Treasury Analytical Note examines the effects of taxes and benefits for the 2018-19 tax year
The Australian Tax Office gets heavy with the Exclusive Brethren – will Inland Revenue follow suit?
Understandably the start of the new tax year on 1st April and the increase in interest deductibility for residential investment property to 80% was generally greeted by residential property investors with enthusiasm. Users of apps such as Airbnb and Uber, on the other hand, were less enthusiastic because the provisions relating to GST on listed services also took effect on 1st April. It has become clear that this change has caused some confusion and led indirectly to price rises.
Now GST on listed services refers to online marketplace operators who “facilitate the sale of listed service”. This is the so-called “Apps Tax”, which National promised to repeal when it was campaigning in last year’s election but then decided to keep it because it needed the money to make up for the loss of its overseas buyers tax.
These rules apply to the likes of Airbnb, Uber, Ola, and Bookabach which facilitate the sale of related the services. They now have to collect and return GST when the relevant service is performed, provided or received in New Zealand. It doesn’t matter whether or not the seller, the actual person doing the providing of the Uber or Airbnb, is GST registered. (For those already GST registered the change will have little effect).
Confusion and an unnecessary price increase?
However, a significant number of those providing the Uber or Airbnb, are not GST registered because the total services they provide annually are below the GST registration threshold of $60,000. But the introduction of the apps tax has prompted some of these non-registered persons to effectively increase their prices 15% to take account of the GST charge. However, this overlooks that though as part of the changes those non-GST registered persons can expect a 8.5% rebate under the flat-rate credit regime scheme.
What happens here is the offshore marketplace (Uber or Airbnb) will collect 15% GST on the booking but then pass 8.5% of that to the persons actually providing the Uber or Airbnb. But as an article in The Press notes, it appears many people now think they are GST registered and have effectively increased their prices by 15%. As Robyn Walker of Deloitte said, there definitely appears to be some confusion around hosts about this law change, and probably many don’t fully appreciate that they’re getting this 8.5% rebate.
As GST specialist Allan Bullot of Deloitte, noted there is a lot of confusion with Airbnb. It’s a complicated area, and something Airbnb providers are very careful about is registering for GST because of the fear they might have to pay GST if they sell the property to someone who’s not GST registered. In which case they effectively had to pay GST on the capital gain.
It appears what we’re seeing here is that those who have been brought into the new flat rate credit scheme haven’t yet quite worked out how the new rules will work for them. I would expect things to settle down in time and maybe Inland Revenue might put out more guidance. But it would appear that some providers are getting an accidental windfall at this point, although the increase is taxable for income tax purposes. Anyway, watch this space to see how this plays out and whether there’s some tweaking to the rules as this scheme beds in.
Treasury analyses the effects of tax and income
Moving on, just before the end of the tax year, Treasury produced an interesting Analytical Note on the effects of taxes and benefits on household incomes in tax year 2018 – 2019. This is interesting in a number of ways because frequently when people are talking about the effective tax burden, they look at the impact of direct taxation on a person’s pre-tax income.
Some have pointed out this is not really a true measure of a person’s net tax burden. They’re referring to the effect of transfers that people might receive from government in the form of Working for Families or New Zealand Super, but also the indirect transfers such as education and healthcare.
This paper tries to examine that for the 2018-19 tax year and what it does is calculate a household’s “final income” which represents net income after direct and indirect taxes and then adds an estimate of the government spending on health and education services received in kind.
As the paper notes basically when you just look at disposable income, that is market income plus transfers, such as Working for Families credits or New Zealand Super, these are incomes are generally lower than market incomes on average over the population of New Zealand, and fairly unequally distributed. However, once you bring in indirect taxes and in kind benefit payments to get final incomes as defined, these are significantly more equally distributed than disposable incomes and close to market incomes when averaged over all households.
Yes, but what about Gini?
The Note also considers the Gini coefficient. This is the measure of inequality, where the higher the number, the more inequality society is. The Gini coefficient starts at 45.6 ± 1.5, and that drops to 35.8 once you bring in income support payments. Once you include consumption taxes and the benefits in kind such as health and education you end up with a Gini coefficient of 28.1 which is considerably lower and indicative of a much more equal society.
What the Treasury analysis did was to take 66% of all core Crown tax revenue and 68% of core Crown expenditure and allocated that to New Zealand households. Although the effect is approximately neutral as the note describes the effect is unevenly distributed. Households in the bottom five “equivalised disposable income deciles” received on average more in government services than they paid in taxes, whereas the opposite is true for houses in the top four deciles.
The second decile is the one where there’s a large amount of support happening. This is because there’s a fairly high concentration of New Zealand super recipients in that second docile.
The Note also considers “retired households”, where one of the people in the household is receiving New Zealand super.
“Drink yourself more bliss”
I was amused to see in the analysis of indirect taxes a comment about the average alcohol excise amounts increasing reasonably steady with each decile household equivalent. In other words, the richer the decile, the more they drink. That is a crude summary but it did amuse me.
As I noted, the Treasury analysis covers GST and the effect of economic benefits in kind. There was some commentary at the time of last year’s High Wealth Individual report that it wasn’t really quite fair because it didn’t take into account what the impact of GST and government benefits in kind. This is interesting to see, and I definitely recommend having a read of the note which is a reasonably easy read.
The Australian Tax Office raids the Exclusive Brethren’s business operations
And finally this week, a story coming out of Australia caught my eye about the Australian Tax Office (“the ATO”) raiding multiple premises associated with the global headquarters of Universal Business Team (UBT) on March 19th. UBT is a Sydney registered company that provides services and advicee to about 3000 exclusive Brethren owned businesses in 19 countries.
