27 Sep, 2021 | The Week in Tax
- This week, a new report finds strong support for using tax to support the post Covid-19 recovery
- A look at the submissions to the Finance and Expenditure Committee’s Inquiry into crypto currencies
- The ATO launches a crackdown on disguised undeclared foreign income.
Transcript
Earlier this week the International Federation of Accountants, in cooperation with the Chartered Accountants Australia and New Zealand (CAANZ) and the Association of Chartered Certified Accountants, issued the third edition of the Public Trust in Tax Study. This is an international study carried out across 8000 people in the G20 countries and New Zealand. These people were asked questions about who they trust in the tax world.
This is the first time this survey has been carried out since 2018 and there are some really interesting findings in here. People continue to have the highest level of trust in professional tax accountants – 55% highly trust them, with professional tax lawyers coming in at 50% and NGOs at 37%.
Now one of the most interesting findings, and one which is very encouraging around the world, is that trust in government tax authorities has improved from a net 2.7% to 14.9% – an almost six-fold increase. But that said, you’ve still got quite a split on that, as you might expect, with 43% saying they trust or highly trust the tax authorities, while 22% say we distrust them or highly distrust them. Politicians still have work to do because they have a net 22.8% distrust.
In relation to media, and this is quite relevant because there’s quite a bit of debate going on at the moment around media reporting, has a net 0.1% positive, but 41.9% distrust or highly distrust social media. The lowest level of trust was in New Zealand were just 13.4% of respondents had trust in social media.
Now, across the G20, 48% of the population are satisfied with the ease and efficiency of their dealings with tax authorities, that’s slightly down from 2018. But people strongly support the use of tax incentives to support sectors affected by Covid-19, with an overall 66% support for that. There’s also support for tax incentives to target what are described as global megatrends, such as climate change and the ageing population.
However, this is really quite interesting because it seems contradictory, 49% support the use of tax incentives to attract multinational businesses. However, support for international tax collaboration has fallen in 15 of the 20 countries sampled since 2018. And here in New Zealand, support for incentives to attract multinationals was bottom. New Zealanders saw it as very unimportant, with only 21% supporting incentives.
New Zealanders were also the least likely to believe in the importance of intergovernmental competition on tax matters, which incidentally was also the position back in 2018 when this survey was last held. New Zealanders were also more inclined than most other countries to require multinationals to disclose country by country tax information.
And this is where there’s been a big shift, because in 2018, 12 of the sample countries said tax information should be made publicly available. But in this current survey, only six countries, including New Zealand, supported it, with the main shift being towards the information should be made available to authorities but not publicly.
Inland Revenue will be very encouraged that when questioned about the least burdensome tax filing processes, New Zealand comes top with 81.8% of respondents reporting less than one week’s time spent each year. And New Zealanders also felt that Inland Revenue ranked highly in the overall fairness of the process and interacting with tax authorities. So again, that’s good work for Inland Revenue. And, of course, this will have started to take account of the impact of Inland Revenue’s Business Transformation programme.
So it’s quite an interesting survey overall. I think the thing that catches my eye is this sort of shifting mood around multinationals and international cooperation. And I think something that tax authorities need to be paying more attention to is that the public is probably not really aware of just how much information sharing is going on. Reading between the lines here, there’s a bit of unease about that.
But the fact that people also prefer tax incentives to attract multinationals is quite interesting to see as well, because those tradeoffs mean there are tradeoffs for overall revenue. But obviously the belief is that more multinationals mean a higher tax revenue. New Zealanders, however, would appear to be very sceptical of that. And that’s probably because we’re not one of the largest 20 countries in the world, so that the issue of multinational investment and its benefits is rather greyer for New Zealand than it might be in other countries.
Cryptos and tax
Moving on, the Finance and Expenditure Committee announced an enquiry into the current and future nature impact and risks of cryptocurrencies and called for submissions last month. These submissions are now publicly available. They received nearly 270 of them from a variety of people, including one from Satoshi Nakamoto, who is apparently quite important in the crypto world. (Assuming it is him).
The Reserve Bank drew attention for its submission where it really was very sceptical about the future worth of cryptocurrency and in fact, made a couple of references to their potential involvement in tax evasion.
PricewaterhouseCoopers and Chartered Accountants Australia and New Zealand also made submissions, and the Chartered Accountants Australia and New Zealand submission is actually quite well worth reading. It was submitted a couple of days before the new Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill was released, which actually addressed some of these issues.
