- Inland Revenue guidance on the tax implications of the Clean Car Discount
- Latest on Inland Revenue’s audit activity
- Insights from the OECD’s latest report on Corporate Tax Statistics
In the week that the Intergovernmental Panel on Climate Change report declared that climate change is “unequivocally caused by human activities” it is rather opportune of Inland Revenue to release its guidance on the tax implications of the Government’s Clean Car Discount Scheme.
To recap, the Clean Car Discount Scheme has been introduced to make it more affordable to buy low emission vehicles. Between 1st July 2021 and 31st December 2021, a rebate will be paid to the first registered person of an eligible vehicle or to a lessor where that person is a lessee.
Starting 1st January 2022, it’s proposed that the Clean Car Discount will be based on vehicle’s CO2 emissions and vehicles with low or zero or low emissions will qualify for a rebate and those with high emissions will incur a fee (subject to enactment of the relevant legislation).
Now obviously, if you’re in business, you need to be aware of the tax consequences if you receive a rebate or pay a fee under the Clean Car Discount Scheme, or lease a vehicle that comes under the Clean Car Discount Scheme. And obviously the outcome varies depending on what you use a vehicle for.
If you get a rebate under the scheme, you will not have to pay income tax on the rebate. It’ll either be treated as excluded income under the rules for government grants if you’re claiming depreciation on the vehicle or a capital receipt. Conversely, if a fee is paid under the Clean Car Discount Scheme, it will be treated as a capital expense and so no deduction will be available. And that’s obviously going to be something which should be watched carefully.
Now, if you’re using the vehicle in your business, and seeking to claim depreciation, then the base cost for these purposes will be either reduced by any rebate received or increased by the amount of any fee. That’s again something to watch out for.
When it comes on to FBT, and this is going to be quite critical, I would say given that we suspect there’s a fair bit of under compliance in this area, FBT will be payable if the car is made available for private use. FBT will be calculated on the cost of the car when purchased or its value if being leased. The cost will either be reduced by the amount of any rebate or increased by the amount of any fee.
For GST purposes, if you get a rebate under the Clean Car Discount Scheme for a vehicle that you use in your taxable activity, the rebate will be treated as consideration for a deemed supply under the rules relating to government grants. So that means you must the return the GST in your next GST return. Conversely, if a fee is payable, then the GST component of that may be claimed as input tax if you’re carrying on a taxable activity.
Overall, this guidance is useful. Inland Revenue have included some examples as well. As I said, it is quite opportune that it arrived at this time when there’s going to be increasing focus on the question of environmental taxation and the role it may have in enabling us to meet our targets under the Paris Accords.
Tracking Inland Revenue audit activity
Moving on, as I mentioned just now there is a suspicion that there’s perhaps non-compliance with FBT going on at the moment. And so it’s quite interesting to see the latest statistics on Inland Revenue audit activity from Accountancy Insurance.
This is the company that provides insurance against Inland Revenue audits and reviews.
For the period to 31 March 2021, they saw the total number of claims increased by 31% compared with the year ended 31 March 2020. So even though it was in the middle of a pandemic, Inland Revenue is still active in reviewing taxpayers. What is interesting to note here is that GST verification claim activity increased by 48% and that for income tax return related activity increased by 67% over the 12 months to 31 March 2021.
Now, this apparently includes two projects Inland Revenue began last year, the bright-line property rules and also the automatic exchange of financial account information programme relating to the Common Reporting Standards.
GST verification activity actually accounted for 90% or more of all claim values in New Zealand, even though actually only 55% of all claims related to GST verification. So that’s a timely reminder that Inland Revenue is still keeping a watchful eye on matters.
It’s actually a little encouraging to hear that Inland Revenue is still actively reviewing GST returns. I’ve seen one or two instances where I’ve wondered how claims got through including one warranty case going on right now where I am really surprised why Inland Revenue was not onto what was happening much, much sooner.
But the fact is, despite the pandemic and the impact it had on general operations for Inland Revenue last year, GST activity has still been maintained. You have been warned
The OECD recently released its third edition of its corporate tax statistics. It’s a treasure trove of information relating to corporate tax around the world and with the topics covered and statistics reported being steadily expanded. And there’s some very interesting insights in the report which is based on 2018 numbers.
Interestingly, that the percentage of corporate tax revenues has risen since 2000 from an average of 12.3% then to 15.3% in 2018. Similarly, you see a rise in the average corporate tax revenues as a percentage of GDP from 2.7% in the year 2000 to an average of 3.2% in 2018. New Zealand by the by at 5.2%. is well above that average for 2018.
