Tax News

The OECD proposes a crypto-asset reporting framework

The OECD proposes a crypto-asset reporting framework

1 Dec, 2022 | The Week in Tax

  • The OECD proposes a crypto-asset reporting framework
  • New levy proposal for farmers’ greenhouse gas emissions;
  • TOP’s bright idea about tax rate

Last week, the OECD launched its Crypto-Asset Reporting Framework (CARF). This is a response to a G20 request that the OECD develop a framework for the automatic exchange of information between countries on crypto-assets. In other words, it is going to be a development of the existing Common Reporting Standards on the Automatic Exchange of Information or CRS. The CARF was presented to G20 Finance Ministers and Central Bank Governors for discussion at their meeting this week in Washington D.C.

The proposed rules cover four areas:

  1. the scope of crypto-assets to be covered,
  2. the entities and individuals subject to data collection and reporting requirements,
  3. the transactions subject to reporting as well as the information to be reported in respect of such transactions and
  4. the due diligence procedures to identify crypto-asset users and controlling persons and to determine the relevant tax jurisdictions for reporting and exchange purposes.

CARF is intended to complement the CRS and mean that crypto-assets will be subject to automatic exchange of information reporting. Now the reason that that has come up is unsurprising really. Individuals holding wallets which are not affiliated with any current financial institution or service provider, and are therefore then able to transfer crypto-assets across jurisdictions. As the OECD report notes:

“this presents the risk that relevant crypto-assets are used for illicit activities or to evade tax obligations. Overall, the characteristics of the crypto asset sector have reduced tax administrations visibility on tax relevant activities carried out within the sector, increasing the difficulty of verifying whether associated tax liabilities are appropriately reported and assessed”

This is a very long way of saying there’s probably a lot of tax evasion going on in the crypto-assets sector.

CARF is therefore an obvious response. It is also part of the huge ongoing trends in the modern tax world of the acceleration in reporting and exchange of information between jurisdictions. This is a very, very significant development in the tax world that happened in the wake of the Global Financial Crisis and has largely gone unreported in the wider press although it appears to be generally accepted by the public. When you align this alongside what’s happening with the Pillar One and Pillar Two proposals, then the days of tax havens where money can be parked outside the tax net of major jurisdictions, are numbered.

So what crypto assets are covered? Well, the definition is pretty broad, it targets assets “that can be held and transferred in a decentralised manner and without the intervention of traditional financial intermediaries”, i.e. banks and other financial institutions. This includes stablecoins, derivatives issued in the form of crypto-assets and certain nonfungible tokens.

There are three categories excluded from what’s termed “Relevant Crypto-Assets”:

  1. crypto assets, where have it’s been determined they cannot be used for payment or investment purposes,
  2. Central Bank Digital Currencies which represent a claim in Fiat Currency on an issuing Central Bank or monetary authority, which function similar to money held in a traditional bank account,
  3. Specified Electronic Money Products that represent a single Fiat Currency and are redeemable at any time in the same Fiat Currency. (Not sure I’ve encountered any of these myself, to be honest).

Reporting entities are any intermediary or service provider which is facilitating exchanges between relevant crypto-assets or between relevant crypto-assets and fiat currencies. Generally, they will be subject to the reporting requirements of the jurisdictions in which they are either tax resident or have a regular place of business or branch through which they carry out reportable transactions.

Keep in mind, CARF ties in with the CRS which is already hugely comprehensive and covers most of the main tax jurisdictions and tax havens. The ability for crypto asset service providers to slip out from underneath the CARF reporting requirements is going to be quite limited.

Three types of transactions are going to be reportable:

  1. exchanges between Relevant Crypto-Assets and fiat currencies,
  2. exchanges between one or more forms of Relevant Crypto-Assets, and
  3. transfers of Relevant Crypto-Assets.

CARF has been developed to sit alongside CRS and in fact at the same time the OECD carried out its first comprehensive review of the CRS regime. It’s proposing some amendments to bring new financial assets, products and intermediates within the scope of CRS.  The changes are also being made to try and avoid duplicate reporting with that which is expected to happen under CARF.