ATO investigators also apparently raided the head offices of a number of Brethren run companies, including OneSchool Global. In what would also be the standard procedure here, they confiscated phones, computers, documents and other materials. This was done as part of what the ATO call a “no notice raid”. Inland Revenue can do such raids as well, but the point is, it’s not done very often, and the fact that this has happened is extremely intriguing to see.
One of the things that I see frequently pop up in the comments of these transcripts, are questions/ pushback about charities having an exemption from tax on their business profits. It’s more complicated than that, but it’s there’s an obvious tension there. (Again thank you to all those who contribute, your comments are read even if I don’t always respond).
On this point I recall a discussion I had with the late Michael Cullen when he was chairing the last tax working group. During a roadshow event I asked him if there was anything which had surprised him during his role. He replied that he had been surprised by the scale of the charitable sector. He and the group had some concerns about whether in fact, all the charitable donations were being used for charity. In particular whether donations made under an exemption to an exempt business were in fact being used for a charitable purpose. The Tax Working Group’s final report noted:
“80. …the income tax exemption for charitable entities’ trading operations was perceived by some submitters to provide an unfair advantage over commercial entities’ trading operations.
81. notes, however, that the underlying issue is the extent to which charitable entities are accumulating surpluses rather than distributing or applying those surpluses for the benefit of their charitable activities.”
The Sunday Star Times asked Inland Revenue to comment on the ATO’s action but Inland Revenue just dropped a dead bat on it. But I would think, as the Sunday Star Times said, any information relating to New Zealand businesses that came into the ATO’s hands would proactively be passed on under the Convention on Mutual Administration Assistance and Tax Matters, part of the double tax agreement between Australia and New Zealand.
The scale of information exchange which goes on between tax authorities is very largely unknown, but it’s probably one of the most revolutionary changes to the tax landscape which has happened in the last five to 10 years. I don’t think we’ve yet seen anything like the impact that it will have.
Will Inland Revenue follow suit?
In summary the ATO clearly feels that it’s justified in launching a “No notice raid”. The question is whether Inland Revenue is considering something similar or is it just going to sit back and watch carefully? We don’t know, it won’t say, but you can be sure that it will be watching very closely to see what findings that come out of the ATO raid. If it does get anything interesting from the ATO, expect to see something similar happen here.
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.
This week, Inland Revenue published a reminder aimed at tax agents that clients must have a taxable activity in order to be registered for GST.
The notice said if your client is filing regular GST refund returns with expenses consistently more than their income, it may suggest they are not carrying out a taxable activity or have errors in their GST returns.
Inland Revenue then notes that clients “may receive a letter if they have filed regular GST refund returns from registration.” Tax agents are advised to “please review the refund returns filed and if required take any necessary action”. Inland Revenue then add that letters may be sent to clients who have been filing regular GST refund returns in the last 36 months.
If anyone receives such a letter their response will be expected to include one or more of the following:
a description of the taxable activity or activities undertaken and an explanation for the regular GST refunds.
A voluntary disclosure to correct any errors in the GST returns,
Cancellation of the GST registration if they are no longer carrying out a taxable activity. The final GST return should be filed with the required adjustments.
Inland Revenue are clearly about to run a campaign on this issue. Based on Inland Revenue’s statistics during the year ended 31st March 2023 there were just under 100,000 GST registered persons with nil turnover. (About the same number as have turnover exceeding $1 million). There’s another 160,000 or so who have a GST turnover of between $1 and $60,000.
According to Inland Revenue the net GST refund paid to GST registered persons with turnover below $60,000 has increased from $463 million in the March 2001 year to $1.473 billion in the March 2023 year.
Clearly Inland Revenue has looked at this and thought “How genuine are some of these GST registrations?” It will probably be looking at some of the lifestyle blocks that I’ve encountered with some grazing income, but the expenses of running outweigh the grazing income. Inland Revenue looks to be gearing up for a campaign to review those such clients in some detail. We’ll track to see what happens on this and give you updates as and when information emerges
When is a subdivision project a “taxable activity” for GST purposes?
Moving on and still on the matter of GST, and actually on the question of carrying on a taxable activity, Inland Revenue has just released a draft Question We’ve Been Asked (QWBA) for consultation on when is a subdivision project a taxable activity for GST purposes.
Following the 1995 Court of Appeal decision in Newman, Inland Revenue had issued a Policy Statement on this issue.
Under the Policy Statement whether a subdivision project is a taxable activity for GST purposes depends on the facts of each case. Determining this takes into consideration factors such as the scale of a subdivision, the level of development, work time and effort involved, the amount of financial investment and the commerciality of the transaction. Based on this the general view was if a person carried out a subdivision involving three or four sections, it was likely to not represent a taxable activity for GST purposes.
28 years on, it’s not unreasonable for Inland Revenue to come back and look at the matter again. In the draft QWBA the Commissioner considers most of these factors are still relevant when considering whether a subdivision is a taxable activity. However, the draft clarifies and, in some respects, differs from the previous Policy Statement.
According to the draft QWBA in determining whether a subdivision represents a GST taxable activity “the most relevant factor will generally be whether the activity is carried on continuously or regularly. This Question We’ve Been Asked focuses on this factor.”
Following on from this, paragraph 29 of the draft states,
“Generally, the Commissioner considers the level of development work involved in the construction and sale of a single house or other residential dwelling as part of a subdivision is not on its own enough for an activity to be considered carried on continuously or regularly.”
On the other hand, the construction and sale of multiple residential dwellings or a large commercial building is more likely to be continuous or regular. This is an interesting change in tone since 1995. But also, when you think about it, the change reflects how generally speaking, it has become easier to subdivide. Certainly, in Auckland if not necessarily everywhere, it has become easier to subdivide.
