Tax News

A look back at the biggest tax stories of 2020

15 Dec, 2020 | The Week in Tax

    • The response to Covid-19
    • The ongoing debate about taxing capital
    • Inland Revenue’s response and how well is its Business Transformation programme going?

Transcript

This is the last podcast for the year so we will be taking a look back over the main tax stories for 2020.  It’s no surprise that the response to COVID-19 will feature very heavily but looking back, the thing that stands out is how rapidly events developed and then the sheer scale of what we were dealing with.

In the podcast on Friday 16th March, I suggested some actions Inland Revenue could take in response to coronavirus following a week in which first Italy then the UK and finally Australia announced special measures throwing around huge sums of money.  By the following Friday we had the first COVID-19 support package including the first iteration of the wage and subsidy scheme.

From then on it was a frantic blur until late May with barely a week passing without one new measure after another.  Most of those did what they were intended to do: get money into the economy and keep people employed.  Some were more successful than others. The Business Finance Guarantee Scheme for example did not work as anticipated with only $176 million lent to 834 businesses by the end of August.

The Small Business Cashflow Scheme on the other hand was a huge success in getting money out to small businesses very quickly. Currently over $1.6 billion has been lent to close to 100,000 businesses and the Government is now working on making the scheme permanent.

Some of the tax measures that have been announced – such as increasing the provisional tax threshold to $5,000 or increasing the low value asset write off temporarily to $5,000 – are measures that probably would have happened sometime soon, possibly even this year it being an election year.  What COVID-19 did was make the Government bring forward those measures and put them into effect much sooner than otherwise might have happened.

It’s also worth pointing out just how well the Ministry of Social Development and Inland Revenue handled the distribution of funds under the various wage subsidies. The Small Business Cashflow Scheme meant that the billions of dollars got very quickly to where it was needed and both organisations deserve credit for making that happen. However, it undoubtedly put Inland Revenue under considerable strain and we’ll talk about that a little later on.

The immediate legacy of the response to COVID-19 is of course the Government’s books being shot to bits.  Interestingly the latest figures show the tax take has not fallen significantly and the deficit is more down to expenses increasing sharply such as the wage subsidies.

The impression is that the economy has come through the crisis in better shape than was anticipated way back in March.

For all that, the Government faces deficits for the foreseeable future so we had the somewhat unusual situation of it running an election campaign with a promise to increase the income tax rate to 39% for income over $180,000. The increase in the income tax rate to 39% is expected to yield about $550 million a year but I suspect we may find it yields more than that because the economy has been in better shape than expected so far.

Aside from the Opposition, Labour’s proposal also got criticised from various sectors saying that the response was inadequate given the scale of the problem. There was also criticism, and this is going to be a continuing theme, that the income tax increase primarily on labour and earnings was not really where tax changes were needed.

Notwithstanding those issues, there are a number of complicated flow-on effects from increasing the top income tax rate to 39% – such as resident withholding tax and fringe benefit tax. Then of course there are the significantly increased powers for Inland Revenue in respect to requesting information from trustees.

This is something which is going to give trustees and beneficiaries pause for thought before they get involved in aggressive tax planning.  The Government has made it clear that if it sees such activity it will increase the trust tax rate to 39%, something which Inland Revenue recommended should be done.

So the immediate impact of COVID-19 and the Government’s response has been the major tax story of the year.

The second big tax story has been the ongoing capital taxation debate which is something I suspected might happen.  Writing at the start of the year I suggested that although the Government had said in April last year it would not introduce a capital gains tax, that would not mean the end of the story.

And so it proved.

Throughout the year, particularly in the wake of COVID-19 and an unexpected housing price boom, there has been a string of stories looking at the question of taxing capital either in the form of a wealth tax as proposed by the Greens or more recently an extended bright line test.

In one recent article I suggested if the bright-line test is to be extended, a ten year timeline would be consistent with the other land taxing provisions in the Income Tax Act.  (Unsurprisingly how that ten year timeline is measured can differ between the various provisions).

What Geof Nightingale from the Tax Working Group pointed out in the same article , was that it would be fairer to have a comprehensive capital gains tax at a rate of 33% rather than the muddled approach to capital taxation we have presently and the previously mentioned complexities of increasing the top rate to 39%.

But they are in a position to make quite some noise about it, so the Government will find this story isn’t going to go away.  So, throughout 2021 and beyond there will be a steady stream of stories about what are we going to do about house prices and what role will tax have to play.

The final tax story of the year is the role of Inland Revenue; how it managed its response to COVID-19 and then going forward, how well is its Business Transformation programme really going?

As I mentioned previously Inland Revenue’s immediate response to COVID-19 deserves praise.  It took action to help clients running into difficulties with payments of tax, including a number of measures which effectively wrote off interest on overdue tax where the taxpayer had been adversely affected by COVID-19. It administered the Small Business Cashflow Scheme very efficiently and it worked very closely with the Ministry of Social Development on the wage subsidy schemes.  At its peak Inland Revenue was handling over 15,000 requests for verification from MSD each day in relation to the wage subsidy scheme.

At a tax conference during the year, I asked Inland Revenue representatives there whether they would have been able to manage all the additional demands that came on them because of COVID-19 without Business Transformation, and their response was that it had given them the additional capacity and flexibility to manage the demands put on them.  In particular the upgrade of the computer systems meant they could actually physically cope with what was coming at them

So far so good, but as listeners will know, in recent weeks I’ve raised questions around what exactly has been going on with Inland Revenue in relation to its audit and investigation performance in view of the fact that hours spent on investigation had fallen by two thirds over the past five years from over 680,000 annually to just over 240,000. That led to an interesting response from Inland Revenue Deputy Commissioner Sharon Thompson on the matter.

That exchange caught the eye of Auckland barrister and ex Inland Revenue investigator Riaan Geldenhuys.  What he pointed out was that Inland Revenue was actually under some strain in delivering Business Transformation even before COVID-19 hit.

