20 Apr, 2020 | The Week in Tax
- New temporary loss carry-back regime – will it help small businesses?
- The inherent flaw in the foreign investment fund regime; and
- The rules around claiming deductions for working at home
Transcript
In today’s podcast, will the latest government tax measures help small businesses? The inherent flaw in the foreign investment fund regime. And we look at claiming deductions for working at home.
The temporary loss carry-back scheme announced by the Government last Wednesday was one of the most significant tax measures yet.
It enables businesses that were expecting to make a loss in either the 19/20 income year or the 20/21 income year to estimate the loss and use it to offset profits in the previous tax year. In other words, they could carry the loss back one year.
Now, this is a measure I’ve seen before and used when I was working in the United Kingdom. That measure was introduced in the wake of a fairly severe recession in the late 80s, early 90s. It’s a promising measure which is expected to cost up to about $3.1 billion over a two-year period.
However, my tax agent colleagues are concerned that we’ve only just ended the year end 31 March 2020. And right up until 1st March, everything was running reasonably smoothly before the effects of Covid-19 landed with a big thump. Companies with a standard balance date of 31st March 2020 won’t actually have been significantly affected by the Covid-19 pandemic, but it’s quite likely that in the year to 31 March 2021 they will be.
The issue we have is that that’s a long way out to be predicting losses. And what if we get those estimates wrong? The position is that use of money interest would still apply. Although the temptation would be to make a guess at an estimated loss for the coming financial year and then carry that back to the 2020 tax year, it comes with the caveat that use of money interest – currently 8.35% – will apply on any underpaid tax. It’s a very much a dual-edged sword.
So, the main concern that my colleagues have about the loss carry-back proposal is that it’s really not terribly helpful for small businesses that have a standard 31 March balance date because they’re being asked to predict too far ahead and with too many variables.
The better option is, as I’ve said previously, would be to postpone or cancel the 7 May provisional tax payment coming up, let things settle down a bit and then work forward from that.
The loss carry-back measure is going to be introduced as a permanent feature with effect from the start of the 2021/2022 income year and the Government will take consultation later this year on the proposal. It is a measure that I’ve thought for some time would be useful.
The problem is its timing is not terribly convenient for many small businesses right now. And this points to a dichotomy in our tax legislation and tax policy.
The majority of taxpayers and small businesses prepare their financial statements, their tax returns to 31 March. But the majority of provisional tax, however, is paid by bigger companies, and many of those have different balance dates. The Government SOEs have a 30 June balance date and then overseas companies might have a 31 December or 30 September balance date.
Now, if you’ve got a 31 December balance date, you’ve got to wait a bit of time ahead, but you’ll probably get a better handle on what’s going to be happening. That’s even truer of those with a 30 September balance date because this has happened halfway through their tax year.
So larger businesses are probably going to be the primary beneficiaries of this measure. It’s not to say it’s of little use to small businesses. It’s just that they’re going to need to proceed with caution because the use of money interest provisions will apply.
I think that this measure will need to be fine-tuned. As I said earlier, I do wonder whether it might just be easier to simply say forget about paying provisional tax on 7 May.
Alternatively, maybe do as the Canadians have done. They’ve introduced a measure where a business can borrow up to 40,000 Canadian dollars from the Government, and if they repay it by 31 December 2022, 25% of the amount borrowed will be written off. Such a measure will help companies with their cash flow, which is the critical matter for small business at the moment.
But still this loss carry-back measure is going to be of use. It’s something that will become part of the tax landscape and we should never look a gift horse in the mouth.
There’s a couple of other things the Government measures announced as well, which are also important for small businesses. One is the changes to tax loss continuity rules.
Currently, if you have a tax loss and you want to continue to carry forward that loss, you must maintain 49% of the same shareholders, what we call the shareholder continuity rule. What has been an issue for some time for growing businesses is that a significant investor wants to come onboard and they want to have more than 51% of the company, maybe a 60- 70% stake. If they do that, then under the current rules, the losses accumulated to that point are forfeited.
This is something we in the Small Business Council recommended be reviewed. It’s therefore good to see this proposal. With effect from this income year – 1 April for most people – if you can show that you’re continuing to carry on a same or similar business as that prior to the change of shareholding, you can continue to carry forward losses. This is a test modelled on what happens in Australia. It’s a welcome move for fast growing companies who want to attract capital but don’t want to lose the value of the tax losses.
The other tax measure announced gives Inland Revenue discretion to temporarily change due dates and other procedural requirements outlined in the various Inland Revenue acts. This is for businesses and individuals affected by Covid-19. This will enable Inland Revenue to extend the filing date for elections and filing tax returns or defer the due date for payment of tax.
This is a good move. It gives Inland Revenue flexibility, which it probably should’ve always had, but it never really managed to see a need for such a measure beforehand. That said, I still think there’s one or two other things that legislative changes will be needed around. For example, accidental overstayers becoming tax resident. But on the whole, this proposal is a good move, and we’ll look forward to seeing that in operation very quickly.
