12 Apr, 2021 | The Week in Tax
- Small Businesses and tax compliance, PAYE for employees of overseas companies
- Managing fringe benefit tax
- A global minimum corporate tax rate?
Transcript
Friday was Small Business Day. If you spent money with a participating small business and posted your interchange on social media, you and the business could have won a share of $200,000 dollars. Now, this is part of an initiative underlining the importance of small businesses in the New Zealand economy.
MBIE defines a small business as one with fewer than 20 employees. And according to Stats New Zealand, there are approximately 530,000 small businesses in New Zealand meeting that definition. They represent 97% of all firms, account for 28% of employment and just over a quarter of New Zealand’s GDP.
So they’re very important to the economy, but most importantly, also for the community. When small businesses move out, the community suffers. So this sort of initiative and the work we were doing during my time with the Small Business Council is important for the economy.
However, when it comes to the tax system there’s actually very few concessions for small businesses. That is part of a deliberate policy, which generally I and most tax experts support, of minimising special exemptions and in doing so, focusing on the basics. And by minimising removing special exemptions, you eliminate the opportunities for people to try and rort the system.
But that comes at a cost for small businesses of greater compliance costs. Compliance costs will always fall heavily on small businesses because they are generally quite under-resourced to deal with this matter.
Now as I said currently our tax system generally makes no concessions for small businesses. However, there is one such example which does apply, and that is the shareholder-employee regime. Under this regime a shareholder who is also an employee of a company can instead of having their salary taxed through pay as you earn, opt to pay provisional tax. Their taxable income can then be determined after the end of the tax year.
It’s a very flexible regime, but it doesn’t always fit well with the general scheme of the Income Tax Act. And I think Inland Revenue may be thinking in terms of such businesses should actually be in the look through company regime. The problem is these special regimes add complexity.
The tax loss carryback regime, which is temporarily in place for the 2020 and 2021 income years, proved unworkable for shareholder employees. They’d already taken profits out of the business by way of a salary. So if the company had a loss in either of those later years and tried carrying it back, it had no income to offset against the loss. So, it was of no use to shareholders employees.
When other tax practitioners and I were discussing a permanent iteration of the current loss carryback regime with Inland Revenue policy a huge stumbling block was the question of the treatment of shareholder employees. In fact, it proved unworkable in the end. And last month the Minister of Revenue revealed a permanent iteration of the scheme is not going to be implemented.
In my view one of the side effects of not having specific small business regimes, is that Inland Revenue policymakers don’t pay enough attention to what’s going on in the small business sector, and that means compliance costs creep up for the sector as issues are not addressed. And in the last week, we’ve had a couple of good examples of how this has played out.
Covid-19 has revealed, a number of things that should have been addressed in relation to employer employee relationships, but for whatever reason had been parked as there was always something more interesting to work on. These strains have started to come through recently.
There was a story in the Herald (paywalled) about a very common thing, Kiwis coming back to New Zealand, but continuing to work for overseas based employers. And what’s happening is that a number of these are potentially facing double taxation, hopefully temporarily, and they understandably are confused about how much they own to which government.
One key concern is if an employee of an overseas employer is in New Zealand for more than 183 days, then technically the employer will need to start accounting for pay as you earn. However, in the meantime, that overseas jurisdiction may still be applying its equivalent of pay as you earn to the employee’s earnings. So there’s a risk of double taxation risk.
And one of the other problems is with foreign tax credits. Technically, under double tax agreements employment is taxable only in the jurisdiction in which it’s being exercised. So as the Herald article pointed out, in a worst case scenario, what can happen is that someone working in New Zealand for an overseas employer may have earned $100,000 dollars and paid UK pay as you earn, but won’t get any credit for it in New Zealand. Inland Revenue’s view is “Well, you’ve earned $100,000. This is the tax bill, pay it.” Meantime, the problem that particular employee faces is that he or she have to then go and get the overpaid UK tax refunded. And of course, that can take some time.
And it may also involve getting assistance through what we call the mutual agreement procedures between Inland Revenue here and the UK’s HM Revenue & Customs. All this takes a lot of time and a lot of stress. It’s a very good example of how the system is evolved, where it really isn’t terribly flexible, and issues arise. One answer is to put people into the Provisional tax regime. Another one is for such employees of overseas companies to register themselves for pay as you earn or what they call an IR56 taxpayer.
Now just to clarify, we’re assuming that the employees of the overseas company, is just an employee, and we’re not dealing with the issues of that employee having sufficient authority to create what we call a permanent establishment, which is a whole other raft of issues, but are not relevant to this particular discussion.