Riaan noted that in the Minister of Revenue’s regular reports to Cabinet on the progress of Business Transformation in July 2019 then Minister of Revenue Stuart Nash had noted that there were strains emerging because of the unprecedented response to Inland Revenue’s rollout of automatic assessments for all people on PAYE.

Now as you might expect, COVID-19 has exacerbated those strains and in his July briefing to Cabinet this year the Minister of Revenue noted that because Inland Revenue had had to divert staff from audit and collection to maintain services “no new audit or debt collection cases will be opened and existing disputes will be managed as judiciously as possible.” The report then went on to note that “Inland Revenue’s ability to support customers is currently stretched to capacity.”

Now of course an unexpected event like COVID-19 will have some flow-on effects, but what has also emerged from these reports to the Cabinet is that the projected administrative savings that Inland Revenue promised the Government as part of the business plan for the Business Transformation programme have been completely wiped out.

The projection was that Inland Revenue would realise administrative savings for the period ending 30th June 2024 amounting to a total of $495 million. According to the latest report provided to Cabinet in July, none of those administrative savings are now expected to be realised[1] so that’s a $495 million dollar hit to Inland Revenue’s bottom line and effectively the Government’s by extension.

Earlier this year an academic article in the New Zealand Journal of Taxation Law and Policy[2] was critical of Inland Revenue’s Business Transformation programme.  The author thought that Inland Revenue had prioritised staff reductions rather than strengthening its ability to improve collection of taxes, particularly in the area of the cash economy.

On top of these issues of cost overruns and poor audit performance, there’s a growing problem of strains in the relationship between Inland Revenue and tax agents.   Tax agents are increasingly exasperated by Inland Revenue’s actions in directly contacting clients about various tax issues ostensibly in the name of better communication.  More often than not these calls result in confusion and duplicated costs which are often not recoverable.

So, this combination of cost overruns, lower audit and investigation work and a strained relationship with a very significant group of stakeholders, is something which is going to need careful monitoring by the new Minister of Revenue David Parker.  We will be watching with interest.

Well, that’s it for this year.  Thank you to all my guests and to all my listeners and readers. I really appreciate your feedback and your patience in sticking with me throughout a tumultuous 2020.  I suspect it will be well into 2021 before things settle back into what we might call normal.

Until then 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 year have a safe and enjoyable Christmas.  Ka kite āno.

[1] “The re-planning of organisation design changes may have implications for Inland Revenue’s ability to realise the administrative savings. The savings have already been removed from outyear baseline funding so the challenge for Inland Revenue is to manage within a reduced funding level. These savings are part of the funding available for transformation. It is too early yet for Inland Revenue to say what the implications will be.” (Para 59)

[2] Not available online publicly

This week talking about UK pension transfers with Tony Chamberlain of GBPensions.

5 Oct, 2020 | The Week in Tax

The difference between the UK and NZ taxation treatment and how some pension schemes are now more valuable because of Covid-19

Transcript

My guest this week is Tony Chamberlain, director of GBPensions a firm specialising in U.K. pension transfers. Tony is an authorised financial advisor with over 30 years’ experience.

Morena, Tony, welcome to the podcast, great to have you on board. So how do pension transfers work? What sort of pensions are we talking about? Who are the people who are most likely to have these types of pensions?

Tony Chamberlain
Well, predominantly we deal with the transfer of U.K. pension schemes. We can assist in the transfer of pensions from other jurisdictions, but mainly the UK.   They fall into two main categories -defined benefit, where the benefit is known in advance, and defined contribution where only the contribution into the scheme is known.

New Zealand really only has defined contribution style schemes, but when we transfer from the UK both types of UK schemes can be treated in a similar manner and whether the defined benefit or defined contribution, they would end up in a New Zealand scheme that is a defined contribution scheme.

TB
And so, the distinction from a tax perspective is a vital one, because in Britain, the position was exempt, exempt tax. In other words, you got tax deductions for contributing to the schemes the schemes grew tax free. But then you got taxed on the way out, whereas New Zealand went the other way, tax, tax, exempt. In other words, we make our contributions after tax in this country. These schemes are subject to tax and the normal taxing rules. And then when you pull them out at the other end, it’s tax free. And I think it would be fair to say that when you marry those two together and it becomes exempt, exempt, exempt Inland Revenue saw that as quite a huge problem.

What was your experience of Inland Revenue when this issue started to emerge about 12/13 years ago?

Tony Chamberlain
I think really Inland Revenue didn’t have any respect or any patience for people bringing monies over from a UK scheme or schemes. The issue I have is that when you’ve lived and worked in the UK under the UK tax regime, you’ve never had to bother with declaring your pension scheme to the UK revenue. So when you come to New Zealand and find that that’s what you should be doing, it’s completely alien to some. Why would you go out of your way to find out if you need to pay this tax, if it’s something that you’ve never experienced in the past?

And Inland Revenue seemed to think that they were actually making sufficient efforts to alert people coming from the UK that they need to declare their pension schemes. They didn’t really. And it’s unfair that they didn’t make it clear or apparent to people coming to the country that this needs to be done.

And Inland Revenue could even have a little bit of patience with people. This insistence that the New Zealand tax that has accumulated and be paid when the money is brought into New Zealand, even before the individuals turn 55 and can access it, is unfair.  It’s wrong that the tax that is generated on an asset must be paid out of a person’s own pocket and the asset which generated the tax liability cannot be used to pay the liability. And to insist that the individual pay the tax out of their pocket because they can’t access the fund before the age of 55, I think is unfair.

It would be nice to see Inland Revenue make some allowance to allow individuals to defer their tax and have it deducted from their schemes at 55 when they can legally access the funds and pay the liability.