KiwiSaver and the Foreign Investment Fund regime rules
Moving on, the foreign investment fund regime was introduced with effect from 1 April 2007. Those who know this rule should also know it applies to KiwiSaver account holders if their KiwiSaver fund is invested overseas.
Basically, the rules say that for KiwiSaver funds, the income to be determined is calculated using what is called a fair dividend rate, that is 5% of the portfolio’s opening market value at the start of the tax year.
Now for individuals, they have the option to take the actual accrued gains/losses over the tax year. And that means that when there was a significant fall in the markets, individuals are protected against that and don’t have to pay tax on a portfolio which has just suddenly depreciated in value.
But unfortunately for KiwiSaver accounts, they don’t have an alternative. And this is also a big problem for the New Zealand Superannuation Fund, the country’s largest taxpayer, because it has a huge portfolio of overseas investments.
Now, the FIF regime has been in place, as I said, for 13 years now. And Covid-19 is the second such financial crisis to have hit financial markets since the regime was introduced. The flaw in the regime is it’s predicated on markets continually going up or being stable.
Events such as we are seeing right now and in the Global Financial Crisis are anomalies which the FIF regime really doesn’t manage well. Particularly if portfolios are significantly devalued for a period of time to come, and if you look at the overall economic return, sometimes too much tax will be paid.
The Tax Working Group recommended reviewing the 5% fair dividend rate and possibly reducing it perhaps to maybe 3 or 4%. And I think that’s something the Government really need to look at. But – there’s always a but – it’s going to need the revenue going forward. So, whether in fact that measure, which I believe is needed and the Tax Working Group recommended, will actually come to pass, we’ll have to wait and see.
Home office deductions
And finally, many listeners and readers will be working from home and will continue to do so when we go to alert Level 3. So what are the rules around claiming expenses for working from home? Well, I did an article on this. The basic rules are as an employee, you can’t claim a deduction.
Instead you are able to be reimbursed by your employer who can make a reasonable estimate of the amount that you should be claiming based on a number of factors such as area of the place you’re working in – your home office – rates, power, Internet usage, etc. A reimbursement based on this is tax free to the employee and deductible to the employer.
If the employer decides to simply pay a flat rate, it might in fact be more than what is actually a reasonable calculation of expenses. Instead, PAYE will apply.
What was interesting to see about that article was the reaction to it – several employers are applying the rules clearly. Others are completely oblivious to it, and others are simply ignoring the fact that their employees have an expense and are just simply expecting them to bear the costs. It will be interesting to see how this shakes down. All employers will need to be looking at this matter and determining some form of allowance to help their employees.
Well, that’s it for this week. Thank you for listening. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you find your podcasts. Please send me your feedback and tell your friends and clients. Until next time Kia Kaha. Stay strong and be kind.
14 Apr, 2020 | Tax News
Are extra expenses and use of personal assets to work from home deductible against your taxable income? As usual with tax, its complicated.
We’re in week three of the Lockdown, and although the Prime Minister has indicated there may be a possible shift to Level 3 from 22nd April, a majority of employees may still be required to work from home even after that shift.
Naturally, employees will be incurring expenses in carrying out their employment duties. And the question arises, can they claim a deduction for these expenses? And the short answer is no. The Income Tax Act specifically precludes a deduction for “An amount of expenditure or loss to the extent to which it is incurred in deriving income from employment. This rule is called the employment limitation.”
This is a longstanding prohibition which has been in place since the mid-1990s. It was introduced as part of a simplification of tax return filing requirements. Instead, what is to happen is that the employer needs to reimburse employees for such expenditure. The employer will be given a deduction for the relevant expenditure and it will be treated as exempt income of the employee.
But what potentially could be deductible? The Inland Revenue guidelines for businesses with home offices are equally applicable for employees working remotely.
These guidelines allow a deduction of 50% for the rental of a telephone line, if it is also a private line which is used for business. Obviously specific business calls would be deductible. With regard to Internet costs this depends on the plan and the business proportion. How that is determined is a matter of some judgement. In addition to these costs, the business proportion of household expenses such as rates, power, rent or mortgage interest expense could be claimed.
Generally, the business proportion is calculated as the area set aside for use as an office over the total area of the house. For example, if an employee has an office which is say, 10 square metres of a 100 square metre house, then the deductible proportion is 10%.
There’s an alternative option of using a fixed rate as determined by Inland Revenue based on the average cost of utilities per square meter of housing for an average New Zealand household and applying it per square metre of the office area.
For the 2018-19 income year the rate was $41.70 per square metre so in the example above the deduction would be $41.70 x 10 or $417. It does not include the costs of mortgage interest rates or rent and rates. These must be calculated based on the percentage of floor area used for business purposes.
All of the above is perhaps easy enough where a person has a dedicated office at home, but as no doubt is happening all over New Zealand right now, employees are working on kitchen tops, dinner tables and out of bedrooms. What happens in these instances?