Clearly, Inland Revenue is seeing a lot of activity in this space. And the question is then arising, well, at what point does a simple subdivision become a GST taxable activity? Hence this updated QWBA.
As I mentioned a few minutes ago, there was always a sort of general conclusion from Newman that maybe three or four lots carved off would not be a taxable activity. But as the draft notes, there’s no specific number of lots created that determines whether a taxable activity exists. Our case law indicates that where a subdivision activity involves the creation and sale of multiple lots, it MAY be a taxable activity. But it doesn’t necessarily mean a subdivision involving creation and sale of multiple lots will always be a continuous activity because, for example, a subdivision is so straightforward that the number of lots sold is not significant, but it does in revenue.
But…a single section could be a taxable activity
Paragraph 32 of the draft notes although an activity leading to the supply of only one section will not usually be considered an activity carried on continuously or regularly, “this does not mean an activity leading to one supply can never be a taxable activity”. It could be that if other factors are sufficiently present, such as the scale of the subdivision or the level of development work. This will be this will indicate the activity is continuous, even if it leads to only one supply. For example, the construction and sale of a single commercial building on subdivided land would be an activity carried on continuously and regularly.
Changes from previous policy
The previous policy referred to the commerciality of the project as a factor but Inland Revenue have now decided that commerciality is no longer significant. In addition, there was an example in the previous Policy Statement where the construction and sale of a tea shop on subdivided land would represent a taxable activity. However, this draft QWBA now considers that building a tea shop would not normally involve more activity at work than that involved in constructing a residential building and therefore would not meet the criteria to be a taxable activity.
No GST, but what about income tax?
The draft also adds a reminder that although it is focused on GST, even if a subdivision activity is not a taxable activity for GST purposes, the resulting sale may still be subject to income tax. This might perhaps be under the bright line test. But there are other provisions that specifically deal with subdivisions carried out within ten years of acquisition. A useful reminder that although a transaction might not be within the GST net, it could well still be subject to income tax.
A few examples
There are some good examples at the end of the draft QWBA. It’s just worth repeating again that the material being put out by Inland Revenue is much more accessible than it was in previous years. The draft contains a good example about a basic subdivision then, which would not be a taxable activity because it’s not carried on continuously and regularly.
Example four illustrates the GST issues where a subdivision is part of an existing taxable activity. Now this is a question that does pop up quite regularly in my experience. In this case, Loammi and Marissa are GST registered as a partnership with a taxable activity of residential property development. They buy dilapidated houses and renovate them to sell for a profit.
In this example they realise they could make a larger profit on a particular piece of land by subdividing before sale. And therefore, even though the subdivision and sale would not be a taxable activity on its own, in this case the sale of the subdivided land is a taxable supply because it was done in the course of furtherance of their existing taxable activity
Overall, this draft QWBA is probably a good warning for anyone considering subdividing property, maybe carving off two, three or four sections, and thinking that that would not represent a GST taxable activity. This view is no longer so clear cut. Like much of tax it’s fact dependent. It’s also another good example where it pays to get good advice beforehand, otherwise a nasty GST surprise could be awaiting.
Foreign Investment Funds – a welcome change of heart from Inland Revenue
Finally, a few weeks back I discussed an interesting Inland Revenue Technical Decision Summary about which methodologies must be used to calculate income under the Foreign Investment Fund (FIF) regime. Under the FIF regime individuals and trusts may switch between the fair dividend rate, which applies a flat 5% to the opening value of a persons FIFs or the comparative value, which looks at the gains, losses and income during the year.
However Inland Revenue had suggested this could not happen where people were making voluntary disclosures of FIF income for prior tax years, something I see quite frequently. Inland Revenue’s proposal was this ability to change methodologies was not available and all taxpayers making voluntary disclosures would be required to adopt the fair dividend rate.
This prompted a fair bit of pushback from quite a number of advisors, including myself. I’m pleased to say that Inland Revenue has now issued an updated draft QWBA on this matter. The updated QWBA notes the Commissioner accepts that taxpayers have a choice of methods to calculate income, even if they fail to declare the income in a tax return and later file a voluntary disclosure or fail to file a tax return by the due date and later provide one including the FIF income.
This updated QWBA is another example of the Generic Tax Policy Process working with Inland Revenue taking on board feedback from advisers. It’s a good result for taxpayers. I was concerned that if Inland Revenue adopted a harsh approach on this, then people would just simply stay in the undergrowth and hope that Inland Revenue never noticed them. And that’s not good for the tax system at all, where you’ve got people who are become compliant and feel that they are unfairly penalised for doing so. Meanwhile other non-compliant persons see this and decide to just take a chance on not being caught in the first place. This is never a wise approach in my view.
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.
An Australian case highlights the problems around removing GST from food, and as the Government’s financial statements for the year ended 30th June 2023 are released, instead of our tax cuts do we actually need more tax?
Last week I mentioned the retirement of Geof Nightingale and I also surmised that it wouldn’t be long before we heard from him again. And sure enough, this week he popped up on Mike Hosking breakfast show talking about the various tax policies on offer. After a tongue in cheek confession that this had all given him a bit of a headache, Geof then made the very wise suggestion that perhaps it is time to establish an independent fiscal costings unit so that during an election campaign the claims of the various parties can be scrutinised impartially.
As Geof noted, this is actually something the Labour Party proposed in the run up to the 2014 election. Now, given the claims, counterclaims and accusations this week about exactly how many families would gain the maximum benefit from National’s tax proposals, maybe this is something which should be looked at again. On the other hand, someone else has also suggested perhaps we can refer them for false advertising? Probably a bit too late for that really.
