Te wiki o te tāke: Details on IRD’s handling of the cost-of-living payments. A doomed tax case highlights the need for change. The OECD on international tax policy reforms.

Te wiki o te tāke: Details on IRD’s handling of the cost-of-living payments. A doomed tax case highlights the need for change. The OECD on international tax policy reforms.

Earlier this week, Nicola Willis, National’s finance spokesman, released information she had obtained from Inland Revenue regarding the cost-of-living payments. Included in this information was the fact that some 6,629 payments were made to individuals with overseas mailing addresses. Now it is possible that some of those persons did actually meet the criteria of being tax resident and also physically present in New Zealand at the time of the payment, however it seems more likely most of those payments were made to ineligible recipients.

This data supports anecdotal evidence I’ve heard from other tax agents who have reported examples of non-resident clients receiving the payment. And the fact that a significant number of payments were made to apparently readily identifiable non-residents is concerning is concerning and points to a potentially systemic error.

Nicola Willis also asked a number of questions regarding ineligible recipients. According to written answers provided by the Minister of Revenue currently, Inland Revenue is not aware of any recipients who were either in prison or under the age of 18, which is a bit reassuring.

It also emerged that 49,300 payments were made to persons who only declared investment income. Now that’s an interesting statistic itself, but as an Inland Revenue spokesman noted, the eligibility conditions did not prohibit payments to such persons so long as they met the three key criteria of their income being under $70,000 are tax resident and are physically present in New Zealand at the time of payment.

In the wake of the fallout from the first payment cycle in August, Inland Revenue has tightened up its processes before the second wave of payments made at the start of this month. As a result, the number of people receiving cost-of-living payments dropped by about 54,000. These types of checks apparently included Inland Revenue screening and questioning people who accessed their myIR accounts from an overseas Internet address.

MyIR is likely to be an extremely useful tool for Inland Revenue for spotting potential discrepancies. I do know one case where they noted that some numerous changes had been made to a draft return before it was finalised and when the return was subsequently investigated it turned out that the changes had been aimed at maximizing the available foreign tax credits in excess of what was allowable.

In relation to the cost-of-living payments errors were inevitable given that they would be made to an estimated 2.1 million recipients. For me, the bigger issue here is whether Inland Revenue is properly resourced. It estimated it required between 750 and 1,000 staff to deliver the payments.  This is the equivalent of nearly 25% of its headcount of 4210 as of June 2021. The questions I’d be raising is why are so many additional staff required, particularly when you consider that Inland Revenue has just completed a $1.5 billion Business Transformation programme?

There’s also the question that there does seem to be a systemic error in relation to those payments made to individuals with overseas mailing addresses. In short, this is disappointing and shouldn’t really have happened. No doubt we’ll hear more about this as National is firing lots of questions on the matter at the Minister of Revenue, its MPs address on average somewhere between 80 and 100 written and oral to the Minister of Revenue each month.

Doomed, but an important point made

Moving on, last year I discussed a Taxation Review Authority (“the TRA”) case in which the taxpayer wanted assessments to be amended to reverse the effect of the over-taxation of a lump sum payment of $150,000 she had received from the Accident Compensation Corporation. This payment represented backdated compensation in respect of the previous compensation, which she should have received over the period April 2014 to September 2017. Instead, the back dated compensation was eventually paid as a single sum and subject to PAYE.

At the time, the taxpayer argued that this represented over-taxation as the payment should have been treated for tax purposes as having been derived on the accruals basis and spread over the income years to which the payment related. The Taxation Review Authority dismissed her challenge, but she has taken her case to the High Court who heard it late last month.

Her appeal was pretty much doomed from the start because currently there is no authority for the payment to be treated as she wishes, although conceptually I believe it’s a reasonable approach. And it transpired that it was a doomed appeal because the High Court declined to exercise its discretion to extend the time for her to file an appeal against the TRA decision.

But as I said, I think the point she is making is valid. Subsequent to the TRA case I obtained information from ACC under the Official Information Act about how many people had received backdated compensation.

And it turns out hundreds of people each year do receive such payments. I therefore took the matter up with Inland Revenue and Parliament’s Finance and Expenditure Committee. I understand that Inland Revenue officials are currently reviewing the treatment of lump sum payments made by ACC and the Ministry of Social Development with a view to reporting to ministers in the coming months. I’ll update you on any developments as they emerge, but that does sound hopeful.

Global tax reform effort broad but it stutters

Yesterday, the OECD released its annual publication on tax policy reforms. This provides comparative information on tax reforms across countries, and this edition focuses on the tax reforms that were introduced or announced during 2021. This 2022 edition has the largest country coverage in its history. It covers the tax policy reforms made in 71 member jurisdictions of the OECD/G20 inclusive framework on the Base Erosion and Profit Shifting on international tax reform and includes all 38 OECD countries.