As the area being used cannot be said to be entirely dedicated to office use, a full deduction based on these apportionments is probably not available. The area of the room used for non-business purposes for example a bed or other furniture should be excluded. Arguably the deduction would be time-limited (for example, if it was only in office use for 8 hours a day, then only one-third could be claimed).
For the employer, they may be able to claim GST on the relevant proportion of GST expenditure claimed using the standard apportionment methodology, if the employee provides invoices. At this point the employer is probably thinking this is getting needlessly complicated.
A more practical approach would be for the employer to simply pay a flat rate allowance to employees. This is allowable if the allowance is based on a “reasonable estimate”.
The other potential issue is fringe benefit tax. Theoretically, FBT applies on the private use of tools such as mobile phones and laptops. Fortunately, there is an FBT exemption if the laptop or mobile phone is provided mainly for business use and the cost of those laptops and mobile phones is no more than $5,000 including GST.
All of the above represents a compliance nightmare for employee employers and possibly a target rich environment for Inland Revenue in a future date where it considers that the allowances paid, or deductions claimed for home office expenditure, have been excessive. In this instance the employer will be liable for the PAYE which should have been deducted from the amount determined to be excessive/non-deductible.
In practical terms, Inland Revenue might simplify clarify a lot of issues for employers and employees alike by issuing a determination setting out a flat rate amount of expenditure it would consider acceptable. An employer could pay above that amount but then PAYE would be applicable.
Of course, all of the above is somewhat hypothetical, if the employer has no cash flow to pay any such allowances. I suspect that is the matter employers are most concerned about right now. In the meantime, let’s hope we can return to a new normality soon.
This article was first published on www.interest.co.nz
14 Apr, 2020 | The Week in Tax
- More on Inland Revenue’s criteria for relief as a result of the COVID-19 Pandemic
- The fringe benefit tax lesson from David Clark’s misadventures
- The pros and cons of a Financial Transactions Tax
Transcript
This week, Inland Revenue has been updating its guidance as to the measures that have been introduced by the Government to help in the short term and longer term with the response to the Covid-19 pandemic.
In particular, Inland Revenue has given more guidance about what its position is around the remission of late filing penalties and use of money interest for tax that is paid late.
The position that has been set out and circulated in some detail to tax agents is as follows. In order to be eligible for remittance, customers – that deathly phrase – must meet the following criteria. They have tax that is due on or after 14 February 2020, and their ability to pay by the due date – either physically or financially – has been significantly affected by Covid-19.
They will be expected to contact the Commissioner “as soon as practicable” to request relief and will also be required to pay the outstanding tax as soon as practicable.
As to what “significantly affected” means, Inland Revenue’s view is this is where their income or revenue has been reduced as a consequence of Covid-19, and as a result of that reduction in income or revenue, the person is unable to pay their taxes in full and on time.
Now a couple of things to think about here.
“As soon as practicable” will be determined on the facts of each case according to Inland Revenue. So that as long as the taxpayer applies at the earliest opportunity and then agrees to an arrangement that will see the outstanding tax paid at the earliest opportunity or be paid over the most reasonable period given their specific circumstances, then that test will be met.
However, what you also need to know is that this is very much on a case by case basis, so that if Inland Revenue thinks you’re trying to pull a fast one, they will deny remission and you will be up for the late filing penalties and use of money interest.
Now, in terms of applying for remission of use of money interest, Inland Revenue is saying it would try and minimise the amount of information it normally asks to be provided, accepting that these are unusual times. But they want people to continue to file their GST returns. So in other words, you may not be able to pay your GST on the regular time, but you should still file it, so that gives them information as to what’s going on.
Obviously, if things have really dived into a hole for a taxpayer, filing a GST return may be a means of getting a refund. Although if you owe tax to the Inland Revenue, that would simply be swallowed up and applied to any arrears.
But in terms of information, Inland Revenue are saying they would expect to see at least three months of bank statements and a credit card statement, any management accounting information and a list of aged creditors and debtors. Inland Revenue goes on, we may not ask for that all that information in every case, but it should be available if we do ask for it.
For businesses, they will be looking to see and to understand what your plan is to sustain your business. You may not be able to get all that information to them; they’ll work around that. So, they’re clearly trying to be as flexible as possible.
Obviously some people were already in trouble before 14 February, so they can ask to renegotiate their existing instalment arrangement with Inland Revenue. Very simply,what will happen is that you enter into an arrangement with Inland Revenue that you’re going to pay X amount at a regular time to meet your liabilities. Inland Revenue have said in some cases they will accept a deferred payment start date.
They may partially write off some of the debt because of serious hardship but expect the remainder to be met by instalment or a lump sum. They may also even write it off completely due to serious hardship. It’s all going to be done on a case by case basis. So that’s the most important takeaway.
Inland Revenue’s communications around remission of late payment penalties and use of money interest are a little confusing, in that it seems to say that anyone paying late will be able to get remission of use of money interest on late payment penalties. That is not the case. It must be Covid-19 related and you must demonstrate that.