Now, this particular issue is particularly problematic when it comes to New Zealand employees of United States employers. The United States tax system is, to put it mildly, probably the most complicated in the world especially in contrast to our regime. It is full of special exemptions and procedurally as well, the Internal Revenue Service (the IRS) is a slow-moving beast.
Issues are starting to emerge where the IRS is expecting the US employer to deduct the US equivalent of pay as you earn. Meanwhile Inland Revenue here wants its cut and although the double tax agreement will give most taxing rights to New Zealand the IRS is very cumbersome in moving to say to the US employer, “Oh, yes, that’s now foreign sourced income so you no longer need to deduct tax.”
And then there’s the other issue I mentioned that the overseas company, could be treated as an employer and required to deduct PAYE in New Zealand. Now, fortunately, in that respect, Inland Revenue has a draft operational statement, which was released for consultation last year which deals with this issue of non-resident employers’ obligations to deduct pay as you earn, pay FBT and deduct employer superannuation contribution tax. The deadline for comments closed on it on 1st September so we ought to be seeing it fairly soon in final form.
And basically, Inland Revenue is saying an overseas employer isn’t going to need to apply PAYE so long as the employee’s presence does not create a permanent establishment or as the operational statement has it, “a sufficient presence.” So that’s a good solution. But I think this illustrates the problems with small businesses overseas and here of dealing with issues around tax systems that weren’t designed with such matters and are slow to respond.
And that leads on to a second related point, the question of fringe benefit tax and the new 39% tax rate, which came into effect on 1st April. As a consequence of the change in the tax rate, a new flat rate of FBT of 63.93% applies to non-cash employee benefits such as discounted goods and services and private use of company cars. But that only applies in in reality to employees earning more than $180,000, which is only 2% of earners.
But the FBT system expects employers to pay using a single rate which prior to 1st April was 49.25%. And so the increase to 63.93% represents a substantial burden. Now, it’s possible to work around that and not use the flat FBT rate by filing quarterly FBT returns and calculating FBT on an attributed basis, i.e. for each employee.
So, yes, that’s a solution, but it leads back to my point at the start of this podcast, it adds to complexity of the tax system and also increases the burden of compliance with small businesses. So I think the point has been reached in our system that going forward, Inland Revenue really should have a hard think about the fringe benefit tax compliance costs for small businesses.
Leaving aside the separate issue of how well FBT is being complied with, particularly in relation to work related vehicle, it does involve a fair amount of compliance for small businesses. The FBT regime dates from the mid-80s and I think it’s time for a rethink. In the 1980s it was probably a sensible approach that the employer paid FBT. Maybe now with better procedures in place, what should happen is that the employer calculates the value of the fringe benefit and that amount is then included as part of an employee’s salary and taxed at the relevant rate. This would immediately deal with the issue of applying this new 63.93%rate.
But that’s something that needs to be considered, perhaps as part a whole package of looking at compliance for small businesses. And I understand there is something in the works on that which we will be watching with great interest and report back on when we hear something in due course.
And finally this week, we’ve talked in the past about the international tax regime striving to try with the digital economy and each tax jurisdiction trying to find an appropriate level of taxation relative to a company’s economic activity in a country. The focus is on the GAFA, as they call Google, Apple, Facebook and Amazon.
Here in New Zealand these companies pay very little tax. Facebook does not publish financial statements in New Zealand, and Google’s accounts to December 2019 show that its revenue in New Zealand was $36.2 million. And it finished up, paying $3.6 million in income tax. That was actually an increase in from the 2018 year, where it paid around $400,000. But Google’s revenue from New Zealand is considerably more than $36 million.
And what’s happening here is replicated all around the world. So the OECD has been looking at this in conjunction with the G20 group of nations. This is part of a shift to try and stop the aggressive use of tax havens to minimise multinationals’ corporate tax bills. And this past week after a meeting of G20 finance ministers there appears to have been a breakthrough in that they are now exploring the equivalent of a global minimum tax on corporate profits.
What’s encouraging about this is that the US Treasury Secretary Janet Yellen, initiated the proposal, and this is a rapid, significant change from the Trump administration. There will be pushback on this, obviously, because certain jurisdictions and Ireland has been mentioned as one who already have a fairly low tax rate, concerned that their current 12.5% corporate tax rate may rise.
And obviously, tax havens will be looking at this with some unease. But my personal view is that the days of the tax havens are numbered because of the double impact of the Global Financial Crisis and Covid-19 anyway. It remains to be seen how well this will develop, but it is an encouraging sign. It might not actually make a great deal of difference to the New Zealand Government’s books, but it will certainly be a step forward in the right direction. As always, we will bring you developments as they happen.
Well that’s it for today, I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next week Ka kite ano!
