FBT Archives - Page 3 of 3 - Baucher Consulting

More on Inland Revenue’s criteria for relief as a result of the COVID-19 Pandemic

14 Apr, 2020 | The Week in Tax

More on Inland Revenue’s criteria for relief as a result of the COVID-19 Pandemic
The fringe benefit tax lesson from David Clark’s misadventures
The pros and cons of a Financial Transactions Tax

Transcript

This week, Inland Revenue has been updating its guidance as to the measures that have been introduced by the Government to help in the short term and longer term with the response to the Covid-19 pandemic.

In particular, Inland Revenue has given more guidance about what its position is around the remission of late filing penalties and use of money interest for tax that is paid late.

The position that has been set out and circulated in some detail to tax agents is as follows. In order to be eligible for remittance, customers – that deathly phrase – must meet the following criteria. They have tax that is due on or after 14 February 2020, and their ability to pay by the due date – either physically or financially – has been significantly affected by Covid-19.

They will be expected to contact the Commissioner “as soon as practicable” to request relief and will also be required to pay the outstanding tax as soon as practicable.

As to what “significantly affected” means, Inland Revenue’s view is this is where their income or revenue has been reduced as a consequence of Covid-19, and as a result of that reduction in income or revenue, the person is unable to pay their taxes in full and on time.

Now a couple of things to think about here.

“As soon as practicable” will be determined on the facts of each case according to Inland Revenue. So that as long as the taxpayer applies at the earliest opportunity and then agrees to an arrangement that will see the outstanding tax paid at the earliest opportunity or be paid over the most reasonable period given their specific circumstances, then that test will be met.

However, what you also need to know is that this is very much on a case by case basis, so that if Inland Revenue thinks you’re trying to pull a fast one, they will deny remission and you will be up for the late filing penalties and use of money interest.

Now, in terms of applying for remission of use of money interest, Inland Revenue is saying it would try and minimise the amount of information it normally asks to be provided, accepting that these are unusual times. But they want people to continue to file their GST returns. So in other words, you may not be able to pay your GST on the regular time, but you should still file it, so that gives them information as to what’s going on.

Obviously, if things have really dived into a hole for a taxpayer, filing a GST return may be a means of getting a refund. Although if you owe tax to the Inland Revenue, that would simply be swallowed up and applied to any arrears.

But in terms of information, Inland Revenue are saying they would expect to see at least three months of bank statements and a credit card statement, any management accounting information and a list of aged creditors and debtors. Inland Revenue goes on, we may not ask for that all that information in every case, but it should be available if we do ask for it.

For businesses, they will be looking to see and to understand what your plan is to sustain your business. You may not be able to get all that information to them; they’ll work around that. So, they’re clearly trying to be as flexible as possible.

Obviously some people were already in trouble before 14 February, so they can ask to renegotiate their existing instalment arrangement with Inland Revenue. Very simply,what will happen is that you enter into an arrangement with Inland Revenue that you’re going to pay X amount at a regular time to meet your liabilities. Inland Revenue have said in some cases they will accept a deferred payment start date.

They may partially write off some of the debt because of serious hardship but expect the remainder to be met by instalment or a lump sum. They may also even write it off completely due to serious hardship. It’s all going to be done on a case by case basis. So that’s the most important takeaway.

Inland Revenue’s communications around remission of late payment penalties and use of money interest are a little confusing, in that it seems to say that anyone paying late will be able to get remission of use of money interest on late payment penalties. That is not the case. It must be Covid-19 related and you must demonstrate that.

As it is being done on a case by case basis, be aware that if you don’t meet the standards that Inland Revenue are expecting to see, they won’t grant you the remission. So that’s the key take away at the moment.

Now, in previous podcasts I have raised the possibility of the 7th May provisional tax and GST payments being postponed. The problem is that Inland Revenue doesn’t have the authority to do that, even though it sounds like a great idea. With Parliament essentially in recess, it’s not something that can be done quickly either. So that’s probably something that longer-term legislation may need to be introduced to give Inland Revenue the flexibility to deal with unexpected events.

It probably felt it had enough flexibility to manage the situation in the wake of the Canterbury earthquakes, but as this Covid-19 pandemic has shown, when it happens nationally, not just regionally, then extra powers or extra flexibility may need to be granted statutorily.

