When is a subdivision a GST taxable activity

When is a subdivision a GST taxable activity

  • loans to shareholders
  • a G20 wealth tax blueprint

It was a busy week in tax with Inland Revenue releasing guidance in relation to a couple of commonly encountered scenarios. The first is QB 24/04 When is a subdivision project a taxable activity for GST purposes?

This covers the frequently discussed and very important issue of what is the GST treatment when you are subdividing land into two or more plots? The standard position about GST is that you must register if you’re carrying on a taxable activity and the value of those supplies exceeds the registration threshold of $60,000.  

What’s a taxable activity?

Clearly many subdivisions will exceed that $60,000 threshold when they are sold so what represents a taxable activity? In order for a taxable activity to exist it must be carried on continuously or regularly. Therefore, it follows that for a subdivision to be continuous or regular, it usually needs to involve the sale of more than one lot. A subdivision which only involved one sale would usually be regarded as a one-off activity because it does not meet this threshold of continuous or regular.

Notwithstanding that the Inland Revenue guidance points out that some subdivisions which only led to one sale may in fact be continuous and regular. But that would only be if the level of activity involved was very high. Now, like so much of tax, it’s this comes down to the question of the facts of a particular case.  Very high in this context might be something like construction and sale of a large office block, or more likely, because more often than not we’re talking about subdivisions of residential land, an apartment block.

The guidance continues the more subdivision plots are divided, the more likely it is to be deemed as being continuous or regular. Following the Newman decision way back in 1995, if a subdivision leads to the sale of four or more lots, that’s typically taken as the benchmark for determining that the continuously or regularly is happening and there is a taxable activity.

On the other hand, what happens when there are two or three lots? Then you have to consider the level of the activity relative to the number of lots being sold in order to determine whether or not this activity is continuous or regular. Therefore, you’d look at the level of development work, the time and effort involved, the level of financial investment and the level of repetition. This last point is probably most critical. If you’re repeating the process multiple times, this is more likely to fall into the continuously or regularly category. But as the guidance notes, everything is fact dependent.

On the other hand, the factors that are not so relevant are whether or not the subdivision is commercial. It doesn’t matter whether the subdivision has a “commercial” flavour or you are subdividing your own land to downsize. Anything done without an intention to sell the resulting land is not relevant. For example, if you build a house on a subdivided lot with the intention of living in it, but later change your mind and decide to sell, work done before you change your mind is not relevant.

Overall, this is useful guidance which comes with a helpful accompanying fact sheet. Keep in mind that the GST treatment is not tied to the income tax treatment. Your project might not be a GST taxable activity, but it could well be subject to the bright-line test or any of the other land taxation rules.

Another common issue – loans to shareholders

Moving on, the other topic, on which Inland Revenue has released useful guidance is a draft interpretation statement on the income tax position in relation to overdrawn shareholder loan account balances (sometimes called shareholder current accounts). Now, as anyone who works with small businesses will tell you this is actually a pretty common scenario. Despite this, the income tax position is not always as well understood as it should be.

In my experience, overdrawn shareholder current account balances typically arise in two scenarios. Firstly, where the owner or shareholder is taking out more in drawings than they’re being paid as a shareholder or employee or any other form of payment. This is a fairly common scenario.

The other instance is where the company has realised the substantial capital gain and shareholders extract the cash without waiting to consider the tax implications of doing so. Often in those situations, advisers don’t find out until maybe months afterwards. At that point it can become quite difficult to unwind the tax consequences because the numbers involved are quite substantial.

It’s therefore good to have Inland Revenue guidance and this comprehensive interpretation statement runs to 41 pages begins with the summary of the basic rules. A dividend is deemed to arise for a shareholder if they are paying little or low interest on an overdrawn shareholder loan account.

The amount of a dividend on an interest free or low interest loan typically represents the difference between a benchmark interest rate that should be charged and the amount of actual interest rate occurring on the loan. Benchmark for this purpose is Inland Revenue’s prescribed rate of interest, which since 1 October 2023 has been  8.41%.

A dividend can also arise where the loan has been advanced to an associated person of the shareholder. This can lead to some quite involved tracing of shareholdings and related calculations about percentage of shareholdings. This is necessary to determine if there is an association and whether that associated company is part of the same 100% owned group and therefore potentially eligible for the exemption on intra-group dividends. This is another area where I’ve encountered situations where this associated person issue hasn’t been picked up.

Incidentally, it’s worth noting, by the way, that although for New Zealand tax purposes, the amount of the dividend is the amount of interest that should have been charged in Australia and the UK, the amount of the dividend is deemed to be the full amount of the advance made. This might be something we might see Inland Revenue take a look at as it’s something that has occasionally come up in discussions with officials.

Loans to shareholder-employees

Were the shareholder is also an employee of the company, then the low or interest free loan is not treated as a dividend but is instead subject to fringe benefit tax. The amount of the benefit is the difference between the interest paid and the prescribed rate of interest. Something to note here is that the shareholder-employee doesn’t solely mean someone within the provisional tax regime, but it also includes shareholders who are employees and whose salary are subject to PAYE There’s a couple of useful flow charts to help people determine who might be captured by these rules.

The draft interpretation statement also notes that typically interest paid by a shareholder on an overdrawn current account is generally not deductible. This is because usually the drawings are often applied for private or domestic purposes, and so there’s no link to an income earning process. However, in some cases the money might have been withdrawn to invest in a residential property or some other income producing asset, in which case the interest would become deductible, if all the other deductibility criteria can be met.

One other key point to note is what happens if a shareholder is no longer required to repay the overdrawn balance, because the company forgives or remits the debt in some way. In this case the full amount of the loan will be deemed to arise either as a dividend or under the financial arrangements regime. In either case the shareholder will usually be taxed on the amount that’s been remitted.

The interpretation statement also covers scenarios when resident withholding tax might need to be deducted and interest therefore be reported as investment income. This would be somewhat unusual, but the interpretation statement explains when it might happen.

Overall, this is an important and useful document setting out the rules pretty clearly on a topic which as I noted is frequently encountered amongst small businesses but isn’t always as policed or managed as effectively as it should be. It’s also accompanied by a more digestible 8 page fact sheet. Consultation is open until 2nd August.

A blueprint for taxing billionaires?