The entire CARF framework runs to over 100 pages. It should be signed off subject to any further work requested by the Central Bank Governors and Finance Ministers at their meeting this week. There will no doubt be some further tweaking, so it’s not yet all set to go. No doubt there will also be some lobbying for changes in the regime.

CARF is, as I said earlier, part of a growing trend for international cooperation on the sharing of information. When implemented it basically will probably mark an end, or certainly a restriction, on the use of crypto assets for tax evasion and other nefarious purposes.

Making farms pay

On Tuesday, the Government released its proposals for how to price agricultural emissions.

These are in response to the recommendations earlier this year from He Weka Eke Noa, the Primary Sector Climate Action Partnership, for a farm level pricing system. The Climate Change Commission, He Pou a Rangi, also provided separate advice on agricultural emissions.

The Government’s proposals try and integrate what He Weka Eke Noa and He Pou a Rangi have suggested. The intention is to price agricultural emissions at the farm level. But it comes with a big stick – if the sector cannot reach agreement by 1st January 2025, then agricultural emissions will be be priced under the Emissions Trading Scheme.

The key part of the proposal is a farm level split gas levy to price agricultural gas emissions. It will apply to farmers and growers who are GST registered and meet certain livestock and fertiliser use thresholds. There would be separate levy prices set for long lived gases and biogenic methane and these will be set up after advice from the He Pou a Rangi and in consultation with the agricultural sector and iwi and Māori.

The long-lived gases (basically carbon) price will be set annually and then linked to the New Zealand Emissions Trading Scheme unit price. There’s a separate biogenic methane levy which will be adjusted based on progress towards domestic methane targets. One of the feedback matters the Government is seeking is whether that methane levy price should be reviewed annually or every three years.

With regards to the revenue raised, the Government proposes it that the revenue is used to fund incentives and sequestration payments, with any remaining revenue to fund the administration of the pricing scheme and a joint government and Māori revenue recycling strategy. There’s a proposal for incentive payments for a range of on-farm emissions reduction technologies and practises. I fully endorse this policy of using funding from an environmental tax to help the transition.

But if you’ve been watching this, you’ll know it has taken a long time to get here. It’s almost 20 years since the infamous ‘Fart tax’ was first proposed and Shane Ardern MP drove a tractor up the steps of Parliament. So progress has been very slow on this, which I personally find very frustrating.

Here in the city, we need to be working on reducing our transport emissions. Rather ironically, on the same day of the Government announcement, Ruapehu Alpine Lifts went into voluntary administration. The ski field operation has clearly been affected not just by one very bad year and the effect of Covid. This is something that’s been building for some time.

We’ve also had the recent floods and damage reports coming out of Nelson where the insurance claims so far total $50 million. So change is happening all around us and my view is we are going to have to adjust to it and try and do something to reduce emissions as part of the global effort. We can’t rely on everyone else to do it for us.

TOP tackles tax bands

Finally, this week, there’s been a lot of talk about tax cuts ahead of next year’s General Election, particularly in the wake of the massive u-turn by the UK government over a proposed higher rate tax cut which has now resulted in the sacking of the Chancellor of the Exchequer (Finance Minister) Kwasi Kwarteng.

Amidst all of that chaos The Opportunities Party released its two-phase tax policy, phase one of which contains substantial tax cuts. But what caught my eye about TOP’s suggestion is their proposal to introduce a tax-free threshold of $15,000, together with adjusted tax thresholds.

Now tax-free thresholds are expensive, but they are seen around the world. Australia has one for the first A$18,200. The UK tax free personal allowance is £12,570 and America has a flat $12,000 exemption.

But what I thought is interesting about TOP’s proposal is they have looked at the question I’ve talked at length about what happens for low- and middle-income earners when their income crosses the current $48,000 threshold and the rate jumps from 17% to 30%. Under our current tax structure 12.5 percentage point jump is the highest such rate – the next jump at $70,000 is only from 30% to 33%.

So, I’ve been thinking for some time that we really ought to be looking at these thresholds and rate bands and maybe combining three into two, which is what TOP propose.

Now, TOP have got to either win an electorate or get across the 5% threshold before they’ll be in any position to propose their policy. (The second part of their policy would fund those tax cuts by a land value tax, which, of course, is longstanding TOP policy). We’ll have to wait and see until after next year’s election.