9 Feb, 2021 | The Week in Tax
- A look at the potential tax implications of the Climate Change Commission’s first draft advice to the Government
- The latest from the OECD on international tax
- A look at what a recent slew of reports and documents say about the state of Inland Revenue and its priorities
Transcript
Last Sunday, the Climate Change Commission released its draft advice for consultation. The draft advice has already stirred up a great deal of controversy and discussion about the suggested objectives for the country and how they are to be met.
On tax, the Commission’s Necessary Action 3 recommended accelerating light electric vehicle (EV) uptake. As part of this it suggested the Government –
“Evaluate how to use the tax system to incentivise EV uptake and discourage the purchase and continued operation of internal combustion engine vehicles.”
I’ve covered this elsewhere and my suggestion is that Inland Revenue needs to look at greater enforcement of the fringe benefit tax rules, maybe including an exemption for electric vehicles and looking also at the application of FBT to parking.
What else did the Commission discuss on the taxation side? Well, it noted that the climate transition will impact government taxation and spending and that the Government needs to plan for this. It noted that fuel excise duties, the revenue comes from that which is spent on land transport, will change and probably decline. It also noted that reducing oil and gas production will result in less tax revenue and also affect the balance of exports because of the reduction in oil exports.
On the other hand, the emissions trading scheme will generate income from the sale of emissions units. Obviously the amount raised will depend on the volume of units and the market price for years, but at current estimates are that it could equate to about $3.1 billion over the next five years.
Now, what the Commission has suggested is that maybe these funds could be recycled back into climate change projects. And that’s something I would agree with. In my piece on the Commission’s draft report I suggested that increased FBT take should be recycled into funding a vehicle purchase scheme.
So I think one of the things that comes out of the Commission’s draft report is that its recommended changes are going to affect the country and the community greatly, and we need to mitigate for that. And if funds are being raised from environmental taxation, my view is they need to be recycled into the economy to mitigate the impact of change.
That, by the way, was also the view of Sir Michael Cullen when he presented the Tax Working Group’s report, which covered environmental taxation, but its interesting observations on that were completely lost in all the hoo-ha over capital gains tax. As the Commission notes, one of the key objectives going forward is a
“process for factoring distributional impacts into climate policy and designing social, economic and tax policy in a way that minimises or mitigates the negative impacts.”
There’s going to be a very interesting debate on this issue which will continue for quite some time. But we are at a point where we’re going to need to take quick action, I believe, which come with consequences. We need to mitigate those consequences as far as possible.
Late last week, the OECD held its 11th meeting of the OECD/2020 inclusive framework on base erosion and profit shifting (BEPS). This is the international project on reforming international taxation.
The (virtual) meeting included a last address from the outgoing Secretary-General of the OECD, Angel Gurría. He talked about what has happened over his 15-year term as Secretary-General. As he said when he took the helm in 2006 –
“tax avoidance and evasion were running rampant. Urgent action was needed, and the aftermath of the global financial crisis presented the opportunity to crack down on these nefarious practices backed by the newly established G20.”
The Secretary-General then ran through the latest developments noting that 107 billion euros of additional tax revenue has been identified as a result of the initiatives such as the Common Reporting Standard and the Automatic Exchange of Information. There have been over 36,000 exchanges of tax rulings between jurisdictions and over 84 million financial accounts have been identified and exchanged in 2019, with a total value of around 10 trillion euros.
He also made a very important point that in a globalised world, tax cooperation is the only way to protect tax sovereignty. That was true at the start of his term in 2006 and remains the case now. Without such cooperation each country’s domestic tax policies are at risk. The latest state of play is a reflection of this where if an international solution is not found by the middle of the year, over 40 countries, including New Zealand, are considering or will move ahead with a unilateral digital services tax.
The solution to this is the so-called Pillar One and Pillar Two proposals. Now, these are progressing, and an encouraging fact is that the new United States Secretary of the Treasury, Janet Yellen, as part of her confirmation hearings stated the United States is –
“committed to the cooperative multilateral effort to address base erosion and profit shifting through the OECD/G20 process, and to working to resolve the digital taxation disputes in that context.”
So that’s extremely encouraging.
The Secretary-General also picked up the Climate Change Commission’s draft report, that carbon pricing is an issue that needs to be addressed. As Mr Gurría noted across the OECD 70% of energy related CO2 emissions from advanced and emerging economies are entirely untaxed. And so, as he put it, “putting a big fat price on carbon is one of the most effective ways to tackle climate change by creating incentives to reduce emissions.”
He also made an interesting comment about rising inequality, saying that policymakers need to do more in this space. This picks up a general trend I have seen emerging for quite some time, following the double whammy of the global financial crisis and covid pandemic, of a renewed focus on taxing wealth and using taxation to reduce inequality.