A quick note on Inland Revenue. Remember that it is closing all online and telephone services and their offices as of 3p.m. today. This is to finalise Release Four of their Business Transformation Program. As I said in last week’s podcast, I agree they should continue to do this. They’ve probably put a lot of work in place beforehand, and it’s going to be more disruptive for them to postpone it. So at a time when productivity does fall away a little bit – it’s after the 31 March year end and it’s around Easter – this is as good a time as they’ll ever get to do it. Services will be back up and running from 8a.m. next Thursday.

Just a final quick note on that – remember, if you’ve got a return or e-file in draft or any draft messages in your MyIR account, those will be deleted. So you should complete and submit them before 3p.m. today.

FBT surveillance

Moving on, there’s a useful little tax lesson from David Clark’s – the Minister of Health – misadventures, and it’s in relation to the photograph that’s been widely circulated of his van sitting isolated in a mountain bike park.

We’re going to see more of Inland Revenue going through social media and picking up signage on vehicles and then matching that signage to its records about fringe benefit tax.

What happened there, someone obviously saw David Clark’s van which had his name and face written all over it and passed it on to a journalist and the story ran from there.

That already happens to some extent with Inland Revenue already looking at people’s use of work-related vehicles. In particular, the twin cab use, which I’ve mentioned before, is something that I know Inland Revenue is now starting to look more closely at in terms of FBT compliance.

You get chatting to Inland Revenue officials and investigators and they’ll have some great stories about how taxpayers have accidentally dobbed themselves in by driving their work-related vehicle towing their boat to, say, a wharf opposite the Inland Revenue office in Gisborne was one story I heard.

So David Clark’s misadventures should be a highlight that if you’ve got a sign written vehicle and you are claiming a work related vehicle exemption, don’t be surprised if Inland Revenue starts matching up your Facebook profile, for example, with your FBT returns and asks questions. This is part of the brave new tax world we live in and is something we will see a lot more of.

Financial transactions tax

Finally for this week, I mentioned in last week’s podcast I did a Top Five on what I saw as the possible future tax trends post Covid-19. One of the things I talked about was greater use of artificial intelligence and data mining and information sharing by Inland Revenue – just referencing back to my previous comment by David Clark and FBT.

I also discussed the likelihood of new taxes coming in. And one of the taxes I commented on was a financial transactions tax and that perhaps that it’s time might come.

But the drawback, as I saw it for a financial transactions tax, is that it needs to be applied globally. And one of the readers asked the following question

“Why does a FTT need to be universal? In the context of your article, I read global as meaning why can’t the New Zealand government apply for all transactions in New Zealand, especially for money leaving the country?”

It’s a good question and so I dug around a bit more on the topic. A financial transactions tax sometimes also called a Tobin tax after the economist who first mooted it, is a tax on the purchase, sale or transfer of financial instruments.

So as the Tax Working Group’s interim report said, a financial transactions tax or FTT could be considered a tax on consumption of financial services.

And FTTs have been thought of as an answer to what is seen as excessive activity in the financial services industry such as swaps and the myriad of very complex financial instruments. Some people consider many of these as just driving purely speculative behaviour and a FTT could be something that would actually help smooth some of the wild fluctuations we sometimes see in the financial markets.

Now, the Tax Working Group’s interim report thought the revenue potential of a financial transactions tax in New Zealand was likely to be limited “due to the ease with which the tax could be avoided by relocating activity to Australian financial markets.”

And this is what I meant by saying a FTT had to apply globally. If you’re going to have a financial transactions tax, you need to have it as widely spread as possible across as many jurisdictions. Otherwise, you’ll get displacement activity.

Now, it so happens I’m looking at Thomas Piketty’s Capital in the Twenty First Century, and he had an interesting point to make about a FTT. And that is that it is actually a behavioural tax, because, as he has put it, its purpose is to dry up its source. In other words, think of it like a tobacco tax. The intention there is not just to raise revenue, its primary function is to discourage smoking.

So a financial transactions tax has the same effect. It drives down behaviour that you don’t want while raising money. But the fact it is driving down transactions means that its role as a significant producer of income for the Government is limited.