The report (not available as a download) breaks down into four parts. The first looks at the macroeconomic background and includes an overview of developments in the global economy. Part two presents the latest trends in tax revenues and in the composition of taxes and also identifies how these were affected by the arrival of the pandemic in 2020. Part three provides detailed description of those tax reforms that were introduced in calendar year 2021. Part four is a special feature which examines measures countries have introduced in response to rising energy prices and also has some policy recommendations.

The key policy trends identified are that personal income taxes and Social Security contributions reduced in most countries, as policymakers tried to boost economic growth and promote equity. That said, changes in personal income tax rates were less common than in previous years. Measures were targeted towards low- and middle-income households, particularly those with children aimed at promoting employment and providing in-work benefits.

Corporate income tax rates were cut in four countries. And the general convergence of corporate income tax rates across the countries continues. However, the big development last year was the agreement of 137 jurisdictions to the Two Pillar solution to reform international tax rules. Now, that seems to be stalling at the moment, but still, as I said, represents a major development.

With regard to VAT (Value Added Tax or GST), not many changes happened last year other than the reversal of most of the temporary VAT reductions introduced in the wake of the pandemic in 2020.

In the field of environment related taxes, the OECD report some progress, but at a slower pace than previously. The effect of carbon prices remains low overall because of the temporary cuts to energy taxes that started to come in with effect towards the end of 2021.

In relation to property taxes there were some measures introduced promoting progressivity and fairness. These predominantly involved tax rises either through increases in tax rates or base broadening measures. The bright-line test being extended from 5 to 10 years last year is one such example of that. The report points out that such measures are often trying to promote the efficient use of existing housing stock as well as greater fairness of property taxation, a long running theme of this podcast.

Part Four on the support measures introduced by governments to try and protect households and firms from the impacts of high energy prices is interesting reading. Here in Aoteaora New Zealand, the major energy issue has been the impact of petrol prices. Fortunately, because of our high renewable sector, we’ve been somewhat shielded from the impact of higher energy prices. But if you’ve seen reports coming out of Europe and Britain in particular, you will know that some horrific energy price rises are either on the horizon or are happening right now.

The OECD report recommends a shift towards more targeted measures aimed at helping those on lower incomes. This “may require improvements to existing transfer and social welfare systems.” So as often with a lot of the stuff we see coming out of the OECD it’s very interesting to see international trends and consider those in a New Zealand context.

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!

This week the Minister of Revenue is not happy with Google

This week the Minister of Revenue is not happy with Google

  • This week the Minister of Revenue is not happy with Google
  • How many ACC lump sums may be over-taxed
  • Inland Revenue updates the square metre rate for home offices


Last week, on the same day as the Budget, Newsroom carried a story about Google and its taxation practises and the Minister of Revenue, David Parker’s views on that. And it was surprisingly blunt. He was, as the article put it, somewhat scathing of Google’s reticence to pay more tax.

The head of Google in New Zealand, Caroline Rainsford, had given an interview to Newsroom, which coincided with the Budget, and it outlined how Google has been pushing back against the nascent plans by the government to set in place its own digital services tax. This is conditional on whether the OECD cannot reach agreement on a unified approach to taxation.

Anyway, Rainsford said that basically, although Google is for the OECD development of a simpler and unified tax system, it’s not encouraging a unilateral approach here. In other words, please don’t tax us more, but we’ll be happy to look to see about what’s happening with this international tax initiative.

Google’s parent company Alphabet reported new net profit of equivalent of US$48 bln for the year ended 31 December 2020. And that makes it the eighth most profitable company in the world.

But the Minister of Revenue, David Parker, returned fire on this. And he noted that Google New Zealand paid $3.6 million in income tax in the year to December 2019, based on a profit of $10.6 million and revenues of $36.2 million. Apparently, similar numbers can be expected for the year ended 31 December 2020, when they’re reported shortly.

The thing which appears to have got Mr Parker’s goat is that Google’s estimated ad revenue in the country is close to $800 million, he told Newsroom;

They could voluntarily pay some tax on the profits taken out of New Zealand already, but they’ve obviously not done that. That revenue used to be earned by media companies. Media companies would have paid tax on it. And other media companies suffer competitive disadvantage competing against Google when Google does not pay a fair amount of tax. It’s not fair and something has to change. And Google is the biggest.

He points out the ad revenue which are being delivered in New Zealand are not being reported within the New Zealand tax net.

This is an issue we’ve talked about beforehand all around the world. And one solution that governments have put forward, pending some form of international agreement on, it is a digital services tax. That is rumoured to be in the order of maybe three percent is one number that’s been outlined. And estimates of how much it might raise, maybe between $30 and $50 million.

But I think the Minister’s point about the amount of revenue that Google is taking out the country and how that might have played in the New Zealand media companies that earned it, is a valid one. Even if it were the DST of $30 to $50 mlnn, that’s still nowhere near what would be the income tax on $800 million of revenue. So this issue is clearly one that Mr. Parker is paying particular attention to. And obviously, given Caroline Rainsford’s comments on that, Google is slightly concerned about the matter.