This is an interesting statistic because over that same time period since 2000, the average statutory tax rate has fallen by 8.3 percentage points from 28.3% in year 2000 to 20% in the year 2021. Over that time the rate has fallen in 94 jurisdictions, stayed the same in another 13, but increased in only four jurisdictions. And that supports the argument that was made that lowering the statutory tax rate and broadening the base would lead to higher revenues.
I do think that we probably now plateaued out with tax cuts. I don’t see corporate tax rates continuing to fall. Over in the United States, they’ve signaled that they will rise.
The report drills down into the statistics by considering effective marginal tax rates as well. And that’s where it gets interesting from New Zealand’s perspective, again, because we adopted more thoroughly than most and the broad-based low-rate approach to corporate taxation by stripping away a lot of preferential regimes, our effective marginal tax rate is at just over 20% is amongst the highest in the OECD. Apparently, that is because we have less general fiscal depreciation rules than other most other jurisdictions, although the report notes that we are now more generous after increasing rates in 2020 in the wake of the arrival of the pandemic.
The report also has details of the impact of the implementation of BEPS and statistics relating to anonymised and aggregated country by country reporting although New Zealand doesn’t feature in this part of the report.
But it also has something that I think policymakers here would want to perhaps think hard on, and that is the question of tax incentives for research and development.
What the report notes is that R&D tax incentives are increasingly used to promote business, with 33 of the 37 OECD jurisdictions offering tax relief and R&D expenditure in 2020, compared with just 20 in 2000. New Zealand is one of those countries now doing that.
And perhaps we need to think very hard about that because in the statistics showing what the direct government funding and tax support for business R&D as a percentage of GDP in 2018, New Zealand is way down the list at just over 0.1% of GDP. You see countries like France and Russia at 0.4% and the United Kingdom, Korea and Israel close to 0.3%.
So we are way off the pace here. And it has been noted for some time that we do not invest enough in R&D. It was one of the reasons the R&D tax incentive scheme was introduced. So, as I said, there’s plenty to consider in this report with heaps of detailed appendices that you can trawl through.
Robin Oliver tax policy scholarships
And talking about tax policy, this week the Tax Policy Charitable Trust announced its annual Robin Oliver tax policy scholarships worth $5,000 for students majoring in tax at either Victoria University of Wellington or at the University of Auckland.
And later this year the Tax policy Charitable Trust will be launching its 2021 competition scholarship competition for tax policies. You may recall that we had the 2019 winner, Nigel Jemson, as well as one of the runner ups John Lohrentz on the podcast. I’m looking forward to seeing what comes out of these policy submissions in due course.
Well, that’s about it for this week. But before I go, it so happens that it is now 17 years since Baucher Consulting started. And as some of you may know, we recently undertook a slight reorganisation carving out some of our compliance functions to Agentro Limited. Big step that, it’s been a great journey for the last 17 years. And I’m looking forward to the future.
I’d just like to take this opportunity to thank my colleagues Eric, Darryn and Judith for helping me get here together with all our clients and many well-wishers who responded to our latest newsletter covering this news. Thank you very much. We really couldn’t have done it without you.
Well, that’s it for this week. I’m Terry Baucher and you can find this podcast on my www.baucher.tax or wherever you get your podcasts. Thank you for listening. And please send me your feedback and tell your friends and clients. Until next week, ka kite āno.
- What will be the big tax issues over the next decade?
- Inland Revenue cracks down on Student Loan debtors
- Is CGT really dead?
This decade is only a few weeks old, but I consider the likely major tax themes for the years ahead are already becoming very clear. Over the holidays, the news has been dominated by the apocalyptic visions of the Australian bushfires, and our thoughts and condolences go out to everyone affected by those fires particularly the families of those who’ve lost their lives.
Leaving aside the politics of climate change, which seem particularly toxic in Australia, New Zealand has signed up to reduce its emissions by 2050 and last year, the Zero Carbon Act became law. And in my view, over the next decade, the role of environmental taxes as one of the tools in meeting our emissions targets will become ever more important. So that is the first big theme I think we can see emerging.
Yesterday, the French government agreed to suspend collection of its digital services taxed until the end of the year.
Now, this was done in order to avoid increased tariffs with the United States government. You may recall that last year when France introduced its digital services tax America retaliated with tariffs. Now, in return for the French suspending collection, the US has now agreed to continue participating in the OECD talks aimed at achieving a generally agreed reform of the international tax system.
Therefore, the second and fairly obvious continuing theme for the next decade will be the issue of reform of international taxation, particularly for how it affects the tech giants such as Amazon, Google and Facebook. This is something that they hope to resolve this year, but I anticipate it could take longer than that. But whatever is determined it’s going to change the shape of international tax for years to come.