Now, the Climate Change Commission’s recommendations and the ongoing OECD BEPS Initiative are just two of the major policy issues on which Inland Revenue will be needing to provide policy advice and ultimately implementation. Although the Treasury provides advice to the Ministers of Finance and Revenue on tax policy, Inland Revenue is the main tax policy adviser to the Government. That’s actually quite unusual by world standards, where more often it is the Treasury Department that drives tax policy advice.
So where is Inland Revenue at in terms of where it thinks tax policy is going? Well, as part of its general processes it prepares a briefing to each incoming Minister of Revenue. And the briefing Inland Revenue provided to the new Minister of Revenue, David Parker has now been released.
Inland Revenue, in conjunction with Treasury, will develop a tax policy work programme, which is then signed off by the Ministers of Finance and Revenue. These programmes will show what the priorities are and the expected policy focus over the next 18 months.
Now, obviously, Covid-19 will have some impact on the programme. The five top policy issues that Inland Revenue have identified as key priorities are rebuilding the economy, issues related to misalignment of the top personal tax rate, the role of environmental taxes and what an environmental tax framework should look like, improving data analytics, and international tax settings.
And the briefing then goes on to set out significant current policy issues, most of which reflect these policy priorities. There is a specific item on taxing the digital economy which notes –
“Ministers will need to make a decision about the suitability of any OECD multilateral solution for New Zealand and whether to progress a unilateral digital services tax.”
But as often is the way it’s what’s not actually said in a document that makes it interesting. Briefings to Incoming Ministers are usually frank in giving an overview of where the department is at, what the main policy issues are as it sees it, and how it proposes that it should deal with the issues. But not everything is revealed.
And there are one or two interesting redactions in here, one of which appears to relate to some form of investigation into taxation of wealth. At a guess this is identifying the wealthy in the group, usually defined as those with more than $50 million dollars in assets, their tax behaviours, how much tax they pay and what are they doing to mitigate tax.
Interestingly, by the way, the tax concessions charities and not for profits get is going to be reviewed to “ensure they operate coherently and fairly and to ensure the integrity of the tax system is protected.” As the Tax Working Group noted, it received a number of submissions complaining about tax preference treatment of charities.
The Briefing also talks about Inland Revenue’s Business Transformation project, described as “complex, high-risk and fiscally significant (costing $1.8 billion)” in the separate briefing provided by the Treasury to the Minister of Revenue.
And there are some more very interesting redactions in here relating to funding of the Inland Revenue including references to other reports which have not been provided and which I have therefore requested under the Official Information Act.
What some of these redactions to an issue that in my view the Minister of Revenue and the Commissioner of Inland Revenue, Naomi Ferguson, need to address, is the poor state of morale.
Inland Revenue’s 2020 Annual Report, released just before Christmas, at the same time as the Briefing to Incoming Minister, puts its staff engagement at a shocking 25%. And it has been bumping around at the 25 to 29% for several years now. And that’s an impact of Business Transformation, which has shaken up the workforce in Inland Revenue quite substantially. In the year to June 2016, the headcount of Inland Revenue was 5,789. As of 30 June 2020, that has fallen to 4,831.
So a substantial amount of change has gone on in the department which doesn’t appear to have been welcomed or met with enthusiasm. It has certainly had a dramatic impact on the Inland Revenue staff engagement and morale. Whatever you might think about Inland Revenue and its activities, poor staff engagement is not good for tax payers at large.
It should be said that remarkably and consistently Inland Revenue staff in their direct interactions with tax agents like myself and the general public continue to be highly professional, well-mannered and and responsive to our needs. But clearly behind the scenes, there is stuff going on that needs to be fixed and that should be a priority for the Minister of Revenue and the Commissioner of Inland Revenue.
There’s also ongoing controversy around exactly what savings are going to be achieved from Business Transformation. The scale of the Business Transformation project means the Cabinet gets regular updates on progress. So next week I’m going to take a closer look at a couple of the documents that have also been released in relation to Business Transformation. These report on how it’s progressing relative to what was expected and what changes and additional funding, if any, may be required.
Well, that’s it for today. I’m Terry Baucher and you can find my podcast on 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.
3 Feb, 2021 | Tax News
Terry Baucher looks at some of the taxation ramifications from the Climate Change Commission’s draft report
The Climate Change Commission released its draft advice for consultation on 31st January. What of note did it have to say about the role of taxation?
The Commission’s Necessary Action 3 recommended accelerating light electric vehicle (EV) uptake. As part of this it suggested the Government:
Evaluate how to use the tax system to incentivise EV uptake and discourage the purchase and continued operation of ICE [internal combustion engine] vehicles.
As the Commission is no doubt aware taxes can have significant behavioural changes very quickly as the following example of the changes in the United Kingdom’s Landfill Tax illustrates.