Removing GST on food – a legislative headache in the making?
Moving on, the multi-party debate on Thursday night on TV1 threw up several moments of light relief, including when the leaders were asked to comment on National’s foreign buyer tax policy and Labour’s proposal to remove GST from fresh and frozen fruit and vegetables. None of the leaders thought much of either policy.
This prompted moderator Jack Tame to challenge Winston Peters, noting that New Zealand First’s manifesto proposed the removal of GST from food. (For the record, the Greens and Te Pati Māori both propose to go further than Labour on this point). It turned out, however, that New Zealand First had literally just updated their manifesto, dropping the original proposal and instead proposing it would “secure a select committee inquiry into GST off basic fresh foods. We must examine if this would deliver real benefits for taxpayers before legislating for it.”
Maybe New Zealand First’s change of tack on this topic was prompted by a recent Australian tax case. In this case the court ruled that a series of frozen food products were subject to GST and could not be zero rated (or “GST-free”, in Australia’s somewhat peculiar GST terminology). In brief, what happened was that Simplot was marketing six frozen food products such as a fried rice or pasta product, each of which contained a combination of vegetables and seasonings, as well as grains, pasta and/or egg.
The case turned on around what constitutes a kind of food marketed as a prepared meal. If they were food, as Simplot argued, then no GST applied. However, if they were if they represented a kind of “food marketed as a prepared meal but not including soup as per Australia’s GST legislation“, then it would have been subject to GST.
After an exhaustive analysis, including examining the packaging and advertising, Justice Hespe ruled GST applied. But it appears that she was none too happy with the whole process and the legislation. She remarked in paragraph 141 of her judgement
“The legislative scheme with its arbitrary exemptions is not productive of cohesive outcomes. It has left the Court in the unsatisfactory position of having to determine whether to assign novel food products to a category drafted on the premise of unarticulated preconceptions and notions of a “prepared meal”. It may be doubted whether this is a satisfactory basis on which taxation liabilities ought to be determined.”
Now that’s probably justice speak for “You have got to be kidding that we have to do this every time.” But they represent pretty wise words of warning for future drafters of any New Zealand legislation removing GST from food.
More tax, not less?
As mentioned at the beginning, a key part of the election campaign has been the various tax proposals on offer, and particularly promises of tax relief in the form of tax cuts or threshold adjustments. Each of the parties, with the exception of Labour, have something on this. But in Stuff economist and previous podcast guest Shamubeel Eaqub said of both Labour and National that they were, “pretending somehow we don’t have long term big, long term issues that we need to deal with and time is running out.” He continued, “In terms of reaching surplus they are all saying getting back to surplus is important but how do you do it while giving tax cuts and spending on things we’ve already promised ourselves?”
I echoed his comments in part by saying that I didn’t believe the politicians of the two main parties are “being serious enough about funding what’s ahead.” And I noted that it was the coming challenges in terms of the ageing population and in particular related health care and superannuation costs that had prompted the last Tax Working Group to propose a capital gains tax.
Several other commentators weighed in as well, and I’d recommend reading in particular what I thought was some fairly insightful commentary from Gareth Kiernan, the Chief Forecaster at Infometrics. He noted something that’s been a theme of this podcast for some time, that New Zealanders are already paying significantly more tax due to the issue of bracket creep because income tax thresholds had not been adjusted since 2010. Governments had benefited from inflation moving people into higher tax brackets.
But in his opinion, this policy,
“It reduces discipline on government spending and muddies the tax and welfare decision for voters. It would be more appropriate for tax thresholds to be indexed to incomes or inflation, so that if any government wanted to alter the income tax rates or thresholds, they would need to articulate the reasons for their policy.”
He also went on to note,
“..in the current environment, one might argue that there needs to be more investment in infrastructure, and more funding for healthcare, and therefore taxes need to go up to pay for that. Alternatively, one might argue that there has been considerable expansion in government spending in recent years with few results to show for it, so spending needs to be reined in and taxes can be cut to go alongside that change.”
Now, I posted a link to this story on LinkedIn and it provoked a lively debate. A couple of people came back straight away with the reasonable assertions if we cut out wasteful expenditure and enforce the tax legislation, we would have sufficient income and that we may not necessarily get a better economy or better outcomes for people by increasing tax.
What is the state of the Government’s finances?
Now, the question of how much the Government spends is quite relevant in this particular example, because this week and providing some context, the Government’s financial statements for the year ended 30th June 2023 were released.
Tax revenue was up +$3.9 billion on June 2022 to a total of $111.7 billion. But that’s actually about $3 billion less than what was projected in the Budget in May. And the main reason for that fall is that corporate tax income at just under $18 billion, is -$2.4 billion below forecast, although higher withholding taxes on interest and dividend income has somewhat compensated for that fall. The GST take was bang on with what was projected at the Budget ($28.13 billion)
Ultimately the Government overall had an operating deficit before gains and losses of $9.4 billion. There’s been a lot of debate about government spending and core Crown expenses as a proportion of GDP were 32.2% of GDP, which is down from 34.5% in the June 2022 year. And the reason for that is the end of the COVID 19 restrictions and support that was given. Net debt is 18% of GDP, which is incredibly low by world standards.
And actually, here’s something we’ve I’ve mentioned before, but perhaps isn’t really known is that we are currently one of the few countries, according to our financials where the Government has positive net worth.
The government has net wealth of about 46% of GDP, whereas some countries such including Australia, which surprises me, are actually negative. Obviously, the big standout here is Norway, thanks to its trillion-dollar sovereign wealth fund.