In its summary, CAANZ said that the taxation of cryptocurrency in New Zealand remains problematic and
The taxation of cryptocurrency in New Zealand remains problematic. Application of the current tax rules results in material inconsistency and the Government legislative response has been light. We believe a comprehensive framework is needed.
The CAANZ submission is actually a good little precis of the current state of the tax treatment of crypto currencies and what Inland Revenue guidance has been issued.
The submission says it seems sensible to remove cryptocurrency from the GST rules, but in relation to the financial arrangements rules, it believes that’s not quite as clear cut as it might be thought. CAANZ believes that there are both pros and cons to making this change, depending on the nature of the coin and the taxpayer specific circumstances.
What it summarises is there’s a need for a comprehensive framework that allows cryptocurrency to fit into the existing tax rules. It’s needed to give simplicity and clarity and reduce compliance costs, because as CAANZ quite rightly points out, the existing tax rules are generally well understood and can be applied to existing and new cryptocurrency overall guidance. And I think that’s where Inland Revenue is trying to head. But it’s moving forward cautiously on this.
CAANZ asked about of its 600 members if they held cryptoassets themselves, if their clients did and if so had they sought advice? They got a reply from about 300, with many expressing concerns about the time and cost involved in keeping accurate and detailed records. And they thought that significant taxpayer education is required because there was a feeling that the rules were unclear, and that people did not understand the rules as well as they should do. So an education campaign was required.
Some interesting stuff there. And no doubt we’ll probably see some further submissions from CAANZ on the new tax bill.
Concealed foreign income
Across the ditch, the Australian Tax Office has released an alert on what is called concealed foreign income. What it’s concerned about is that people are misrepresenting foreign income as a gift or a loan from a related overseas entity such as a family member, friend or a related company or trust.
It is basically saying all those taxpayers deliberately omitting foreign income, concealing their interests in foreign assets or making false claim for deductions in their tax returns, will face substantial penalties, including possible sanctions under criminal law. Now, the ATO Alert also sets out guidance as to how to document genuine gifts or loans from overseas related entities where the funds are not used for income producing purposes.
Now, this is of interest because often where the ATO goes, Inland Revenue will follow. And at the moment we know Inland Revenue is assiduously working through information it’s received under the Common Reporting Standard Automatic Exchange of Information which should cover foreign income. But it is one of those areas that myself and other colleagues persistently see – people have overseas income and are not entirely clear about their obligations in relation to it.
In most cases, they’re reporting it in the jurisdiction in which the assets are situated, but not reporting it here because there is this idea that double taxation means if it’s being taxed over there so it doesn’t get taxed here. So disabusing people of that misconception is something we’re working on constantly. And again, this is also a question of perhaps more Inland Revenue guidance allied with an education campaign.
Covid support update
And finally, just a quick reminder that applications for the third round of the wage subsidy opened last Thursday and are open until 11.59 p.m. on 30th September.
What you’ve got to keep in mind here is that if you miss one of these subsidy rounds, that’s it. No retrospective applications are allowed. And I’ve seen one or two instances where people have not realised this and have missed the opportunity to claim a wage subsidy. So be alert. We may be seeing more in this space. The resurgence support payment is still available and as I mentioned last week, there may be further rounds to come.
That’s it for today. I’m Terry Baucher. And you can find this podcast on my website, www.baucher.tax or wherever you get your podcasts. Thank you for listening and please give me your feedback and tell your friends and clients. In the meantime, kia pai te rā, have a great day!
9 Mar, 2020 | The Week in Tax
- GST issues paper proposes change in GST treatment of crypto-assets
- Retrospective change to treatment of donation tax credits
- More on Inland Revenue’s decision to stop accepting cheques
Transcript
Early last week Inland Revenue released a GST policy issues paper.
The paper “covers a number of issues which have been identified where the legislation produces an outcome that does not reflect the underlying policy intent. The paper is designed to address those issues and maintain and in doing so, maintain the certainty and efficiency and fairness of the tax system”. And so what the paper does is outline technical issues that have arisen in the GST area and then suggesting potential policy options and solutions to those issues.
There’s a whole number of issues covered in here. For example, the paper starts off by talking about tax invoice requirements. Then there’s a discussion on the apportionment and adjustment rules which are complex and difficult to apply, and they’re looking to see how they can improve those set of rules. The apportionment and adjustment rules do cause headaches in the GST area. So another look at that area is always welcome.