Between its introduction in 1996 and 2016 the rate of Landfill Tax was increased from just under £10 a tonne in 1996 to nearly £90 a tonne by 2016. Over that 20-year period the annual amount of waste landfill fell from 50 million tonnes to 10 million tonnes.
So what tax changes could be used to incentivise change?
The available evidence indicates that the present fringe benefit tax (FBT) rules are unintentionally environmentally harmful. A NZ Transport Agency report in 2012 examining the impact of company cars found they were heavier with higher engine ratings than cars registered privately. The availability of employer-provided parking encouraged longer commutes from more dispersed, automobile-dependent locations than would otherwise occur. Under present rules employer-provided parking is largely exempt from FBT.
The trend for larger, heavier vehicles has accelerated since 2012 with a greater preference for vehicles such as SUVs and utes. Last year 77% of all new passenger vehicle registrations were SUVs and utes.
A by-product of the trend for purchasing of twin-cab utes appears to be widespread non-compliance with the existing FBT rules. This is in part because of an incorrect perception that such vehicles automatically qualify for the “work-related vehicle” exemption from FBT. The combination of greater numbers of such vehicles and apparent under-enforcement of the FBT regime[1] exacerbates the trend for indirectly environmentally harmful practices identified by the NZTA in 2012.
Inland Revenue should therefore immediately increase its enforcement of the FBT rules relating to twin-cab utes. These changes should be allied with the adoption of the approach in Ireland and the United Kingdom where FBT is greater on higher emission vehicles. I consider these emission-based FBT rules can be adopted relatively quickly, and it ought to be possible to have these in place by 31st March 2023.
As an interim measure to encourage greater take up of EVs the Government could consider exempting EVs from FBT until the new emission-based FBT rules are in place. In Ireland, EVs with an original market value below €50,000 are presently exempt from FBT. The threshold here could be $50,000.
Additional FBT related measures include increasing the application of FBT on the provision of carparks to employees and not taxing the provision of public transport to employees. This reverses the present treatment and fits better with a policy of decarbonisation without impacting an employer’s ability to provide such benefits.
Taxing the provision of employer-provided carparks could raise significant funds. The 2012 NZTA report estimated the annual value of free parking in Auckland to be $2,725. With at least 24,000 employer owned car parks in the city this amounted to a tax-free benefit of $65 million per annum. FBT is generally charged at 49% of the value of the benefit so the potential FBT payable could be between $75 and $100 million per annum.
The suggested FBT changes should change behaviour, but as the Commission also pointed out we need to reduce emissions. We have one of the oldest vehicle fleets in the OECD and it is getting older. The average age of light vehicles in Aotearoa New Zealand increased from 11.8 years to 14.4 years between 2000 and 2017.[2] Compounding this issue, the turnover of the vehicle fleet is slow, on average vehicles are scrapped after 19 years (compared with about 14 years in the United Kingdom).
Furthermore, we are one of only three countries in the OECD without fuel efficiency standards. As a result the light vehicles entering Aotearoa New Zealand are more emissions-intensive than in most other developed countries. For example, across the top-selling 17 new light vehicle models, the most efficient variants available here have, on average, 21% higher emissions than their comparable variants in the United Kingdom. They are also less fuel efficient, burning more fuel and therefore generating higher emissions. The Ministry of Transport estimated if cars entering Aotearoa New Zealand were as fuel efficient as those entering the European Union, drivers would pay on average $794 less per year at the pump.
The Commission is concerned about the impact of its proposals on low-income families, who could be asked to bear a disproportionate part of the costs of change. For this reason, I suggest the funds raised from the FBT changes should be first applied to a vehicle exchange programme. This would remove older higher-emitting vehicles (say ten or more years old) by subsidising purchase of newer vehicles (maybe from car rental companies with excess stock).
If it seems counter-intuitive to subsidise “old carbon” technologies there are three short-term benefits to consider: newer cars generally have lower emissions, are more fuel efficient and are safer, indirectly helping reduce the road toll. This scheme also supports the most vulnerable families who cannot rely on public transport and are most likely have older, less fuel-efficient vehicles. Furthermore, funds involved would go further than if applied in directly subsidising the purchase of electric vehicles.
I also suggest the buy-back scheme is targeted at lower-income families and should therefore be means-tested. A starting threshold might be the Working for Families tax credits threshold of $42,700 above which abatement applies. This threshold could be increased if the vehicle is more than, say, 15 years old with accelerated rates applying if the car is more than 19 years old (i.e. older than the life expectancy of the average car in Aotearoa New Zealand).