TB
Yes, I mean it’s counterintuitive to people that they are being taxed on something they can’t actually access, or the funds aren’t available.  Accrual taxation is conceptually, theoretically correct but it’s a mystery to the layman. This is one of those areas where there’s a massive assumption made around what people should know and what people actually did know.

I mean, there is now a clearer set of rules than when we first looked at this issue 12/13 years ago. But I still struggle with the economic concept that people are bringing money into the country and are being taxed on that. But it seems to me that’s economically idiotic, that we’re taxing capital coming into the country, whereas the same people, for example, if they borrowed from an offshore bank to buy a house here, no issues.

I just find the whole thing, the way we treated overseas pensions incorrect. And New Zealand’s an outlier in this.  My views on this are well known. Inland Revenue isn’t listening anymore because it’s a nice little earner for them. Eventually when you have to design a special scheme because the ordinary rules don’t work that, to me, is an example of a system where the fundamentals aren’t working in the first place. But anyway, this one’s been done to death, so moving on quickly.

Tony Chamberlain
Whether or not you disagree or agree with the tax itself, we could debate that all day.  But I think a concession could still be given by Inland Revenue, that if the tax has been generated and the individual is liable to it, let the individual defer that tax until they are able to access the money from the fund and pay the tax. After all, it is the fund that has generated the tax. But at least let the individual defer the tax until they’re able to withdraw the tax from the fund. That’s fair.

TB
I couldn’t agree more with you on that one. It’s a very harsh treatment. And I know there was one case with a couple of intensive care specialist nurses who got hit with one of these liabilities in a really odd set of circumstances that triggered the charge. And they were in Auckland, but they sold up and moved to Nelson so they could realise the funds to pay the tax. And that is economic idiocy all round. We want skilled migrants. What are we doing? We just tax them so they go to another part of the country. So Auckland, which short of these skilled migrants, loses out. I mean, that really is a stunning piece of poor planning.

And interestingly, just a quick aside, there’s a lot of talk about the Green Party’s poverty action plan, which has a wealth tax on this. One of the points that’s not discussed, but they do address, is this very issue of people being asset rich and cash poor, say elderly people who might be living in a house mortgage free. Under the Green’s proposal the tax liability can roll up and basically be payable when they pass. And so someone there has thought conceptually about this very issue of someone is going to be taxed on something but without the cash to meet it.

This is a distinction which could have been argued more I feel, when the current foreign superannuation scheme legislation was going through. That is has the person really triggered income here because they have no legal right to that pension until they reach the right age.  This is separate from the issue you know was happening way, way back prior to the introduction of the QROPS regime when there was some chicanery going on, where people from Britain were able to transfer to schemes here and access funds before age 55. That leads us onto the QROPS regime: what is a QROPS and how does that work? When do we use these?

Tony Chamberlain
So, in essence, the British government launched the QROPS regime, which is Qualifying Recognised Overseas Pension Scheme in 2006. It was an amalgamation of old pension rules in the UK, brought together to tidy up the pension regime, which was getting very messy with constant changes.

And QROPS is a regime where if a pension scheme is established in an overseas jurisdiction outside the UK and registered in its home jurisdiction, and it could satisfy certain requirements of the British authorities, the overseas scheme would qualify for QROPS status.

For example, a QROPS can be a New Zealand registered pension scheme which satisfies various HM Revenue & Customs (HMRC) requirements in the UK that stipulate what can be withdrawn, when it can be withdrawn and has certain constraints on the scope of investments. And if the New Zealand scheme can satisfy HMRC’s requirements, it gets certification as a QROPS. It goes on the HMRC website and then you can effectively receive monies from UK pension schemes without any UK tax deductions being made. So it can be a straightforward transfer.

TB
Critically KiwiSaver schemes can’t be QROPS. They were specifically taken out of the regime, weren’t they, because they didn’t actually ever meet the requirements to be a QROPS.

Tony Chamberlain
That’s right. What happened was that as the KiwiSaver regime was getting  some weight behind it in 2010, 2011 and 2012, some of the KiwiSaver providers thought, well, it’s a good idea to try to get schemes into the QROPS regime, and that way we can receive funds from UK schemes.

Now we actually advised one company at the time that KiwiSaver rules could physically not satisfy the QROPS rules even though they were they were given QROPS status by HMRC. The KiwiSaver rules breached the QROPS rules. What was happening was HMRC were being sent information scheme documents and trust deeds from New Zealand KiwiSaver funds and just basically gave them a very quick glance and going “Yes you’re a bona fide overseas registered scheme so we can give you QROPS status.”  HMRC was looking no further into the actual trust deeds and the rules around KiwiSaver.

It took them a couple of years and then they suddenly realised that, “Oh, hang on, the KiwiSaver rules –  because they allow withdrawal of funds before retirement age under hardship or to purchase a house – can’t comply with the QROPS rules because the QROPS rules do not allow funds to be paid out before retirement.” So there was a cull when the British Government removed the list of approved QROPS for a month and when it reappeared again, every KiwiSaver had been removed.

So KiwiSaver funds never really satisfied the QROPS rules. There were some that were initially given the QROPS status and some transfers were made, but within a year or two once the HMRC realised what had happened, it cancelled or removed every KiwiSaver from the QROPS approval. So those people in KiwiSaver who transferred are in the middle of quite a big bunfight because they really have got some issues.

TB
I mean, this actually happened just as the legislation introducing the current taxing regime for foreign superannuation schemes, UK pension schemes, was going through in 2013.  https://www.ird.govt.nz/income-tax/income-tax-for-individuals/types-of-individual-income/foreign-superannuation

And Inland Revenue here were very naive thinking HMRC would just bend the rules to suit it. I think serious questions could be asked about how Inland Revenue handled the whole thing. I think they saw it as a huge tax grab and weren’t too worried about if people had put it into KiwiSaver. And I know several people raised this issue at the time asking “You know, KiwiSaver funds may well not comply. Have you got UK sign off on it?”