There’s a proposal dealing with the treatment of GST and courier business practices where part of an international delivery is subcontracted. There’s an interesting proposal relating to business conferences and staff training. The paper points out that for overseas businesses it’s impractical for them to register for GST to claim a GST refund for a one off expense of sending their staff to a conference or training course in New Zealand. This is something we’ve encountered from time to time. And it’s a deterrent to businesses who might want to come here for a tax conference or any other conference, actually, because if they don’t manage it correctly, then their costs go up by 15 percent. And from the perspective of a New Zealand conference centre this is also an issue for them because they may not be getting business they could otherwise expect.
The proposal here is to zero-rate conference and staff training services supplied to non-resident businesses. That’s a good initiative. It is also actually conceptually logical because if the conference is being carried out for business purposes, then a GST registered business would be able to recover the GST on that. So this proposal is sort of short circuiting that process.
There’s also commentary on managed funds, insurance payouts to third parties, some tweaking of the rules in relation to compulsory zero rating of land and various other remedial issues.
But the issue that’s caught my eye and is quite welcome is in relation to the GST treatment of crypto assets. Now, what the paper notes is that at present there are over 5,000 crypto-assets and the total global market value of all such assets is in excess now of over 300 billion U.S. dollars. But the GST treatment is very inconsistent.
GST was originally designed by the French way back in the 1950s as part of the forerunner of the European Union, the European Economic Community. The designers of GST didn’t ever contemplate crypto-assets and nor did our legislation which dates from 1985. And as the paper points out, crypto-assets have a very different GST treatment to either money or financial services. It’s not clear, for example, whether the supply of crypto-assets could either be an exempt financial service, subject to 15 per cent GST or it’s a zero rated supply to a non-resident. So there’s a lot of confusion on this.
And it’s a matter that we have been discussing with Inland Revenue and clients. Work arounds have been established, but there’s always a level of uncertainty. So we were looking for guidance from Inland Revenue from on the matter and this paper gives that by proposing to exclude crypto currencies from GST and the financial arrangements rules.
Now, the financial arrangements rules, as regular listeners will know, are a minefield for most taxpayers. It would certainly be a big problem for crypto-asset investors if Inland Revenue had decided that crypto-assets could be within the financial arrangements regime, because, given the volatility, many investors would probably be subject to being taxed on an unrealised basis. So good to hear they’re planning to clarify that this won’t be the case which is a big win for crypto currencies.
There’s another little win as well in that GST registered businesses raising funds through issuing security tokens or crypto assets, which, quote, “have features that are similar to debt or equity” such as a right to share of the profits of a project, should also be able to claim input tax credits on their capital raising costs. This is a good move, and it means that crypto-asset businesses are not disadvantaged if they wanted to try and raise capital through issuing crypto-assets which are a substitute for debt or equity. That’s a good clear rule and also good to see this.
The paper also points out, inevitably, that income tax rules still continue to apply to crypto assets. These changes only relate to GST. The income tax rules set out in the Frequently Asked Questions issued last year will still apply.
Submissions on this issues paper close on 9th of April. If everything progresses as usual, you might see these proposals included in an omnibus tax bill released towards the end of this year. This means that all of this could possibly be in law by 1st of April 2021. Or maybe a little later than that if the omnibus bill is delayed, perhaps because of the election. Still this paper is good news for crypto-asset investors.
Moving on. As many tax practitioners will know, in dealing with Inland Revenue it’s often the case that it’s “Heads they win. Tails you lose.” And this can emerge where Inland Revenue, for example, loses a case in court and then promptly changes the law to what it thought should have been the result.
And this is about to happen. Late last year, the Court of Appeal ruled in the case of Commissioner of Inland Revenue vs. Roberts that a gift of forgiveness of debt made to a charitable trust which was progressively forgiven and donation tax credits claimed, represented money and therefore qualified for the donations tax credit.
In the case in question, Mr and Mrs. Roberts had transferred $1.7 million to a trust by way of loan and then started executing deeds of gift, releasing the trust from the liability to repay specified amounts of that loan and the trust then claimed a tax credit on the basis that the forgiveness of debt was a charitable gift. And the High Court said, “Yes that’s acceptable” and the Court of Appeal upheld that decision on the 17th of December. Immediately Inland Revenue said we’re going to change the law so it’s only gifts of cash that can be eligible for the donation tax credit.