The third theme is wealth inequality. This has been talked about for some time. And what I think you will see coming forward is a question of how we address that. Wealth disparities have been reportedly rising over the past decade or so and various taxes are being mooted as a means of addressing that matter.
Housing affordability is one of those issues where wealth inequality plays out. And earlier this week, the annual Demographia report on housing affordability said that New Zealand’s eight major markets were completely unaffordable.
So, addressing housing affordability is one part of the equation which ties in with wealth inequality. And we’ll see across the coming decade stumbling attempts to try and address the issues coming from that. That’s a global trend as well.
Last week the news emerged that Inland Revenue had arrested a person at the border in relation to owing student debt. A woman had just returned to the country to visit a sick mother and she was arrested at Auckland Airport while about to fly to the United States. This is part of a law change that was made in 2014, which gave Inland Revenue the powers to arrest student loan defaulters leaving the country.
There are about 100,000 borrowers living offshore, and many of these have overdue debt. Actually, some of the numbers related to student loan debt are quite astonishing. There’s more than $16 billion dollars of total debt due and more than 700,000 currently have outstanding debt with 100,000 having overdue debt. And many of those are overseas and apparently outside the reach of Inland Revenue. So, it’s not surprising. Inland Revenue has given itself powers to arrest people. It does shake the tree quite dramatically and has produced some results.
Although it’s a very dramatic move the number of people that have been arrested for this has been actually quite low. It was three in 2016, one in 2017, two in both of 2018 and 2019 and one so far this year.
Now, this is a bit of an intergenerational matter because older people will take the view “Pay your debts” or “We’ve paid our student loans, so why shouldn’t you?”. And one response will be “You didn’t have student debt” and generally the issue dissolves into name-calling on both sides.
But leaving that aside, there are two things that concern me about this. Firstly, I think it’s another example where the current approach to penalties and interest just doesn’t work. If you’re going to charge penalties and interest, you’d hope that that actually does encourage payment. But apparently it doesn’t seem to do that.
The top 10 outstanding borrowers collectively owe $4.28 million dollars, at which point they’re going to give up. This is what I see in our business. They just simply going to give up. It then moves from being their problem to being our collective problem, because that’s now a debt that’s probably irrecoverable.
Secondly, why don’t we see people being arrested at the border for outstanding PAYE and GST? Time and again, I encounter situations where businesses have not paid their PAYE. In some cases, deliberately not doing so and filtering the cash away for their own purposes. Yes, Inland Revenue catches up with them eventually, and in some cases those people go to jail.
But I can’t help but think why don’t we have such a draconian policy towards arresting people who owe PAYE and GST? Particularly in the case of PAYE because that affects the livelihoods of many people. It’s not just a case of a debt between and individual student loan debtor and the Government. In the case of someone who’s defaulting on their PAYE and maybe also on the employer KiwiSaver contributions, their employees are missing out.
So, it seems to me that if we’re going to have such a dramatically fierce tool, which admittedly, is not used extensively, why are we not applying it more often to debts where arguably the social impact is greater?
And finally, I recently raised the question about whether, in fact, capital gains tax was killed off as supposedly happened last year when the Government did not follow through on the Tax Working Group’s recommendation for a general capital gains tax.
In my article, I took the view that the issue isn’t going to go away, in part because it’s tied into the wealth and housing affordability issues that I mentioned earlier. Also, what we’re seeing is that Inland Revenue will be applying the existing rules, which are often open to interpretation about intent, much more stringently.
And I’ve already come across examples where Inland Revenue is seeking to tax transactions which would have been subject to the bright line test if the bright line test had been in place at the time of those transactions.
Now Inland Revenue has been through their Property Compliance Programme, looking at this issue for almost 10 years now. But what was interesting to note about this particular set of transactions is that many of them date back to beyond what we call the time bar limit, usually for four or five years. And in fact, one of them was a 2012 transaction. So, it’s nearly eight years old now.
What seems to be happening is two things. Firstly, Inland Revenue is applying its enhanced capability through its Business Transformation program to review transactions. But secondly, and this is a critical point if you do not include a source of income in your tax return, which you should have included, then the time bar rules don’t apply.
Generally speaking, Inland Revenue can’t go back more than four or five years after a tax return has been filed, unless there’s been fraud or willful evasion. But if the income is never included in the first place, then it can go back as far as it likes. And Inland Revenue is now making use of this tool.
So what that means is that for all those people out there who may have had a quick turnaround on a property transaction, for whatever reason, you may find that even though you think that may be beyond the time limit for Inland Revenue to look at it, don’t make that assumption. They have more tools in there to do so now. And they’re now very keen to apply those tools to investigate older transactions. So, I expect to see quite a few more cases involving transactions eight, ten years, maybe even older as the as the Inland Revenue decides to crack down on this whole question of property transactions.
