- An overview of the new Covid Resurgence Support Payment
- What could be the implications of Facebook’s actions in Australia
- Pre-31st March year end tax planning
On Wednesday, the Government passed under urgency, the Resurgence Support Payments bill.
This was introduced in the wake of the move to level three and then level two lockdowns in the Auckland region. This had been in the works for some time, but then just got pushed through under urgency following what we might call the Valentine’s Day mini outbreak.
Resurgence supports payments may be applied for if there is an increase in the alert levels from Level 1 to Level 2 or higher and the alert level remains higher than Level 1 for seven days or more.
It’s going to be available to all businesses in New Zealand each time it activates. So even though Auckland went into a Level 3 Lockdown and then back down to Level 2, because a lot of tourism is currently dependent on tourists from Auckland, the resurgent supports payments will apply nationally. This is a wise move, which cuts down a lot of administration, but also reflects the fact that Auckland is a prime source of tourism for the very weakened tourist industry.
Businesses are able to apply if they’ve experienced a revenue decrease or a decrease in capital raising ability of at least 30% due to the increase in the alert level. And they need to measure their revenue for that 30% fall over a continuous seven-day period where the first day is on or after the first day of the increased alert level. All seven days must be within the period of the increased alert level. The affected revenue period then needs to be compared against a regular seven-day revenue period that starts and ends in the six weeks prior to the increased alert level.
This scheme is going to be administered by Inland Revenue rather than the Ministry of Social Development as happened with the wage subsidies. Applications should be made through myIR and Inland Revenue is expecting that people receive the resurgence support payment within five working days of their application.
The payment must be used to cover business expenses such as wages and fixed costs. Note that this isn’t a wage subsidy per se, it’s a support payment. And that possibly explains the slightly unusual change from the previous wage subsidy in that this payment is subject to GST now.
Although no income tax deduction will be available for expenditure relating to use of the resurgence support payment, GST registered businesses will be able to claim input tax deductions for any expenditure funded by the resurgence support payment. In other words, if you pay the rent using the resurgence support payment, you won’t get an income tax deduction for it, but you will still be able to claim a GST input tax credit.
The payment consists of a base amount of $1,500 dollars per applicant, plus $400 per full time equivalent employee, up to a cap of 50 full time employees. Although payments are capped at 50 full time employees, businesses with more than 50 full time employees may still apply.
There is a further cap in that the amount an applicant may receive will be the lower of the base amount and four times the amount their revenue has declined, as declared by the applicant as part of the application. And I can see Inland Revenue having a bit of work going on in years for larger scale applications here.
Anyway, the measure is now in place and fortunately everyone within the Auckland region, because they are still in level two, will be able to apply for this because they have been at an Alert Level higher than Level 1 for the required seven-day period. I imagine there will be further tweaks to the scheme as we go forward in the event of further outbreaks.
Facebook gives Australia the fingers
Moving on, yesterday across the Ditch, Facebook announced that …
“due to new laws in Australia from today, we will reluctantly restrict publishers and people in Australia from sharing or viewing Australian and international news content on Facebook.”
And with that, it stopped any sharing of Australian news media sites and indirectly, some New Zealand sites could be affected as well.
Now, this stoush has been brewing for some time. The Australian Government is trying to force Google, Facebook and other tech giants to pay more for the media content. Google has played along with this proposal. Microsoft, which runs the Bing search software, is also playing along. But Facebook has pushed back very hard and decided to go very hardball with this move.
Now, barely two years ago, Facebook literally made blood money about live streaming the Christchurch massacre and then wrung its hand about the difficulties of taking down such abominations. But yesterday it basically was able to switch off all of Australia’s major media sites on Facebook just like that. And I’m sure there will be a few pointed comments made about that.
I can’t see how such outrageous behaviour will not draw a strong response. And this is where I think from a tax perspective, things may go. The Australian government has previously been lukewarm about a Digital Services Tax, but Facebook’s actions might prompt a rethink. The Australian Tax Office has done some work on this, and there might be a bill lying around which could be introduced at the drop of a hat in effect saying, “Here, stick this up you”.