The OCED measures of debt is slightly different, but general government debt is still below the OECD average. But like the commentators who are thinking we should be looking at our spending, I’m of the view we need to be investing in our infrastructure beyond roads.
But one of the things that puzzles me and it’s always brought up about government spending, it seems, is that somehow $55 million was spent on a proposed cycleway across the Auckland Harbour Bridge, which never eventuated. And then there’s a significant amount of money that’s gone into mental health, but yet doesn’t seem to have found its way to the frontline. So, I definitely agree with the view that there’s questions to be asked about the quality of our spending and how effectively it’s deployed is the quality of our public service able to deliver on what’s required? It may mean the answer is a combination that we do need more funding, but also we may actually need to invest in the capacity of bureaucrats to actually deliver.
The climate change bills arrive for Auckland ratepayers and us all
But the key point I want to come back to about the costs ahead which we’re not hearing enough about from the two main parties, is how are we going to manage the impact of climate change? This week, remember, Auckland Council has just signed off on the process of what’s to happen with a buyout of 700 properties that were red stickered following the January and February floods. That’s going to cost a total of $774 million, $387 million of which is going to come from the government.
Of note here and it’s something quite a few people have raised a red flag about, is that although insured Category 3 property owners will receive 95% of the the pre-flood market value, those who were uninsured will receive 80%. This raises the issue of moral hazard – if that’s what’s going to happen why bother insuring.
This is a big issue that I think we have to discuss: how are we going to fund all of this? Then if we are going to be in a scenario where we have to be buying out property owners, is buying out uninsured people fair for the those who have insured themselves? Is this approach a fair cost both to the people in the affected local government area and those generally in the wider population, because that’s who’s funding these buyouts.
In my view this is going to be a bigger issue because, I want to repeat again, we have so much of our wealth tied up in property, and yet property is the asset class that is most exposed to the effects of climate change. We’ve had Auckland with 700 homes, and over on the East Coast there’s another 400 homes, I believe, where this buy out process is underway.
If we are going to be assisting property owners, and I believe we should, is the quid pro quo that the level of taxation on property rises? Bernard Hickey had some interesting stats in his daily Substack The Kākā around how much of our wealth relative to the country’s GDP is committed to housing. A total of $1.6 trillion, or four times our GDP, is committed to housing. But more importantly, although that’s not so out of line with other countries, it dwarfs our other investments
This royally skewed set of incentives is why our housing market is worth NZ$1.6 trillion, which is four times our GDP (NZ$400 billion), 10 times the value of our listed companies (NZX total market value of $160 billion), eight times larger than our total managed funds sector ($200 billion including NZ Super Fund and ACC) and 16 times larger than our only-very-marginally-incentivised household pension funds (Kiwisaver at $100 billion). For comparison, Australia’s housing market is worth the same four times GDP, but is worth four times stocks, three times and funds under management. In the United States, its housing market is worth twice GDP, once the stock market, twice funds under management and 7.5 times its comparable ‘subsidised’ household pensions market, which is known as 401k in America, rather than KiwiSaver.
Bernard believes, and I agree having looked at it when researching Tax and Fairness this overinvestment is a by-product of our tax settings. Therefore, if we change those tax settings around the incentive to invest in property that may change two things. One, we invest in more productive assets. And two, we raise the revenue to help deal with the coming crisis around climate change.
Will the Election change the discussion?
But at the moment it has to be said that funding the cost of climate change is not part of the two major parties’ discussions around tax, but who knows? My view is the debate around tax policy and our tax settings isn’t going to end with the Election next Saturday, it’s going to continue beyond that. In my view these issues around funding climate change will accelerate. If we can come to some form of multi-party accord on this, I think it will be better for us. But tax is politics, so don’t be holding out too much hope for agreement soon.
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 to rā. Have a great day.
At last week’s International Fiscal Association’s Trans-Tasman conference, a lot of the discussion among New Zealand advisors outside of the seminar rooms was around the state of tax policy. There is a growing concern that a more active government with interventions and proposals such as the proposed zero rating of GST on fruit and frozen and fresh fruit and vegetables is undermining the Generic Tax Policy Process which has been in place for nearly 30 years.
Like many practitioners, I’ve been involved with the GTPP at various stages. It is well-regarded internationally and has operated since 1994. It is intended to ensure
“better, more effective tax policy development through early consideration of key policy elements and trade-offs of proposals, such as their revenue impact, compliance and administrative costs, and economic and social objectives. Another feature of the process is that it builds external consultation and feedback into the policy development process, providing opportunities for public comment at several stages.”
However, the concern is emerging that against this well-established background more recent measures such as the Tax Principles Bill, or the legislation that enabled Inland Revenue to carry out its high wealth individual research project, have happened outside the GTPP framework. The proposed GST zero rating of fresh and frozen fruit and vegetables could be another example. These developments are unsettling the previously predictable process for working through and discussing tax proposals.
I’m of the view that tax is fundamentally about politics and politicians will always make political calls. The GTPP is intended to minimise the effect of that and give more predictable tax policy outcomes. But you can’t eliminate it entirely and this dichotomy between efficient tax policy process and politics will always be there.
There is also the question raised in an interesting story this week by BusinessDesk (paywalled) in reference to the work of the Corporate Taxpayers Group (CTG) about when consultation ends and lobbying begins. The CTG includes the main corporate taxpayers such as Fonterra and the four big banks. The New Zealand Superannuation Fund, the largest single taxpayer in the country, is also a member.
The CTG meets regularly at the offices of Deloitte (more frequently than I had imagined) as the story outlines, and there is an annual membership fee which is to pay for the secretariat, which will make submissions to Parliament and to Inland Revenue.