One of the interesting things going on around the world in the tax policy area now is something of a trend amongst international organisations such as the International Monetary Fund (IMF), the Organisation for Economic Cooperation and Development (OECD) for releasing papers for discussion on the taxation of capital and wealth.

The latest such paper A blueprint for a coordinated minimum effective taxation standard for ultra-high-net-worth individuals was commissioned by the Brazilian G20 presidency earlier this year. The report was written by the French economist, Gabriel Zucman, a protégé of Thomas Piketty. It proposes a framework the approximately 3,000 or so billionaires in the world to pay at least 2% of their wealth in individual income tax or wealth taxes each year.

Zucman’s report notes there been a vast improvement in international tax cooperation since the mid-2010s, particularly with the Common Reporting Standard on the Automatic Exchange of Information which commenced in 2017. He also pointed to the recent agreement hammered out by the OECD for a minimum tax of 15% on large multinationals. (It’s worth noting though that agreement has yet to be fully implemented as progress has slowed recently).

Zucman correctly points to this growing international cooperation and exchange of information as laying the baseline for further international cooperation in the form of what he terms a common minimum standard, ensuring an effective taxation of ultra-high net worth individuals. According to Zucman this “would support domestic policies to bolster tax progressivity by reducing incentives for the wealthiest individuals to engage in tax avoidance and by curtailing the forces of tax competition.”  This would target the tax havens where much of this wealth is sheltered.

The paper estimates that a 2% tax on those 3,000 billionaires could realise between US$200 and US$250 billion U.S. dollars in revenue annually. If it was extended to those worth more than $100 million, that could generate another US$100 to US$140 billion per annum. These tax revenues would be collected from “economic actors who are both very wealthy and undertaxed today”. Those affected might not agree with this assessment that they’re presently under taxed.

The paper is realistic enough to note that there are real challenges with the proposals, such as how to value the wealth, ensure effective taxation if some jurisdictions don’t agree to implement it, and of course compliance by taxpayers. It’s a bold proposal which has attracted a lot of attention although I’m sceptical about the potential level of revenue which could be raised. We really don’t have a very detailed understanding of the composition of the wealth and where it is held of the very wealthy. That’s an issue which would need to be addressed. And as I mentioned, there are serious issues around valuations and informed enforcement, which Zucman acknowledges.

Starting a conversation?

But for me, the most interesting thing to me about this whole proposal, it’s the latest. As I said, it’s the latest in the line of papers coming out of the likes of the G20, the OECD, the IMF, the World Bank, all of whom are basically saying that we are not taxing wealth sufficiently and we need to do something about that to address inequality. As Zucman himself puts it in the Foreword of the report

“The goal of this blueprint is to offer a basis for political discussions – to start a conversation not to end it. It is for citizens to decide through democratic deliberation and the vote how taxation should be carried out.”

In other words, he is repeating my old precept that tax is politics.

My personal view is we need to have a broader discussion around the taxation of capital. One of the points to emerge from the current debate going on over replacing the Cook Strait ferries is that the new ferries represented just 21% of the total cost of Project iReX. The other 79% represented the cost of upgrading the supporting infrastructure not just for the larger ferries but also to make it climate change and earthquake resilient for the next 100 years.

Even if we dialled back the futureproofing to, say, 50 years, we’re still talking about significant sums of investment. We’re also still left with the key point of how will we pay for the vast amount of infrastructure that we will need to upgrade to deal with the continuing impact of climate change. In my view our politicians have not yet seriously engaged with us on this issue.  

Meanwhile in the UK…

And finally, this week a quick note on the UK election which is next Thursday. The likelihood is that the opposition Labour Party is heading for a massive win. One of their key tax proposals is the abolition of the remittance basis or non-dom tax regime.

But not every voter has understood exactly what that means. As Labour candidate Karl Turner recounted to the Guardian

“We met a guy who said he was going to vote Labour but wouldn’t now because he had just heard that we were taxing condoms,”

“I said, ‘condoms?’ ‘Yeah,’ he said: ‘I just heard on that [pointing to the TV] that you are taxing condoms, and I’m not having it. You’re not getting my vote.’ It was Terence [Turner’s parliamentary assistant] here who worked it out.

“‘We’re taxing non-doms, not condoms,’ I said. ‘Oh,’ he said. ‘Like the prime minister’s wife? Ah.’ He calls out: ‘Margaret: they’re taxing non-doms, not condoms.’”

And on that note, 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 to rā. Have a great day.

(Loaded to Soundcloud 30 June 2024. Appeared interest.co.nz 1 July 2024).

The Government is considering a review of the charitable exemption for religious organisations this term.

The Government is considering a review of the charitable exemption for religious organisations this term.

  • Canada loses patience and imposes a Digital Services Tax effective 1 January 2024
  • Inland Revenue appears to be gearing up for a fringe benefit tax initiative.

Late last week, in response to some questions about a review the charitable exemption that religious organisations enjoy, the Prime Minister responded he was “quite open” to the idea, adding “I’ve actually been thinking through the broader dimension of our charitable taxation regimes…We will certainly be looking at things like that this term.”

The hint that a review of the exemption religious organisations and churches enjoy provoked a testy response from Brian Tamaki, among others which was in turn rebuffed by the Finance Minister, Nicola Willis.

But this is a topic which keeps popping up and obviously people have some concerns about how the exemption operates. It was also reviewed in some depth by the last Tax Working Group.

So what’s the exemption worth?

Putting some numbers around the value of the charitable exemption is a little difficult. Every Budget Treasury prepares a paper on the value what are called “Tax Expenditures” that is specific tax exemptions granted under the Income Tax Act.  According to the Tax Expenditure statement prepared by Treasury for Budget 2023,

the forecast value for the year ended 31 March 2023 of charitable and other public benefit gifts given by companies was $32 million. In relation to the donations tax credit for charitable or other public benefits (including to religious organisations), value for the same period was estimated to be $315 million. (Which grossed up at 33% is ~$945 million.)

The annual report of Charities Services include a snapshot of the finances for 27,000 charities registered with it. According to the report for the year ended 30th June 2023 the income of the religious activities sector was $2.39 or just under 10% of the total income across all charities.

It’s interesting to consider charities income by source for the same period.  $5.29 billion represented donations, koha and fundraising activities. Based on Treasury’s Tax Expenditures statement it appears donations tax credit or charitable donations by companies has been claimed for maybe only a billion dollars of this sum. Interestingly, about half of the total income charitable sector earns during the year comes from services and trading.