The Commission has opened the debate on our transition to a greener, low-emissions economy. Tax will have a major role in that as Pascal Saint-Amans, the Director of the OECD’s Centre for Tax Policy and Administration acknowledged last year when he suggested that when responding to the impact of Covid-19.
Governments should seize the opportunity to build a greener, more inclusive and more resilient economy. Rather than simply returning to business as usual, the goal should be to “build back better” and address some of the structural weaknesses that the crisis has laid bare.
A central priority should be to accelerate environmental tax reform. Today, taxes on polluting fuels are nowhere near the levels needed to encourage a shift towards clean energy. Seventy percent of energy-related CO2 emissions from advanced and emerging economies are entirely untaxed and some of the most polluting fuels remain among the least taxed (OECD, 2019). Adjusting taxes, along with state subsidies and investment, will be unavoidable to curb carbon emissions.
The 2019 Tax Working Group (the TWG) chaired by Sir Michael Cullen undertook a review of environmental taxation and made several significant recommendations in its final report.
Unfortunately, the backlash against the TWG’s proposed capital gains tax meant that its commentary and proposals on environmental taxation were overlooked.
Nevertheless, the TWG’s groundwork in this area now needs to be built on. It’s therefore interesting to note that in its briefing to the new Minister of Revenue David Parker Inland Revenue noted one of its top tax policy priorities was “the role of environmental taxes and what an environmental tax framework should look like.”
Given that David Parker is also the Minister for the Environment I suggest Inland Revenue might be accelerating its work in this field, if the goals suggested by the Climate Change Commission are to be met. Watch this space.
[1] FBT is tied to employment. Over the 10 years to 30th June 2020 the amount of PAYE collected by Inland Revenue rose by almost 66% from $20.5 billion to $34 billion. However, over the same period the amount of FBT paid rose 28% from $462 million to $593 million. This gap suggests some level of under-reporting and enforcement.
[2] By comparison in the United States in 2016 it was 11.6 years for cars and light trucks and 10.1 years for all vehicles in Australia for the same year and 7.4 years for passenger cars in Europe in 2014 (Ministry of Transport data)
10 Aug, 2020 | The Week in Tax
- Fringe benefit tax
- How workable is the Greens Party’s wealth tax?
- Is unemployment insurance on the cards?
Transcript
The new car sales results in July turned out to be something of a surprise, with 8,400 new passenger vehicles sold, which was more than 3½% higher than the corresponding July last year. However, overall passenger new car sales are down 23% over the first seven months of July of this year, which makes July’s results seem very strong.
What caught my eye about these results was that SUVs represented 77% of the new cars sold in a month. That’s the highest ever. Sales of SUVs have been growing in popularity for a variety of reasons. And one particular subgroup which has had strong growth in sales is the twin cab ute.
This brings us back to the question of the fringe benefit treatment of twin cab utes. This is a topic which we’re going to hear plenty more about as Inland Revenue gets round to thinking ‘You know, maybe we might need to collect some tax to pay for all this support we’re providing to the economy’.
Fringe benefit tax (FBT) is calculated in one of two ways. You can either take 20% of the GST inclusive cost price and apply that to the vehicle, or you can take the motor vehicles tax value, which is the original cost less the total accumulated depreciation of the vehicle as at the start of the relevant FBT period. That latter option, the cost price, comes down to a minimum FBT value of $8,333. You then tax the resulting value at the FBT rate, which generally speaking is 49%.
Now, just as an aside, the SUVs represent very good value for money, particularly twin cab utes. For $30,000 you can get a reasonably well spec’d vehicle. And this is one of the problems with electric vehicles – which represent an insignificant amount of new car sales – is they’re expensive. Consequently, because they’re expensive and FBT is driven off the vehicle value, it means that unless a company has made a very big commitment to the use of electric or hybrid motor vehicles and imposes some fairly stringent rules around their private use, hefty FBT bills will ensue. So, this is a major disincentive for their purchase.
Coming back to twin cab utes, the myth has been around for quite some time that if properly sign-painted, they represent work related vehicles and are therefore exempt from FBT. There’s plenty of anecdotal evidence I’ve discussed before about widespread non-compliance or non application with the rules around work related vehicles.
Inland Revenue hasn’t said anything publicly about this although we understand in the background an initiative was under consideration, before COVID-19 rather took its eye off the ball.
But a key point, which people must understand, that if a vehicle is available for private use other than travel from home to work or incidental travel, then it is not a work related vehicle, even if it is sign-painted. It is therefore subject to FBT. This is the bit which I think is going to potentially trip up a lot of tradies and other users of twin cab utes. You have to make sure you are compliant with the FBT rules around private use, which are pretty stringent.