But if you want to hear more about what type of tax changes could happen and their implications then this week on RNZ’s The Detail podcast, Jenée Tibshraeny of the Herald and I spoke to Sharon Brettkelly about tax cuts here and in the UK, how our tax system works and what could be done if we’re helping people at the lower income level.

Well, that’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts.  Thank you for listening and please send me your feedback and tell your friends and clients.

Until next time kia pai te wiki, have a great week!

Terry’s top five

Terry’s top five

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.

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

 

Inland Revenue’s new approach to tax investigations

2 Dec, 2019 | The Week in Tax

  • Inland Revenue’s new approach to tax investigations
  • Waste disposal levy good example of an environmental tax
  • How being six minutes late could cost the ATO almost $100 million

 

Transcript

This week, more highlights from the Chartered Accountants of Australia New Zealand Annual Tax Conference, are the proposed waste levy increases a good behavioural tax and how being six minutes late could cost the Australian Tax Office nearly 100 million dollars.

CAANZ Annual Tax Conference

Last week, I was at the Chartered Accountants of Australia New Zealand Annual Tax Conference. We heard a number of papers from Inland Revenue, including from the commissioner herself. But the one I want to focus on is on their investigations and what is the future of investigations going forward now. This was chaired by Scott Mason of Findex and Tony Morris of Inland Revenue.

Scott began by pointing out something we had noticed over the past few months – that Inland Revenue had not appeared to be very active in the investigation field and certainly wasn’t being very visible. And he raised the point that in such an environment, voluntary compliance falls and “industry practices” emerge where advisers respond to non-activity from Inland Revenue by thinking that keeping quiet is actually a valid strategy.

Tony Morris responded by acknowledging that that was an issue, but in fact, Internal Revenue after the business transformation restructure was now moving forward again.  It had much more data available and understood that data better. For example, he noted that there was now potential to get the EFTPOS data for a particular industry. And then from there calculate what should be the potential cash sales for a business in that industry. The analytics were now available to determine more quickly if there were issues around non reported cash sales.

That’s something I’ve mentioned in the past. Now Inland Revenue will in some cases physically visit a business to see what’s actually going on behind the counter. So a question was then put to Tony – why not release some of this data to tax agents? This is an approach I favour. Tony replied that this can be a two-edged sword. Obviously, tax agents need to use that information proactively. But clients may not want you to know that they’re not doing that well, or that their positions are now in jeopardy, because they have been quietly salting away piles of cash unnoticed, such as the baker who got put away for nearly five years this week. He was jailed after failing to declare some six and a half million dollars in cash sales.

So Inland Revenue obviously wants to clamp down on such behaviour and identify much more quickly what’s going on. But the converse of releasing data to tax agents is that there is a risk that something might be seen as a benchmark. Therefore rather perversely it might encourage behaviour if people say “Well, if that’s the benchmark, we’ve got a bit of leeway to quietly salt away some cash”.

I think in the end the answer to this question of the cash economy is going to be what I talked about last week – the Swedish example – of fiscal control units, a centralised approach that’s already happening.

Australia and New Zealand are slightly behind the eight ball on that area of progress. But it is a matter where we could see change similar to changes we’re seeing in the rest of the world. And I would expect that Inland Revenue, with its enhanced capabilities, may decide that’s an area where it wants to move forward into.

Nudge letters

What Tony Morris talked about was Inland Revenue has developed a policy of what they call sending out “nudge” letters, which are to encourage behaviour in the right place. And these are sometimes often sent to a wide number of clients. The problem is that while that might be encouraging better behaviour at a macro level, it does cause some confusion at the micro level for individual clients who think they are already compliant. So why are they receiving notes about compliance with the automatic exchange of information, for example?

But he also revealed one or two interesting snippets.  Particularly one which I think people who file their own tax returns ought to be aware of.  If you’re filing your own tax return online Inland Revenue can see how you progress that filing.  They will note if you are amending the expenses  – this is one thing they watch very carefully. Tony Morris gave the example of someone who amended the expenses that they were claiming in their tax returns 80 times. He also noted that more often than not, early filings before the normal due dates are more likely in Inland Revenue’s experience to be fraudulent.

