7 Dec, 2021 | The Week in Tax
- Latest Covid-19 developments
- How Christopher Luxon’s property portfolio is representative of the taxation of property debate
- Inland Revenue releases draft statement on charities and donee organisation
Transcript
Last week, New Zealand entered the new COVID-19 protection framework, or the traffic light system. Currently here in Auckland, we are on red and most of the rest of the country is on orange, with a few other exceptions. As part of this, the Government has made a new transition payment available, which is aimed particularly at businesses in the Auckland, Waikato and Northland regions, because these are the ones who have had the longest period under the old alert level system.
This transition period payment will be paid through the Resurgence Support Payment system starting in a week’s time from 10th December. It’s set at a higher base level than the current Resurgence Support Payments, applications for which closed last night, by the way. The payment is $4,000 per business, plus $400 per full time equivalent employee, up to a cap of 50 full time equivalent employees. The maximum that any business can receive is $24,000. Treasury estimates the likely total cost of the payment is going to be somewhere between $350-490 million.
This is a new support being made available. The Leave Support Scheme and Short-Term Absence Payment are also available. The Government will be considering further targeted support once the new Covid-19 protection framework beds in.
One other thing to note is that the rules have been changed so that recently acquired businesses can access the Resurgence Support Payment. This is because under the previous rules, the applicant had to have been operating as a business for at least one month before August 17th. So, businesses acquired after July 17th were not eligible for any payment. Although few businesses were affected by the previous criteria, it made a difficult time even worse.
The test will be that the business that was sold must have been in operation for at least a month prior to August 17th and the new business is carrying on the same or similar activity as before the change in ownership. This is a welcome little break. However, there will still be pressure on businesses. As is well known, hospitality and tourism have had a very, very hard time of it over the last 16 weeks of lockdown
Mega landlords
Moving on, there’s been quite the debate this week over the taxation of property as a number of factors came together. Stuff has been running stories on what it calls mega landlords. One story noted that the proposed changes to the interest limitation rules have led investors to start reconsidering their investment portfolio. And also there’s been changes in the Bright-line test, which is now runs for 10 years.
A survey from the Chartered Accountants Australia and New Zealand (CAANZ) and in conjunction with Tax Management New Zealand, found that the proposed tax policies had already affected many property investors’ behaviour. 70% of the 360 odd respondents reported that their clients had changed or were planning to change their investment behaviour. What exactly that might be obviously depends on individual circumstances. According to CAANZ’s New Zealand tax leader John Cuthbertson, it’s likely to be not purchasing additional properties. However, as he also pointed out there’s still some confusion and uncertainty around the complexity of the rules.
Multi property owners
And then Christopher Luxon, the new leader of the National Party, came under some fire when it was revealed that he had seven properties as part of his investment portfolio. However, as business journalist Bernard Hickey pointed out this is actually an entirely rational investment approach under current rules.
This is the crux of the matter. Property has been very tax-preferred, particularly in relation to the non-taxation of gains, and the deductibility of interest even though there are two parts to the economic return, i.e. the taxed rental income and the (usually untaxed) capital growth. Apparently, the value of Luxon’s properties increased by approximately $4 million over the last 12 months. He can reasonably expect that none of this gain will be taxed.
These themes form the background behind the new legislation to limit interest deductions. It so happened that last Monday Parliament’s Finance and Expenditure Select Committee heard oral submissions on the new tax bill, the Taxation (Annual Rates for 2021-2022, GST and Remedial Matters) Bill to give it its full title.
The FEC received 83 written submissions, which are available on its website, including a monster 216 page submission from CAANZ. The size of that submission, which was one of the largest I’ve ever seen, gives you some idea of the complexity involved in this whole matter.
Listening to the oral submissions, the constant refrain was that the proposed rules are far more complicated than people realise, and we don’t know what the unintended consequences might be. The Corporate Taxpayers Group (their submission was a more manageable 21 pages) suggested that really the introduction of the interest limitation rules should be deferred until 1st April so that people can get their head around what’s going on. I think this is a fair point and one other submitters made.
CAANZ and the Corporate Taxpayers Group were concerned about how rushed this whole process has been and how that fits in with the Generic Tax Policy Process (GTTP). I and one or two other submitters suggested that there really needs to be a thorough review of the bright-line test and this legislation in line with the GTPP, because that’s what’s supposed to happen and hasn’t been happening recently. The bright-line test, for example, was introduced six years ago so it’s time for a review as to how it’s working. Since its introduction the bright-line period has gone from two years to ten years period. How is that working? is a fair question to ask.