As I said, this is a matter that I have talked about beforehand. Inland Revenue’s tools for dealing with this are much stronger now because it actively searches social media. At one tax conference an Inland Revenue representative said that if it saw someone put a photo on Facebook about going fishing and showing the ute towing a boat, it would happily drop a quick message through the myIR system to the effect of ‘Hey, we see you’re enjoying your fishing. Did you make sure you complied with the FBT rules?’ That’s very Big Brotherish, but it’s what it can do.
And so, you can’t say you’ve not been warned. I expect that we will start to see a significant increase in Inland Revenue investigations of FBT for the work-related vehicle exemption and twin cab utes.
The Green Party wealth tax plan
Moving on now into the election season. And some of the parties have released their tax policies. Others will either not do so or have already made it clear, as National has, that they don’t propose tax cuts or tax increases.
But the Green Party came out and announced as part of their Poverty Action Plan, a proposed wealth tax of 1% on net worth above $1 million and 2% above $2 million dollars net worth. (This is per person, by the way.)
Writing this week in the Herald, former member of the Tax Working Group, Professor Craig Elliffe, took a look at the Greens policy.
He noted that when things settle down, there’s quite likely going to be a requirement for more taxes to pay down some of the government indebtedness. And noting that the Tax Working Group itself had suggested that the tax system needed to look at the taxation of wealth and capital, Professor Elliffe then looked into the Greens’ proposals and raised the question whether a wealth tax was the best form to deal with these issues. And his short answer was no.
The whole article is well worth reading. Professor Elliffe pointed out that wealth taxes have declined in use: 12 OECD countries had a wealth tax in 1990, but only three -Norway, Spain and Switzerland retain them now. Add in Argentina and we’re talking about only four countries of any substantial size having a net wealth tax. You do however, find plenty of transfer taxes, such as inheritance tax gift duties.
And most of the OECD members also have a capital gains tax, although Professor Elliffe, for fairly obvious reasons, shied away from mentioning that.
Wealth taxes don’t raise much revenue was another of his arguments. And then there’s the whole question about tax integrity. What would happen in terms of tax planning, if attempts were made to introduce a wealth tax? I think that’s a very valid concern.
He also raised the question of jurisdictional flight. People may move out of New Zealand and move assets into and out of New Zealand and try and attempt to limit the wealth tax. All that is perfectly valid. But I can’t help but wonder whether the days of tax havens sheltering vast amounts of wealth, trillions of dollars in fact, are actually numbered.
Every country around the world now faces major pressures on its balance sheet, with lower taxes and greatly increased debt. So I’m beginning to think that we may see, just as we did in the last 10 years with the introduction of the Common Reporting Standards on the
Automatic Exchange of Information, a concerted move to end tax havens.
And that won’t happen overnight because obviously there will be very significant interests pushing back against that. But governments will probably look at the issue and conclude we cannot have trillions of dollars of assets stashed away where we can’t tax it at a time of such severe strain on our finances.
Now, Craig Elliffe finishes his article by noting
In summary, there is likely to be a strong need for tax revenue and standing back from the New Zealand tax system the under-taxation of capital is an issue for the variety of reasons set out in the Tax Working Group’s interim and final reports. Is a wealth tax the answer? I don’t believe so when there are other alternatives.
Coincidentally, the same week – the same day – the Financial Times published an article which basically said higher taxes are coming.
The article argues the paradigm that we’ve operated under for the last 40 years since 1980 of relatively low taxes and smaller government has been broken.
Since March, governments have rightly embraced enormous deficits to limit the collapse in economic activity, protect incomes and sustain employer-employee relationships. As a result, public debt burdens are rising everywhere to levels not seen for many decades, or even ever before. According to the OECD, many of its member governments could add debt worth 20 to 30 percentage points of gross domestic product this year and next.
This is going to force a simple choice on just about every government. They can tolerate the high debt burdens indefinitely, rather than try to bring them back down to moderate levels. Alternatively, they can permanently increase the state’s tax take to balance the books and start whittling down the debt. Either way, combining “responsible” policies on both debt and tax burdens is no longer an option…We may have to jettison both and learn to live with permanently higher public debt and permanently higher taxes.
The article goes on to cite the example of Japan which in 2000 had a tax to GDP ratio of 25.8% which was then well below the OECD average. This has now risen to 31.4%, which is still below the OECD average of about 34%.
And the article notes, “if Japan is a harbinger of the future for all rich economies, then expect public debt to stay high and taxes to move higher”. So that’s going to be a reassuring thought to be considering when we listen to what the politicians talk about tax going forward.
An unemployment insurance scheme coming?
And finally this week, something interesting popped up, which was also slightly related to a Green Party policy in relation to ACC. Grant Robertson, the Minister of Finance, raised the idea of a permanent unemployment insurance scheme.