Overall Charities Services estimated that the total expenditure by charities was about $22.7 billion. In other words about $2.1 billion of the funds raised were not spent or distributed for whatever reason.

Charities Services also provides a quarterly snapshot of new registrations. The latest available is for the period to 30 June 2023 when it received 388 applications (of which 78 were subsequently withdrawn). Religious activities seem to represent a fairly substantial portion of the new registrations.

What did the Tax Working Group recommend?

The last Tax Working Group took a look at this issue and the best place to consider its views is in Chapter 16 of its interim report which sets out the issues involved.

In its final report the Tax Working Group noted it had “received many submissions regarding the treatment of business income for charities and whether the tax exemption for charitable business income confers an unfair advantage on the trading operations of charities.”  

The Tax Working Group responded as follows:

“[39] It considers that the underlying issue is more about the extent to which charities are distributing or applying the surpluses from their activities for the benefit of the charitable purpose. If a charitable business regularly distributes its funds to its head charity or provides services connected with its charitable purposes, it will not accumulate capital faster than a tax paying business.

[40] The question then, is whether the broader policy tax settings for charities are encouraging appropriate levels of distribution. The Group recommends the Government periodically review the charitable sector’s use of what would otherwise be tax revenue to verify that the intended social outcomes are actually being achieved.

I think if the Government is going to review the charitable sector, and religious organisations in particular, the Tax Working Group’s recommendations will be starting point. In April 2019 when the last Government responded to the Tax Working Group’s eight recommendations on charities it noted that Inland Revenue’s Policy Division was already working on five of the recommendations. Two of the remaining three were under consideration for inclusion in Inland Revenue’s policy work programme. The other, in relation to whether New Zealand should apply a distinction between privately controlled foundations and other charitable organisations, would be undertaken by the Department of Internal Affairs, which oversees Charities Services. It’s likely the COVID pandemic disrupted this proposed work programme.

We may get a clue as to the Government’s thinking in next month’s budget, but I think the Government’s focus will be on getting its tax relief package out of the way first so Inland Revenue’s resources will be applied there. The Government and Inland Revenue may then look at this exemption, but I imagine given the fuss and general controversy around such a move, it’s probably relatively low priority. Maybe we’ll see something in the Budget.

Canada loses patience and introduces a digital services tax

There was an interesting development in the Canadian budget, which was released earlier this week. The Canadian Government has decided to push ahead with the introduction of a digital services tax (DST) on large tech companies. Over a five-year period, this was expected to raise ~C$5.9 billion (about NZ$7.3 billion).  

Canada had held off for two years to allow for the conclusion of the international negotiations on Pillar 1 and Pillar 2 to conclude, but they’ve dragged on with no clear conclusion in sight. The Canadians have therefore decided to push the button on a DST commenting:

“In view of consecutive delays internationally in implementing the multilateral treaty, Canada cannot afford to wait before taking action….The government is moving ahead with its longstanding plan to enact a Digital Services Tax.”

The tax would begin to apply for the 2024 calendar year, with the first year covering taxable revenues earned since January 1st, 2022. Understandably, this has provoked a pretty vigorous reaction from the United States, where the headquarters of all these tech companies are situated.

What does that mean for us down here? Well, again, we may find out more in the Budget. The Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Bill which was enacted just before 31st March included legislation for our digital services tax. The Government is therefore in a position that it can watch to see if other countries follow Canada’s lead and then decide whether it should follow suit.

The whole purpose of the digital services tax legislation is to act as a backstop in the event the Two-Pillar solution does not reach a satisfactory conclusion. At the moment negotiations are stalled thanks to vigorous push back by the the companies most affected, such as Alphabet, the owner of Google, Amazon and Meta, owner of Facebook. It’s interesting to see this Canadian move and I wonder if other countries will push ahead with their own DSTs. There are quite a number lot of digital services taxes around the world, with many on hold pending the outcome on the Two-Pillar negotiations.

Taxing Google to help New Zealand media?

Just as an aside, as is well known the media in New Zealand is in desperate financial straits and a question that keeps coming popping up is taxing the digital giants more effectively. That’s because a substantial portion of the advertising revenue that in the past went to New Zealand media companies is now going overseas in the form of (little taxed) various licence payments and fees for services to the the likes of Alphabet and Meta. Watch this space I think things are about to get very interesting.

Inland Revenue gearing up for fringe benefit tax initiatives?

This week, Inland Revenue consolidated the various advice and commentary on fringe benefit tax advice it’s published over the years under a single link. This seems to me to be further signs that Inland Revenue is gearing up to launch a fringe benefit tax initiative. It follows comments by the Minister of Revenue Simon Watts, in several speeches in which he referred to Inland Revenue’s regulatory stewardship review of FBT released in 2022. I got the clear impression that he, and therefore Inland Revenue were keen to look further at this matter and investigate what revenue raising opportunities may arise through a more through stricter enforcement of the FBT rules.

As a very good article by Robyn Walker of Deloitte noted  FBT is nearly 40 years old. It’s a very strong behavioural tax. It exists to stop people converting taxable salaries into non-taxable benefits. So, it never really should be an extensive tax raise revenue raiser.

That said, I think there have been issues particularly in relation to the status of twin cab utes and the work-related vehicle exemption as to whether there is sufficient enforcement going on. My expectation therefore is Inland Revenue is gearing up to launch a number of fringe benefit tax reviews and this small step consolidating its previous commentary and advice into a single space is another sign.

Got an idea to improve our tax system? Enter the Tax Policy Charitable Trust scholarship competition

Finally, this week, the Tax Policy Charitable Trust has announced its 2024 scholarship competition. This is designed to support the continuation of leading tax policy research and thinking and to inspire future tax policy leaders. Regular listeners to the podcast will know we’ve had past winners Nigel Jemson and Vivien Lei  as guests, and I’m looking forward to meeting the next batch of scholarship recipients.

Entrants may submit proposals for propose significant reform of the New Zealand tax system, analyse the potential unintended consequences from existing laws and changes, and suggest changes to address them. It’s open to young tax professionals aged 35 and under on 1st January 2024 working in New Zealand with an interest in tax policy. The winning entry this year will receive a $10,000 cash prize. The runner up will receive $4000 and two other finalists will each receive $1000 each.

