Provisional tax is due so watch out for changes to the use of money interest rates and rules

Provisional tax is due so watch out for changes to the use of money interest rates and rules

  • 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.

Refugee evacuation

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 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!

A look at the G7’s agreement for a minimum corporate tax rate of 15%

A look at the G7’s agreement for a minimum corporate tax rate of 15%

  • A look at the G7’s agreement for a minimum corporate tax rate of 15%,
  • The role of tax in the Climate Change Commission’s final advice to the Government
  • FBT and what is a work related vehicle?


Last weekend in Cornwall, England, the G7 Leaders meeting confirmed what had been agreed by the G7’s Finance Ministers and Central Bank Governors over Queen’s Birthday weekend, that a minimum corporate tax rate of 15% would be introduced on a country-by-country basis.

What the Finance Ministers and Central Bank Governors have agreed to is what they describe as “an equitable solution on the allocation of taxing rights with market countries, a water taxing rights on at least 20 percent of a profit exceeding a 10 percent margin for the largest and most profitable multinational enterprises.”

Now, what’s also part of this deal and has been probably overlooked because of the commitment to the 15% rate, is that the G7 also agreed to “provide for appropriate coordination between the application of these new international tax rules and the removal of all Digital Services Taxes and other relevant similar measures on all companies.”

And that’s where it gets a little interesting, because when you look at the press conference held immediately afterwards by the US Secretary of the Treasury, Janet Yellen, it becomes apparent that this is a bit of a win for what we call the GAFA – Google, Apple, Facebook and Amazon.  When she was questioned about how, for example, the French are targeting Amazon and Facebook, Secretary Yellen replied as follows,

“It is intended to replace an approach that focused on just a few US digital giants, and the agreement is that this new approach will replace an approach that we found objectionable, that targeted large, successful US digital firms. But most of these firms are likely to be included in this new scheme the Pillar One scheme.”

Pillar One and Pillar Two are part of this international framework being built to set up how we tax digital economy in the 21st century.

And it’s quite interesting because it comes back to discussions, as we mentioned previously, about the impact of the digital economy and, for example, how much tax Google pays here relative to how much it’s actually taking out of the economy. On the basis that New Zealand gets to tax 20% of the residual profit above a 10% margin, it’s possible that Google’s tax bill may triple to maybe $9 or $10 million. And that would be based on the assumption that about $200 million or so of its estimated $800 million that it takes out in advertising becomes taxable. Is that a big win for New Zealand? I’m not so sure.

The other point that I’ve noted about Secretary Yellen’s comments, is that the 15% rate is in the US view, a minimum, with 21% as the target. Questioned, “Well, how are you going to make this work?” Yellen also pointed out that the agreement under Pillar Two contains an enforcement mechanism that would come into play and apply to jurisdictions that decide, “No, we’re happy to be tax havens and we don’t want to sign up to this agreement”. This so-called “under tax payment rule” would essentially put pressure on those countries to abide by the corporate minimum tax, whatever is eventually agreed.

And so that’s basically calling time, as the G7 communique refers to it on this race to the bottom on corporate tax rates which has been going on for about 40 years now.

The next stage is that the agreement will be worked out through the G20/OECD inclusive framework. There is a July meeting of G20 Finance Ministers and Central Bank Governors, which is hoped will get final agreement on this 15% minimum corporate tax rate and on the agreement on the Pillar One taxing rights.

I suspect as usual, politics will come into play here. And I do wonder how India is going to react to this, because it has made significant use of digital services taxes. But we’ll have to wait and see. It’s certainly a step forward in the right direction. And it is another step on the road towards ending tax havens, whose days, in my view, are numbered.

What was also interesting about the G7 Finance Ministers and Central Bank Governors communique announcing the global minimum corporate tax rate, is that that particular announcement was just one paragraph of 20. It was actually number 16 because the first focus was on “building a strong, sustainable, balanced and inclusive global economy”. And then the G7 Finance Ministers went on to talk about the transformative effort to tackle climate change and biodiversity loss. And they spent a bit of time on this, as did the G7 leaders when they released their communique.

And of course, coincidentally, in the same week as the G7 Finance Ministers made their announcements, we had the Climate Change Commission releasing its final advice to the Government on how to move forward on climate change.