Now, this is something that the ACT party has also advocated. As the Productivity Commission noted most OECD countries have some form of employment and unemployment insurance, which people can draw down for a set period of time if they lose their job. This tends to help people in employment on middle and higher incomes,
We don’t have unemployment insurance at the moment. Instead we have Jobseeker Support, which at $250 a week is substantially well below what the people who’ve just lost their jobs were earning. And that is why the Government introduced a special package for people who have become unemployed as a result of Covid-19 since February. Basically paying them close to double what’s available under Jobseeker Support.
Another option might be to significantly increase benefits, which is what the Welfare Expect Advisory Group recommended. But that, of course, means putting more strain on the government’s finances which leads us back to the question of whether higher taxes are needed.
And on that bombshell that’s it for this week. Thank you for listening. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you find your podcasts. Please send me your feedback and tell your friends and clients. Until next time, ka kite anō.
14 Apr, 2020 | Tax News
Are extra expenses and use of personal assets to work from home deductible against your taxable income? As usual with tax, its complicated.
We’re in week three of the Lockdown, and although the Prime Minister has indicated there may be a possible shift to Level 3 from 22nd April, a majority of employees may still be required to work from home even after that shift.
Naturally, employees will be incurring expenses in carrying out their employment duties. And the question arises, can they claim a deduction for these expenses? And the short answer is no. The Income Tax Act specifically precludes a deduction for “An amount of expenditure or loss to the extent to which it is incurred in deriving income from employment. This rule is called the employment limitation.”
This is a longstanding prohibition which has been in place since the mid-1990s. It was introduced as part of a simplification of tax return filing requirements. Instead, what is to happen is that the employer needs to reimburse employees for such expenditure. The employer will be given a deduction for the relevant expenditure and it will be treated as exempt income of the employee.
But what potentially could be deductible? The Inland Revenue guidelines for businesses with home offices are equally applicable for employees working remotely.
These guidelines allow a deduction of 50% for the rental of a telephone line, if it is also a private line which is used for business. Obviously specific business calls would be deductible. With regard to Internet costs this depends on the plan and the business proportion. How that is determined is a matter of some judgement. In addition to these costs, the business proportion of household expenses such as rates, power, rent or mortgage interest expense could be claimed.
Generally, the business proportion is calculated as the area set aside for use as an office over the total area of the house. For example, if an employee has an office which is say, 10 square metres of a 100 square metre house, then the deductible proportion is 10%.
There’s an alternative option of using a fixed rate as determined by Inland Revenue based on the average cost of utilities per square meter of housing for an average New Zealand household and applying it per square metre of the office area.
For the 2018-19 income year the rate was $41.70 per square metre so in the example above the deduction would be $41.70 x 10 or $417. It does not include the costs of mortgage interest rates or rent and rates. These must be calculated based on the percentage of floor area used for business purposes.
All of the above is perhaps easy enough where a person has a dedicated office at home, but as no doubt is happening all over New Zealand right now, employees are working on kitchen tops, dinner tables and out of bedrooms. What happens in these instances?
As the area being used cannot be said to be entirely dedicated to office use, a full deduction based on these apportionments is probably not available. The area of the room used for non-business purposes for example a bed or other furniture should be excluded. Arguably the deduction would be time-limited (for example, if it was only in office use for 8 hours a day, then only one-third could be claimed).
For the employer, they may be able to claim GST on the relevant proportion of GST expenditure claimed using the standard apportionment methodology, if the employee provides invoices. At this point the employer is probably thinking this is getting needlessly complicated.
A more practical approach would be for the employer to simply pay a flat rate allowance to employees. This is allowable if the allowance is based on a “reasonable estimate”.
The other potential issue is fringe benefit tax. Theoretically, FBT applies on the private use of tools such as mobile phones and laptops. Fortunately, there is an FBT exemption if the laptop or mobile phone is provided mainly for business use and the cost of those laptops and mobile phones is no more than $5,000 including GST.
All of the above represents a compliance nightmare for employee employers and possibly a target rich environment for Inland Revenue in a future date where it considers that the allowances paid, or deductions claimed for home office expenditure, have been excessive. In this instance the employer will be liable for the PAYE which should have been deducted from the amount determined to be excessive/non-deductible.
In practical terms, Inland Revenue might simplify clarify a lot of issues for employers and employees alike by issuing a determination setting out a flat rate amount of expenditure it would consider acceptable. An employer could pay above that amount but then PAYE would be applicable.
Of course, all of the above is somewhat hypothetical, if the employer has no cash flow to pay any such allowances. I suspect that is the matter employers are most concerned about right now. In the meantime, let’s hope we can return to a new normality soon.
This article was first published on www.interest.co.nz