Next week, picking up the theme of the big tax issues for the coming decade, I’ll be joined by 2019 Tax Policy Charitable Trust Scholarship runner up John Lohrentz. We will be discussing his fascinating proposal for a progressive tax on bio-genomic methane emissions in the agricultural sector. We’ll also be discussing the future role of environmental taxes.
Perhaps the Tax Working Group was fatally compromised from the outset when the taxation of the family home was excluded from its terms of reference. My view is that too often proponents of a capital gains tax default to arguing the difficulties and are therefore on the back foot from the outset.
Even so, the decision to not expand the taxation of capital gains in any form is extremely surprising, not just to me but probably also even to groups such as the New Zealand Property Investors Federation.
But the question of a CGT was just one of the issues the Tax Working Group (TWG) examined. Its final report contained 99 recommendations across the entire tax system. The government’s response to these recommendations breaks down into five categories:
- rejected and no further work;
- the recommendation is a high priority for the tax policy work programme;
- the recommendation should be considered for the current tax policy work programme;
- the recommendation represents policy work which is already underway; and
- endorsed because the TWG agrees with the present policy settings and the government agrees with the recommendation.
Also dead in the water alongside CGT are 13 other recommendations, including all the TWG’s proposals for using the proceeds of a CGT to reduce personal income tax, a framework for applying any new “corrective taxes” and the development of a clearer articulation of the government’s goals regarding sugar consumption and gambling activity.
Finally, there will be no new environmental tax proposals beyond those already on the tax policy work programme. This also means that this parliamentary term there will be no resource rentals for water or input-based instruments such as a fertiliser tax.
The lack of significant environmental taxation changes is perhaps as big a surprise as the CGT decision. This is not only because it represents a clear rebuff for the Green Party, but also because during the media lock-up at the launch of the TWG’s final report, Sir Michael Cullen made much of recycling environmental taxes to help farmers transition to a lower-emission economy.
Not proceeding with a CGT means the TWG’s suggestions over using the proceeds to reduce income tax particularly for lower income earners will not proceed. This leaves the government with the problem of what to do about income tax thresholds which now have not been adjusted since 2010. Pressure for some movement on these will continue to build up until and beyond next year’s election.
The 11 recommendations that the government considers a high priority for the tax policy work programme are a mix of system integrity issues such as a review of tax loss-trading, better compliance around debt collection, and more politically visible initiatives like seismic strengthening work (which given it’s been more than eight years since the Canterbury earthquakes is something which really should have been resolved by now).
Devising rules for land speculators and land bankers is also a high priority but there’s not much detail at the moment. The TWG suggested that local government should levy residential land taxes on vacant land and the government has told the Productivity Commission to include this issue as part of its inquiry into local government funding and financing. We shall have to wait to see more detail on this initiative.
The TWG made a number of recommendations regarding compliance costs for businesses. All of these have been put into the “consider for inclusion in the tax policy work programme” category. It would have been good to see these be given higher priority, as several measures which increased thresholds such as that for provisional tax would be very helpful for smaller businesses. Instead, the tax policy process means that it could be two, or more likely three, years at the earliest before these recommendations become law.
To be frank, although the TWG’s recommendations around business compliance costs are welcome, they are also on the timid scale. For example, there’s nothing which compares with the proposal in the recent Australian Budget allowing small businesses to instantly write off assets costing less than A$30,000.
All of the TWG’s proposals regarding international taxation are already in the work programme. This means that an Inland Revenue discussion document about a digital services tax will be released in May.
Watching international developments on equalisation, or diverted profits taxes, is part of the current work agenda. It’s interesting to note that Britain’s HM Revenue and Customs has seen its tax take from diverted profits tax rise from £31 million in the 2015-16 tax year to £388 million in 2017-18. HMRC puts part of the increased tax take down to behavioural changes by multinationals following the introduction of the diverted profits tax. Could a diverted profits tax have a similar effect in New Zealand?
The TWG’s recommendations relating to retirement savings such as reducing prescribed investor rates of KiwiSaver funds for those earning below $48,000 have been parked in the “consider for inclusion” pile. And the deferment of this work highlights one of the issues a CGT was intended to address: the imbalance in tax treatment between various asset classes.
With the decision to walk away from a CGT, property investors retain their significant tax advantage over ordinary savers and those investing via KiwiSaver funds. It is this continuing imbalance in treatment plus the wider concern of growing wealth inequality which means that despite her decision today the prime minister has, as Macbeth lamented, “scotch’d the snake not killed it.” We will be re-litigating these issues in another ten years if not sooner.
This article first appeared on The Spinoff