I look forward to seeing what comes out of this and hopefully we will have the winners on our podcast sometime in the future. In the meantime good luck to all those who enter.

On that note, 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 to rā. Have a great day.

A new FBT exemption

A new FBT exemption

  • Interest and short-stay accommodation
  • Climate change
  • Paying for New Zealand superannuation

Happy new tax year and welcome to the 2023-24 tax year and as is often the case the start of a new tax year it means newly enacted legislation is now in place.

However, some of the same old issues are still with us.

The Taxation (Annual Rates for 2022-23, Platform Economy and Remedial Matters) Bill (Number 2) finally received the Royal Assent on 31st March. Apparently this bill had nearly 200 new clauses, which between them had some 42 different application dates. So, it was a surprisingly complex bill. But remember, its most controversial proposal to standardise the treatment of GST on fund management firms was removed.

As noted, the bill has got quite a considerable amount of new provisions in it, and we’ll pick up several over the next few weeks. But I want to start by looking at the new fringe benefit tax (FBT) exemptions for bikes and public transport. As you may recall, the bill originally had an exemption for public transport, but at the last minute an FBT exemption for bikes was introduced. That actually covers bikes and “low powered vehicles”, so obviously covers scooters, e-scooters, e-bikes. The exemption from FBT applies where you are travelling between home and work. There’s going to be a maximum cost for the low-powered vehicles, which is yet to be confirmed by regulation shortly.

Watch out for the hook in the FBT exemption for bikes and public transport

But the key point to keep in mind is that the bike or scooter must be used mainly for travelling between home and work. Therefore, where that isn’t the case, FBT would still apply. This together with the maximum price cap on the exemption should rule out people buying high end bikes, e-bikes or e-scooters and then using them mainly for private use hoping that it’s exempt from FBT.

Now the exemption is from FBT, there is no equivalent exemption for PAYE. What that means is, it is very important for employers to consider how they provide that benefit and don’t make the mistake of assuming “Well, the FBT exemption applies so nothing to worry about.” The issue that arises is where the employer purchases the bike or scooter directly, then the FBT exemption should apply. However, if the employee chooses and purchases a bike personally and is then reimbursed, then PAYE will apply and there’s no exemption.

This principle also applies to the exemption around the use of public transport or vehicle shares, such as Uber and similar apps. Again, the employer must incur the cost for the exemption to apply. As some have noted that’s actually administratively quite awkward. It seems likely quite a few employers will accidentally trip up on this by reimbursing the employee rather than incurring the costs directly. The hope is that this particular anomaly can be quickly resolved and therefore ease the compliance involved.

Now, the new act also contained a permanent exemption from the interest limitation rules for build to rent dwellings. This exemption will apply where there are at least 20 connected dwellings, and the landlord must offer a fixed term tenancies of at least ten years. By the way, for the purposes of the interest limitation rules, as of 1st April, only 50% of the interest is now deductible unless one of the exemptions, such as a new build or build to rent, applies.

Interest limitation rules and short-stay accommodation – don’t get mucking fuddled

Coincidentally, last week, Inland Revenue released a draft interpretation statement for consultation on the interest limitation rules and short-stay accommodation. The interpretation statement considers how the interest limitations will apply and then also explains what other income tax rules may be relevant depending on the circumstances. The draft interpretation statement runs to 79 pages and is now common practice, it’s accompanied by a fact sheet.

It says much about the complexity of the rules in this area that the fact sheet runs to 13 pages. That’s because not only are the interest limitation rules applicable owners of short-stay accommodation must also take into consideration the potential application of the mixed use asset rules which have been around for over ten years now, as well as the ring fencing rules.

For the purposes of the draft interpretation statement, short-stay accommodation is defined as accommodation provided to paying guests for up to four consecutive weeks. The interpretation statement covers five scenarios where such accommodation is provided:

either in a holiday home;
in a person’s main home;
in a separate dwelling on the same land as the main home;
in a separate property used only for short-stay accommodation; and
on a farm or lifestyle block.

Within each of those five scenarios, the interpretation statement will explain if and how the interest limitation rules will apply, what apportionment rules apply, and whether ring fencing rules apply. There are also variations within these scenarios. If there’s a new build involved, for example, a person’s holiday home is on new build land, then the interest limitation rules will not apply. However, the deductibility of interest is still subject to the other apportionment rules, such as those contained in the mixed-use asset provisions and the ring-fencing rules will still apply.

As can be seen, there’s a great deal of complexity now involved, and this is partly the result of the somewhat ad hoc approach adopted by the Government in tackling what it sees as the preferential treatment of residential property investment. It also reflects generally incoherent policy resulting from the lack of a comprehensive capital gains tax. Whatever, the key lesson to watch out for is that the short-stay accommodation rules are now incredibly involved, so proceed with great care.

The taxation of capital is a longstanding issue and one which in my opinion, will need to be addressed sooner rather than later. Not only because of the tensions it creates within the tax system, but also because of the need to find additional revenue to meet the demands of an ageing population and the impact of climate change, which we’ve spoken about previously.

We like New Zealand Superannuation – but how are we going to pay for it?

And three reports this week highlighted this ongoing tension around meeting future liabilities. Firstly interest.co.nz covered a study coming out the University of Otago regarding New Zealand Superannuation. The study surveyed almost 1300 people in 2022 asking them what they felt about the age of eligibility, means testing and the willingness to increase both current and future taxes to pay for New Zealand Superannuation.

The study found there was widespread opposition to financial barriers for receiving superannuation. Means testing was not popular, but the support for keeping the retirement age at 65 has increased, with almost a quarter ranking the age of 65 as most important aspect of New Zealand super compared with a fifth back in the 2014 survey. 61% of those surveyed ranked raising the retirement age to 67 as the worst policy. The general response was they would prefer universal superannuation.

The New Zealand Super Fund, which has been established to help spread the cost of superannuation was popular. Although there was opposition to increases in current taxes to pay for New Zealand Superannuation, a majority of respondents still support higher current taxes to reduce the size of future increased tax increases given plausible investment returns.

A day earlier independent economist Cameron Bagrie told Newshub he had concluded New Zealand might need to introduce tax increases to have to deal with the impact of climate change and what he called an “infrastructure mess.” In his view, taking into consideration climate change, infrastructure and superannuation “If I step back, though, and think about tax rates in general over the next ten years, where do I think they’re going to be headed? I think they’re going to be biased up as opposed to down.