Talking about the distortions
In the course of the hearing Green MP Chloe Swarbrick rather mischievously raised the issue of an inheritance tax with one submitter. That promptly earned her a bit of a telling off from the chair of the FEC. In my oral submission, I took the opportunity to put forward the Fair Economic Return proposal Susan St John and myself have developed. Whether that gets any traction remains to be seen.
To perhaps unfairly reference Christopher Luxon again, the concern we have is that his $4 million of capital appreciation in the past 12 months is most likely not to be taxed. And whether that’s actually an appropriate tax setting is something we don’t believe is correct. And I think the evidence is growing about how distortionary it is and that something needs to change.
This whole debate, which went on this week and will continue, reinforces the point that Craig Elliffe made in last week’s podcast that the debate over the taxing of property or capital isn’t going away because the current position is unsustainable. A point that rarely gets made is that Aotearoa-New Zealand is really unique in not either having a capital gains tax, or a wealth tax or estate and gift duties or taxing imputed rental. All of those exist in one form in most of the major jurisdictions of the OECD and G20, but there is none of them that don’t have any of those except for ourselves. So that’s why I think this debate will continue.
Doing charity, or accumulating wealth?
Moving on, I remember listening to the late Sir Michael Cullen talking about his experience on the Tax Working Group. I asked him about whether anything had been a surprise to him, and he replied he had been surprised by the extent of what was happening in the charitable sector,
This is something that pops up from time to time with criticism and accusations of charities abusing their charitable status to get an unfair advantage over other businesses. Sanitarium is the one charity (of the Seventh-day Adventist Church) that often pops up when this happens. The Tax Working Group’s view on charitable donations was that it is a long-standing relief. In its view the issue will be around whether, in fact, those charitable organisations are making charitable donations. The concern that arises is when they’re not and they are accumulating wealth without distributing it.
Now it so happens that this week Inland Revenue released a draft operational statement on charities and donee organisations. Now this is a bit of a monster statement, it runs to 105 pages. It outlines the tax treatment and obligations that apply to charities and donee organisations and how the Commissioner of Inland Revenue will apply the relevant legislation.
As I said, the statement is so big it’s been split into two parts, one for charities and one for donee organisations. I’m not proposing to run through this in detail right now, but the statement sets out briefly what exemptions are available and how Inland Revenue is expecting that process to be managed. Inland Revenue is taking submissions until the end of next February. And I would expect that this would generate quite a bit of feedback.
It’s good Inland Revenue has set out formal rules for charities and donee organisations. It is also, in my mind, an indicator that Inland Revenue has some concerns about what’s been happening in this sector, and it is now making very clear what are the rules, what it expects to see, and there will be consequences if the rules aren’t followed.
Well, that’s it 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 reading) and please send me your feedback and tell your friends and clients. Until next week kia pai te wiki, have a great week!
20 Sep, 2021 | The Week in Tax
- Latest Lockdown developments including third round of wage subsidy and second Resurgence Support Payment
- NZ Super Fund pays $2.3 billion in tax on record $15 billion return
- Using tax to fund NZ Superannuation
Transcript
There’s inevitably been a certain Groundhog Day effect to the current Lockdown now we’re into our fifth week. It dominates the discourse and that hasn’t really changed in the tax world. The Government has now announced that there will be a third round of the Wage Subsidy and applications for that opened at 9:00 a.m. Friday and will remain open until 11. 59 p.m. on Thursday, 30th September.
As of September 12th, there have been 427,388 applications approved for the first two rounds of the wage subsidies, which has supported over 982,000 employees and 274,000 businesses. The total amount paid out to that date is just under $1.8 billion.
To quickly recap the tax implications of the subsidy for an employer, the receipt by an eligible business is excluded income to the extent that the subsidy is passed on to the employee. The employer is not entitled to an income tax deduction for wages paid out of the wage subsidy and the amount of wages paid in excess of the wage subsidy, that is amounts funded by the employer, are deductible as normal. No GST applies to the payment.
Now, Inland Revenue just reminded people that any amount of the subsidy that is not passed on to an employee is required to be repaid to the Ministry of Social Development (MSD)because that’s part of the criteria and declarations made at the time of application. If the wage subsidy isn’t returned to MSD, then Inland Revenue may consider the amount not returned as taxable income, which needs to be included in the income tax return for the year in which it was received.
Now, the interesting development this week is that the Government has now said that a second payment under the Resurgence Support Payments scheme will be available and, applications for that opened Friday. Now, in order to qualify, organisations must experience at least a 30% decline over seven days for the period commencing 8th September as a result of being at Level Two or higher.
Remember, the Wage Subsidy is only available at Levels Three and Four, but the Resurgence Support Payment (RSP)is available at Levels Two, Three and Four.