As it is being done on a case by case basis, be aware that if you don’t meet the standards that Inland Revenue are expecting to see, they won’t grant you the remission. So that’s the key take away at the moment.
Now, in previous podcasts I have raised the possibility of the 7th May provisional tax and GST payments being postponed. The problem is that Inland Revenue doesn’t have the authority to do that, even though it sounds like a great idea. With Parliament essentially in recess, it’s not something that can be done quickly either. So that’s probably something that longer-term legislation may need to be introduced to give Inland Revenue the flexibility to deal with unexpected events.
It probably felt it had enough flexibility to manage the situation in the wake of the Canterbury earthquakes, but as this Covid-19 pandemic has shown, when it happens nationally, not just regionally, then extra powers or extra flexibility may need to be granted statutorily.
A quick note on Inland Revenue. Remember that it is closing all online and telephone services and their offices as of 3p.m. today. This is to finalise Release Four of their Business Transformation Program. As I said in last week’s podcast, I agree they should continue to do this. They’ve probably put a lot of work in place beforehand, and it’s going to be more disruptive for them to postpone it. So at a time when productivity does fall away a little bit – it’s after the 31 March year end and it’s around Easter – this is as good a time as they’ll ever get to do it. Services will be back up and running from 8a.m. next Thursday.
Just a final quick note on that – remember, if you’ve got a return or e-file in draft or any draft messages in your MyIR account, those will be deleted. So you should complete and submit them before 3p.m. today.
FBT surveillance
Moving on, there’s a useful little tax lesson from David Clark’s – the Minister of Health – misadventures, and it’s in relation to the photograph that’s been widely circulated of his van sitting isolated in a mountain bike park.
We’re going to see more of Inland Revenue going through social media and picking up signage on vehicles and then matching that signage to its records about fringe benefit tax.
What happened there, someone obviously saw David Clark’s van which had his name and face written all over it and passed it on to a journalist and the story ran from there.
That already happens to some extent with Inland Revenue already looking at people’s use of work-related vehicles. In particular, the twin cab use, which I’ve mentioned before, is something that I know Inland Revenue is now starting to look more closely at in terms of FBT compliance.
You get chatting to Inland Revenue officials and investigators and they’ll have some great stories about how taxpayers have accidentally dobbed themselves in by driving their work-related vehicle towing their boat to, say, a wharf opposite the Inland Revenue office in Gisborne was one story I heard.
So David Clark’s misadventures should be a highlight that if you’ve got a sign written vehicle and you are claiming a work related vehicle exemption, don’t be surprised if Inland Revenue starts matching up your Facebook profile, for example, with your FBT returns and asks questions. This is part of the brave new tax world we live in and is something we will see a lot more of.
Financial transactions tax
Finally for this week, I mentioned in last week’s podcast I did a Top Five on what I saw as the possible future tax trends post Covid-19. One of the things I talked about was greater use of artificial intelligence and data mining and information sharing by Inland Revenue – just referencing back to my previous comment by David Clark and FBT.
I also discussed the likelihood of new taxes coming in. And one of the taxes I commented on was a financial transactions tax and that perhaps that it’s time might come.
But the drawback, as I saw it for a financial transactions tax, is that it needs to be applied globally. And one of the readers asked the following question
“Why does a FTT need to be universal? In the context of your article, I read global as meaning why can’t the New Zealand government apply for all transactions in New Zealand, especially for money leaving the country?”
It’s a good question and so I dug around a bit more on the topic. A financial transactions tax sometimes also called a Tobin tax after the economist who first mooted it, is a tax on the purchase, sale or transfer of financial instruments.
So as the Tax Working Group’s interim report said, a financial transactions tax or FTT could be considered a tax on consumption of financial services.
And FTTs have been thought of as an answer to what is seen as excessive activity in the financial services industry such as swaps and the myriad of very complex financial instruments. Some people consider many of these as just driving purely speculative behaviour and a FTT could be something that would actually help smooth some of the wild fluctuations we sometimes see in the financial markets.
Now, the Tax Working Group’s interim report thought the revenue potential of a financial transactions tax in New Zealand was likely to be limited “due to the ease with which the tax could be avoided by relocating activity to Australian financial markets.”
And this is what I meant by saying a FTT had to apply globally. If you’re going to have a financial transactions tax, you need to have it as widely spread as possible across as many jurisdictions. Otherwise, you’ll get displacement activity.
Now, it so happens I’m looking at Thomas Piketty’s Capital in the Twenty First Century, and he had an interesting point to make about a FTT. And that is that it is actually a behavioural tax, because, as he has put it, its purpose is to dry up its source. In other words, think of it like a tobacco tax. The intention there is not just to raise revenue, its primary function is to discourage smoking.
So a financial transactions tax has the same effect. It drives down behaviour that you don’t want while raising money. But the fact it is driving down transactions means that its role as a significant producer of income for the Government is limited.