Incidentally, that whole experience was something I’ve seen again recently where policy, which affects individuals and small businesses, doesn’t actually have an effective force in consultation because the big boys, the big end of town, as it’s called, the large law and accounting firms, they don’t realise how significant the issue is. I had one lawyer in a large law firm tell me we didn’t pay enough attention to this issue at the time. And since then, they’ve been scrambling to try and work something out with Inland Revenue and HMRC.

Anyway, we are where we are. And I mean, as you say, those people who did transfer into a KiwiSaver QROPS are really stuck because they can’t move. They can’t take out anything and have to sit it out until age 65. That was the other thing that slipped by. You know, you’ve transferred to a QROPS and you can withdraw it at age 55. But if it’s in a KiwiSaver fund, you have to wait an extra 10 years. So I’d say there may be a few financial advisors that should be looking at their Professional Indemnity cover on the matter.

Tony Chamberlain
Well, I actually put a portion of blame to the insurance companies and their lawyers. They should have read the KiwiSaver legislation. They should have then read the QROPS legislation and seen that never the twain shall meet. They were just completely opposing pieces of legislation.

And HMRC were at fault in granting the QROPS status. This all happened after they had lost a big court case where they’d be made to look very silly. HMRC took a Singaporean QROPS to court – Panthera – about its incorrect status.  When HMRC tried to impose an unauthorised withdrawal charge on the Panthera, QROPS clients complained that they would not have made the transfer if HMRC had not granted QROPS status.  At the time of transfer they thought it was a QROPS. Eventually HMRC was forced to back down.

TB
Oh no, not good. Another acronym which comes up in this area is SIPP. What does SIPP stand for and how do you use them?

Tony Chamberlain
So, a SIPP is a Self-Invested Personal Pension and they came around in about 1993/1994 in the UK. Basically it’s a personal pension similar to what most people in the UK have, but it has wider investment scope. And what happened in 2015 is HMRC introduced a flexibility rule, which meant that instead of splitting the contributions between a 25% lump sum and a 75% portion which must be applied to purchase an annuity, from 2016, a SIPP could actually pay the remaining 75% portion as a lump sum as well.

And so, a SIPP effectively is a glorified pension scheme that now does not require the client to have to retain 75% of the fund to provide an income. They can now access the entire fund as a lump sum.

And there are some tax planning opportunities by using SIPPs for New Zealand individuals. If we come back to the New Zealand tax for example, where an individual is looking at transferring their UK scheme into a QROPS and they have already accumulated a New Zealand tax liability and they are younger than 55, they’ve got to pay that New Zealand tax liability out of their own pocket, as we’ve already discussed. But if the individual transfers to a SIPP, the tax ability does not become payable on demand in New Zealand because it’s gone from one existing UK scheme to a SIPP which is also a UK scheme.

And so if the individual can transfer to a SIPP, they can benefit from some of the very high transfer values, specifically from defined benefit schemes which we are seeing and keep the funds in a defined contribution scheme, which is a SIPP. So that when the individual turns 55, they can access the proceeds in New Zealand. They can then deal with that New Zealand tax liability that they would have otherwise had to pay out of their pocket if they transferred their scheme to a New Zealand QROPS when they were, say, 50. So it’s a case of the ability to defer the tax to a time when you actually have the funds to pay it.

The other thing is that some individuals don’t know if they are going to retire in New Zealand. And so, if they have a SIPP they can go back to the UK without ever having to pay the New Zealand tax on transfer in the first place. So, a SIPP has got some tax planning angles – it gives probably as many options as a QROPS. But it depends on the age of the individual, the size of the fund, what they want to do, and what their future thoughts are going to be, where they going to retire.

TB
You mentioned the rising value of defined benefit scheme. What’s driving those values up, because you were talking pre-podcast about an example where the value went up £100,000 in 90 days.

Tony Chamberlain
As I said before, defined benefit schemes don’t have a value until it comes to be calculated.  The actuary, when he comes to calculate a transfer value has to use annuity rates given to him by GAD the UK Government Actuary’s Department. And annuity rates are based predominantly around Gilt yields in the UK plus some other factors.

TB
Gilts being bonds, the equivalent of New Zealand Treasury bonds.

Tony Chamberlain
Yes. They actually started off as a piece of paper with a gilt edge, and that’s how they got their name.

And so the actuary has to determine, based on the pension that the individual was given under the defined benefit scheme, what pot of money is a fair and reasonable amount for the individual to go and provide themselves with that amount of income based on gilt yields, bond yields.

We saw falling gilt yields just prior to Brexit, so that meant the transfer values were going up prior to Brexit quite steadily. Of course, we’ve then had the Covid-19 crisis and that has further reduced gilt yields, which means the cost to the scheme actuary in providing a guaranteed pension that’s prescribed under a defined benefits scheme has gone up, because they now need to buy more gilts to provide the same amount of income, which a defined benefit provides and has guaranteed. So transfer values have risen significantly.

And you’re right, we had a case that just immediately prior to lockdown the guy obtained a transfer value of just over £300,000. But the client thought gilt yields were going to fall further because of the Covid-19 crisis. So he waited and requested another valuation three months later, and that’s gone from £302,000 to £420,000. So in the space of about three months, he’s made 33 percent profit. And the transfer values we’re seeing are phenomenally high compared to what they would have been a year ago.

TB
So, these falling gilt yields are the main reason why defined benefit schemes are basically being phased out all across the UK. And aren’t some of the state schemes such as the NHS and Teachers schemes – there are now some restrictions on transfers?

Tony Chamberlain
Yes, the statutory unfunded schemes, which are basically the defined benefit schemes of British government run departments such as the armed forces, the police force, the National Health Service, and civil service are defined benefits schemes. And clearly with gilt yields falling, the cost of providing those defined benefits has gone through the roof. And because they are statutory unfunded schemes, that means that there is no pot of money accumulating to provide those benefits. The pension benefits to individuals within these schemes are paid out of the tax revenues collected by HMRC so that’s why they are called the statutory unfunded schemes. And so the UK Government is seeing millions and millions of pounds going out of the door with people transferring their pension schemes. And they stopped it because it was just going to cost too much.