Now, the income tax treatment of this is that the RSP is not subject to income tax and accordingly, income expenditure funded by payments under the RSP scheme are not deductible. GST registered businesses will return GST on payments received under the RSP and will be able to claim input tax deductions for expenditure funded by payments under the RSP such as rent, for example. The intention is any RSP received is used to cover business expenses such as wages and fixed costs.
As of 12th September, about $500 million dollars has been paid. And the Government has indicated that there could be another two payments after the for which applications opened today. These will be three weeks apart, so long as the conditions that continue to trigger the Resurgence Support Payment scheme continue to apply, i.e. the country is in an Alert Level Two or higher.
Now, there’s an ongoing debate, quite rightly so, about the level of support, whether it’s targeted or appropriated enough, but it’s useful to see Inland Revenue is keeping people up to date as to what their obligations are. Whether the level of support is the right level or appropriately directed, well, that’s another matter.
And just quickly, a reminder that there are some other schemes available. There is the Leave Support and the Short-Term Absence Payments Schemes. Businesses may still be eligible for the Small Business Cashflow (Loan) Scheme. And there’s also Business Debt Hibernation. We talked about these when we first went into Lockdown. All those four schemes, by the way, are available at Alert Level One or higher.
A very large taxpayer
Moving on, the New Zealand Superannuation Fund, which was an initiative by the late Sir Michael Cullen, has just posted its strongest ever annual return of 29.63% for the June 2021 financial year. This means that the fund has now grown to $59.8 billion dollars, an increase of $15 billion over the 12 months.
And during that period, the Government made contributions totalling $2.1 billion to the fund. Now the super fund is a sovereign wealth fund, but almost uniquely, as far as I can tell, amongst sovereign wealth funds, it’s taxed. For the year just ended, it paid $2.3 billion dollars on its $15 billion. And that’s because the rules around the Foreign Investment Fund and the Financial Arrangements regimes apply to the super fund. It therefore will pay a fair amount of tax, obviously, when its investment return is nearly 30%.
Making it fairer, go further
Now, of course, the Super Fund was established to help fund the future cost of New Zealand Superannuation. You may recall last week we discussed the Treasury’s draft long term fiscal outlook and in relation to the growing cost of superannuation, Treasury put forward a couple of options to consider, which were increasing the age of superannuation entitlement from 65 to 67 or actually cutting back the amount of people’s entitlements.
New Zealand Superannuation is universal, which is one of its great strengths. Radio New Zealand has received Inland Revenue figures which show that in the March 2010 income year, there were 2,209 people who were on incomes of more than $200,000 a year who were receiving super.
By the year ended 31 March 2020 that number had more than tripled to 7,860. And as Baby Boomers and the population ages, more people who on the face of it don’t need Super will be receiving it because of its universality.
The Retirement Commissioner, Jane Wrightson, was asked about this and she said it’s not a problem, because one of the great things about New Zealand Superannuation is that it is universally applied. But she did say it is a reasonable policy question, the normal answer to this has been means testing which was applied briefly in the mid-90s and applies in Australia. However, this was roundly rejected by New Zealanders in the past.
So, two questions emerge. One, how are we going to fund superannuation going forward? And secondly, is it right that it is universal and people who on the face of it have sufficient to fund their retirement are still receiving it? Mind you, you could say 7,800 people in the context of the hundreds of thousands receiving New Zealand Superannuation isn’t actually that much, but that number will grow.
Now, a suggestion to address this particular issue of potential over generosity for higher income earners has been put forward by my colleague, Associate Professor Susan St John of the University of Auckland Retirement Policy and Research Centre. She has released a briefing paper updating an idea she’d first proposed back in 2019. It basically treats the pension as a basic income and then taxes pensioners’ other income at a higher rate.
And the idea is that there will be a threshold at which it becomes uneconomic to take super, thus saving funds.
The proposals is, instead of having super inside the tax system, take it outside, treat it as a basic income, and then tax people receiving other income at a higher rate. And then that would mean, as I said, once their other earnings reached a certain point they would be better off to not claim superannuation.
The issue, as has been pointed out all around by various people, is that the number of pensioners between now and 2060, is expected to double. And Treasury’s forecast is that the cost of superannuation, which is already our most generous welfare payments, is going to grow at one and a half times faster than the economy over that period. Therefore, its cost, relative to the economy, is going to increase.
Susan St John’s proposal is that by taxing people who are earning higher incomes means that the payment is then focused on those who really need it. That is, those on lower incomes and that amount is likely to grow as well. And her modelling suggests the break-even point with a flat tax rate of 39% is when the other income exceeds $139,000 a year which is still pretty generous, I guess.