Climate change will cost “multiple billions” under ALL scenarios

Bagrie will probably be reinforced in his view by the Climate, Economic and Fiscal Assessment for 2023 released last week by the Treasury and Ministry for the Environment. This report concluded,

It is clear that the size and breadth of the economic and fiscal costs of climate change to New Zealand will be large. The physical impact of climate change and the choices the country makes to transition to a low emissions future will affect every aspect of the economy and society for generations. These impacts will have flow on implications for the Crown’s fiscal position.

What particularly seems to be concerning the Treasury and the Ministry for the Environment is that at present in the planning to help meet our climate targets there is an assumption that we will be purchasing offsets from offshore. As the report notes,

The cost of purchasing offshore mitigation to achieve New Zealand’s [commitments] presents a significant fiscal risk. For all scenarios considered, our analysis estimates this cost to be multiple billions over the period 2024 to 2030.

Multiple billions in this case could range from a low-end estimate of around $7.7 billion to perhaps as high as $23.7 billion. Apparently, the costs involved represent between 3.9% to 28% of the new operating expenditure that will be made available in each budget. Therefore, if climate change is swallowing up to 28% of the new operating expenditure that puts pressure on other areas such as education and health.

The report also discusses the potential tax implications. As noted at the start of section 6 on Fiscal Impacts, “Climate change will create multiple cost pressures for the Crown and is likely to negatively affect its tax base through changes to economic activity.” This presents a big question for policymakers and politicians – how do we have enough revenue to square the circle between meeting the demands for health and superannuation, and our climate change commitments? So that is why, like Cameron Bagrie, I think there is an inevitable pointer towards tax changes.

And on that bombshell, 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 to rā. Have a great day.

PM’s Department warns Inland Revenue off looking at a CGT

  • PM’s Department warns IRD off looking at a CGT
  • The IRD admits not having the data on non-compliance with fringe benefit tax
  • Residential property investment looks very undertaxed compared to other investments

Transcript

After the dramas of last week’s tax bill being introduced and then withdrawn within 24 hours, it’s been a calmer week in tax. On Thursday the tax bill was reintroduced without the offending provisions relating to GST on fund manager services. Interestingly, there has been some more measured discussion as to the merits of that proposal, and I do wonder whether a government might introduce an amended proposal at a later date, perhaps this time with any GST raised use to boost incentives for lower income Kiwi savers, such as the proposal made by the Tax Working Group.

Elsewhere this week, I got involved in some interesting debates over the question of whether the tax thresholds should be raised. My view is yes, but on the Today FM show, Max Rashbrooke made the alternative case for better targeting of low-middle income earners. I agree with host Tova O’Brien that tax is going to be a big issue in next year’s election. And like many of us she was looking forward to seeing what the tax policies of the various parties would be.

Whatever policies we’ll see next year will be they’re almost all certain to address the issue of raising productivity in New Zealand and what part tax and economic policy will play in achieving that goal. And that is the subject of an interesting paper released by Inland Revenue just a couple of weeks back. This is the first long-term insights briefing which public service agencies are required under the Public Service Act 2020 to publish at least once every three years. These briefings are designed to provide information on medium and long-term trends, risks and opportunities and provide, “impartial analysis on possible policy options”.

Inland Revenue’s chosen subject was Tax, foreign investment and productivity. A really meaty topic and the whole paper runs to 111 pages. As the briefing explains, it examines how New Zealand’s tax settings are likely to affect incentives for firms to invest into New Zealand and also benchmark our tax settings against those in other countries.

The initial evidence is that, compared with other OECD countries, we appear to have relatively high taxes on inbound investments. This then gets down to the question whether those tax settings are

likely to mean higher costs of capital (or hurdle rates of return) for investment into New Zealand than for investment into most other OECD countries. High taxes on inbound investment have the potential to reduce economic efficiency and be costly to New Zealanders by reducing New Zealand’s capital stock and labour productivity.”

I think economists would be looking at this paper with some great interest as well. Now, the OECD analysis that is often used for comparison purposes looks at company tax provisions. But this paper also notes that there are other broader tax issues that should be taken into consideration. And when you take a broader perspective, maybe New Zealand isn’t as much as an outlier as it first appears.

What the briefing is intended to do is, “initiate a process of discussion on these sorts of issues.” The briefing considers several possible tax changes, namely:

  • a cut in the company tax rate
  • accelerated depreciation provisions
  • inflation indexation of the tax base
  • a higher thin capitalisation rule safe harbour
  • an allowance for corporate equity
  • special industry-specific or firm-specific incentives, and
  • a dual income tax system.

These measures are all possible ways of lowering the costs of capital. And some of those can also promote tax neutrality. However, there is unlikely to be a single best option, and choices between the options will ultimately depend on what weightings are given to the possible objectives of reforms.  Of course, politics comes into play, for example, a lowering corporate company income tax rates for non-resident investors isn’t going to be terribly popular because that might mean higher tax rates for individuals. Therefore, there are these series of tradeoffs that have to be considered.

The briefing is accompanied by 45 pages of appendices. Some of the papers referenced are quite interesting. One in particular caught my eye, was prepared in 2016 by a couple of American economists relating to accelerated depreciation allowances, a measure that’s often promoted. As there’s a wealth of data available in America, these economists and analysed data for over 120,000 firms.

They presented three findings. First, accelerated depreciation raised investment in eligible capital relative to ineligible capital by 10.4% between 2001 and 2004 and then by 16.9% when it was reintroduced between 2008 and 2010. Their second finding was that small firms responded 95% more to that incentive for accelerated depreciation than larger firms. I think this is particularly important in the New Zealand context. Finally, firms responded strongly whether these policies of depreciation in generated immediate cash flows, but not necessarily when cash flows were in the future. In other words, firms were very interested in short term quick return investment. Now, given that I think our smaller firms are under-capitalised and we have lower productivity, obviously one of the points for future discussion from this briefing is about the role of accelerated depreciation.

Now, the object of the briefing isn’t to propose a single solution. It is, “…to start a conversation on what people see as the most important objectives for reform and whether particular reforms are worth considering further.”