Piketty suggests its likely revenue could be little more than 0.5 percent of GDP. The European Union when it was considering a FTT of 0.1% thought it might raise the equivalent of somewhere between 0.4% and 0.5% percent of GDP. (about EUR 30-35 billion annually in 2013 Euros). 0.5% of GDP in a New Zealand context would be maybe $1.5 billion. Not to be ignored, but still not a hugely significant tax.
The other issue that the Tax Working Group were concerned about – and I think this is something that we really want to think about in the wider non-tax context – is that any relocation to Australia, for example, would reduce the size of New Zealand capital markets.
And I think this is a long-term structural issue in the New Zealand economy we ought to be considering more seriously – in the wake of what comes out of the initial response when Covid-19 pandemic ends, how the economy looks going forward. This will be one of the issues to look at.
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. Please send me your feedback and tell your friends and clients until next time. Happy Easter and stay safe and be kind. Kia Kaha.
6 Apr, 2020 | The Week in Tax
- More on Inland Revenue’s response to COVID-19
- Inland Revenue is closing down next week
- How might COVID-19 affect tax in the future?
Transcript
In today’s article, more on Inland Revenue’s response to the Covid-19 pandemic. Inland Revenue is closing down, but only temporarily, and what lies ahead in the tax world.
Inland Revenue grudging guidance on late filed tax returns
This week has been the first full week of the lockdown. So, we’re all settling down into some sort of routine and Inland Revenue has provided further guidance around the application of the time bar rule and its right to review tax returns after they have been filed.
The guidance that has been issued has not, as I had hoped last week, given a blanket extension of time for filing the March 2019 tax returns, which were due by March 31st. Instead they set aside some criteria where in four years time Inland Revenue might be considering a review of a tax return and the scenario where it would not do so because the return had been filed late as a result of the 2020 Covid-19 Pandemic. Basically, these rules will apply if the return was due before 31 March, but instead is filed by 31 May.
The criteria are relatively specific in that if in four years time, 31 March 2024, Inland Revenue will close any review or compliance activity for any March 2019 tax return, which was filed after 31 March 2020, but before 31 May 2020, has no other exclusions from the standard time bar rule, that is, there’s no fraud or willful omission or income which should’ve been declared has been omitted. There’s no dispute going on, it does not involve tax avoidance, and doesn’t have tax in dispute of greater than $200 million. A very specific set of criteria there. I can tell you that that last one is rather redundant because anyone who was dealing with a tax
return of that size would have made damn sure it was filed by 31st March so there was never any issue around the time bar applying.
This concession does read a little like the sign in a bar which says credit will only be extended to anyone over 85 who is accompanied by both their parents. I find it rather grudging. I think it just stores up issues for arguments three or four years down the track, which are unnecessary.
This is a highly unusual situation. Inland Revenue has rather glided right past the fact that we have been ordered to shut down by the government. For a government agency to still be insisting that filing deadlines should be continued to be met as if nothing was happening, is frankly a little unrealistic.
I’d still like Inland Revenue to come out and give a flat concession, saying that they would extend the basic times for filing elections and tax returns to, say, 30th April, if not as far as 31st May.
Just as an aside, I noticed that for large multinationals, they are required to file a Basic Compliance Package and Inland Revenue, in the same notification I just referred to – talking about late filing dates – told the multinationals that a decision has been made to extend the timeframe for filing Basic Compliance Package to 30th June 2020.
I’m trying to understand why it is that small businesses get no such concessions when we’re not always as well resourced, while larger multinational organisations who have access to the best tax advice, get a three-month extension of time. That’s a sort of left hand not talking to the right hand and not thinking about what they’re doing.
Thinking of rorting the wage subsidy – don’t
There has been quite a lot of discussion amongst tax agents about the wage subsidies and eligibility for the wage subsidy, which does apply to shareholder employees and also to independent contractors. But several agents in discussions have been wondering whether, in fact, some of the applications they’re receiving, are shall we say, gilding the lily.
This scheme is quite generous, it is designed to help everyone through the Pandemic and there’s no doubt that everyone has taken a massive hit to their business. It could be accused of being overgenerous, but that said, I would caution people about trying to push the boundaries on this one. I think the general backlash against businesses that are seen to have rorted this system will be quite strong. And the Finance Minister made it clear that people who made false declarations would be prosecuted.
Use of money interest and late payments
We’ve still not heard anything about a reduction in the use of money interest rates. Rather amusingly, an article in the April edition of the Tax Information Bulletin noted that an Order in Council has been made to ensure that the Commissioner’s use of money interest paying rate cannot be set at a negative rate. In other words, they had to pay something. Rather redundant in the current circumstances.
The position is that Inland Revenue has said that it will be effectively wiping interest and penalties. But these are only on Covid related circumstances that caused the late payment, and it has essentially reserved itself the right to look at everything on a case by case basis. Again, we’re still waiting to hear if they’re going to delay the 7 May provisional tax and GST payments, something I think should be done as a matter of course.