You can tinker with the tax rate, but it’s an interesting idea. What it builds on is two things.
Firstly, New Zealand Superannuation is a type of universal basic income, which there’s always been a lot of discussion around. Secondly, it then uses the tax system to introduce a bit of equity and disincentivise excessive take up, but not too much, to be honest, because you can earn up to $130,000 in other income. This relative generosity shouldn’t really disincentivise work which is obviously one of the big problems about means testing, the disincentives it creates.
So it’s an interesting. Treasury I think seems quite interested in it, or appears to have had some discussions on the topic and we may hear more about it.
Well, that’s it for this week. Next week, we may be discussing the interest limitation rules in more detail. We’ve been waiting for those for some time. And given that they come into effect from 1st October, it’s going to be quite a crash course to get people up to speed by that time.
But anyway, 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 give me your feedback and tell your friends and clients. In the meantime, kia pai te rā, have a great day!
6 Sep, 2021 | The Week in Tax
- Latest lockdown developments
- More on allowances from Inland Revenue
- Could a tax forgiveness programme help SMEs hit by Covid-19?
Transcript
As of today, businesses can now apply for the second round of wage subsidies if they meet the criteria for doing so. Unlike last year, the wage subsidy is being paid in two weekly instalments, and one twist to this is that if you have not applied for the previous two-week period, you now miss out permanently. The qualification is if you have suffered a 40% loss compared to a similar period in the six weeks immediately prior to the move to Alert Level Four on 17th August 2021.
As of August 31st, $922 million has been paid to businesses that had met the criteria, and 225,335 applications had been approved, covering over 822,000 jobs. Another 14,708 applications were declined with 73,000 still being processed as of the first of August.
The support continues to be there, and you can apply for wage subsidies in Levels Three and Four, even if you’re outside Auckland so long as you meet the eligibility criteria. There’s also the Resurgence Support Payment, which is available at levels Two, Three and Four. And there’s various other schemes such as the Leave Support Scheme, Short Term Absence Payments and the Small Business Cashflow Loan Scheme which are also available.
There will always be a few businesses that somehow don’t meet the criteria and other businesses that are slipping through. Whether these are enough to keep the business alive, is another matter, because as I’ve said previously, one of the issues Covid-19 has highlighted is how many small businesses are, in fact, relatively undercapitalised.
And just be aware that the applications are being scrutinised. There are now reports that four applicants who received a wage subsidy are now being investigated as to whether, in fact, those were valid applications.
Clarifying the home office rules
Moving on, I’ve spoken previously about allowances and Inland Revenue Determinations issued in relation to payments provided to employees to work from home. Inland Revenue has now issued a third determination, Determination EE003, which will start from 1st October and will run for 18 months through to 31st March 2023.
What this does is amalgamate and replace all the previous determinations that have been published on the topic which we covered recently. However, although this consolidates the previous determinations that have been made, there are actually no changes to the actual operating principles set out in those determinations and the amounts of payments that can be made by employers to employees as a reimbursement for home office use and use of personal telecommunication tools.
Those rates are $15 per week if they are treated as exempt income for an employee of working from home and then a further $5 a week if that employee is using their own telecommunications tool. So that’s a maximum of $20 dollars per week. As I’ve said previously, these allowances are not terribly generous, but they are at least a de minimis work around. Inland Revenue has by extending the application of the determination through till 31st March 2023, given itself time to have a further consideration of what it wants to do with the law around this practise.
At the same time, Inland Revenue’s latest Agents Answers for September sent to tax agents has caused some confusion. It had a note explaining that if a company uses a home office that is the home of one of its shareholders, it will not be able to claim a deduction for the office unless it has incurred the actual cost. This means that if a shareholder or director, runs the company’s business through a home office and pays all expenses relating to the home office, the company has not incurred any expense and cannot claim a deduction.
This came as a surprise loss to many fellow tax agents and left us scratching our heads a little bit on this. What Inland Revenue has done is set out the law, which is quite clear that the company can only claim the expense if it can prove a nexus between its business income and the home office expense and no private portion can be claimed. The company must incur the expenditure within the income year, that is, it has a liability to pay the expense either direct to the provider or to the homeowner.
And that last phrase there is where perhaps practise will probably align with the theory. What one often sees is that small businesses run out of family homes, will claim a home office expense. And in reality, what it should be is a reimbursing allowance of the type we’ve just been discussing. The director or shareholder-employee or other person should file an expense claim for the home office expenditure they’ve incurred.