And this week, the Government has released a Supplementary Order Paper to a tax bill going through Parliament right now, which addresses that matter.
And it makes it very clear that only gifts of cash will qualify for the donations tax credit and the 33% rebate back in cash from Inland Revenue.
Now, it’s arguable that what Mr and Mrs. Roberts did was pushing the envelope a little bit. But the question of the treatment of gifts in kind is a live one. I encountered one such case recently where a charity was saying, well, what if the building owner was to give us the use of the property rent free? Is that eligible for the donations tax credit? And I said “No it has to be in cash.”
So this is a matter that does pop up from time to time. There’s also some GST rules around this which are a little unclear. So, on the one hand, some clarity around this rule is to be welcomed. But I can’t help but wonder if Inland Revenue are just taking an overly draconian approach here, because as I said, there are other alternatives where gifts are being made in kind and maybe the donors should be getting a tax credit for that, perhaps you might want to go for a reduced tax credit.
But there’s a second issue here, which is also of concern, and that is because this is a Supplementary Order Paper to an existing tax bill, opportunities to submit on the bill are therefore basically being sidestepped. Now this happens from time to time in our legislative process. But it’s not the first time this has happened in this Parliament. And I’m personally not in favour of seeing stuff like this happen because these are issues that Inland Revenue probably knew about anyway and probably should have raised beforehand.
Obviously, Inland Revenue was expecting its appeal would be successful and therefore wouldn’t have necessarily put something forward. But maybe it should have done so to bring these issues out for discussion. As it is, it’s lost a case and has then decided, “Well, we’re not going to have that because it’s arguably a threat to the integrity of the tax base. But it’s also not what we consider to be the underlying policy’s intent”. Maybe it’s Parliament’s job to determine what the underlying policy intent is and as such, in a democracy, maybe we should have got more input into that matter.
And finally, speaking of getting some input into the matter. The decision by Inland Revenue and other agencies such as ACC, to stop accepting cheques in payment as of first of March is still rumbling on. And a couple of things happened this past week in relation to that.
Firstly, I got contacted by an international website, Tax Notes International, which is based in the United States. The journalist, in fact, was in New Hampshire and he expressed quite a bit of surprise at what was going on about that money. He pointed out, not unreasonably, that the fact that 424,000 cheques were received during the year to 30th of June 2019 is not an insignificant number in relation to a population of five million. He thought Inland Revenue’s action was quite offhand in that respect.
But he had also sought some feedback from Inland Revenue on the issue who and they said that it has received 160 requests for exceptions to this rule so far. It has accepted 76, turned down 22 and are in the process of reviewing the other 62 requests.
Then Andrew Bayly, the National MP for Hunua and a member of the Finance and Expenditure Committee, made the opening address at the Accountants and Tax Agents Institute of New Zealand’s annual conference last Friday in Taupo. (Excellent conference by the way).
He raised this issue and he has begun a petition to overturn the decision by Inland Revenue and other government departments on the matter.
I’m supportive of that. I don’t agree with the decision. I think the use of cheques will peter out anyway. But government agencies are imposing arbitrary costs on their “customers” when we have no choice in the matter. We can’t exactly go to the Australian Tax Office or the US Internal Revenue Service and use them instead. Inland Revenue is actually kicking the costs across to ourselves as tax agents and the taxpayers and just for its administrative convenience, and that’s unacceptable.
So keeping the pressure up, I have written to the Minister of Revenue and the Commissioner of Inland Revenue on the matter. Don’t hold your breath, but I think we need to keep pressing away at that. It could be that Inland Revenue may decide to relax the rules around the requests for exceptions. But let’s watch this space and see.
Finally, on a personal note, I was very honoured and frankly humbled to receive this year’s President’s Award at the Accountants and Tax Agents Institute of New Zealand’s (ATAINZ) Annual Conference. It is a huge honour and I’d like to thank the ATAINZ Board and all its members for their support of my activities over the past few years. I’d also like to thank my wife Tina and my colleagues here at Baucher Consulting Ltd, Eric, Judith and Darryn, without whom this wouldn’t have been possible. Thank you all very much.
And on that note, I’m Terry Baucher and this has been the week in tax. 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 have a great week. Ka kite āno.