Inland Revenue shutdown for Release Four
Moving on, Inland Revenue is about to close for seven days, from 3pm next Thursday 9th April, and will reopen on 8am, Thursday 16th April.
This is part of Release Four of its Business Transformation programme.
It’s a good time for it to be done over Easter. This was well planned in advance and will probably take the strain off their systems because clearly Inland Revenue is still trying to sort out the working remotely thing out, as we all are.
A few things to note about the Inland Revenue shutdown is that the MyIR online services will also be unavailable, as well as the offices being shut, the phone lines will be closed. And there is something else. If you’re thinking about filing your tax return in early because you think you’re due a refund, you should make sure you have filed it by 3pm on 9th April. Otherwise if you have a return or e-file in draft or any draft messages in a myIR account, these will be deleted as part of the upgrade. So, if you’re filing returns, or sending messages through the MyIR portal, get it done before Thursday.
What lies ahead – the future of tax
And finally, what lies ahead in the tax world as a result of the Covid-19 pandemic? Well, my Top Five looks at the fallout of the Covid-19 pandemic. I put forward five tax changes I think we will see over the coming years. Here’s a quick teaser.
I think in the short term, tax rates will rise. We will see the re-emergence of a very strong debate over the taxation of capital. And that means capital gains tax will be back on the table. Environmental taxes will rise in importance. The corporate tax rate around the world will rise and the OECD BEPS initiatives will come through very quickly. And finally, the power and reach of tax authorities will increase – the stuff we see with FATCA and the Common Reporting Standards – we’re going to see more of that.
Here’s the whole article.
So 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. Please send me your feedback and tell your friends and clients. Until next time, Kia Kaha, stay strong.
3 Apr, 2020 | Tax News
When a post COVID-19 world dawns, there’ll be plenty of options for new taxes. Photo: Terry Baucher.
Terry Baucher on rising tax rates, the taxation of capital, environmental taxes, a rising corporate tax take and increasing power and reach of tax authorities
1) In the short-term tax rates will rise.
The initial shock to government balance sheets is enormous. To compound the problem, many governments are still recovering from the effect of the Global Financial Crisis in 2008. Here in New Zealand, the Government’s books were in good order coming into this crisis. But with projections of a potential doubling of net government debt in a matter of months the Government’s finances will undoubtedly come under strain.
In case you missed it, not only will there be a huge hole in the Government’s books as a result of this pandemic, but the inexorably rising cost of New Zealand superannuation remains. As is the not so small matter of responding to climate change. Remember, it was barely three months ago that smoke from Australia was affecting our atmosphere here.
The tax system was going to have to change to adapt to those two issues, and those changes will accelerate in the wake of the COVID-19 pandemic. The first sign of how those issues will be addressed will be in next month’s Budget.
My guess is that next month’s Budget was going to include an adjustment of the tax thresholds probably targeted, as the Tax Working Group recommended, at low to middle income earners. I think that will still happen because putting money in people’s pockets in a recession would be a reasonable measure at this stage. It will however, be the last such adjustment for quite some time.
Medium-term, maybe within a couple of years, personal income tax rates are likely to rise, at least for high earners. It’s worth keeping in mind that the top individual tax rates in those countries we compare ourselves with, are several percentage points higher than New Zealand. In Australia and the United Kingdom, it’s 45%, the United States top rate is 37% and across the EU-28 it averages 39.4% with Sweden and Denmark the highest at 55%. A move higher seems inevitable, if not back to the 39% rate which prevailed between 2000 and 2009.
During the 1970s and early 1980s the Robert Muldoon led National Government responded to a series of economic shocks with several ad-hoc measures. These were increasingly ineffective and were swept away during the reforms of the 1984-1993 period. However, desperate times call for desperate measures and Grant Robertson or his successor might be tempted to follow the overseas examples of special levies.
For example, in 2011 the United Kingdom introduced an annual charge on certain balance sheet liabilities and equity of banks. In 2017 Australia introduced a similar levy essentially only applicable to the four largest trading banks.
Australia also had a Budget Repair Levy of 2% on incomes over A$180,000 between 1 July 2014 and 30 June 2017. It was replaced by a permanent increase in the Medicare Levy to 2.5% for those with income over A$180,000.
Separate from special levies, the ugly combination of the inexorably rising cost of New Zealand Superannuation, a significantly damaged economy and weaker government finances, means the continued universality of New Zealand Superannuation will be increasingly debated.
Options might include means testing, or a reintroduction of the deeply unpopular New Zealand Superannuation Surcharge, which applied in the 1990s. An alternative to these might be the proposal made by Susan St. John, for a special tax to apply to recipients of New Zealand superannuation who are earning above a certain threshold. This proposal at least has the merit of fitting in with the principles of a progressive tax system as it targets those whose income indicates that they are not really in ‘need’ of New Zealand Superannuation.
One other possibility might be to increase the GST rate, and barely three weeks ago Simon Bridges did not completely discount the option of doing so.
However, the TWG noted that GST is seen as a regressive tax for low-income earners. It’s also worth noting that increasing the rate of tax for a consumption tax such as GST could slow down spending, which is contrary to what’s going to be required in order to help restart the economy.