Climate change and tax

Now, the Climate Change Commission actually had little to say about specific tax measures. It did note, for example, that reducing oil and gas production in New Zealand would reduce the Government’s tax revenue. As is well known, the Emissions Trading Scheme would remain the main pricing tool.

The Commission did note that tax could be used to incentivise investments and choices, although it didn’t say much specifically on this. It talks about maybe using taxes for R&D incentives. We have an R&D tax credit incentive scheme. And you may recall that last year I spoke with John Lohrentz about an interesting idea using R&D tax incentives to reduce methane emissions.

The Commission did suggest that the tax system should be examined for ways to discourage the adoption of internal combustion engine vehicles and encourage low emission options. It noted that some submitters, and I was one of them, raised concerns about how fringe benefit tax is calculated for light vehicles and in particular the question of emissions from utes and trucks.

Most of that went by the by. But then last Sunday the Government announced its feebate proposal for electric vehicles and a debate kicked off on social media, over this question of twin cab utes and their “exemption” from FBT. So I thought today I would have a look at this widely held belief that utes are exempt from FBT under the work-related vehicle exemption

To go back to basics under Section CB 6 of the Income Tax Act 2007, a fringe benefit arises when a motor vehicle is made available to an employee for their private use. However, that provision does not apply when the vehicle is a work-related vehicle.

Now, Inland Revenue’s summary of this is that FBT will not apply to a vehicle if it meets all of the following conditions:

  • it is drawn or propelled by mechanical power (this includes trailers);
  • it has a gross laden weight of 3,500 kg or less;
  • the vehicle is mainly designed to carry goods or goods and passengers equally;
  • it has prominent company branding that cannot easily be removed;
  • you tell your employees in writing that the vehicle is not available for private use; except for travel between home and work, and for travel related to the business, such as stopping at the bank on the way home from work.

And then Inland Revenue say as part of this, you must give employees a separate letter explaining this restriction rather than mentioning it in their employment agreement.

Now the statutory definition of work-related vehicle is set out in Section CX 38 of the Income Tax Act. And as just recited, there’s restriction around the display of branding, for example. And on this, sticking the branding on say the spare tyre, which is on the back of the vehicle, is insufficient because that’s fairly easily removable. The sign writing has to be prominent.

The definition of a work-related vehicle in section CX 38 does not include a car. And then there is the bit that I think is causing all the issues around fringe benefit tax. Under section CX 38(3), the motor vehicle is not a work-related vehicle on any day on which the vehicle is available for the employee’s private use, except for private use, that is travel to and from their home, that is necessary in, and a condition of their employment or other travel in the course of their employment, during which the travel arises, incidentally, to the business use.

There are a couple things to note here, for example, that it is NOT a work-related vehicle on ANY day when it’s used privately. Then on the question of private use travel to and from their home is ok if “it is necessary in, and a condition of their employment.”

Now, in my view all of those conditions are where the gap, in FBT compliance, is happening. The home to work restriction is not being followed through. I would also question, in fact, whether as many companies have the separate letters in place that Inland Revenue expects.

This home office base of business is something Inland Revenue has looked at. Increasing numbers of businesses are working from home digitally whether it’s a trade or digital business.  So it’s reasonably clear that home is a place of work and therefore travel from there which is for business purposes is covered by the exemption.

But as I’ve noted beforehand, FBT does seem to be tracking behind in payments[1]. And there are perhaps apocryphal stories of Ministers of Revenue turning up to meetings in the South Island and being greeted “Welcome to the South Island where we don’t pay FBT.”

To get across this Inland Revenue will need to devote some resources to finding out exactly what is going on in this space, because as came out through the feebate debate, the twin cab ute has become one of the most popular and best-selling vehicles in New Zealand. And the question arises particularly when you see them in an urban environment, are these really work-related vehicles and what is Inland Revenue going to do about it?

And this comes on to my final point this week as to whether Inland Revenue, in fact, has the capability to investigate the issue. It should have. It has very extensive information gathering powers. I would have thought it was a straightforward matter to obtain details of all companies which own twin cab utes or similar vehicles and then cross-reference that information with FBT returns.

Maybe that is going on, and if so it would mean Inland Revenue has decided to keep quiet that it is actually working on such a project. Although Inland Revenue has a policy of proactive enforcement on issues by announcing “We are about to look at these areas”. It’s just done so about real estate agents. So saying it’s looking at FBT would actually be conducive for getting people to look and see if they’re actually compliant.

