young professionals working in New Zealand. I’m joined today by Nigel Jemson, the winner of the Tax Policy Scholarship Competition for 2019. Nigel has been working in tax for seven years and is currently the group tax manager at Spark New Zealand. Morena Nigel, welcome to the podcast.
Nigel Jemson
Good morning, Terry. Great to be here.
Terry Baucher
Thank you. Now, you won the competition with a proposal for a Trusted Taxpayer Regime. What are the key components of this regime?
Nigel Jemson
So when designing this proposal, I was trying to design something that would give benefits to both small business and Inland Revenue. From the IRD perspective they have a problem of administrative costs and being able to effectively scrutinise taxpayer compliance across a wide population. That’s quite difficult to achieve in a cost-effective manner. So in order to enhance IRD’s ability to do this, I’ve proposed under the Trusted Taxpayer Regime, IRD would gain access to tax payers financial information via a real time link to the tax payers accounting software. That would save IRD the administrative costs of having to request access to that information and they can order that in real time.
TB
They can access that information anyway in the first place by demanding it under section 17 of the Tax Administration Act 1994.
Nigel Jemson
Yes, I think that’s just means I can just get access to that data in real time and potentially run data analytics and be able to audit taxpayer data faster to scrutinise taxpayer compliance more effectively.
Fortunately for small business, there is a benefit for them as well. In return for giving up this power out and their revenue and to encourage the small business to be a trusted taxpayer that get a 10 per cent tax discount on their income tax payments throughout the year. The second benefit under this proposal would be removal of the end-of-year tax filing obligation. This would be replaced by a less onerous quarterly tax statement, which would be a simplified sort of quarterly tax assessment which would replace the current provisional tax obligations.
TB
That’s excellent. I’m fascinated that you’re currently working at Spark, one of New Zealand’s largest companies, yet your proposal is very much targeted at small businesses. It is in an area where you wouldn’t normally deal with this day to day So what attracted you to this idea?
Nigel Jemson
Yeah, it’s quite ironic, as when I won one manager said, “OK, can your next idea be something that targets large corporate telcos?”.
In light of the tax policy scholarship competition’s briefing to propose a significant reform to the tax system, I had to design a proposal that would have a wide ranging impact. So I designed a proposal that would benefit the vast majority of businesses – the proposal targets businesses (including companies, partnerships and sole traders) with less than $5m turnover which is 97.5% of all businesses according to Stats NZ.
Small businesses in particular, do suffer under higher compliance costs relatively compared to other types of tax payers and larger tax payers. If you think about a sole trader business, for instance, they’ve got to deal with a number of tax obligations that an employee wouldn’t have to deal with: more complicated income tax returns, provisional tax, GST, PAYE etc. And compared to larger businesses, small businesses also have relatively less resources in time to deal with these tax obligations that are imposed on them and they don’t have the money to hire a tax professional like me full time. So it made more sense to target a proposal where it could achieve the greatest benefit.
And another criteria for the competition was feasibility of introduction and political acceptance. I think if my proposal had incorporated all businesses it would be harder to justify from a fiscal cost point of view and also might be less likely to gain broad public acceptance because there is a negative perception of large corporates getting tax breaks.
TB
But it doesn’t cover all corporates, it’s across all small businesses and sole traders as well. Talking it on the politics of it, listeners will know I was a member of the Small Business Council. I ‘d have to say that if we had been aware of this proposal (we had wrapped up our report by the time Nigel Jemson wrote it), we would have taken a very close look at it because it addresses the issues that you raised about compliance costs and the burden for small businesses in that they’re expected to do all be all things to all people, but without the resources of a Spark.
So what are the benefits in this proposal for both Inland Revenue and businesses?
Nigel Jemson
So for Inland Revenue the aim was to lower the administrative costs and improve their effectiveness of administering the tax system. So easy access to taxpayers’ financial information would reduce the time and effort required to access their information and therefore make it easier to check and enforce compliance. And there could be other flow on benefits as well from having access to such a large data pool, for example they could run analytics over that over that data to try and find potential risk areas.
And due to greater oversight I think as well because trusted tax payers have elected into this regime and know the IRD is watching them, they’re more likely to be compliant in their tax affairs. And then IRD can focus more resources comparatively on taxpayers who are not in the regime because they know they’re probably less likely to comply.
TB
As part of that you are saying that really this scheme should target businesses where more than 80% of the income is of a basically non-cash basis where it is easily trackable. These businesses, in any case, are probably are working with accounting systems anyway. There is some leeway around that 80% threshold, but it mainly targets non-cash businesses.