Tax policy aimed at the big overwhelms the small
Now this highlights an issue that I’ve talked about previously is that our tax system doesn’t always work well for small businesses. There’s a mismatch that goes on. A lot of policy is driven by larger taxpayers who have the resources to manage their affairs properly and also make submissions when legislation is being considered. However small businesses just tend to muddle along as best they can and sometimes have matters, to put it bluntly, just dumped on them unexpectedly with an increase in compliance costs.
Managing compliance costs for SMEs is always a bit of a hard one for tax authorities. There’s a trade-off between minimising compliance costs and the potential for abuse. If I was to say where I think Inland Revenue lies on that line, I think they have always been more cautious about the opportunities for concessions to be abused.
So that’s that means that sometimes obstacles like this Agents Article note appear, which have everyone head scratching and don’t actually reflect the actual practise. Sometimes, I think policymakers at Inland Revenue would be a little surprised at how “imprecise” would probably be a polite way of putting it, some accounting records kept by small businesses are. This is, as I said earlier a reflection of how small businesses are undercapitalised or under resourced and sometimes the I’s aren’t dotted and T’s aren’t crossed.
Anyway, this note on home office expenses, as I said, caused some confusion. It probably could have been phrased better, it certainly caused a stir when it landed, even though ultimately when you drill down it isn’t a question of Inland Revenue changing the policy. Instead, it’s just saying there are procedures to be followed and you should do so. How helpful you might think that is in the midst of a general lockdown is another judgement you can make.
Tax forgiveness?
And finally, a very interesting article just popped up the other day from Ranjana Gupta, a senior lecturer in taxation with Auckland University of Technology. Ranjana has suggested that a tax forgiveness policy could help many small businesses get through the financial woes that they’re dealing with a result of Covid-19.
She’s been carrying out some research and based on this suggests a voluntary disclosure programme for overseas income could protect these businesses affected by the pandemic and also promote honesty in tax matters. Essentially, what she’s pointed out is that the system, as it currently operates, tends to be quite punitive rather than encouraging compliance. Just to give an example, if you’re late with filing a return and paying tax, a late filing penalty will be imposed for the tax returns involved and there will also be late payment penalties and interest on top of that.
All the research I’ve seen shows that there is no better compliance here in New Zealand over prompt payment of tax than in other jurisdictions that may only impose an interest charge. And as a tax agent unwinding the position where late payment penalties have been imposed is very, very frustrating at times. As I said, it doesn’t seem to encourage any prompter payments. Instead, what happens is the late payment penalties accelerate so rapidly that the debt balloons to the point where taxpayers just give up.
So, Ranjana’s point is a fair one. And she goes on to say that if a taxpayer is operating outside the tax system, the consequences of entering may be harsh because of this penalty regime. And so, this encourages even inadvertent tax offenders to remain outside the system.
And that is something I have encountered, that taxpayers who have realised they’ve made error are often quite worried about coming forward and how hard they will get hit for non-compliance. And so, the position that Ranjana is proposing, and I agree with it, if it’s made clear that there’s an amnesty going on, that may encourage people to come forward who may have stayed under cover hoping Inland Revenue wouldn’t find them.
And interestingly, she then goes on to discuss the point that currently 31% of the population are immigrants and one in 10 of those are self-employed without employees, with about 5% small businesses with employees. And her argument is that they may not be fluent in English and may be unaware of their tax obligations and are therefore unintentionally non-compliant. This was something we actually came across during my time on the Small Business Council. The migrant community is of a size that some may only deal in their own native language rather than, as you might think, in the wider community.
So anyway, as Rajana notes, they now face the ramifications of making a voluntary disclosure. And her suggestion is maybe Inland Revenue should think about some form of amnesty, or message to the public as to how it would take a more sympathetic approach to people who come forward. So, I think this is an interesting proposal.
I have found, to be fair, where people have come to me and made voluntary disclosures to Inland Revenue they’ve been treated reasonably well. There haven’t been many instances of any very heavy penalties being imposed. Tax is collected and the interest is paid and then the system carries on as normal. So, Ranjana’s proposal is something worth considering.
Well, that’s it 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 colleagues. Until next time Kia Kaha! Stay strong.
2 Mar, 2021 | The Week in Tax
- Observations on the International Fiscal Association conference
- Covid Resurgence Support Payments applications go live
- Inland Revenue/Treasury analysis of wealth in New Zealand causes a stir
Transcript
Last week I was in Queenstown at the International Fiscal Association’s annual conference. This is probably the most attended tax conference in New Zealand for anyone interested in tax policy.
Traditionally, the conference is opened by the Minister of Revenue, and the Commissioner of Inland Revenue Naomi Ferguson attends together with many of the most senior Inland Revenue policy officials, many of whom make presentations on matters of tax policy.