But when does this move from consultation to lobbying. Very difficult to say. I don’t see it as lobbying although I do appreciate the risks that might be involved in that. But having been involved in the process and been in meetings with CTG representatives, Inland Revenue officials, I don’t believe that’s the case.
But as I said, I can understand why some might be concerned by this. It comes back to a key part of any democracy, and that’s transparency. But on the whole, as I said, I think New Zealand’s been very well-served by the GTPP. And I know that internationally it’s very well regarded because it has got a stability of process to it.
I think one of the issues that’s causing raising concern is because left wing governments are likely to more interventionist. But I do think this situation is exacerbated at the moment because the strain of the boundary between capital and revenue, and our general under taxation of capital, the lack of a capital gains tax, wealth, tax, death duties, are putting strains on the system. And so, politicians are trying to find shortcuts to try and deal with this issue and the need for more revenue. You can dispute how much is needed. But when I look at the state of roads and hospitals and you see the growing bill for climate change, my view is and it’s also the view of Treasury, as I pointed out a number of times, and its Long Term Insights Briefing He Tirohanga Mokopuna we need more revenue.
A whole lot of hissing
So, there are strains emerging and it’s impacting the GTPP, which makes tax advisers understandably a little unsettled about how well that process will continue. As Louis XIV’s finance minister Jean-Baptiste Colbert said in probably one of the most famous maxims about taxation: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” That was true in the 17th Century and remains true today. And there is quite a lot of hissing going on at the moment.
The GTPP in operation – consulting on trading stock
Moving on and still on to the topic of consultation and an example of the GDP in operation. Inland Revenue has released a paper for consultation on the treatment of trading stock disposed of below market value.
At present, whenever trading stock is given away, or disposed of for below market value it’s deemed to have been disposed of at market value. The reason for that rule is reasonably solid. It’s to counter potential tax avoidance where the stock is given away or may be used for private consumption by a business owner or sold at a deep discount to associated persons. In some cases, it could apply for a particular industry, exchanges of stock could take place at cost or less. All of those generate benefits in terms of the under taxation of revenue. So that’s why that rule exists.
But there have been instances where businesses have wanted to give away stock and make donations for charitable purposes, and that’s when this rule becomes problematic because they can’t effectively do so. Over time the practice has developed for granting temporary emergency relief in some situations as a work-around.
In 2004 a permanent override was put in place with donations to farming, agricultural and fishing businesses during what is termed an adverse event. And there have been a large number of those weather-related adverse events either for drought or like we’ve experienced this year, flooding.
Between 2010 and 2012, there was a temporary override for 18 months in response to the Canterbury earthquakes. And then again, starting in March 2020, a temporary override was put in place for four years in response to COVID 19.
That override will end on 31st March next year, and the object of this consultation paper, is to propose a more permanent solution rather than using ad hoc solutions whenever we encounter a particular scenario such as COVID or earthquakes.
The consultation paper runs to 29 pages and includes a useful appendix which summarises all the potential summary policy options and how they may play out. Overall, this is a good example of the Generic Tax Policy Process in operation. Consultation on the paper is now open and closes on 6th September.
Managing retreat & how to pay for it.
As just mentioned, temporary emergency relief from the usual stock donation rules has been granted for a number of reasons, including this year, the flooding in January and February and the impact of Cyclone Gabrielle. A constant theme of this podcast is the question of environmental taxation and the need to address the longer-term question of how we going to pay for these climate related events.
Earlier this week a Government expert working group released its report on the question of what’s termed managed retreat.
The report, which clocks in at 284 pages, is very comprehensive and raises a number of potential scenarios and alternative measures that could be needed. One of which, as the excellent Newsroom story covering the report notes, is conditional powers to basically force people to leave particular areas that are under threat.
Being a tax podcast the question we are most concerned about with environmental and climate change impacts is how we are going to pay for it. The report has two key proposals E65 and E66.
But consider this, we have currently 700 homes which have been rendered uninhabitable following the flooding in January and February. And there’s another 10,000 homes that require flood protection. The Government has said it will split the costs over the uninhabitable homes with local councils affected. But, as far as I can tell, neither the councils nor the Government have really fully funded for these costs of maybe a cool billion or so this year and maybe every year and rising. So, it is an issue that needs to be addressed.
The report has some interesting discussion around what happened in Canterbury in relation to the earthquakes and then the first and I emphasise, first, example of managed retreat, from the Bay of Plenty settlement of Matatā
The report says, however we decide to fund this, the funding should not be subject to the usual vicissitudes of the annual budget round because that would mean it would lead deferment and dangerous delay. When it comes to kicking a football down the road, the politicians, as we know, are better than the Football Ferns at kicking it a long way out of trouble. Or so they think, but the issue still remains. I totally agree, therefore, with the report’s recommendation that there has to be a permanent funding solution.
I maintain that if we are going to do something around the lines of environmental taxation, the funds that are allocated to it should be hypothecated, and certainly not form part of the consolidated fund because we’ll then have politicians tempted to raid those funds. We’ve seen this in the recent Auckland Budget Council, by the way, where reserves built up for environmental purposes were used for other purposes.
In terms of holding politicians to account, I think we need to be asking a lot more questions about them on this matter because this is going to affect us all. We’ve had a miserable winter with extensive flooding and the ground is sodden. What happens when the next big floods come along, who pays for the clean-up?