Piketty suggests its likely revenue could be little more than 0.5 percent of GDP. The European Union when it was considering a FTT of 0.1% thought it might raise the equivalent of somewhere between 0.4% and 0.5% percent of GDP. (about EUR 30-35 billion annually in 2013 Euros). 0.5% of GDP in a New Zealand context would be maybe $1.5 billion. Not to be ignored, but still not a hugely significant tax.

The other issue that the Tax Working Group were concerned about – and I think this is something that we really want to think about in the wider non-tax context – is that any relocation to Australia, for example, would reduce the size of New Zealand capital markets.

And I think this is a long-term structural issue in the New Zealand economy we ought to be considering more seriously – in the wake of what comes out of the initial response when Covid-19 pandemic ends, how the economy looks going forward. This will be one of the issues to look at.

Well, that’s it 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. Please send me your feedback and tell your friends and clients until next time. Happy Easter and stay safe and be kind. Kia Kaha.

Shareholder advances under Inland Revenue scrutiny – are you paying FBT on these advances?

17 Feb, 2020 | The Week in Tax

Shareholder advances under Inland Revenue scrutiny – are you paying FBT on these advances?
More about using cheques to pay tax
Australian tax complications when purchasing property

Transcript

This week, Inland Revenue gets curious about loans to shareholders. More about how you can pay your tax and the cost of investing in Australian property just went up.

Listeners will recall one of my previous guests was Andrea Black, who at the time was the independent advisor to the Tax Working Group. Andrea has moved on and is now the policy director and economist at the New Zealand Council of Trade Unions taking over from Bill Rosenberg, a fellow Tax Working Group member.

Andrea has just published a Top Five piece on tax and paid employment.

And one of the top five items caught my eye, because it picks up some other things that I’ve been seeing, has to do with advances from companies to shareholders.

Now, the interesting thing that’s emerged from the Tax Working Group is what happened after 2010 when the tax company rate was cut from 30% to 28% and at the same time the top personal tax rate went down from 38% to 33%. Since then amount of loans advances from companies to shareholders has exploded, and there is an eye-catching graph in a Tax Working Group paper which shows the value of shareholder current account advances.

And they’ve gone from just under $10 billion in back in 2010 to nearly $26 billion by 2016. So, what’s happening here? Well, it appears that this could be a way of people trying to avoid paying the top 33% tax rate because company profits are tax paid at 28% and then the taxpayer then receives an imputed dividend and then tops up the 5% differential, assuming they’re taxed at the top rate.

But what happens if instead the money is advanced as an interest free loan or a loan to a shareholder? Now, there are rules around this, and interest free loans are subject to a prescribed interest rate. This has been cut to 5.26% with effect from 1st of October 2019. If you’re not charging interest, you are required to charge this prescribed interest rate of 5.26% on any overdrawn shareholder current account.

Now that is a longstanding rule, but in my experience, it’s not always observed, and I even had an interesting case at the start of an Inland Revenue review. The company did have an overdrawn current account for some shareholders. We advised Inland Revenue as you are supposed to saying “Look, oops our bad. This is an overdrawn current account and we haven’t been charging interest. Here’s the amount of interest we should have been charged”.

What was interesting about this case was it involved a fairly sizable company which had independent advisors, who ought to have known this. More curiously, the Inland Revenue investigator didn’t seem to be aware that that this could have been a problem. Perhaps this is why these current account debits have been gradually growing without too much observation from Inland Revenue.

So, the issue which arises here is have those companies being charging interest and if so, have they charged interest at the correct rate? Otherwise, there’s probably a load of FBT going to be payable. And why exactly are they doing this? If there is a constant pattern of substitution of, say, a salary or dividends with drawings made through the current account, Inland Revenue could follow the lead it took in the Penny-Hooper case. You may remember that case from nearly ten years ago. Inland Revenue may say, “Well, this actually constitutes tax avoidance and we’re going to treat these drawings as additional salary or remuneration”.

So, it remains to be seen what’s going to happen in this case. This is another head’s up. If you’re a company and you’re advancing money to your shareholders and you’re not charging the prescribed interest rate of 5.26% then you potentially have a problem on your hands.

And what I think we can also say with some confidence is that matters highlighted by the Tax Working Group as requiring work will be picked up by Inland Revenue as part of their work programme. The data mining capabilities of the Inland Revenue are now greatly enhanced, so I would anticipate seeing a lot more “Please explain” letters coming from Inland Revenue investigators.