The conference is held under Chatham House rules, which means I can’t actually say too much about what was said in some presentations, but that does mean there’s a fairly open and robust debate about tax policy, and that is helpful.
Topics on the first day included the implications of the new 39% tax rate, Inland Revenue’s compliance programme (which actually referenced last year’s podcast episode with Andrea Black on the topic), the Taxation of Property, Digital Services Tax, and Anti Avoidance.
Now, last week I said I foresaw issues around actions being taken ahead of the increase in the 39% tax rate. And what was said at the conference has reinforced my concerns.
For example, people will need to look ahead and consider carefully how a change in a shareholder employee’s salary will look to Inland Revenue.
The general consensus, by the way, was that paying dividends before the 31st March year-end should be OK. But I was one of the sceptics because my view is Inland Revenue might ask “You paid a very large dividend last year. Why didn’t you pay a very big dividend this year when you could.” So all that remains to be seen.
But there’s also a point I hadn’t previously considered. There’s also potentially going to be some very adverse FBT implications if employers are not careful.
This is because the FBT rate will also increase from 49.25% to 63.93% for those receiving benefits who are earning more than $100,000, actually some $132,000.
There’s a risk, therefore, that an employer may apply the new rate to all employees with vehicles rather than just those earning above the threshold. What that means is, there could potentially be some quite significant overpayments of FBT. The problem is managing FBT is very complicated. There’s the matter we’ve talked about previously about what is a work-related vehicle, for example.
But leaving that aside, how you actually go about applying the relevant rates of FBT is complicated. The FBT rules have been around relatively unchanged now for 30 odd years, so as one presenter said it’s probably time to have a closer look at these rules apply and operate.
Inland Revenue intervenes earlier
Moving on, applications for the COVID-19 resurgence payment went live on February 23rd. Now as of 7.30 Thursday morning, 9,500 applications for a total of $28 million had already been received and Inland Revenue had disbursed $6 million. The Commissioner of Inland Revenue and the Minister of Revenue in his opening remarks, both praised the efficiency of the new Business Transformation programme, which has enabled them to deliver very quickly things like the COVID-19 Resurgence Support Payment.
Now, I don’t think the Commissioner will mind me revealing that Inland Revenue had also already picked up what they considered a number of clearly fraudulent applications for the COVID-19 resurgence payment. So clearly the real time data enables them to deal with these applications very quickly, but also identify much more quickly where there’s something wrong.
And that actually was the theme of one of the other conference presentations: Inland Revenue believes it is now able to intervene earlier and therefore stop things getting out of hand. I’m certainly seeing some evidence of that and this inevitably will help with the integrity of the tax system. If people who are trying to manipulate the system are caught very quickly that reinforces people’s perceptions of the system’s integrity. And that’s good for everybody.
Inland Revenue looks at ‘wealth’
The new Minister of Revenue, David Parker is also the Associate Minister of Finance, a continuing role from the last Government. Last year in his role as Associate Minister of Finance, he asked Inland Revenue and Treasury to undertake an analysis of wealth in New Zealand. And the report that was prepared for him in August 2020 was released as part of a story on Thursday.
The headline in the paper was that the wealthiest New Zealanders’ average tax rate was 12% on their total income. For this purpose income means all economic gains, including for example untaxed capital gains. Inland Revenue and Treasury’s definition of the wealthiest New Zealanders means anyone with net wealth exceeding $50 million dollars or more. The report noted that once you included all economic gains then 42% of this group were paying a lower tax rate than the 10.5% starting income tax rate on the first $14,000 of income.
Now, there’s quite a lot to digest in this report and the related fallout is already quite widespread. On Thursday I finished up speaking to Radio New Zealand’s The Panel on that matter and also to Stuff about it. This is just another instance of the ongoing debate around the taxation of capital. Now, the taxation of capital wasn’t a topic that appeared on the International Fiscal Association’s conference this year, but I imagine it will be at some point.
There was a paper on property taxation presented by Young IFA (one of the presenters of which included another previous guest of this podcast, Nigel Jemson.)The presenters were basically saying the taxation of property is an issue we’re going to need to think about changing, and offering up some options.
But one of the things that this survey highlighted is something that I’ve mentioned previously, and that’s we don’t actually have a lot of very good data in this area. The work that was done did included extrapolating data from the NBR’s Rich List along with data from held by the Reserve Bank of New Zealand and income included in tax returns.