Instead what may happen over the medium-term is that GST may be extended to apply to financial services, something the TWG recommended be investigated. This could happen in the wake of overseas changes in this area. Globally I expect to see a fierce debate emerge on the matter of expanding the ambit of GST, with countries looking to withdraw or tighten current exemptions around food and financial services.
2. The taxation of capital.
Aside from short-term measures a longer-term implication will be increasing the tax on capital. This will also be a global issue.
Inevitably, here in New Zealand that will mean the reignition of the debate over whether New Zealand should introduce a comprehensive capital gains tax. That’s already begun with former Prime Minister Bill English raising the possibility in a briefing to private investors.
In the short term I suggest the answer will still be “no” for the simple reason it would do enormous damage to the Prime Minister’s reputation (and re-election hopes) for her to repudiate what she said little under a year ago that there would be no CGT while she was leader of the Labour Party.
Putting that aside, we can expect Inland Revenue to ramp up its enforcement of property disposals. It’s even possible New Zealand First might be persuaded to abandon its opposition to making all residential property investment subject to a CGT.
One of the key drawbacks to CGT is that it is a transactional tax – the tax only arises on disposal. If people aren’t buying and selling, no tax rises and there’s always been great concern about what they call the ‘lock in’ effect of a CGT. That is, people will not sell because they do not wish to trigger a tax liability. This means CGT revenues can be either a feast or a famine for governments who prefer more regular tax streams such as PAYE and GST.
Given the politics around CGT other alternatives may be considered. Globally, the idea of a wealth tax has been gathering momentum since Thomas Piketty raised the idea in his monumental work Capital in the 21st Century. A wealth tax is part of Senator Bernie Sanders’ platform. Here in New Zealand, the TWG dismissed a wealth tax as “a complex form of taxation that is likely to reduce the integrity of the tax system.”
Re-examining the role of a wealth tax in the wake of the COVID-19 pandemic seems likely. The 5% fair dividend rate applying as part of the foreign investment fund regime is a de-facto wealth tax which could be adapted for this purpose (although at a much lower percentage, maybe a maximum of 2% as Piketty suggests). The fair dividend rate had its origins in the suggestion of the MacLeod Tax Working Group in 2001 of a applying risk-free rate of return methodology to the taxation of investment property.
The TWG also rejected the idea of a land tax, noting Maori concerns and its terms of reference. But maybe a land tax could be introduced for non-resident landowners only. This would be in line with a trend I see repeatedly in overseas jurisdictions of either taxing non-residents more heavily than locals or restricting the available exemptions. For example, in Australia non-residents do not qualify for the 50% discount for assets held for more than 12 months. Together with higher income tax rates the result is the tax rate on property disposals can be as much as 45%. Similarly, in the United Kingdom and the United States estate taxes of up to 40% apply to assets situated there. Expect to see these issues debated both here and abroad over the coming decade.
3. Environmental taxes will be more important.
Like the cost of New Zealand Superannuation, addressing the cost of climate change will soon push its way back up the tax agenda once the immediate COVID-19 pandemic crisis is past.
As part of this, the importance of environmental taxes to the tax base will rise. The TWG final report noted that according to the OECD, New Zealand ranked 30th out of 33 OECD countries for environmental tax revenue as a share of total tax revenue in 2013.
The TWG’s reference to the growing importance of environmental taxes was something that got drowned out last year with the debate over CGT. In his briefing at the launch of the TWG’s final report, Michael Cullen stressed the need to initially recycle revenues to help those farmers most affected transition to a greener economy.
What we will see emerge is a range of short-term tactical actions with immediate application allied to longer-term measures all intended to encourage a switch to a greener economy.
Tackling emissions in the transport sector could involve the use of congestion charging, putting more money into public transport including rapid electrification of trains and buses. Charging vehicle emissions could be part of this, perhaps allied with subsidies to get older cars off the road, replacing them with newer, more fuel efficient cars as an interim measure. This could achieve three benefits: it lowers emissions, reduces costs for families who are dependent on cars to move around and finally improves road safety because newer cars are safer. It would be a better use of funds than subsidising the purchase of electric cars.
The TWG recommended increasing the Waste Disposal Levy, currently $10 per tonne at landfills that accept household waste. The TWG noted the effect of increases in the equivalent levy in the United Kingdom as illustrated by the following graph:
Landfill tax rates and waste volumes in the United Kingdom
Other initial measures which would also raise revenues and simultaneously encourage behavioural change would be to remove fringe benefit tax on the use of public transport and, as in the United Kingdom, tie FBT to the level of emissions of the vehicle. (The coming clampdown on the non-compliance around FBT on twin-cab utes might have the indirect effect of taking these high emission vehicles off the road).
Longer term measures could include widening the scope of the emissions trading scheme although I would like to see that introduced alongside John Lohrentz’s proposal for a progressive tax on biological methane emissions.