Following on from last week’s item about the fact that Inland Revenue is withdrawing the general application ability to pay tax by cheques from 1st of March, earlier this week I went to a meeting between tax agents and Inland Revenue staff. And this point got raised with several agents saying, “Well, we’ve got elderly clients who either have no access to online banking or don’t know how to use it. They’re not happy about it. And we’re not happy about this”. Two things emerged from this discussion. Firstly, the Inland Revenue staff acknowledged this was something that was a potential problem. But they also pointed out that in fact, in certain circumstances, Inland Revenue will allow cheques to continue to be used to meet tax payments. Coincidentally, also this week, a new Statement of Practice SPS 20/01 was released by Inland Revenue which explains when it considers tax payments to be made on time.

The SPS discusses what the alternatives for people who used to pay by cheque, and can and are concerned they may no longer do so. And it gives a couple of examples about the options. One involves John who lives in a remote rural area and lives off the grid. He does not have any access to the internet nor a reliable phone service and is hours away from any banks. So, in this case, Inland Revenue would agree that his circumstances are exceptional, and he may continue to pay his tax by cheque after 1st March 2020.

The alternative example is another elderly person, Mary who is aged 75. She doesn’t have access to the Internet either. She has no Westpac branch. (You can actually rock up to a Westpac branch and pay your tax in cash or by using a debit card). Mary does have an EFTPOS card and the Inland Revenue here say:

“Through discussion with the customer about her circumstances, it was agreed that she is able to, with assistance by phone, set up a direct debit with us, or make payments using an automatic payments form. On this basis, an exceptions arrangement to pay tax by cheque post 1 March 2020 would be declined.”

So, there are instances that you can still continue to pay by cheque, but it’s very much a case by case basis.

I stand by what I said last week. I think that this is blanket policy which should not be allowed. I would say in that example they give about Mary, elderly people like that would be very, very cautious about talking over the phone to someone about paying tax. Particularly since Inland Revenue is sending out frequent reminder warnings about the phishing and phone scams going on.

So, I think you’ve got this dichotomy between Inland Revenue wanting to minimise its own administrative costs and not actually addressing the real concerns of people who are concerned about using online and phone banking.

The second point came out of the discussion was also pretty interesting, was that Inland Revenue had also said that in future, when either setting up or updating your bank account details, it would require a direct debit.

Now, that caused quite a stir amongst the tax agents. And let’s just say there was a full and frank exchange of views on the matter, which also coincided with us being advised that, in fact, that particular advice was going to be withdrawn. Clearly, quite a lot of people have said, “Wait a minute, what’s this?” because cancelling the direct debit with Inland Revenue is not that easy. The takeaway here is you do not have to set up a direct debit with Inland Revenue unless you really want to. Therefore, proceed with caution.

And finally, and this is a long running issue for me, a warning how the tax consequences of investing in Australia are often overlooked. There is a lack of awareness that, first of all, Australian capital gains tax will apply to property. But secondly, there’s also all the other hidden charges involved in investing in Australian property, such as Stamp Duty – or as they call it in New South Wales – Transfer Duty.

What caught my eye this week is that the state of Victoria, has announced it will withdraw its grace period for exempting foreign purchaser additional stamp duty on residential property.

This would apply to discretionary trusts that have foreign beneficiaries, for example, a New Zealand trust with, say, three beneficiaries here and one in Australia. This will now become regarded as a foreign trust for surcharge tax purposes unless the trust deed is amended to expressly exclude the foreign persons, that is the New Zealand residents as potential beneficiaries of the trust.

The change may mean that there will be a surcharge payable on the purchase by a New Zealand trust of residential property in Victoria. New South Wales has similar rules. In fact, there is a Surcharge Purchasers Duty of 8% for residential land purchases by foreign persons, which would include a foreign trust. New South Wales also has a land tax and it imposes a 2% surcharge for residential land purchases by foreign persons.

So, this is very much a case of if you’re investing in Australia, be aware there are great tax complications. I always tell my clients, “Don’t let the tax tail wag the investment dog”, but you really have to be sure if you are investing in Australian property that the returns justify the additional tax consequences that you’re going to incur.

And on that bombshell, that’s it for The Week in Tax. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. Until next time have a great week. Ka kite āno.