When Inland Revenue initially put out an issues paper saying this was the proposed subject of its briefing it asked for responses. A few replied raising the issue of how the absence of a capital gains tax just reduces the coherence of the tax system, and there may be productivity concerns because of the light taxation of property. The briefing addressed these issues as follows:

The Department of Prime Minister and Cabinet has advised that briefings should not focus on issues that have already been subject to considerable analysis. Capital gains tax was considered by the recent tax working group and the government decided against a general tax on capital gains. Therefore, we, the briefing, are not making a capital gains tax on property or a more general tax on capital gains a central focus because it has been the subject of recent debate and policy consideration.”

The problem with this approach is this is a meant to be a long-term insights briefing, and taking capital gains out of the picture immediately circumscribes its value. And by the by, in most cases, any foreign investors are subject to capital gains tax in their own country. Capital gains tax is a factor anyway for offshore investors and so maybe we should be factoring it in here.

To be fair, once you’ve gone through the paper and you understand what is driving it, the absence of commentary on capital gains tax although disappointing, shouldn’t be a distraction from what is a very interesting and valuable paper with plenty to digest. I do recommend reading this as it contains some very interesting issues, such as the idea of a dual income tax system which individually could be the subject of a podcast.

FBT reviewed

Moving on Inland Revenue has also released its 49-page Fringe Benefit Tax regulatory stewardship review. This is something else required under the Public Sector Act 2020 which requires regulatory stewardship reviews to ensure that policy and operational responsibilities are effective and operating as intended. Last week I mentioned how the new tax bill reintroduced this week gives an exemption from FBT for the provision of public transport. I noted the current treatment as an example where one set of tax policies probably doesn’t sit well with a wider set of objectives

FBT was chosen for review because it hasn’t been fully reviewed since some minor changes were made nearly 20 years ago. And as the review notes, over time, stakeholders have raised problems with the design and operation of FBT. The review is seen primarily as a diagnostic exercise investigating three questions:

  • Does the design of FBT meet the policy intent?
  • What is the employer and business experience of complying with FBT?
  • How does Inland Revenue administer FBT?

The review also considers whether FBT as in its current format is fit for the future, taking current workforce trends into account with more and more people working from home now.

The summary conclusions are that it does perform its primary task of ensuring that remuneration from employment is taxed, whether it’s paid in cash or provided by way of a non-cash benefit. FBT is one of those taxes which is as much designed to support the tax base by tackling anti avoidance behaviour as well as raise tax. But as the review then notes

However, it is not clear that FBT is a tax that functions well. Consistently, views expressed to the review team were that FBT is complex and that it imposes a high administrative and compliance burden relative to the tax at stake.”

There was also this interesting feedback “many interview participants felt that any intuitive connection with remuneration had been lost.”

FBT was introduced in 1985 to counter an avoidance of PAYE on salaries by providing people with non-cash benefits. Initially it had a very important role, particularly since back then tax the top tax rate was still 66%. However, a lot has changed in the last 37 years.

One of the main points that comes out of the report is that submitters feel FBT is not being complied with by all businesses and it’s not being enforced by Inland Revenue. This is seen as unfair by those who shoulder the compliance burden. The official response is “Inland Revenue is unable to comment on the amount of non-compliance with the FBT rules using existing data, although the use of START at its new computer will enable a more timely and targeted compliance approach.

That is a hell of an admission. The review then points out if non-compliance with FBT rules is perceived to be risk free, then that perception could undermine the integrity of the tax system as a whole. Therefore, this risk needs to be addressed.

The review then puts up a couple of proposals to do so. Firstly, which many might see as a bureaucratic answer, commission a policy project to act on the findings of the review. This would be to conduct an enquiry into fundamental reform, for example moving benefits-in-kind into the PAYE system. That was something not supported by interviewees. Secondly, “requiring operations to take steps to address the concerns raised about compliance and enforcement”, which might be more crudely and accurately expressed as “Do your damn job Inland Revenue”. And that is where I would begin.

We probably should have a review of fringe benefit tax and how it operates and whether the current system is fit for purpose. It definitely is compliance intensive. And there’s also this widespread perception of non-compliance, particularly in in in in regard to the definition of work-related vehicle and the rise of the twin-cab ute and whether such vehicles are genuine work-related vehicles. At the same time, I believe you have to enforce the current law because the perception might arise that the integrity of the tax system is being undermined. That’s actually in breach of official’s duties under the Tax Administration Act. I think it does no harm to show that compliance of the rules is required. Plus, it might raise a little bit of extra revenue.

There is some interesting commentary about how much revenue FBT does raise. For example, in the 2019/20 tax year, the Inland Revenue collected $592 million of FBT, which is 24% up on the $479 million collected in the 2009/10 tax year. However, back in the early 1990s FBT revenue was close to 5% of PAYE revenue and around 3% of direct income tax revenue. But now it’s closer to 1.6% of total PAYE revenue and about 0.9% of total direct income tax revenue.

FBT revenue rose steadily between its introduction and 1989 but then significantly reduced between 1990 and 1995. This decline may be the result of changes to the definition of benefits subject to FBT, but it may also reflect employers responding to its advent and switching to cash only salary packages. There may also have been some tax planning around trying to mitigate FBT.

FBT is paid by a relatively small number of taxpayers. Nearly 69% is paid by employers of 101 or more people. And in fact, that according to Inland Revenue data. Employees with 501 or more employees represent just 2% of all FBT filers, but 41.4% of all FBT paid for the year ended 31st March 2020.

For me the key takeaway here is that Inland Revenue really needs to begin to put some resources into management of FBT. I have heard commentary that it didn’t feel it was worthwhile, but there are spin-off effects. As noted, the perception of the integrity of the tax system is undermined. And also, there’s the wider policy objectives we mentioned. If FBT isn’t being monitored, how does that fit with the wish to reduce emissions? If it turns out people think, well, actually, work-related vehicles don’t pay FBT, then people might continue to use relatively inefficient vehicles. We’ve seen, by the way, with the green car discounts, how much an incentive in terms of cashback has made a difference with new registrations.  Moving FBT perhaps to an emissions-based charge such as they do in Ireland and the UK, might have some interesting implications and help drive down emissions.

One of the drivers behind the long-term inside’s briefing is that changes to the tax settings will drive foreign investment. It’s not a particularly revolutionary insight. There’s no doubt tax affects investment decisions.

Tax affects investment decisions

A very clear example of that, in my view, is when we consider the taxation of residential investment property, which I discussed with RNZ’s The Panel on Wednesday. This stemmed from an Official Information Act request I made to Inland Revenue asking for details of the number of taxpayers returning residential property investment income, how many reported net positive income, how many reported losses and what was the net income returned.