If Australia does move forward with a Digital Services Tax, then I think our government will surely follow. Now I’m in the “ get into the Tax Tech Giants hard” basket and have been for some time
, particularly since what happened in Christchurch. Yesterday’s actions by Facebook underscore my belief in that approach.
Incidentally, during this whole run up to this stoush erupting, at least one tech commentator suggested that a DST would be a better approach instead of what the Australian government was trying to do. We’ll see how this all plays out and it’s going to be very interesting to watch. Facebook just lifted the stakes considerably.
There are, according to the OECD, about 40 countries either with an active DST or considering introducing one. Maybe Australia is about to become number 41.
Now, briefly following up from last week’s podcast, Inland Revenue is to pay approximately $6.6 million to compensate over 640,000 KiwiSaver members whose employer contributions were delayed in getting to the providers. Now, this happened last April, when Inland Revenue moved KiwiSaver to its new Business Transformation START platform. And for some reason there was a delay in passing on employer contributions to people’s KiwiSaver accounts.
This story reports delays of as much as six months or more. So people lost out on investment performance over that time. And during that time, the use of money interest rate paid by Inland Revenue dropped to zero which would have been the usual way of compensating for the delay.
Instead, what’s going to happen is Inland Revenue has been given approval to make ex gratia payments of about $6.6 million in total. This is a slight bit of a disappointment for Inland Revenue because as I said, by and large, the Business Transformation programme, controversial as it is, has worked relatively smoothly and improved processes. It’s certainly not a Novopay scale disaster, but it’s just another sign that sometimes with IT projects things go wrong.
End of year planning
And finally, the 31st March tax year end is fast approaching. So it’s time to start thinking about what steps could be done in advance of that. Now, there’s a couple of things in particular people might pay attention to.
Firstly, you have until 16th March to make use of the $5,000 threshold for “low value assets”. Under this you get a full write off for assets up to the value of $5,000 acquired on or before 16th March.
This is an emergency measure introduced a year ago as part of the Government’s initial response to Covid-19. So now’s a good time to see if there’s equipment you want to replace or upgrade and take a full write off.
For assets purchased on or after 17th March, that threshold of $5,000 will be reduced to $1,000 going forward.
Now, the other thing to think about is tied in with the forthcoming increase in the personal tax rate to 39%. And the suggestion would be that companies might want to think about paying dividends out to use imputation credits prior to that date so that the shareholders are taxed at 33% rather than 39%.
Sometimes you might pay a year-end dividend anyway because that’s just part of the regular distribution pattern. But you might also do so because the shareholders might have an overdrawn current account which you want to get into credit.
The thing that complicates matters this year is whether such a move might represent tax avoidance. I don’t believe so. But one thing people must keep in mind is that as part of the increase in the tax rate to 39%, trusts have to provide more information about distributions they’ve made in prior years. So as the commentary on the tax bill said, “this is expected to assist in understanding and monitoring the changes in the use of structures and entities by trustees in response to new 39% rate.”
And that’s what gives me pause for concern about paying large dividends before 31st of March. If there isn’t a regular pattern of large dividends before the increase and then a large dividend isn’t repeated after the rate increase, Inland Revenue may look to argue tax avoidance and effectively tax retained earnings. So approach that one with caution.
I think this is a point where Inland Revenue really needs to come out and be very clear about what is going to happen with dividends paid by companies to trust shareholders, which aren’t then distributed. I think you’ll have a problem if the pattern was previously such dividends were distributed by the trust, maybe less so if that wasn’t the case. Again it’s a question of watching this space. And we’ll bring you developments as and when they happen.
Well that’s it for today, I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next week Ka kite ano!
- The new Minister of Revenue’s first speech set out the Government’s tax objectives including a possible digital services tax
- Could the bright-line test be extended? And watch out for existing tax provisions
- A reminder about back-dating GST registration
The new Minister of Revenue, David Parker, made his first public speech in his role last week at the Chartered Accountants Australia and New Zealand Tax Conference. The speech introduced himself, gave a bit of his background in business and in government. He then outlined the Government’s expectations over what is to happen over the next three years.