However, I have reservations about whether that’s happening and whether, in fact, Inland Revenue does have the capability to do so. I’ve just been informed that in another round of restructuring, 77 of 138 team leaders are to be made redundant. These are the exact people who have the experience and skills to lead such investigations. Now, that doesn’t make a lot of sense to me laying off such a high proportion of your skilled labour.

Unexpected tax bills

And then there was a story this week about pensioners receiving large tax bills. Now, Inland Revenue subsequently issued a press release on this. But a common theme when I spoke to journalists about the story itself was that pensioners had tried to contact Inland Revenue to confirm what PAYE tax code they should be on.

And so the question arose as to whether, in fact, they had got the correct advice from the Inland Revenue call centre. And that leads back to what we discussed a couple of weeks ago about what’s going on with Inland Revenue’s use of contractors. Because if the contractors aren’t being trained properly, then Inland Revenue is giving incorrect advice and pensioners are left cleaning up the mess, owing tax bills of up to $2,000.

And that is not good for the tax system. Because the fear I have, if I and other tax agents are saying to our clients, “These are the rules, you must comply with them”, but clients have the sense that other people are not complying with the rules and Inland Revenue is not catching those other people, then the whole basis of voluntary compliance on which our tax system is built around is undermined. And that is something that I think we should all be concerned about.

Well, that’s it for today, I’m Terry Baucher and you can find this podcast on my website 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.

Climate Change Commission’s draft report

Climate Change Commission’s draft report

Terry Baucher looks at some of the taxation ramifications from the Climate Change Commission’s draft report

The Climate Change Commission released its draft advice for consultation on 31st January. What of note did it have to say about the role of taxation?

The Commission’s Necessary Action 3 recommended accelerating light electric vehicle (EV) uptake.  As part of this it suggested the Government:

Evaluate how to use the tax system to incentivise EV uptake and discourage the purchase and continued operation of ICE [internal combustion engine] vehicles.

As the Commission is no doubt aware taxes can have significant behavioural changes very quickly as the following example of the changes in the United Kingdom’s Landfill Tax illustrates.

Between its introduction in 1996 and 2016 the rate of Landfill Tax was increased from just under £10 a tonne in 1996 to nearly £90 a tonne by 2016. Over that 20-year period the annual amount of waste landfill fell from 50 million tonnes to 10 million tonnes.

So what tax changes could be used to incentivise change?

The available evidence indicates that the present fringe benefit tax (FBT) rules are unintentionally environmentally harmful. A NZ Transport Agency report in 2012 examining the impact of company cars found they were heavier with higher engine ratings than cars registered privately. The availability of employer-provided parking encouraged longer commutes from more dispersed, automobile-dependent locations than would otherwise occur.  Under present rules employer-provided parking is largely exempt from FBT.

The trend for larger, heavier vehicles has accelerated since 2012 with a greater preference for vehicles such as SUVs and utes. Last year 77% of all new passenger vehicle registrations were SUVs and utes.

A by-product of the trend for purchasing of twin-cab utes appears to be widespread non-compliance with the existing FBT rules. This is in part because of an incorrect perception that such vehicles automatically qualify for the “work-related vehicle” exemption from FBT. The combination of greater numbers of such vehicles and apparent under-enforcement of the FBT regime[1] exacerbates the trend for indirectly environmentally harmful practices identified by the NZTA in 2012.

Inland Revenue should therefore immediately increase its enforcement of the FBT rules relating to twin-cab utes. These changes should be allied with the adoption of the approach in Ireland and the United Kingdom where FBT is greater on higher emission vehicles. I consider these emission-based FBT rules can be adopted relatively quickly, and it ought to be possible to have these in place by 31st March 2023.

As an interim measure to encourage greater take up of EVs the Government could consider exempting EVs from FBT until the new emission-based FBT rules are in place.  In Ireland, EVs with an original market value below €50,000 are presently exempt from FBT. The threshold here could be $50,000.

Additional FBT related measures include increasing the application of FBT on the provision of carparks to employees and not taxing the provision of public transport to employees. This reverses the present treatment and fits better with a policy of decarbonisation without impacting an employer’s ability to provide such benefits.

Taxing the provision of employer-provided carparks could raise significant funds. The 2012 NZTA report estimated the annual value of free parking in Auckland to be $2,725. With at least 24,000 employer owned car parks in the city this amounted to a tax-free benefit of $65 million per annum. FBT is generally charged at 49% of the value of the benefit so the potential FBT payable could be between $75 and $100 million per annum.