No longer friends with Russia…
At the International Fiscal Association Trans-Tasman conference last week, we spent a lot of time discussing double tax agreements. It so happens, Russia has decided to suspend its double tax agreements with 38 countries, which it considers are now ‘unfriendly’ in the wake of the invasion of Ukraine. New Zealand is on that list. So that probably means that for someone in Russia trying to claim tax relief from under the double taxation between New Zealand and Russia, they’re out of luck and they’re probably going to be facing higher tax bills as a consequence.
TikTok and GST fraud
And finally, just on the topic du jour this week of GST, there’s an absolutely extraordinary story coming out of Australia about how social media influencers on TikTok encouraged at least 56,000 people to take part in a A$1.6 billion tax fraud scheme. Apparently these TikTok influencers explained how to get fraudulent GST refunds. The scam involved obtaining an Australian Business Number, then filing Business Activity Statements (the equivalent of GST returns) and claiming false GST refunds. In some cases, there were attempts to claim refunds of up to A$100,000.
The Australian Tax Office apparently is still grappling with the sheer size of the scandal. There’s a story in the Australian Financial Review about a Victorian woman who managed to stay out of jail, after repeated attempts to try and get A$115,000 fake GST refunds for a dog grooming business that had been set up more than a decade ago but had been largely dormant until 2020 before she attempted to pull this scam.
Fascinating story which will be interesting to see how it plays out. To me it lends support to the suggestion that we should look seriously at zero rating transactions between GST registered businesses. It should be a means of stopping such attempted frauds. Obviously, if that proposal is taken forward, it should go through the proper Generic Tax Policy Process consultation.
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 to rā. Have a great day.
As previously leaked, on Sunday Labour announced that if re-elected, it would introduce legislation to zero rate GST on fresh and frozen fruit and vegetables, with effect from 1st April next year. This is a key plank of what it’s calling its ten-point plan to address the cost of living.
According to the fact sheet supplied at the time of the launch, based on the latest statistics from the New Zealand Household Economic Survey in 2019, the policy is estimated conservatively to save households about $18 to $20 per month. Now, one of the key criticisms of this policy is of course its complexity. But Labour is confident that in defining where the boundary will lie, it will be able to draw down on overseas experience in this area. “There are boundaries everywhere in the tax system and we are confident tax officials can make it work”.
The framework around the policy is whether the fruit or vegetable has been processed or not. And processed in this context means cooked or combined with other ingredients. This therefore rules out anything canned because of the heating process that is involved. Processed does not include being cut up and wrapped without additives, so that prepared vegetables such as fresh spinach in a bag, presumably salads, would be zero rated. Similarly, mixed vegetables frozen together would be zero rated for GST. But on the other hand, the release gives an example of potatoes mashed into chips, coated in canola oil and then frozen, would be excluded and therefore still attract GST.
There is a proposal to establish a consultative expert group immediately after the election to work through the final details of the policy. One of the criticisms of the policy is, and I’ve said so previously, whether the benefit of the GST reduction would be passed through to consumers. This is to be addressed by tasking the newly established Grocery Commissioner with ensuring that supermarkets and other grocery outlets are not profiting from this change. The Grocery Commissioner has powers under the new Grocery Industry Competition Act 2023 to require it to request information and reports from supermarkets on matters such as their prices and margins.
Depreciation on commercial property to be removed, again
Labour estimates the cost of this policy to be about $2 billion over a four-year forecast period to 30th June 2028. And the sting in the tail is that this is going to be paid for by commercial property landlords. Because Labour is proposing to remove what it has called in the fact sheets, “the last remaining large COVID 19 economic stimulus measure”, which was the introduction of depreciation for non-residential buildings.
According to Treasury’s costing of the COVID 19 Response and Recovery funding decisions, that particular decision back in March 2020 costs an estimated $545 million annually. it should be said that back in 2020 when depreciation was reintroduced, there was no indication that this was going to be a temporary measure. In fact, the accompanying commentary noted:
“New Zealand’s position of a zero-depreciation rate for almost all buildings is unusual internationally. International studies have generally found buildings do depreciate. The Tax Working Group reviewed and recommended changes to these tax settings. The Government has accepted the group’s recommendation to reinstate depreciation for industrial and commercial buildings.”
So the news that barely three years after it was brought back in, it’s to be removed again will be a big surprise for the commercial property sector. And you can expect very strong representations about that. Certainly, some projects in the pipeline may be delayed as companies and investors work out the impact of the withdrawal of depreciation.
There was some interesting stuff in the accompanying fact sheet about the proportion of weekly expenditure on fruit and vegetables by household income. And what might surprise people is that it’s the lower deciles, deciles one to four, who actually spend the greatest proportion of their budget on fresh fruit and vegetables. It works out nearly 2.5% for some of the deciles. So that’s greater in relative terms than what happens for decile ten households.
But what’s also notable here is that this survey apparently shows that the amount of fruit and vegetables being purchased as a proportion of all expenditure has been declining for some time, and it declined from just under 2% in 2013 to just over 1.7% in 2019.
What’s happening there would be interesting to know, but it could be that the cost pressures on fresh fruit and vegetables are actually more longstanding than just the post COVID 19/climate related events burst we are experiencing at the moment. The Grocery Commissioner will obviously be paying particular attention to that on a longer term.
Increasing Working for Families support
The announcement, or the focus on the GST policy, overshadowed the other big announcement made, which was a proposal to increase the Working for Families in-work tax credit by $25 a week from 1st of April next year. This is going to provide additional support to around 175,000 low- and middle-income working families. It’s the sort of measure which is supported by many, and I would be in that group, because it’s targeted and it gives to those most in need. Although I do note that Child Poverty Action Group are still disappointed that the criteria for this is still about being in work. Their long-standing position is that the in-work criteria should be removed because that would benefit all families and particularly children of those on the lowest incomes.