And in talking about the Government’s priorities over the short term he mentioned that one of the first items of business for the Cabinet, was making improvements to the Small Business Cashflow Scheme so it continues to provide ongoing support.
Now, the latest is that close to 100,000 businesses have taken out loans with total lending of $1.6 billion. So, it’s been a huge success. I’m a big fan of the scheme which fills a hole we identified on the Small Business Council.
The new measures approved by Cabinet: extending the scheme for three years, increasing the interest free period from one year to two, and broadening how the loans may be applied, such as for capital items are estimated to result in additional lending of about $130 million for small businesses.
What the Minister has also asked for is further advice on changes to the scheme that will allow more businesses to benefit from it, including adjusting the eligibility criteria for the loan
On the tax side of matters the Minister confirmed that the Government will progress the promised new top personal tax rate of 39% on income over $180,000. And that new top personal rate will apply from 1st April 2021. The plan is to have it legislated and in place before the end of this year.
Minister Parker then said “the new 39% rate will need to be supported with integrity measures to address issues like people sheltering income in trusts to avoid the top tax rate. I’m receiving advice from officials on the necessary integrity measures.” So that’s a coded warning that although they haven’t increased the trust tax rate from 33% to 39%, it’s clearly something they may well consider.
And there’ll be other matters in hand to support the new rate which obviously, we’ll have to wait and see. These potential measures are something I would like the Government and Inland Revenue be very transparent about because the situation that developed the last time the tax rate was at 39% was only finally resolved by the Penny Hooper case. I think this is unsatisfactory because it creates uncertainty about the boundaries of acceptable tax planning.
Parker then went on to talk about improving our tax system and the taxation of multinationals stating
Our preference continues to be an OECD led multilateral solution rather than a proliferation of digital services taxes. However, success at the OECD is not guaranteed and has been blocked for some time. We are seriously considering implementing a DST in the event the OECD project fails to reach agreement within a reasonable timeframe.
And in talking about this, he referenced the fact that local New Zealand companies “deserve a level playing field when doing business. We don’t want to force New Zealand competitors into dodgier tax minimisation strategies to compete”. So the Minister is pointing the finger very firmly at the digital giants and their ability under present rules to order their affairs where they pay little or no tax in New Zealand which, as he put it, “This is a legal fiction that is divorced from modern reality and needs to be fixed”. So I think we can expect to see more action in this regard from the Minister of Revenue and Inland Revenue.
The Minister finished his speech with a line which I’m pretty certain was written by the Honourable Deborah Russell MP, who’s a big Star Trek fan: “Let’s all crack on with it so our people can live long and prosper even in the midst of a global pandemic.” Indeed.
Moving on, one of the matters that wasn’t mentioned by the Minister in his speech directly, but has been boiling over this week has been the question of taxing capital gains and the role of tax in dealing with the housing crisis and house prices.
The Minister of Finance has said that he has already requested Treasury to explore the options about extending the bright-line test. In the exchange of letters between the Minister of Finance and the Reserve Bank Governor, Adrian Orr, the Reserve Bank Governor, pointed out he would be happy to talk about fiscal measures, which would include tax changes.
This, of course, has prompted a lot of speculation about what’s happening. And the ACT party then went straight out and said, is the Government looking to bring in a capital gains tax by stealth?
Of course, the Prime Minister last year ruled out a capital gains tax on her watch. The thing is, though, the bright-line test is already in existence, so it’s hardly it would be a new tax to extend its scope. That happens with taxes all the time. And yes, it would also be bending the position a little bit.
But it’s also worth pointing out that the bright-line test is actually a fallback test. It applies if none of the other taxing provisions apply. And this brings us to a provision
which if I was a rather devious Inland Revenue official, I’d be closely looking at applying. And this is Section CB14
of the Income Tax Act.
Now, under Section CB14, where a person sells land within 10 years of acquisition, any gains from that sale that are not taxed under other provisions and this would include the bright-line test will be taxable if at least 20% of the gain results from one or more factors that occurred after the land was acquired. Those factors include a change or a likelihood of change in the operative district plan.