TB
Moving on, how has Lockdown been for you? I’ve heard one or two interesting experiences from business owners.

Tony Chamberlain
Values went up, service levels went down. But I think unlike many businesses and I keep count our blessings, really, we were lucky.  I think people were sitting at home twiddling their thumbs and got round to doing things they couldn’t do during their normal working life, including going through their paperwork and realising that they had pension schemes from 10, 20 years ago.

So we were actually inundated with enquiries, and one week was the busiest in terms of enquiries for at least five or six years. And it’s been really eye-opening to see what people have got which they’d overlooked.

TB
And that touches on a point I was going to raise, and we talked a little bit at the top of the podcast, how well aware are people of their New Zealand tax obligations in relation to these schemes?

Tony Chamberlain
Well, that comes back to the start of our conversation. They’re not. Although I think the longer they’re here the more they hear from other people who have got an inkling that there is an issue and tell them, ‘You know you’ve got tax to pay on your pension scheme? How long have you been here?”

But generally, people are completely ignorant to the fact that there’s a New Zealand liability. They may have some recollection when they took their pensions out in the UK, that when they got to retirement, they might have to pay some UK tax on the pension. But about 90% of clients have no comprehension that they’re going to have to pay New Zealand tax on their pension schemes.

TB
Wow. Final question on something coming up. If the current government is re-elected, there’s a proposal to increase the top tax rate to 39 percent on incomes over $180,000. Pension schemes when they come in, are taxed as a single lump sum.  So, I guess the opportunity is for people to perhaps think about getting their money in now because they could face a significantly higher tax liability. Roughly how long does it take to transfer schemes?

Tony Chamberlain
Certainly defined benefit schemes are increasing in value and we’ve seen very few under £100,000, which is $200,000 more or less, which automatically breaks the new potential threshold. But there’s a bit of a double edged sword. Covid-19 has caused defined benefit scheme values to rise. Unfortunately, it’s also caused the UK pensions industry to virtually grind to a halt.

So whereas we were saying to clients at the start of the year that the process to transfer a scheme from the UK will take six months or more, we can’t really say that with any certainty now. So really, we’ve got to tell people it could take 9-12 months to get the money out.

So if you want to try and make that 31st March 2021 deadline – that we don’t even know if it’s actually going to come in – people are really up against getting transfers completed before that legislation ever happens. It will take at least six months to complete a transfer and probably longer.

TB
Well, on that bombshell, I think we’ll leave it there. Thank you very much, Tony Chamberlain of GBPensions. It’s been fascinating to hear the tale of what happens in the pension industry. Really, really helpful.

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 āno.

A controversial extra relief for the newly unemployed

2 Jun, 2020 | The Week in Tax

  • A controversial extra relief for the newly unemployed
  • Are redundancy payments overtaxed; and
  • Record numbers apply for instalment arrangements with Inland Revenue.

Transcript

According to a Statistics New Zealand report this week, job numbers dropped by a record 37,500 in April. This is the worst fall in employment on record. So naturally, the Government is still under pressure to ameliorate the impact of these job losses.

And its latest measure is a special relief payment beginning on 8th of June. From that date, anyone who has lost their job since March 1st because of the Covid-19 pandemic will be paid $490 a week for anyone who lost full time work and $250 per week for losing part time work. These payments will last for up to 12 weeks and will not be taxed.

Now, the scheme announced is similar to the Job Loss Cover payment introduced by the National Government in the wake of the Canterbury earthquakes in 2010 and 2011.  It also has a number of similarities to the ReStart package for workers who lost their jobs in the Global Financial Crisis in 2008. So these are undoubtedly welcome measures for those affected.

The controversy has arisen because beneficiary advocates have pointed out it appears to discriminate against the existing unemployed people. Furthermore, the fact that the payment that is being received of $490 dollars per week is almost double the $250 a week (after tax) that someone on the current Job Seeker payment would receive, implicitly acknowledges that the current level of benefits being paid is too low. This is a point that was made by the Welfare Expert Advisory Group report last year, which actually recommended benefits be increased at a cost of over $5 billion.

One of the other features, which beneficiary advocates might question, is that people who qualify for this payment but have partners who are still working may still be eligible for the payment so long as their partner is earning under $2,000 per week. Anyone who’s been involved with the existing treatment of beneficiaries will know that there are often very harsh cases coming into play where a couple’s income is aggregated, and that benefits are often struck down because a person has formed a relationship or is deemed to have formed a relationship during the period.

So the gap between the generosity of this new measure and the existing rules is quite marked and has drawn criticism.  How that will play out is largely a political matter. But it points to something that I’ve talked about previously –  we do need to look at our welfare settings and particularly the interaction with the tax system.

Unusually, these payments are not being taxed, whereas benefits are actually taxed. Now, the net effect is intended to be the same, but still it’s an interesting distinction. So whether it points to – as has been hinted at – there’s going to be some further changes and significant changes at that, in the benefits and welfare system remains to be seen.

For the moment, the important thing is for those who are directly affected now, this new payment will come as a relief for them as it’s intended to do so. And leaving aside the politics of it all, we shouldn’t be scapegoating those who’ve been unfortunate enough to be affected by the scale of the pandemic. Let’s look to try and improve the system for everyone, but don’t blame those who are caught up in it right now.

Speaking of redundancy, this week, I spoke to Madison Reidy of Newshub about the tax treatment of redundancy. Currently, redundancy is treated as a extra pay for tax purposes,  subject to pay as you earn and taxed at normal rates. That is, it’s fully taxable to the recipient. The PAYE that’s applied is based on the combined total of the redundancy and the annualised value of the PAYE paid to an employee in the previous four weeks.