I shared my information with Geraden Cann of Stuff who ran the story.

In summary for the year ended 31st March 2019, 36% of all those filing individual tax returns and reporting rental income incurred a loss. For the year ended 31st March 2020 that proportion fell to 32%, and in the year ended 31st March 2021, it fell further to 27%. As you can see in the year ended 31st March 2021 about 240,000 people reported rental income with 173,500 in profit but 63,600 with losses amounting to $358 million. The net income rental income reported for the year was $1.428 billion. According to the Reserve Bank of New Zealand’s statistics, the valuation of residential investment property as of 31st March 2021 was $369 billion. That represents a pretty poor 0.4% return pre-tax.

So why are investors investing in residential property then? Because that return is not much better than you might have got if you put your money in the bank. The obvious answer to that is hoped-for tax-free capital gains plays a part in their decision-making. that. To be fair, that’s an understandable investment decision. If property prices are going to rise 20%, and you’re not being taxed on that 20% gain and you’re generating sufficient income to manage your costs, which is what two thirds of taxpayers seem to manage, then that’s not an unreasonable investment decision.

But at some point you have to realise that investment, which does beg the question which has been addressed in another academic paper, can you actually say that you did not purchase with an intent of sale. How otherwise does the investment makes sense without having to sell it?

I also asked for a breakdown of the number of residential properties held. Inland Revenue ‘doesn’t have comprehensive information’ so it responded

We do, however, hold partial information based on the IR3R calculation worksheets used by a subset of around 60,000 property owners who use this form as an input to their filing. Proportions calculated from this subgroup of taxpayers for the 2020-21 tax year are provided in Table 2.

The IR3R calculation worksheet tends to be used by unincorporated taxpayers (individuals or trusts) who are likely to have smaller investment portfolios. The supplied proportions are not necessarily representative of the wider picture incorporating all residential rental taxpayers and all entity structures.

As you might expect, 25% of all those holding between one and three properties report a loss. The proportion holding between 4 and 9 drops to 0.42%. Quite remarkably, among those with ten or more properties, 0.1% do report losses. One suspects that group are extremely heavily leveraged, and probably these positions are likely to change as interest limitation rules take effect.

Context

To put this in context, the Financial Markets Authority publishes a KiwiSaver Annual Report. This details the number of KiwiSaver schemes, the value of those schemes and actually the income reported and tax paid by all KiwiSaver schemes. The total value of KiwiSaver schemes was $81.6 billion and the total tax paid by KiwiSaver schemes was $474.6 million.

As I mentioned, the net pre-tax profit for the year ended 31st March 2021 for investment properties was $1.42 billion. Assuming a maximum 33% tax rate, that would equate to roughly $470 mln in tax. In fact, it’s almost certainly a lot lower because of not every taxpayer with investment property would be taxed at 33%.

When you look at the amount of capital invested in housing, $369 billion and the amount of capital invested in KiwiSaver, $81.6 billion, there’s approximately 4.5 times more capital invested in housing. But the taxable returns are so much lower that relatively speaking, they’re a quarter of KiwiSaver returns so the tax take ends up being broadly similar.

A really big question therefore arises around the efficiency and allocation of capital. That is why it is a bit disappointing Inland Revenue’s long-term insights briefing didn’t address that matter. But I understand that Treasury has been looking the housing issue and has come to the conclusion that tax settings have been a real driver of house price inflation. As I said on RNZ people have made rational decisions to invest in property but those also come with consequences.

And in my view, one of those consequences is inefficient allocation of capital. We also have rising inequality and essentially the arrival of a landed gentry, which means that if you do not have parents or family that can help you into housing, you’re likely to be unable to ever get on the property ladder. That’s not a particularly great scenario to have and coming back to the point Tova O’Brien made is something that next year we should be seeing the politicians talk about the sort of tax policies which address all these issues.

Revisiting 1952

And finally, our condolences to the Royal Family on the passing of the Queen. Just to put her 70-year reign in context, the population of New Zealand in 1952, when she became Queen, was just under 2 million. The Government’s total tax receipts for the year ended 31 March 1952 were just over £200 million or approximately 25% of GDP.

Some interesting taxes used to apply back then including an ‘Amusement tax’ which collected £308,000. The top tax rate was 60% and there was also Social Security in addition. Income tax represented 49% of all tax collections (it’s now nearly 67%). Incidentally, Land Tax, Death and Gift Duties, all now repealed, collected more than £9 million or 4.6% of the tax take. Taxes change over time. But it’s interesting to be coming back to the question of taxing capital. We didn’t have a capital gains tax in 1952, but we did tax capital. Maybe the pendulum is swinging back again.

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!

The unintended consequences of the interest limitation proposals

The unintended consequences of the interest limitation proposals

  • The unintended consequences of the interest limitation proposals
  • A coming clampdown on the fringe benefit tax rules around twin cab utes
  • Inland Revenue updates its advice on non-cash dividends

Transcript

Having pored over the 143-page discussion document on the interest limitation proposals for the last few weeks and discussed them with colleagues, the summary position I’ve reached is that the Government should be very mindful that there will be some unintended consequences, and it should therefore be prepared to fine tune its proposals.

In particular, two issues seem to be emerging. One is that the interest limitation rules and the proposals to allow an interest incurred in relation to new bills, may mean that the trend which was causing concern of first home buyers being squeezed out in favour of developers and investors with access to plenty of assets and therefore leverage, is probably going to accelerate.

Developers and investors are able to outbid first home buyers for vacant plots of land or buildings where a single home might exist now but has potential for it to be converted into two, three or more dwellings. Given that under the new build proposals, interest deductions will continue to be allowed for building additional dwellings the likelihood of first home buyers being able to buy vacant land, put a building on it and move in is likely to be diminished. They’re simply going to be outbid by those who have access to greater access to finance. And I think that trend will be accentuated by these proposals.

That probably is not an intended consequence, but as in taxes everywhere, unintended consequences are often in play and the housing market is probably one where the unintended consequences of decisions taken 30 or more years ago have now come home to roost with a vengeance.