Section CB14 almost certainly applies to properties which are rezoned for higher density or may have been brought into the special housing areas if you remember those. It’s a little applied provision. And in fact, the Tax Working Group recommended that it be repealed but it’s still on the books.
It has a couple of stings in its tail. It applies, as I mentioned, for land sold within 10 years of acquisition. But if you occupied it as a residential home, normally under the Income Tax Act, you will be fine. However, in this particular provision, the sale is not exempt unless the purchaser acquires it for residential purposes. So that means if someone whose house may have gained value because of a zoning change, such as the Auckland Unitary Plan, sells it to a developer or, and this is the tricky part, you actually decide to move on and sell it to a trust or another entity, such as a look through company, for example, to rent out the property, that sale/ transfer will be taxed under this provision. There’s a deduction of 10% of the gain allowed for each year of ownership.
Now, what this provision points out and what the ongoing debate around, what do we do about taxing wealth (you may recall the Deutsche Bank report I mentioned last week), is that our current rules are all over the place. We have very specific rules, such as the Foreign Investment Fund regime, which apply. But then in relation to land transactions, we have a series of rules that apply, mostly for disposals within 10 years, but in other cases indefinitely if there is an intent to purchase for a purpose of disposal.
And so, one of the arguments in favour of a capital gains tax is actually Simplification, believe it or not, because of these overlapping rules. Picking your way through these is a minefield with plenty of traps where I and other accountants get plenty of work when people misunderstood the implications of the bright-line test and other land taxing provisions.
So, I’ve never bought the argument that capital gains taxes are too complex. All taxes have a certain level of detail. But capital gains tax basic principle, you buy something which you sell and you’re taxed on the difference is fundamentally easier for people to grasp than, say, trying to explain the operation of the Foreign Investment Fund rules. But the politics are what they are. So a capital gains tax is probably not going to happen.
But I think we will see Inland Revenue making extensive use of provisions such as CB 14 to pick up transactions that have not previously been taxed. And we know they’re going through all transactions where a transfer has happened within five years, the bright-line period, where there is no obvious answer that it’s been a residential property sale to a new home-owner.
So watch this space there’s going to be plenty of activity from Inland Revenue in that area and the debate will continue to rage. I think the Government will find it has to make a movement on this space. It’s also worth remembering that the bright-line test was introduced in response to housing pressures and was introduced by a National government. So there is, in theory, a possibility of cross party support for a measure. It probably won’t happen, politics being politics.
But as I said, I think the dam is under increasing pressure and will break unless something is done to relieve the pressure of expectations of younger generations who are presently locked out of the housing market.
Backdating GST registration
And finally, a quick reminder from Inland Revenue about GST registrations. Generally speaking, the date of GST registration is the date an application is made. But in exceptional circumstances, those registrations can be backdated.
And Inland Revenue have issued a Standard Practice Statement on the effective date of GST registrations and what you can do about backdating a GST registration.
The key thing is, you got to have the supporting relevant documents, bank statements, tax issues, tax invoices issued and copies of contracts, and you’ll need to explain what was going on with your taxable activity and why your registration wasn’t filed sooner.
The fact Inland Revenue has drawn attention to this issue means that obviously it’s been receiving a few such applications or they’re looking at situations where people probably should have been registered for GST sooner.
Well, that’s it for this week. Next week, I’m going to be joined by Rod Spicer from Accountancy Insurance. We’ll be talking about the role of insurance in handling Inland Revenue audits and what Inland Revenue activity they are now seeing.
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 week, ka kite āno.
The Week in Tax – back to normal after the Government’s decision on TWG report?
International tax pressure is building to create a Digital Services Tax because OECD’s BEPS initiative is growing consensus.
Why you shouldn’t be spending any refund from Inland Revenue that turns up unexpectedly. Unexplained credit balances sometimes are paid to prevent interest payments to Inland Revenue and these are getting refunded!
Expect the report from Welfare Expert Advisory Group soon. They consider the interaction between tax and social assistance.
Next week’s guest is Marjan van den Belt
Full transcript and links