Nigel Jemson
Yeah, you have to have 90% of your total receipts being non-cash. And the reason for that is just so there’s a data trail so you can actually verify that the receipts that the business is getting. And there would be a number of safety checks in place so that IRD could know that taxpayers weren’t trying to hide cash receipts from it. There’d also be some sort of link between the bank account and the accounting software to prevent manipulation of the data.
TB
Your Trusted Taxpayer regime bears some similarity to the existing Accounting Income Method, which I’ve heard described as a good idea, badly executed. And just as an aside, one of the reasons why the take up of AIM has been is the question of Inland Revenue’s concerns about manipulation have put too many prescriptions around its use. And I think you’ve managed to sidestep those issues I believe. So, what would you say are the major differences between your proposal and the Accounting Income Method?
Nigel Jemson
Well, my proposal is similar in the respect that you calculate and pay income tax as you go. My proposal has a concept of a quarterly tax statement, which is a kind of simplified mini income tax assessment. AIM has a statement of activity, which is a similar concept. What I’ve tried to do is simplify and refine that process so it’s less onerous on the small business. Under my proposal, the amount of tax payments would be reduced to four times a year. Under AIM you’d still need to file a tax return at the end of the year, whereas the Trusted Taxpayer Regime removes that requirement.
And I think that’s quite a benefit to the taxpayer. Because I don’t have to have that end of year wash up, another point in the year when have to think about tax and get a tax agent involved. So that is good, I think. The kicker is my proposal actually provides a decent incentive to join with a 10% tax discount for the taxpayer. I like the idea that if the taxpayer does something which actually lowers Inland Revenue’s administrative costs, the small business should get some benefit from that. I think it’s quite an attractive proposition. And in this case, I think real time access to taxpayers’ financial information could deliver a real benefit to IRD and it could be compensated in some way. And the final thing I note, it’s just that the lower amount of tax payments at four times a year instead of AIM’s six payments.
TB
Yeah, it’s funny you raise this point because one of the issues whenever small business taxation comes up it is frequently accompanied by a call for a lower tax rate. And you’ve you’ve been very specific in rejecting that approach instead of opting for this 10% tax credit. Would you please give us a little bit more behind your reasoning on that?
Nigel Jemson
Sure. I opted for a tax credit for a couple of reasons. Firstly, a blanket lower tax rate across the board for small business doesn’t really mesh with my idea that taxpayers had to do something extra that actually benefits Inland Revenue to get the discount. So, you had to target this in a way that has a credit rather than some sort of special class of taxpayer that has a lower rate. A tax credit just makes it easier to deliver that, whereas a lower tax rate across the board would introduce significantly more complexity.
TB
And just speaking from the discussions I know went on within the Tax Working Group and in the Small Business Council, whenever the idea of a special rate for small businesses came up, it was rejected out of hand for those reasons that it was too broad. What I find appealing about Nigel’s proposal is it’s targeted and the fiscal cost is much less. Although you have to go through quite a few number of hoops to qualify for it they’re not insurmountable. So that’s a good trade-off here, which is why I like it.
A tax credit for corporate taxpayers would also include an imputation credit so that would benefit the final shareholders. If you had a lower tax rate and then the profits are distributed out to the shareholders there’s ultimately no benefit because that’s going to be taxed at the higher rate of 33%.
Now, one of the fascinating things about this paper is you actually quote the Journal of Economic Psychology. Who knew that existed? And you talk about tax morale. Now, what do you mean by tax morale and why do you think it’s important?
Nigel Jemson
So tax morale is the overall sense in society of whether the tax system is fair ie whether people feel that they have a moral obligation to pay taxes and believe it’s the right thing to do, regardless of what sort of enforcement obligations or penalties might apply to them. And I think that’s really important. We have a self-assessment system in New Zealand. IRD to a large extent relies on people to voluntarily comply because they believe it’s the right thing to do.
And simply put IRD cannot audit the whole population. They need tax morale to be strong in our society. And I think we do have pretty good tax morale in New Zealand.
My proposal is designed to enhance tax morale further. I think if you introduced an additional IRD access to information without having some quid pro quo for the taxpayer in return, that would probably not go down too well with small business because Big Brother’s watching you. So, I think having an actual incentive for small business in the form of a tax discount is designed to encourage them into the regime and boost tax morale.