Now, as Madison and I discussed, the tax treatment of redundancy is pretty harsh. Actually it’s harsh in two ways. Firstly because it’s taxed at a time when you may have to be reliant on it for an unknown period of time. The second point is that for some people the lump sum may be taxed at a higher average tax rate than would normally apply to them. This would be particularly true of lower income earners, say, earning around the $48-50,000 mark, where most of their income is being taxed at 17.5%. They may receive a redundancy payment which would be taxed at 33 percent. And the current system makes no concession for that.

It hasn’t always been the case. But our tax rules have been pretty hard on redundancy since 1992 when the rules were changed and redundancy became fully taxable. There was a period between 2006 and 2011 when a credit was given up to a maximum $3,600. But that was withdrawn in April 2013. Ironically, it was going to be withdrawn from April 2011, but then got extended for a further period to 1st of October 2011 following the Canterbury earthquakes.

But the treatment of redundancy seems harsh compared with what happens across the ditch in Australia, where the first A$10,638 dollars is tax free. And then A$5,320 dollars per year of service is also treated as tax free. So substantial payments can be received and, depending on the length of service, may not be taxed in Australia at all.  It does have to be redundancy. Accumulated leave and sick leave would be subject to tax in Australia. Over in Britain, the first £30,000 of redundancy is tax free.

It seems to me that we ought to be looking at this question of redundancy and whether, in fact, the rules are appropriate.  There’s going to be a lot of redundancy paid out over the next few months. We haven’t seen the full impact of the pandemic on employment yet. And therefore more people, sadly, will be losing their jobs. And at the moment, they’re going to get hit very hard with the tax on their redundancy and that’s going to cause some grievances.

As an aside, the treatment of lump sum payments under PAYE is a problem not just for redundancy. Retiring allowances are treated the same way. And most egregiously in my mind, are ACC payments. Sometimes people get in a dispute with ACC over the amount that’s due to them. When those disputes are resolved in their favour, then ACC may make several years of payments all at one go.  These are just simply treated as an extra pay and taxed as if it is the recipient’s normal income income.

What that might mean is say, for example, four years arrears at $20,000 a year or $80,000 might be taxed all at once,. The average tax rate which would apply on this payment is therefore much higher than would have applied if the person had received the payments when they should have done. This is a running sore in ACC, which again, governments have talked about changing but not followed through.

And finally, Inland Revenue is reporting a massive jump in the number of people applying to pay their tax off in instalments.

According to Inland Revenue, in March 2020, there are 104,443 payment instalment arrangements in place, compared with 41,014 in March 2019. The amount of tax that’s under instalment has gone from $659 million to $1.167 billion. I suspect this number will rise again in April.

Now Inland Revenue has been very proactive in accepting instalment arrangements, but it is a sign of the scale of what’s going on at the moment that so many more taxpayers are now under an instalment plan. It has doubled in one year. And possibly we may see it may have tripled once we see the April figures.

I’ve talked about instalment arrangements previously and what you need to do is get in front of Inland Revenue as quickly as possible. Explain what’s happening and give them a plan as to how you’re going to deal with it. Don’t put your head in the sand.

Just bear in mind that although at the moment Inland Revenue is being fairly generous about what is COVID-19 related or not, it may well take a second look at this. And that may mean that some people who were trying to set up instalment arrangements prior to the arrival of the virus may still be stuck with having to pay use of interest at 7% on the unpaid debt because it was a pre COVID-19 debt.

Whatever the case, the key thing in dealing with Inland Revenue is communication. Don’t put your head in the sand. Deal with the matter. You’ll find that at this stage, they’re responsive to requests.

Well, that’s it for this week. I’m Terry Baucher, and you can find this podcast on my www.baucher.tax  or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. Until next time, Kia Kaha, stay safe.

Inland Revenue releases a determination on payments to employees for working from home

4 May, 2020 | The Week in Tax

  • Inland Revenue releases a determination on payments to employees for working from home
  • COVID-19 tax measures legislation is introduced
  • Provisional tax is due 7th May

Transcript

This week, Inland Revenue releases a determination on payments to employees for working from home. The COVID-19 tax measures legislation is introduced and in case you forgot, Provisional tax is due Thursday 7 May.

A little earlier this month, I outlined the rules regarding employees claiming a deduction for home office expenditure, and I suggested that Inland Revenue should issue a ruling on the matter to help clarify the position. It was quite clear that many employees were unaware of the position. And likewise, employers were not sure of their own obligations.

Therefore, I’m very pleased to see that Inland Revenue has followed through and on Wednesday issued Determination EE002: Payments to employees- for working from home costs during the COVID-19 pandemic.

Now this Determination is described as a temporary response to the COVID-19 pandemic and applies to payments made for the period from 17th of March to 17th of September 2020.

What the Determination does is explain the rules that apply where employers have either made or intend to make payments to employees to reimburse costs incurred by their employees as a result of having to work from home during the pandemic. And it notes that realistically

…many employers will not be in a financial position to make additional payments to employees during the COVID-19 pandemic. This Determination is not intended to suggest that employers make such payments to employees.

The Determination explains only the employer can claim a deduction for such expenditure, but they can reimburse employees for their costs and such payments would be exempt income for the employee. It’s not binding on employees and employers who can work out their own allocations and allowances within the rules.

Critically, and very usefully, the Determination sets out the amounts Inland Revenue regards as acceptable. Under the Determination an employer who pays an allowance that covers general expenditure to an employee working from under because of the pandemic, can treat up to $15 per week of the amount as exempt income of the employee. And this amount applies on a pro-rata basis if the payment is made fortnightly i.e. $30 per fortnight or $65 per month if you make a single monthly payment. Anything above that $15 per week threshold, unless they can prove that the actual costs are higher, the excess would be taxable Income and subject to PAYE.