The suggested FBT changes should change behaviour, but as the Commission also pointed out we need to reduce emissions. We have one of the oldest vehicle fleets in the OECD and it is getting older. The average age of light vehicles in Aotearoa New Zealand increased from 11.8 years to 14.4 years between 2000 and 2017.[2] Compounding this issue, the turnover of the vehicle fleet is slow, on average vehicles are scrapped after 19 years (compared with about 14 years in the United Kingdom). 

Furthermore, we are one of only three countries in the OECD without fuel efficiency standards. As a result the light vehicles entering Aotearoa New Zealand are more emissions-intensive than in most other developed countries. For example, across the top-selling 17 new light vehicle models, the most efficient variants available here have, on average, 21% higher emissions than their comparable variants in the United Kingdom. They are also less fuel efficient, burning more fuel and therefore generating higher emissions. The Ministry of Transport estimated if cars entering Aotearoa New Zealand were as fuel efficient as those entering the European Union, drivers would pay on average $794 less per year at the pump.

The Commission is concerned about the impact of its proposals on low-income families, who could be asked to bear a disproportionate part of the costs of change. For this reason, I suggest the funds raised from the FBT changes should be first applied to a vehicle exchange programme. This would remove older higher-emitting vehicles (say ten or more years old) by subsidising purchase of newer vehicles (maybe from car rental companies with excess stock).

If it seems counter-intuitive to subsidise “old carbon” technologies there are three short-term benefits to consider: newer cars generally have lower emissions, are more fuel efficient and are safer, indirectly helping reduce the road toll. This scheme also supports the most vulnerable families who cannot rely on public transport and are most likely have older, less fuel-efficient vehicles. Furthermore, funds involved would go further than if applied in directly subsidising the purchase of electric vehicles.

I also suggest the buy-back scheme is targeted at lower-income families and should therefore be means-tested.  A starting threshold might be the Working for Families tax credits threshold of $42,700 above which abatement applies. This threshold could be increased if the vehicle is more than, say, 15 years old with accelerated rates applying if the car is more than 19 years old (i.e. older than the life expectancy of the average car in Aotearoa New Zealand).

The Commission has opened the debate on our transition to a greener, low-emissions economy. Tax will have a major role in that as Pascal Saint-Amans, the Director of the OECD’s Centre for Tax Policy and Administration acknowledged last year when he suggested that when responding to the impact of Covid-19.

Governments should seize the opportunity to build a greener, more inclusive and more resilient economy. Rather than simply returning to business as usual, the goal should be to “build back better” and address some of the structural weaknesses that the crisis has laid bare.

A central priority should be to accelerate environmental tax reform. Today, taxes on polluting fuels are nowhere near the levels needed to encourage a shift towards clean energy. Seventy percent of energy-related CO2 emissions from advanced and emerging economies are entirely untaxed and some of the most polluting fuels remain among the least taxed (OECD, 2019). Adjusting taxes, along with state subsidies and investment, will be unavoidable to curb carbon emissions.

The 2019 Tax Working Group (the TWG) chaired by Sir Michael Cullen undertook a review of environmental taxation and made several significant recommendations in its final report.

Unfortunately, the backlash against the TWG’s proposed capital gains tax meant that its commentary and proposals on environmental taxation were overlooked.

Nevertheless, the TWG’s groundwork in this area now needs to be built on. It’s therefore interesting to note that in its briefing to the new Minister of Revenue David Parker Inland Revenue noted one of its top tax policy priorities was “the role of environmental taxes and what an environmental tax framework should look like.”

Given that David Parker is also the Minister for the Environment I suggest Inland Revenue might be accelerating its work in this field, if the goals suggested by the Climate Change Commission are to be met. Watch this space.

[1] FBT is tied to employment. Over the 10 years to 30th June 2020 the amount of PAYE collected by Inland Revenue rose by almost 66% from $20.5 billion to $34 billion. However, over the same period the amount of FBT paid rose 28% from $462 million to $593 million. This gap suggests some level of under-reporting and enforcement.

[2] By comparison in the United States in 2016 it was 11.6 years for cars and light trucks and 10.1 years for all vehicles in Australia for the same year and 7.4 years for passenger cars in Europe in 2014 (Ministry of Transport data)