TB
I mean, this is one of the things I really like about your Trusted Taxpayer Regime is that its name and its approach recognises that small businesses act as unpaid tax collectors and frankly, it’s a bit of a sore point at times. And so just about tax morale, you’re quite rightly pointed out that if you were to say, “We’ve got this brilliant idea, you’re going to let Inland Revenue have access to everything” and there’s no quid pro quo. Well, it would be worse than AIM, which has had a very little take-up with people and people are just not going to buy it. In this case, there is a definite quid pro quo. Many of the businesses that qualify for it would be well along that pathway anyway to integrating their systems with software such as MYOB.
But most importantly, we get called customers a lot by Inland Revenue now. But this is something that actually says, “Well, yes, you are customers, you’re helping us. And here’s something for making our day a bit easier”. So, what prompted you to include this idea of the sort you’re talking about, recognising the role of small busineses as tax collectors?
Nigel Jemson
Often from my own personal experience as a tax professional, there are a lot of additional obligations aside from income tax which are imposed on businesses. So, you have GST, PAYE etc. I know a lot of my own time and my own role is spent on non-income tax obligations, so I can only imagine for small business with less resources to deal with that what it would be like. So that’s that’s another reason why I’ve proposed an actual cash tax discount with this 10% discount, because there’s only so much you can do to simplify the tax system and make it better. Another way of doing that, would be simply by reducing taxpayers’ costs, having less tax to pay.
TB
Currently, for Pay As You Earn if you use a PAYE intermediary you will get a subsidy for that. But incredibly, that’s being withdrawn at the same time as the requirement for payday filing was being introduced. And I have to say, I’ve been less than impressed by IRd saying we want you to do this more frequently and we’re going to remove you the ability to cover your costs of doing so. So again, it’s why I like how you’ve recognized that approach Nigel Jemson.
Now your proposal doesn’t cover GST, but do you think there’s scope for maybe having quarterly filing for GST in this?
Nigel Jemson
Well, I think it makes logical sense. I’m not saying I’d consider it in my original proposal, but I completely agree with this suggestion. You’re dealing with essentially the same set of financial information to calculate your quarterly income tax. So, it makes sense to do your GST at the same time. And I think that would further actually simplify taxpayer compliance costs every quarter. Only having to think about tax once would be it would be a step forward. You know, aside from payroll and other obligations, I think there would be good to incorporate both.
TB
Do you foresee any difficulties from that?
Nigel Jemson
Well, Inland Revenue might not be in favour because it’s not getting GST returns as often if businesses filing GST monthly or bi-monthly. But then again, if the taxpayers are in this Trusted Taxpayer Regime it can actually see the information at any point. So, I don’t know. I’m not too sure it would be a major issue.
TB
What’s been the feedback about your proposal from Inland Revenue? Is it something policy officials have said they would explore? I mean, [Minister of Revenue] Stuart Nash I think handed over the cheque to you, didn’t he? So, if he and if Inland Revenue are keen about this, how quickly do you think it could be implemented?
Nigel Jemson
I think some work would need to be done about implementation to flesh out more how Inland Revenue would benefit from the data and how they’d use it. And that would be quite key to the proposal being a success. You need to make sure that Inland Revenue will actually be able to use this information effectively. And because it’s a new thing, there might be some time to build up that capability and work out what they need to do.
You’ll also need to work with software providers as well, because they essentially would have to build this into Xero and MYOB, etc. to build this sort of gateway. And you can imagine there could be some technical difficulties and privacy issues and all that that would need to be sorted first.
I think the core concept of a quid pro quo, so some sort of some kind of benefit for a taxpayer that goes beyond their ordinary compliance obligations is quite an attractive proposition. I did get some feedback from one of the judges that maybe they weren’t necessarily convinced on the benefits for Inland Revenue gaining access to this data. But they were attracted to the core idea of a taxpayer getting some benefit for essentially good behaviour.
So, the judge suggested maybe another option instead of Inland Revenue gaining access to information would be some sort of systems audit. This would allow Inland Revenue to gain confidence about how good is their tax compliance framework and how they are meeting their tax obligations.
I think a barrier to the proposal being implemented would be because it has an incentive. Our traditional thinking is not favouring widespread use of incentives in the tax system because these introduces distortions. I think there are some good reasons for that. I’m just saying that the incentive is another useful weapon that can be used from time to time to enhance taxpayer compliance and benefit the tax system. And especially if you’re moving to something like real time access to taxpayer financial information, you would have to actually deliver some sort of quid pro quo to the taxpayer. Otherwise, I think there’d be outrage.