But he also talked about how Inland Revenue could perhaps use social media to put a message across in a very specific way.  We do know Inland Revenue watches social media closely. For example, Inland Revenue might notice that a client is putting his boat into the water at Whangamata on Sunday. So the question that they might put  through myIR is “how is your FBT return going?” Because FBT on twin cab utes is one of the great under-reported and probably undeclared sources of income that it might want to have a look at.

That was all very, very interesting. It gave an insight into where Inland Revenue is at, where it thinks it’s going to go, particular areas of interest to it and how it approaches these issues at a tactical level. The ability to watch what goes on in a tax return I think is fascinating and should serve as a warning for people.  And how it also might possibly make more use of watching social media to then make quiet “nudges” to make sure people are compliant. Tony also made a note that the initiatives on the property area have seen the strike rate gone up astronomically since they started really looking into this area in the wake of the introduction of the Brightline test in October 2015. So that was an absolutely fascinating session from Scott and Tony.

Behavioural taxes

Another highlight of the conference was a debate about whether behavioural taxes were a good thing to have. The team arguing against included Barry Hollow of Inland Revenue.  As he said, he found himself in a very unusual position for a tax policy person arguing against such taxes.  His extremely witty yet insightful and funny speech carried the day and the motion was defeated. The government wasn’t listening, though, because this week it released proposals for increasing the waste disposal levy.

And to repeat a point I made earlier at the time of the launch of the Tax Working Group, Sir Michael Cullen talked about recycling the revenue from environmental taxes to help people transition to a lower carbon economy. Or in this case, a lower waste economy, because the amount of waste per capita New Zealand produces is extraordinary. There’s also the fact this waste disposal levy is a very good example of a behavioural tax which works.

The Tax Working Group cited the example of the U.K. They raised their waste levy tax rate from £10 pounds a tonne in 1996 to £80 a tonne by 2016. But over the same period of time, the annual waste in landfills fell from 50 million tonnes a year to 10 million tonnes a year.

https://www.interest.co.nz/sites/default/files/styles/full_width/public/embedded_images/Baucher%202.jpg?itok=Cr0dx6Vj

So, you saw the tax increases achieving the desired result of lower waste And that’s something I think we really need to think about going forward. The reflex “All taxes bad, no tax is good” approach is understandable in political terms.

But you’ve got to look beyond the politics of this. If this tax is being recycled to reduce waste and we’re moving away from the use and disposal economy to reach “the circular economy” as it is called, then encouraging that is something we all need to be on board with.  Because our environment in New Zealand is our key selling point. You know Stephen Colbert on The Late Show. He’s showing off the beauties of New Zealand and we have $46 billion of agricultural exports. They’re all dependent on our natural environment. So protecting them and making sure we make the best use of it and keep it free of pollution so we are green and clean is something we should all be behind.

The ATO stubs its toe

Finally from the “So you think you’re having a bad day” files, the Australian Tax Office has been forced to ask the Federal Court, the highest court in Australia, for special permission to appeal a decision it lost in the High Court, involving a A$92 million tax bill against mining giant Glencore. This is quite a significant transfer pricing case, by the way. And apparently the reason why the ATO had to find a special motion was it was six minutes late in meeting a critical filing deadline last month.

Now, schadenfreude aside, the case is a good, if extreme, reminder of the critical importance of filing tax returns and elections on time. Inland Revenue is reasonably flexible about late filed tax returns and can be persuaded to waive penalties in many cases. However, it is typically inflexible about other deadlines, such as those involving the disputes process, Notices of Proposed Adjustment, Notices of Response and elections to join the look through company regime. Ask any tax agent and I’m pretty sure we’ve all had situations where we’ve encountered delay in filing for the look through company or its predecessor, the qualifying companies.

These are really, really important and the big lesson is be aware of the timing of your elections and don’t leave it to the last minute. Otherwise, you too could be tripping up over a significant tax bill, although maybe not to the tune of 100 million dollars.

Next week, I’ll be joined by Chris Cunniffe of Tax Management New Zealand. We’ll be discussing the role of tax pooling and also the results of TMNZ’s recent survey of tax agents. Inland Revenue might not like that one too much.

Have a great week. Ka kite āno.