The other thing that Labour’s also planning to do is to lift the Working for Families abatement threshold from its current level of $42,700 to $50,000. But that’s not going to happen until 1st April 2026. That would be worth another $13 a week to eligible families.
I’ve spoken before about what goes on with the abatement levels, and it’s worth pointing out again that when Working for Families was first introduced in 2006, the abatement thresholds were adjusted annually. That was stopped by Bill English in the 2009 Budget, with the effect that if the then threshold of $36,827 had continued to be indexed to CPI, it would now be $51,702. In that context, Labour’s promise to raise to $50,000 in three years seems a little ungenerous.
Whether yesterday’s announcements are the sum of Labour’s tax policy for the election is not yet clear. Apparently, they are. But I note that they are still promising three more cost of living policy announcements to be made during the election. So, we’ll have to wait and see.
More GST – the importance of GST groups
Moving on, Inland Revenue is presently engaged in updating its various Interpretation Statements and other guidance, such as Questions We’ve Been Asked and in various statements of practice, to update various legislative updates that have happened over time. Some of this advice refers to the Income Tax Act 1994, whereas now we’re on the Income Tax Act 2007. So, Inland Revenue has been releasing a steady stream of updated guidance for consultation, and most of these updates confirm the existing position.
The latest released last week and also continuing this week’s GST theme, are two draft interpretation statements for consultation on the treatment of GST groups. One looks at when GST groups may be formed in general, and the second looks specifically at the rules around GST groups for companies
There has been a little bit of uncertainty around how the GST group rules interacted with other parts of the GST Act, and that was taken care of by an amendment included in the Taxation (Annual Rates for 2021-22, GST and other Remedial Matters) Act in 2022, which clarified the interaction of the GST group rules with the Income Tax Act. The position now is that the GST grouping rules are applied before the other provisions in the GST Act.
The idea behind the GST grouping rules is to eliminate the need to be charging and recovering GST on intra group sales. Think of a large group that’s supplying goods and services to another group member. If they are not within the same GST group, one party would charge GST and the other party would have to recover the GST. So, the idea of the grouping rules is to simplify administration.
How it’s done is that there is a representative group member chosen that carries on all the group members activities and that entity, whoever it is, is responsible for all the administration of GST. If a sale is made by someone outside the GST group, to a member of the group, it’s deemed to be made to the representative member as the registered person. Similarly, the various sales that might be made by group members to outside the GST group, are all treated as taxable supplies made by the representative member.
However, taxable supplies between group members are mainly disregarded with the idea of simplifying administration. One paper considers what happens with GST groups of companies. These can be formed where there is 66% commonality of shareholders, similar to the income tax rules for loss-offsets between group companies. In some cases, you can have non-registered entities as part of the GST group. The other paper covers the rules in general and where you can have groups of other entities such as trusts, for example, or maybe limited partnerships.
So, the two papers explore that and explain the background behind how the GST group rules operate. And as I say, these are part of a wider Inland Revenue project to update its material. These are very useful Interpretation Statements and consultation on these is open until 14th of September.
At the same time, I can’t help but think that Inland Revenue should be exploring the idea of introducing compulsory zero rating of GST between all GST registered entities. This would largely eliminate the need for rules around GST grouping. I think what it would also do is tackle an area of GST fraud which incurs relatively frequently where a fraudster might register for GST and then files a number of false GST returns, claiming input tax based on made up invoices.
Although Inland Revenue tracks down and catches these people, there is a time lag while the fraud is going on. I’m beginning to think if you want to try and tackle that, compulsory zero rating between GST registered businesses is perhaps a place to start. Giving Inland Revenue more resources to look into it, is another interim measure that could be done.
Trans-Tasman Tax issues
And finally on the Thursday and Friday just gone I was at the International Fiscal Association Australia-New Zealand Joint Conference in Queenstown. This is the first time in over 30 years the Australian and New Zealand branches have held a joint conference. It was highly successful. One reason IFA conferences are so attractive is because very senior Inland Revenue, and Treasury officials, and for this conference, Australian Tax Office and Australian Treasury officials, attend and share their views on insights on current tax topics. (Consequently, the conferences are held under Chatham House rules to enable officials to speak freely).
It’s always interesting to swap notes with other attendees and this conference was no exception, but it was particularly interesting because of the focus on Australasian issues. Both sides got to see differing perspectives on common topics, which included the question of tax treaty policy and updates from very senior people from both Australia and New Zealand on the OECD Pillar One and Pillar Two proposals. Australia and New Zealand are very well represented on the key working groups on this, we’ve got very good knowledge of how things are progressing. We also got a view on the latest environmental and tax developments, including a view from the IMF’s principal environmental fiscal policy expert.
“A hot steaming mess” – the perils of Australian taxation
A particularly interesting session was on the taxation of trusts in the trans-Tasman context. the current state of Australia’s trust tax law was described as a “steaming hot mess”. I regularly encounter scenarios where trustees have migrated to Australia without considering the tax ramifications, and a steaming hot mess is perhaps an understatement of the consequences. Overall a very useful session.
Incidentally, Australia and New Zealand are currently renegotiating the double tax agreement between the two countries. And the point was made that although as tax professionals we tend to look at tax treaties solely tax related, one panelist reminded everyone that they’re actually often part of bigger trade negotiations.
For example, as part of its efforts to obtain a free trade agreement with the EU, Australia has opened negotiations with double tax agreements with several EU countries. Apparently one reason a UK a double tax agreement between the United States and the United Kingdom in the mid-1970s was so advantageous for the Americans was because at that time the UK was negotiating the purchase of upgraded missiles for its submarine fleet.
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 to rā. Have a great day.