TB
Well, I mean, I think you’re right that it’s this whole question of voluntary compliance, but also a quid pro quo. Inland Revenue’s Business Transformation program has greatly simplified its administration costs. But a cynical tax agent such as myself might say that actually some of those costs are being passed down the line to ourselves.
So, if you’re wanting to encourage compliance and we all do, because Gresham’s law applies and bad money drives out the good, you want to encourage behaviour like this. And that’s why I think the Trusted Taxpayer really appeals because, yes, there is an incentive which we regard as distortionary. But think of it also as recognizing our role in the smooth running of the tax system. And I think also fiscal costs might not be that great because you’re getting four tax payments a year as opposed to three. So better management of cash flows.
Well, this has been an absolutely fascinating discussion Nigel Jemson. I really appreciate you taking the time to talk and congratulations again on your win. I hope you have put the money to good use. I hope we hear more about this. No doubt you were a very bright future ahead of you. So, thank you again for joining us, Nigel Jemson.
Well, that’s it for the week in tax. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. Until next time have a great week. Ka kite āno.
24 Feb, 2020 | The Week in Tax
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- Changing tax thresholds and capital gains tax are back on the agenda
- Inland Revenue warns the hospitality industry
- OECD estimates international tax reform could be worth USD100 billion annually
Transcript
Last week began with Simon Bridges, the National Party leader, outlining the party’s proposed economic platform for the coming year. And in that speech he alluded to the expectation of tax cuts before, in what was possibly a casual use of language, he said that persons on their average wage should not be paying a third of their income in tax.
This prompted a bit of a pile on because it was quickly pointed out that someone earning the average wage of about $65,000 per annum pays on average 19.2% in income tax. And in fact, some nerd calculated only a person earning $3 million or more, would actually have an average income tax rate of 33%.
And this is a reflection, as I explained to Wallace Chapman and the Radio New Zealand panel on Tuesday afternoon, of our progressive tax system. As your income rises, the tax rate rises starting at 10.5% before reaching 33% on income over $70,000. But the point I made is that the rates jump quite sharply from 17.5% to 30% at the $48,000 mark. And so, the question should be whether those thresholds and rates are appropriate.
And interestingly, when looking at this in preparation for speaking to Wallace Chapman, I went back to just see how often the tax thresholds have been changed. As I explained, 33% cent has pretty much been baked in since 1989 with the exception of the period between 1999 and October 2010, when it was increased to 39% before dropping back slightly to 38%. The threshold has varied obviously during that time, but over the past 30-year period, the top rate threshold has only been adjusted six times by my reckoning. Six changes of thresholds in 30 years is actually quite surprisingly low.
Many other countries adjust for inflation. Britain does. And it’s a mandate in the UK tax legislation that if you are not adjusting income tax thresholds, you must specifically legislate to not do so. My view is that something like that should be in our tax legislation, because otherwise politicians are able to claim tax cuts when in fact we’re dealing with something which is no more than an inflationary adjustment.
But the tax pressure point for people is not, in my view, around the 33% top rate, even if it is perhaps low by world standards. But on that threshold, around the $48,000, when someone moves from 17.5% to 30%. That’s quite a significant jump of twelve and a half percentage points and quite a lot of other things are happening at the same time. Working for families’ abatements are kicking in at 25 cents on the dollar for income above $42,700 dollars. For someone who’s on or near average wage or possibly a bit below and maybe receiving working for families’ tax credits, they have a quite significant jump in their marginal tax rate jump.
They go from 17.5% to 30% and then they have an effective 25% on working for families’ abatements. And it’s not inconceivable they might also have a student loan in which case they lose another 12% of their income anyway if it is just over $20,000. So, it’s not impossible for someone earning around $50,000 to have an effective tax rate of 67 % or more. That is 30% income tax, 12% on the student loan and 25% working for families’ abatement.
We’re going to see something this election from both sides of the spectrum about tax and this is an area where I believe the parties that want to sell their tax policies on need to focus on. It’s that low to middle income earner, moving up through thresholds who is definitely most in need of some form of tax adjustments.
Then at the same time, no fewer than three separate bodies popped up with the capital gains tax issue. And I can probably now say I told you so. Because those who listen to the podcast will know that I said at the start of this decade, not so long ago, that I expect that capital gains tax debate to re-emerge. I have to be honest; I didn’t think it would happen so quickly.
We had the Helen Clark Foundation releasing a paper on housing affordability in which it proposed a capital gains tax. There was an interesting snippet in there, which highlighted one of the reasons why our housing is so expensive, but I think also should be of great concern to us economically. The report said and I quote,
Loose regulation of mortgage lending. Buyers in New Zealand are borrowing up to 7.5 their income, compared to 4.5 times in the United Kingdom has allowed prices to inflate rapidly.