4. The corporate tax take will rise.
Tax is power. And maybe once matters have settled down, one of the most significant effects will be a shift in the power of taxation back towards the state and democracies. This will reverse the trend of the past 30 years ago or so, where lobbyists for corporates and special interests have been able to drive down corporate tax rates. This trend has been most noticeable overseas but as the CGT debate last year revealed New Zealand is not immune to the same influences.
The COVID-19 pandemic has almost certainly put paid to any idea of corporate income tax cuts. But the TWG noted that there was little justification for lowering corporate tax rates and a background paper prepared for it noted:
“…the two recent reductions in the company tax rate in New Zealand (from 33% to 30% on 1 April 2008 and from 30% to 28% on 1 April 2011) did not cause a surge of FDI into New Zealand. Nor did it show up in New Zealand’s level of FDI increasing relative to Australia’s.”
How the backlash against corporates will initially manifest itself will be in the adoption of the OECD’s international tax initiatives such as Base Erosion and Profit Shifting, or BEPS, and the recently launched Global Anti-Base Erosion Proposal (“GloBE”) – Pillar Two. The OECD estimates aggressive tax planning by multinationals costs US$240 billion annually.
Late last year, prior to the outbreak of coronavirus, these initiatives looked in danger of stalling after the United States indicated it might not adopt the measures. This appeared to be the result of lobbying by American multinationals. However, the US Government’s finances like those of every other country have been devastated by the pandemic.
So, for a brief moment, I can see the OECD and the US government’s intentions aligning, resulting in a relatively quick agreement on the changes to multinational taxation.
In any case, the digital giants such as Google, Facebook, Apple and Amazon might well drop their opposition to the OECD’s proposals as the price of stopping the widespread introduction of digital services taxes. (The UK government has pushed ahead with its 2% DST effective as of 1st April).
Notwithstanding the OECD measures, social media tech companies might find themselves hit with advertising levies as a means of supporting local media. India raised 939 crores (about $207 million) for the year ended 31st March 2019 from a digital advertising levy. Expect to see other countries follow suit (it could be one way of supporting New Zealand journalism and media which is in crisis as the collapse of Bauer Media shows).
This may now be the time to implement a global financial transactions tax. However, in order for an FTT to be effective, it must be universal. The European Union outlined a possible FTT back in 2013 but has been unable to reach agreement on its introduction. Without that universal agreement, an FTT is effectively inoperable because it is too easily avoided. Adopting the principle of never wasting a crisis, it will be interesting to see if the objections to an FTT are overcome by governments’ need for new sources of revenue.
5. The power and reach of tax authorities will increase.
The final trend that will accelerate is one which has been happening very quietly over the past 10 years since the GFC. That is the swapping of data between tax authorities through initiatives such as FATCA and the OECD’s Common Reporting Standards or the Automatic Exchange of Information.
According to Inland Revenue, since the CRS exchanges started in 2018 it has “received more than 1.5 million records on New Zealand tax residents from 74 jurisdictions.” These records relate to approximately 80,000 New Zealanders. Inland Revenue apparently intends to contact all those for whom it has received information and confirm they have met their obligations.
Separately Inland Revenue has used information sharing agreements with Australia to collect $46 million of overdue child support for the year ended 30th June 2019. In the same year it sent the Australian Tax Office details of 149,031 student loan debtors for matching and obtained contact information for 81,875.
The scale of this information sharing is unprecedented and has happened with very little public debate on the matter. Furthermore, exchanges under CRS are separate to specific information sharing which can happen as part of a double tax agreement between New Zealand and another jurisdiction. No specific data on those information exchanges is made public but anecdotally it is significant.
A little-known feature of the multilateral agreement under CRS is that all signatories agree to undertake to assist in the collection of unpaid tax. Prior to CRS such agreements were negotiated individually as part of a double tax agreement. Under CRS Inland Revenue can now assist any of the other 68 jurisdictions with which it has activated the CRS Multilateral Competent Authority Agreement.
As Inland Revenue’s Business Transformation upgrade continues its data analytic capabilities will increase. My understanding is that the latest upgrade will now enable it to automatically assimilate information it receives under CRS and automatically connect it with taxpayers. This information will only be available to Inland Revenue who can then monitor the taxpayer’s compliance against the data it holds. A question then arises as to the extent Inland Revenue is using artificial intelligence and how that use is being monitored.
Information sharing and the growing use of AI by Inland Revenue and other tax authorities will be a trend about which we should see increasing discussion over the next 10 years. For the moment, citizens appear to be paying little attention to what is happening. How much longer will that inattention will continue? And what are the implications for privacy and democracy? Or is it a case of the ends of higher tax collections justify the means?
Writing about the Easter 1916 Uprising a couple of years before Lenin’s alleged aphorism, Irish poet, W.B. Yates wrote “All changed, changed utterly.” It is indeed all changed, changed utterly and the extent and impact of those changes to the tax landscape will only become clearer over the coming years.
This article was first published on www.interest.co.nz