There’s an ongoing controversy about the level of taxation paid by the wealthy. This is slightly distorted by the fact that the wealthy have investments in companies both listed and in their own trading companies. Now, those companies have paid tax imputation credits, but they haven’t distributed them. So there’s a latent amount of taxes which has already been paid and a second layer of tax representing the difference between the company tax rate of 28% and the personal rate will then kick in when the dividends are paid out. An interesting point of note is the top one percent in New Zealand apparently owns close to 70% of all listed companies on the stock market. Their portfolios are obviously much more diverse.
A distorting differential
And this differential emerging between the company income tax rate of 28% and the top individual tax rate of 39% was something that was discussed at the IFA conference. But another presenter pointed out something that has been going on for a long time, and that is if you look at the distribution of taxable income and what you do see is a bell curve with two big spikes and those spikes are around $48,000 of income, which is when the tax rate goes from 17.5% to 30% and around $70,000 when it goes from 30% to 33%. What’s more these have been in the system for some time.
And it was this which prompted me to say that there does appear to be some income manipulation going on in the self-employed sector. There’s one estimate provided recently to the Tax Working Group which said that the self-employed may be paying 20% less on average relative to someone earning income subject to PAYE.
So there’s going to be an ongoing debate around the taxation of wealth. There’ll be focus, obviously, on the extremely wealthy and we need to know more about what wealth they hold and how it is held.
But we might also see Inland Revenue start to look at this issue of who is reporting income around the $70,000 threshold. It’s quite conceivable, in fact, that people will not do too much around the increase to 39% for income above the $180,000 threshold because it’s obviously going to draw attention. However, the evidence seems to be that some manipulation has been going on at lower levels of income without attracting too much attention from Inland Revenue and that may change.
And on that note, that’s it 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 week Ka kite ano!
23 Feb, 2021 | The Week in Tax
- An overview of the new Covid Resurgence Support Payment
- What could be the implications of Facebook’s actions in Australia
- Pre-31st March year end tax planning
Transcript
On Wednesday, the Government passed under urgency, the Resurgence Support Payments bill.
This was introduced in the wake of the move to level three and then level two lockdowns in the Auckland region. This had been in the works for some time, but then just got pushed through under urgency following what we might call the Valentine’s Day mini outbreak.
Resurgence supports payments may be applied for if there is an increase in the alert levels from Level 1 to Level 2 or higher and the alert level remains higher than Level 1 for seven days or more.
It’s going to be available to all businesses in New Zealand each time it activates. So even though Auckland went into a Level 3 Lockdown and then back down to Level 2, because a lot of tourism is currently dependent on tourists from Auckland, the resurgent supports payments will apply nationally. This is a wise move, which cuts down a lot of administration, but also reflects the fact that Auckland is a prime source of tourism for the very weakened tourist industry.
Businesses are able to apply if they’ve experienced a revenue decrease or a decrease in capital raising ability of at least 30% due to the increase in the alert level. And they need to measure their revenue for that 30% fall over a continuous seven-day period where the first day is on or after the first day of the increased alert level. All seven days must be within the period of the increased alert level. The affected revenue period then needs to be compared against a regular seven-day revenue period that starts and ends in the six weeks prior to the increased alert level.
This scheme is going to be administered by Inland Revenue rather than the Ministry of Social Development as happened with the wage subsidies. Applications should be made through myIR and Inland Revenue is expecting that people receive the resurgence support payment within five working days of their application.
The payment must be used to cover business expenses such as wages and fixed costs. Note that this isn’t a wage subsidy per se, it’s a support payment. And that possibly explains the slightly unusual change from the previous wage subsidy in that this payment is subject to GST now.
Although no income tax deduction will be available for expenditure relating to use of the resurgence support payment, GST registered businesses will be able to claim input tax deductions for any expenditure funded by the resurgence support payment. In other words, if you pay the rent using the resurgence support payment, you won’t get an income tax deduction for it, but you will still be able to claim a GST input tax credit.
The payment consists of a base amount of $1,500 dollars per applicant, plus $400 per full time equivalent employee, up to a cap of 50 full time employees. Although payments are capped at 50 full time employees, businesses with more than 50 full time employees may still apply.
There is a further cap in that the amount an applicant may receive will be the lower of the base amount and four times the amount their revenue has declined, as declared by the applicant as part of the application. And I can see Inland Revenue having a bit of work going on in years for larger scale applications here.
Anyway, the measure is now in place and fortunately everyone within the Auckland region, because they are still in level two, will be able to apply for this because they have been at an Alert Level higher than Level 1 for the required seven-day period. I imagine there will be further tweaks to the scheme as we go forward in the event of further outbreaks.
Facebook gives Australia the fingers
Moving on, yesterday across the Ditch, Facebook announced that …
“due to new laws in Australia from today, we will reluctantly restrict publishers and people in Australia from sharing or viewing Australian and international news content on Facebook.”