Seven and a half times income is a quite frightening statistic in my mind, because it means that those people who are taking mortgages at that level have absolutely no margin for error if – actually it’s not if it’s when – interest rates rise. So, the hope obviously from that group of people is that the equity in the house keeps ahead of the potential risks that they have an interest rate rise and that their earnings rise substantially to bring down that income ratio.
Then we had Dominic Stephens of Westpac. He highlighted the problem that house price inflation has picked up, again, as he predicted, with the non-implementation of a capital gains tax.
And finally, we had the United Nations Special Rapporteur Leilani Farha from Canada damning New Zealand’s housing crisis, calling it a perfect storm.
And she called for a capital gains tax as well. So, an interesting trifecta of opinions on the matter.
And like I said, at the start of the year, we’re going to see more about this. This issue isn’t going to go away. Whether or not capital gains tax is an appropriate tool for resolving the housing matter is obviously up for debate. I think it’s one of the tools that should be in the box. But I’m also wondering whether there are other options that need to be engaged as well from the tax side. But never mind that issue. That debate is going to keep strengthen over the coming years.
Moving on, we got an email from Inland Revenue who do like to keep in communication with everyone much more now under their upgraded system. It told us, quote, “We’ll be contacting your clients in the hospitality industry to thank them if they’ve been keeping their books in order.” Which I thought was a marvelously passive aggressive way of saying ‘if they’ve been keeping good books in order, great. If not, we’ll be asking questions’. And the email actually goes on to say, “we’ll also be encouraging our clients to put their records right if they’ve left anything off their past tax returns”.
Passive aggressive tones aside, this is something we’re going to see a lot more of. Inland Revenue is going to get very specific about targeting particular industries and it’s going to be very vocal about what it’s going to do and how it will go about it. The message will be sent out to tax agents, hospitality industry associations, etc. They’ll be told, ‘We’re going to look at this, so pass the word along to your members’.
And to be honest, I think that’s a good approach because to apply Gresham’s law, bad money will drive out good. Those sorts of operators who are undercutting other taxpayers who are fully compliant are a risk to the whole sector as well as simply leeching off the system, in that they expect the full availability of public services but aren’t prepared to contribute fully to that. And that, incidentally, is Inland Revenue’s messaging.
I see that, by the way when I get communications from the UK’s H.M. Revenue and Customs they have the same slightly passive aggressive tone to them, saying if you’ve not paid your tax on time, then you are not funding hospitals, roads, schools, etc.
So the messaging from tax authorities is changing in this area. But the key takeaway here, and you can’t say you weren’t warned, is that if you’re not compliant Inland Revenue will be asking questions. And I really do say that it is a question of will, not if. It would be foolish to pretend because compliance in the past has been monitored inefficiently that it will continue to be the case. That most definitely isn’t the case. Everything I see in my interactions with Inland Revenue at either an operational level or talking at the higher policy level points to much more sharply tuned tools being employed more quickly to deal with matters like this.
And talking about dealing with matters of tax compliance or in this particular case, tax avoidance, the Organisation for Economic Co-operation and Development has just published an estimate of what it thinks will be the potential benefits from reform of the digital economy.
Several matters came out of this. We have this ongoing what they call the Pillars 1 and 2 approach and so far, according to the latest report given to the G20, they are still confident they can nut out something on this matter by the end of the year. Now what is obviously going to get the tax authorities and governments interested, is that the OECD estimates the combined effect of Pillars 1 and 2 as potentially bringing in up to 4 % of global Inc corporate income tax revenues, which is equivalent of U.S. $100 billion dollars annually.
The interesting thing they also say which will also encourage buy in from governments, is that the revenue gains are expected to be broadly similar across high, middle and low-income economies.
A 4 % increase in corporate income tax take here in New Zealand would amount to if my calculations are correct over $650 million annually based on the current income company income tax take of $16.4 billion. That’s a very tidy sum of money.
I have to say, I doubt whether in fact we would benefit as much as that. We’re very much a price taker in these matters as those who deal more in this international tax space have pointed out. So, I think the benefit will be substantially less than $650 million annually, but still very much worthwhile for our government to buy into the OECD’s approach. But we shall have to wait and see, and I will keep you informed as news emerges.
Well, that’s it for the week in tax. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. Until next time have a great week. Ka kite āno.
