This week I’m joined by Geof Nightingale of PwC and we discuss:
- The Tax Working Group
- How the Budget surplus could be used to improve taxes for middle income earners
- The pros and cons of a Digital Services Tax and
- The OECD’s recently announced international tax proposals
- Tax Working Group’s capital gains tax is scrutinised
- We find out how much tax farmers in New Zealand actually pay
- International Monetary Fund challenges Tech companies
It’s Friday, the 29th of March. Welcome to This Week in Tax!
- The Tax Working Group’s capital gains tax proposal has come under scrutiny;
- We find out how much tax farmers really pay; and
- The head of the International Monetary Fund gives the tech companies the side-eye.
The Tax Working Group’s proposed capital gains tax proposals were the subject of a series in the New Zealand Herald this week which looked at how the proposals would affect various sectors. This is a good read because it’s also taken the opportunity to have input from a member of the Tax Working Group, Geof Nightingale who coincidentally was a member of the 2009/10 Tax Working Group.
The group looks at how the various sectors would be affected – starting with businesses, farmers which includes the farming sector, lifestyle blocks, homeowners, and investors in KiwiSaver and the like.
Now, what comes out of these is, firstly, the point is made repeatedly that gains to the date of implementation, i.e., the valuation date that they’re proposing are going to be exempt. It’s only gains from that point onwards that will be taxed, so that’s a key point for dealing with the lifestyle blocks. A good example is made there by Geof when he was talking in yesterday’s Herald.
The complexities emerge around businesses and also around investors. For businesses, there was a real issue around valuations of good will and how about rollover relief – what we call “what happens when someone dies when you’re trying to pass assets from generation to generation?” These are all issues which the Tax Working Group have looked at but will need further scrutiny if they’re going to be implemented.
The really complicated part is what happens for investors. Here, we see that the policy it adopted 30 years ago of the tax-tax-exempt approach to retirement savings which means that savings are not tax-preferred which is contrary to what happens around much the rest of the world.
You then have the current approach with the taxation regime, the foreign investment fund regime, and the financial arrangements regime. And then, you’re trying to shoehorn a capital gains tax regime into that as well. It is an absolute dog’s breakfast – or a real Brexit, as we say here – and this is an area which, quite rightly, investors in that sector are saying, “This is far more complicated than is appropriate!”
Interestingly, a couple of things spin out of this. Susan St John writing for interest.co.nz published a piece where she looked at the minority view of the Tax Working Group. Three members of the group – Joanne Hodge, Robin Oliver, and Kirk Hope – disagreed and set out their views as to why they disagreed with a general capital gains tax being applied across all sectors.
They did, however – and this gets often overlooked – support taxing capital gains of residential property investors. What Susan St John picks up is the point that was made by the minority group is that, if we wanted to tackle housing inequality, then a capital gains tax isn’t the way to go. She criticises the final report for not spending more time looking at the risk-free rate of return method. Basically, this is the method used for the foreign investment fund fair dividend rate approach, i.e., you apply a set percentage to the value of the asset and that creates the taxable income which is reported by the taxpayer. That’s not an unreasonable approach. It’s actually, in some ways, conceptually simpler.
Her point is that – and, interestingly, it’s been made by some of the opponents of the capital gains tax – is that, if applied on a broader basis, this would tackle inequality and tackle the housing problem as well as being a regular source of income for the government.
Now, also spinning out of that, the head of Federated Farmers in Marlborough climbed into the proposals, saying that (a) farmers are going to be an ATM machine for beneficiaries was one of the targets. This prompted a fairly robust rebuttal from Professor Lisa Marriott.
In writing for The Spinoff, she took a look at just exactly how much tax the farming sector does pay. This is something that has intrigued me for some time. What Lisa did is she went to the Inland Revenue, used the Official Information Act, and got details of the income tax paid by the farming sector for the year 2016/17 tax year.
Now, the total tax take for that year was $76.5b. Of that, the farming sector contributed $758m, according to the Inland Revenue. In other words, 1% of the total tax take.
Pouring with a certain amount of dry sarcasm, Lisa Marriott pointed out that this is hardly an ATM pumping money out to be distributed all around the place. Dairying only pays $223m in income tax.
Now, a couple of issues that come spin out of this, firstly, the farming sector makes a lot of noise yet isn’t actually directly paying a great deal of income tax. Its employees might be paying quite a bit of pay as you earn, but the fact that, on an estimated $758m of tax, that represents maybe $3bn of taxable profit across the sector which isn’t a lot given the size of the sector, and it points to something that proponents of the capital gains tax have been saying – that people have been rolling up the gain, have been farming for capital gain, not for income.
And so, should we really be allowing that to happen on principles of equity? Something on that principle of equity should be said that farmers are able to claim an interest deduction for the full amount of borrowings they have on the basis that they are deriving gross income. But, if a substantial amount of that income in economic terms is a capital gain, why should they be getting a deduction for that? This is something the tax system has allowed for the last 30 years, and it’s an anomaly which can only be addressed either by introducing rules which restrict interest deductions or a comprehensive capital gains tax.
Now, this is an interesting point to think about next time you hear farmers saying they’re the backbone of the economy. Contemplate that they only contribute one percent of the total tax take.
Finally, this week, we talked about the digital services tax on the tech giants. They’re still under scrutiny. Facebook has finally responded by saying it will try and ban white supremacist speech. The response from tech companies were, “Go on.”
But, on the tax side, the latest person to weigh on this is Christine Lagarde, Head of the International Monetary Fund. She has come out and said the tech giants should pay all tax.
As I said last week, this is a trend that’s running around the world. Countries are looking at the tech giants, realising that the current tax system doesn’t tax their profits extremely well, and are looking to introduce new means of doing so such as the digital services tax.
Now, the Organisation for Economic Co-operation and Development is working on a more comprehensive approach to taxing more tech giants. We may see something towards the end of next year. But, in the meantime, as I noted last week, an increasing number of countries are saying, “Enough of this. We can’t allow this to continue. We’re pushing for a digital services tax.”
The IMF carries a fair amount of weight. So, when it starts weighing in on this argument, you can expect that the pressure on the tech giants will continue to build.
Please send me your feedback, tell your friends and clients, and have a good week!
Until then, as-salamu alaykum.
Peace be upon you, and peace be upon all of us.