And the other unintended consequence I believe is going to come about, is that the burden of these proposed changes will fall on a group that aren’t really its target. And they also happened to be the least equipped to manage the level of detail and compliance that will be expected. And this group here are the is the so-called mum and dad investors, people who have one, maybe two investment properties which represents their retirement fund.

This is a group of people who are not really in the Government’s target, they’re not the larger investors who are able to have been able to leverage up significantly and outbid first home buyers. These are people that have decided to purchase investment property for their retirement. Or it may be that a couple have formed a relationship and they’ve moved into one property and rented out the other property,

Whatever their circumstances, this is a group that’s going to face a significant amount of compliance going forward, and for very little reward for the Government I would add, either politically or in terms of actually improving the housing market.

It seems to me the Government ought to think seriously about an exemption for such a group. Maybe to say that holders of one investment property are exempt or the rules only apply above a threshold.

Currently, the average rental income in the country is about $25,500 dollars a year. Maybe if the gross rental income is, say, $30,000 dollars or less the rules won’t apply.

Alternatively, if the Government still wants to remove this tax anomaly of a full interest deduction for a partly untaxed return in the form of capital gains, it could then say only 50% per cent of the interest is deductible. By the way that was something a previous guest John Cantin suggested could be an option. It would be a more straightforward option.

The thing that has been interesting when dealing with the discussion document proposals is that although the concept of denying interest deductions seems straightforward in itself, what has been really revealing is the level of detail we’ve had to work through, particularly in relation to the new build exemption.

The complexity means tax agents like me, other advisers and individuals are now at a greater risk of getting their tax returns wrong – for example incorrectly calculating the proportion of interest that’s deductible.  Greater complexity means a greater likelihood of something happening and a client suing for negligence. It could be that professional indemnity insurance premium premiums rise as a consequence.

But anyway, both advisers and those affected by this would want to see the Government think hard about making the proposals less onerous from a compliance perspective.

Submissions close on Monday the 12th. As I have said previously, be constructive with your submissions. The Government isn’t going to listen to people moaning that these are terribly unfair. That’s a fact of life. These submissions will be considered by Inland Revenue, and we’ll know more in about four to six weeks when the final form of the proposals is released together with the draft legislation. It’s a tight timeline because all of this is meant to be in place by 1st October.

Fringe benefit tax

Moving on, the issue of twin-cab utes and FBT is back in the press with Minister of Revenue, David Parker, saying he was considering a clampdown on the fringe benefit tax rules. He has apparently received advice on how twin-cab utes were being taxed and he has confirmed that he was considering acting on it.

Inland Revenue advice was that there is no exemption to twin cabs, which I’ve previously discussed. And that’s correct, even though there’s a popular belief there was one. What Inland Revenue believes is that the existing rules aren’t being properly enforced, which is also my conclusion.

The astonishing thing, though, is that Inland Revenue went on to say it wasn’t so keen on chasing down this matter because it wouldn’t bring in much money. David Parker said, quote, “Inland Revenue advised me that it’s not as big an issue relative to other enforcement priorities. But we’re having a look at the issue because they are proliferating.”

There are two points to be made about this. Firstly, Inland Revenue has a duty under section 6 of the Tax Administration Act 1994 “to protect the integrity of the tax system.” including people’s perception of the integrity of the tax system.

So a public statement making it known that it really didn’t feel that this was a big issue sends completely the wrong message about enforcement for myself and other tax advisors and those conscientious taxpayers, the vast majority of which want to follow the rules. Inland Revenue basically saying,” Well, we’re not really bothered about this”. In the context of an $85-billion annual tax take saying an extra $100 million a year isn’t that significant may be true, but it does nothing for the integrity of the tax system to say so.

The other thing in here which David Parker has picked up on – he is also the Minister for the Environment – is that the climate change policies are undermined by not enforcing rules around twin-cab utes. These are high emitting vehicles and the Productivity Commission noted we are importing higher emission vehicles relative to what’s available in the rest of the world. In other words, New Zealand has become a bit of a dumping ground.

And so if we’re tackling emissions, reducing emissions is an ongoing job and in that context, not enforcing the FBT rules makes that job harder. Transport emissions are one area where New Zealand can make progress in reducing its emissions. Leaving aside the issues around reducing methane emissions from our agricultural sector, we can certainly do more in improving emissions from the transport sector.

So it will be interesting to see how this plays out. Inland Revenue I think will be upping the ante on this. Get any group of tax advisors together and we’ll all have stories about some of the abuses we’ve seen. Like Inland Revenue previously photographing or sending someone to watch popular boat ramps and boats being launched at the weekend, just to see whether a purported company vehicle was being used in a private capacity. Apparently one such boat launching ramp in Gisborne was opposite the Inland Revenue office and one company after a few weeks got a call from Inland Revenue asking if they were, in fact, correctly reporting FBT.

Transfers as ‘dividends’

Moving on, Inland Revenue has this week released a number of Interpretation Statements which give its view of how the law operates. One that people should pay particular attention to is Interpretation Statement 21/05 on non-cash dividends. Now, what this does is consider when a transfer of value from a company to a shareholder is treated as a dividend for tax purposes. These are sometimes also referred to as the deemed dividend rules.

The Interpretation Statement wisely, in my view, focuses on the type of non-cash transactions that are often entered into between small and medium companies and their shareholders. Now, sometimes FBT picks up some of these issues, but other times they don’t. A common example of a non-cash dividend would be a loan from a company to a shareholder.

So what the interpretation statement does is set out a number of examples of how these rules might work. For example, there’s a banana company which provides one of its shareholders with a large number of fresh bananas. That is a dividend. Another example would be the shareholder owes the company money and the company forgives the debt. That’s another as a dividend or a telecommunications company provides one of its shareholders with telecommunication services for free.

The interpretation statement works through various scenarios like this and clarifies which are dividends together with the rules for calculating the dividend and when the dividend is deemed to have been paid.

It’s actually a very valuable document.  It’s also quite astonishing to realise it is in fact an update of a previous item on deemed dividends which dates from March 1984. I know Inland Revenue has got a lot on its plate, but it is a bit of a surprise to see it taking 37 years to update this sort of matter.

Anyway, the interpretation statement is out there. So people should be more aware of this deemed dividend issue. It obviously indicates that this is one of the areas Inland Revenue is looking at. They have, in fact, been quite interested in the area of shareholder advances, that is loans from the company to shareholders for some time. So this Interpretation Statement should serve as a warning.

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 āno!