And with that, it stopped any sharing of Australian news media sites and indirectly, some New Zealand sites could be affected as well.
Now, this stoush has been brewing for some time. The Australian Government is trying to force Google, Facebook and other tech giants to pay more for the media content. Google has played along with this proposal. Microsoft, which runs the Bing search software, is also playing along. But Facebook has pushed back very hard and decided to go very hardball with this move.
Now, barely two years ago, Facebook literally made blood money about live streaming the Christchurch massacre and then wrung its hand about the difficulties of taking down such abominations. But yesterday it basically was able to switch off all of Australia’s major media sites on Facebook just like that. And I’m sure there will be a few pointed comments made about that.
I can’t see how such outrageous behaviour will not draw a strong response. And this is where I think from a tax perspective, things may go. The Australian government has previously been lukewarm about a Digital Services Tax, but Facebook’s actions might prompt a rethink. The Australian Tax Office has done some work on this, and there might be a bill lying around which could be introduced at the drop of a hat in effect saying, “Here, stick this up you”.
If Australia does move forward with a Digital Services Tax, then I think our government will surely follow. Now I’m in the “ get into the Tax Tech Giants hard” basket and
have been for some time, particularly since what happened in Christchurch. Yesterday’s actions by Facebook underscore my belief in that approach.
Incidentally, during this whole run up to this stoush erupting, at least one tech commentator suggested that a DST would be a better approach instead of what the Australian government was trying to do. We’ll see how this all plays out and it’s going to be very interesting to watch. Facebook just lifted the stakes considerably.
There are, according to the OECD, about 40 countries either with an active DST or considering introducing one. Maybe Australia is about to become number 41.
KiwiSaver makeup
Now, briefly following up from last week’s podcast, Inland Revenue is to pay approximately $6.6 million to compensate over 640,000 KiwiSaver members whose employer contributions were delayed in getting to the providers. Now, this happened last April, when Inland Revenue moved KiwiSaver to its new Business Transformation START platform. And for some reason there was a delay in passing on employer contributions to people’s KiwiSaver accounts.
This story reports delays of as much as six months or more. So people lost out on investment performance over that time. And during that time, the use of money interest rate paid by Inland Revenue dropped to zero which would have been the usual way of compensating for the delay.
Instead, what’s going to happen is Inland Revenue has been given approval to make ex gratia payments of about $6.6 million in total. This is a slight bit of a disappointment for Inland Revenue because as I said, by and large, the Business Transformation programme, controversial as it is, has worked relatively smoothly and improved processes. It’s certainly not a Novopay scale disaster, but it’s just another sign that sometimes with IT projects things go wrong.
End of year planning
And finally, the 31st March tax year end is fast approaching. So it’s time to start thinking about what steps could be done in advance of that. Now, there’s a couple of things in particular people might pay attention to.
Firstly, you have until 16th March to make use of the $5,000 threshold for “low value assets”. Under this you get a full write off for assets up to the value of $5,000 acquired on or before 16th March.
This is an emergency measure introduced a year ago as part of the Government’s initial response to Covid-19. So now’s a good time to see if there’s equipment you want to replace or upgrade and take a full write off.
For assets purchased on or after 17th March, that threshold of $5,000 will be reduced to $1,000 going forward.
Now, the other thing to think about is tied in with the forthcoming increase in the personal tax rate to 39%. And the suggestion would be that companies might want to think about paying dividends out to use imputation credits prior to that date so that the shareholders are taxed at 33% rather than 39%.
Sometimes you might pay a year-end dividend anyway because that’s just part of the regular distribution pattern. But you might also do so because the shareholders might have an overdrawn current account which you want to get into credit.
The thing that complicates matters this year is whether such a move might represent tax avoidance. I don’t believe so. But one thing people must keep in mind is that as part of the increase in the tax rate to 39%, trusts have to provide more information about distributions they’ve made in prior years. So as the commentary on the tax bill said, “this is expected to assist in understanding and monitoring the changes in the use of structures and entities by trustees in response to new 39% rate.”
And that’s what gives me pause for concern about paying large dividends before 31st of March. If there isn’t a regular pattern of large dividends before the increase and then a large dividend isn’t repeated after the rate increase, Inland Revenue may look to argue tax avoidance and effectively tax retained earnings. So approach that one with caution.
I think this is a point where Inland Revenue really needs to come out and be very clear about what is going to happen with dividends paid by companies to trust shareholders, which aren’t then distributed. I think you’ll have a problem if the pattern was previously such dividends were distributed by the trust, maybe less so if that wasn’t the case. Again it’s a question of watching this space. And we’ll bring you developments as and when they happen.
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 ano!