We don’t know how much other digital companies such as Facebook, LinkedIn and Twitter take out of New Zealand through digital advertising. Google is clearly the biggest. It’s thought overall including Google’s $800 million there could be as much as one billion dollars of ad revenue going offshore. So the government will be looking at that.

It will be encouraged, no doubt, by the announcement from the US Department of Treasury this week that it is in favour of a global minimum tax rate, and it has suggested that it should be at least 15%. The US Treasury has said that 15% is a floor and discussions should be continued to be ambitious and push that rate higher – 21% is a number that’s been raised previously. But the US Treasury’s view is

a global minimum corporate tax rate would ensure the global economy thrives based on a more level playing field in the taxation of multinational corporations and would spur innovation, growth and prosperity while improving fairness for middle class and working people”.

And no doubt Minister Parker will say amen to that.

On the other side though, the UK is the only country in the G7 which hasn’t signed up to this multilateral deal that’s being put together by the OECD. And Boris Johnson’s Government has been described as “lukewarm and evasive” on the matter. I think lukewarm and evasive is something that plenty of people have said about Boris Johnson, the latest of which being his former special adviser, Dominic Cummings, last night. But the UK also has long standing cultural or actual colonial links to many of the tax havens which are at the heart of the whole issue.

So we’ve got an interesting combination of factors going on here. Minister Parker is clearly looking at the whole Google and digital taxation matter and is obviously happy to push ahead by applying pressure and maybe push ahead with the implementation of a digital services tax. Which, by the way, the Tax Working Group said might be something to have in place if an international agreement could not be made.

On the other hand, there’s some progress on this by the US Treasury throwing its weight behind a global minimum tax. But then we have the pushback from the UK, or rather, we should say the UK not making a decision. And then there’s been pushback, as I mentioned earlier, from the likes of Ireland with its 12.5% corporate income tax. So it’s internationally the biggest thing that’s going on in tax right now. And it’s a question of just watch this space and see what develops.

Heads the IRD wins, tails the taxpayer loses

Now, moving on, a few weeks back, I discussed a case brought in the Taxation Review Authority against the Commissioner of Inland Revenue contesting the tax treatment of a lump sum paid to a claimant by ACC.

The payment was for weekly compensation for the period from the date she was injured on 22 April 2014 to 17 September 2017. And the taxpayer contended that the payment should be treated for tax purposes as having been derived on an accruals basis and spread over the income years to which the payment related, rather than being taxed in the year in which it was received. As is the current practice.

And this, as I mentioned at the time, is a longstanding issue I have been aware of. And it can mean for claimants that they receive a lump sum, and instead of being taxed at an average rate of 17.5%, they find the lump sum taxed at 33% or even potentially now at 39%. So, it’s an issue I think needs looking at.

I subsequently made an Official Information Act request to ACC about the number of such payments for backdated weekly compensation. ACC replied this week, and it made for some interesting reading. In the year to June 2017, the number of such claimants was 1,187. They received on average $42,482. The median amount, by the way, was $21,643. The maximum was $650,000.

And for 2018 similar sort of numbers – 1,172 claimants, 2019 saw 1,283, and in the year to June 2020 it was 1,466, who received on average $42,505. The median there was $21,146, but the maximum was an eye watering $1,180,000.

There’s a consistent trend there, and enough people in the system and big enough numbers for Inland Revenue Policy and the Minister of Revenue to have a look at that. We do some averaging, for example, it has been pointed out to me, in farming cases we average some of the income because of droughts. So, spreading income over several years in which it relates is not unknown to the tax system and our financial arrangements regime actually operates on that principle.

I propose to send these numbers off to Inland Revenue Policy and to the Minister of Revenue’s office. I’ll keep you posted as to how things develop from there.

Square metre rate up +4.7%

And finally this week, the square metre rate for the year ended 31 March 2021 has been set by Inland Revenue at $44.75 per square metre. That’s up from $42.75 per square metre for the year ended 31 March 2020.

Now, although this sounds quite a technical thing, it relates to the calculation of home office expenses and Inland Revenue’s square metre rate option provides a simplified process. Which means that taxpayers don’t have to keep detailed records of utility costs, contents, insurance, Internet on their private residence, and then have to apportion these costs between business and private use. Instead, they simply apply the rate to the area of the house that is used for business purposes.

It’s a nice, simplified process, something I think we should see more of in the system to try and simplify the process for clients. I think Inland Revenue would have the information or would be able to dig out some of the information for this expense, maybe by an analysis of GST returns. By the way, premises costs such as mortgage interest rates and rent, still have to be claimed based on the business proportion of the actual expenditure incurred by the taxpayer.

This is a sort of throw away measure it seems, but one that actually affects quite a lot of people. And as I said, I think we should see more of this setting rates, giving maybe a standard deduction for people, just to simplify the system.

Well, that’s it for today. 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 week, ka kite āno.