Additional payments can also be made for the cost of furniture and equipment, and that’s to recognise the fact that an employee might incur a depreciation loss on furniture and equipment used in a home office, which because of the employee limitation, they’re not allowed to claim that deduction.

The Determination actually offers two options: a safe harbour option in which an employer can pay up to $400 to an employee and it would be treated as exempt income. Alternatively, the employer can reimburse employees for the actual cost of furniture and equipment purchased for use in a home office.

The Determination also usefully summarises the impact of a previous Determination EE001 relating to telecommunication usage plan costs under which to $5 per week can be paid is exempt income if the plan is used for the job.  Otherwise, then you take an apportionment basis depending on the amount of business use involved.

Finally, the Determination sets out what evidence is needed to support the payments.  For the safe harbour option of $400 reimbursing for home office equipment and furniture, no evidence is required if that’s the only amount paid. In relation to the $15 per week for other expenditure (such as additional heating and power costs), again, no evidence is required. And similarly, for the telecommunications usage plan costs of $5 per week. In every other instance you would need to provide evidence or have evidence available to support the payment made.

Now this is a temporary measure, it was signed off on April 24th and released on April 29th and it only applies for payments between 17th March up until 17th September.  But it’s a good measure and helps clarify a position with a lot of uncertainty around it. Inland Revenue would have been working flat out behind the scenes on this one.

Moving on, the legislation for the tax and other COVID-19 related measures was introduced into Parliament on Thursday. Now, the tax part of this covers the temporary loss carry-back regime and also gives the Commissioner of Inland Revenue a temporary discretionary power to modify where appropriate due dates and timeframes or other procedural requirements under the various Inland Revenue acts.

The tax loss carry-back regime ad inserts a new section IZ 8 into the Income Tax Act 2007 and the legislation on this amounts to nearly 5 ½ pages, so it’s quite involved.  They’ve also put in an anti-avoidance provision, section GB 3B to counter any possible tax avoidance or abusive use of the loss carry-back measure.

As previously discussed, small businesses with a 31st March balance date are probably not going to really benefit from this scheme, but let’s wait and see. Obviously, if you’ve got a balance state, which is not to 31st March, say, for example, to 30th September 2020, this measure is more likely to be of greater use. So, it’s almost a question of suck it and see what we can do around that. But at least we now know the relevant legislation.

Intriguingly, some have suggested that maybe an alternative position might have been to have an extended income tax year or double tax year that is treat the period from 1st of April 219 through to 31st March 2021 as a single tax year. That’s an interesting response. I have seen something similar in the UK when a loss carry-back regime was introduced. How much use is made of it we’ll just have to wait and see.

The Commissioner of Inland Revenue has also been given a temporary discretionary power for the period from 17th March 2020 until 30th September 2021. These are included in new sections 6H and 6I of the Tax Administration Act 1994. Now those temporary sections may be extended in duration, but they give Inland Revenue the ability to do as we’ve discussed in recent weeks and extend the timelines for filing tax returns or clarify what are the COVID-19 implications for tax residency.

I still think we probably may finish up with some specific legislation on these issues, but at least Inland Revenue now has the tools it needs to respond quickly to issues as they arise.

Looking ahead to the Budget

What next? Well, the Budget is in two weeks on the 14th of May.  We may see some more tax measures but probably it will focus on Government spending, over the next four-year period and what measures it plans to apply to start paying for all of this. My understanding is that the long overdue income tax threshold changes I’ve previously suggested are now off the table. No doubt people will be making submissions behind the scenes on what they would like to see.

Intriguingly, the COVID-19 legislation released on Thursday included reference to a Small Business Cashflow Scheme which is to be administered by Inland Revenue. [As has been reported elsewhere this was a mistake although I was aware beforehand that something might be in the pipeline.] The scheme is probably a counter to complaints that small businesses have been making about the difficulties of accessing bank finance under the Business Guarantee Finance Scheme, which was announced a couple of weeks ago. We’ll soon see, and I’ll report further if there’s any interesting tax matters which come out of it.

Provisional tax is due

Finally, a reminder that the third instalment of Provisional tax for the March 2020 income tax year is due Thursday, 7th of May. Now, if you can pay that, you should do so. Hopefully, businesses will be in a position to do so as well those with regular sources of income, such as overseas pension schemes.

But if you can’t pay your provisional tax tell Inland Revenue quickly so that it will then apply the concession relating to use of money interest. And if you’ve got any issues around what you think your tax bill is going to be or how you’re going to manage it, get in touch with your tax agent or contact Inland Revenue directly through your myIR account and let them know what’s going on.

Latest guidance from Inland Revenue on Covid-19 tax measures

29 Apr, 2020 | The Week in Tax

  • Latest guidance from Inland Revenue on Covid-19 tax measures
  • Draft guidance from Inland Revenue on tax implications of owning overseas rental property and application of financial arrangements rules
  • DIA ruling on AML-CFT

Transcript.

This week, the latest from Inland Revenue on its response to the Covid-19 pandemic. Inland Revenue releases draft guidance for consultation on the tax implications of owning overseas rental property, and the Department of Internal Affairs isn’t really helping.

Inland Revenue has been releasing updates on its interpretation of various tax issues arising out of the Covid-19 pandemic. The latest release on Wednesday was a public statement regarding residency issues.

In a previous podcast I raised the question of what is going to happen to people who may inadvertently become tax resident of New Zealand either because they fell sick or were unable to leave when they intended to because of border closures. Subsequently, they then become tax resident under the days present test, that is they’ve been present in New Zealand for more than 183 days in any twelve-month period.

In this instance what the Inland Revenue guidance says is that an individual will not become tax resident in New Zealand under the days present test just because they become stranded here. They will be treated as non-resident if they leave New Zealand within a “reasonable time after they are no longer practically restricted in travelling.  Then extra days when that person was unable to leave will be disregarded. The day tests are based on normal circumstances when people are free to move.”

Now this is good to hear. But I’d feel more comfortable advising clients on this if we had some form of statutory basis to this interpretation. As it stands this is at Inland Revenue’s discretion. And I do know of pre-Covid-19 instances where a person has been deemed to be tax resident even though they fell sick and were unable to travel. In my view there’s no difference between not being able to travel because of the Covid-19 pandemic and the resulting travel restrictions around that, and not being able to travel because you’re physically sick.

The United Kingdom has a specific clause in its legislation excluding days where someone is not able to travel because of sickness or ill health, either of themselves or of a relative.  I think it would ensure future clarity if a similar provision was actually legislated for, maybe later on in the year. But anyway, as a temporary measure, it’s good to see the Inland Revenue has taken this approach.

Next week we should see the legislation relating to the loss carry-back provisions. The general consensus forming around small business advisers and fellow tax agents is that although it’s a measure which is useful in the long term, right now because of the timing of how everything has happened, it’s probably not terribly significant for a lot of small businesses.

That said, people are considering tweaks to make it more user friendly for small businesses. One of the issues that’s being addressed during consultation with Inland Revenue, which is going on at the moment, is about possibly allowing shareholder-employee salaries to be reduced too.

At present if a shareholder has an overdrawn current account, i.e owes the company money, then interest of 5.77% is chargeable on the overdrawn balance.  The problem is, revising the shareholder-employee salary to utilise the loss carry-back rules may worsen the shareholder current account balance. So people have been suggesting if some sort of a workaround could be introduced to resolve that matter. We’ll see what comes out when the legislation is released on Tuesday or Wednesday next week.

Moving on, the normal everyday compliance matters and consultation programme for Inland Revenue still continue to run along, even though right now Inland Revenue policy resources are very much focused on producing answers to the Covid-19 pandemic. And so it’s easy to have overlooked a couple of draft Interpretation Statements which were released just before the country went into lockdown.

The first of these is an Interpretation Statement on tax issues arising from the ownership of overseas rental property. The Interpretation Statement begins with a reminder that New Zealand tax residents are taxed on their worldwide income and gives a quick overview of the residency rules.  It outlines the New Zealand principles about recognition of income and expenditure as these rules may differ from an overseas country. It goes on to explain what you can do if you are required to prepare tax returns in an overseas to jurisdiction to a balance date other than 31 March and how to calculate the conversion of foreign income into New Zealand dollars.

Apart from covering overseas rental income and income from the sale of the property, the Interpretation Statement also explains the very often frequently overlooked and horrendously complicated financial arrangement rules.  These relate to the foreign currency gains on a mortgage that may be taken out to purchase an overseas rental property.

Finally, the Interpretation Statement also covers off a taxpayer’s entitlement to foreign tax credits and the application of double tax agreements. Overall, it’s a very comprehensive document.  Submissions are due by the end of the month but given current circumstances, Inland Revenue will take submissions past that date.

A related Interpretation Statement has been issued on the application of the financial arrangements rules to foreign currency loans used to finance overseas rental property.

Regular readers will know that I have discussed these from time to time. These basically are the quantum physics of New Zealand tax. They are mind numbingly complicated and frankly were not, in my view, really intended to apply to Mum and Dad investors with an overseas property.

The Interpretation Statement itself goes into quite a bit of detail about the financial arrangement rules, which as I said previously, are horrendously complicated.  It also discusses applying some of the Determinations that Inland Revenue has issued to help interpret the application of the financial arrangements rules.

The Determinations are themselves very complicated and in many cases, some of these Determinations have not been revised to take effect of the updates to the Income Tax Act.  In fact, if you read some Determinations, they still refer to the Income Tax Act 1976, i.e. they go back to when the financial arrangements legislation was first introduced in the mid-80’s. It really is odd that such complicated provisions should apply to Mum and Dad investors.

One way that this could be resolved would be to raise the thresholds around the application of the rules and maybe rethink the policy intent and application. Who exactly should be covered by the financial arrangements rules and consequently face a quite hefty compliance burden?  The rules often result in an irony in some cases, where for New Zealand tax purposes, the sale of the property should not be taxable, but the redemption of the mortgage may trigger taxable income.

And finally, from the “You really aren’t helping” files, a ruling from the Ministry of Justice and the Department of Internal Affairs relating to their administration of the Anti-Money Laundering and Countering Financing of Terrorism Act.

A matter of interpretation for some time was whether the use of tax pooling arrangements such as those made through companies such as Tax Management New Zealand would be subject to these rules.

Apparently on April 20th, the Ministry of Justice advised the Chartered Accountants Australia and New Zealand that it would deny an application for an the exemption because there was a “medium risk” of money laundering and terrorism financing being associated with tax transfers.

I really cannot express how mind numbingly exasperating this decision is. It’s going to affect a lot of taxpayers going forward. As a result of what’s going on right now with the Covid-19 pandemic  tax transfers are going to become quite important. So basically, we have Inland Revenue doing its best to try and make matters as easy as possible and the Government’s general policy trying to assist taxpayers through this pandemic.

And then we have the Ministry of Justice and the Department of Internal Affairs taking a very juristic approach to the matter and completely contrary to the wider policy going on. I really can’t express how frustrating this decision is. This was something that really should have been sorted out way, way before. Accountants have been subject to the AML legislation since 1st of October 2018, and 18 months on we are only just getting a decision like this.

I said way back that I thought the DIA and the Police Financial Intelligence Units were under-resourced. I consider the whole AML approach was needlessly bureaucratic with a lot of duplication and frankly, probably not really achieving very much. And in a nutshell, this decision actually exemplifies all those points.

Anyway, that’s it for this week. I’m Terry Baucher and you can find his podcast on my website. www.baucher.tax or wherever you get your podcasts, please send me your feedback and tell your friends and clients. And until next time Kia Kaha stay strong and be kind.