Submissions close next Friday on the Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Bill. This is the tax bill introduced alongside the Budget. The bill, as is typical, sets the annual rates for the current year ending 31st March 2024, but also has key provisions relating to the establishment of the legislative basis for the implementation of the Pillar Two international tax proposals at a later date. Separately, there are key provisions for increasing the trustee tax rate from 33% to 39%, with effect from 1st April next year.
The main part of the bill involves preparing the groundwork for the OECD’s Pillar Two multinational tax proposals. These are part of the Global Base Erosion and Profit Shifting (BEPS) initiative which is intended to introduce a global minimum corporate tax rate of 15%. Now, I generally have no involvement with clients that would be affected by these proposals which are targeted at the large multinationals. Most of the clients I deal with on international affairs are much, much smaller scale operations.
But there will be plenty of expert commentary and submissions on this particular bill because it will affect significantly large multinationals, those with international presence and gross turnover exceeding €750 million annually in any two of the preceding four years. It’s a fairly select group. There may be some tweaks as a result of submissions being made, but I would expect this to go through largely unchanged. But it will be interesting to see what submissions are made around this.
Increasing the trustee tax rate – maybe not quite such an obvious move
Of much more direct interest to many more clients and probably also much more controversial is the proposal to raise the trustee tax rate from 33% to 39%.
Now, conceptually aligning the trustee tax rate with the top personal income tax rate makes sense. We see that in other jurisdictions. Practically speaking, however, given the incredibly diverse and prolific nature of trusts in New Zealand, this would seem to be a much more practically difficult issue to implement it.
In discussions with other advisors, a couple of points have emerged. There seems to be a general consensus that some form of de minimis threshold is appropriate to take account of the fact that there are so many more trusts and they have operated on a policy of not generally distributing income because the 33% tax rate probably aligned with most of the income tax rates applicable to most of the beneficiaries. The 39% tax rate only kicks in above $180,000 income and that’s a much smaller group.
The argument which has been raised is that the measure, although conceptually correct, is actually in response to a small group. And therefore, it has a rather indiscriminate effect on people whose aggregate income including that of a trust, would not cross the $180,000 threshold. The suggestion has been made that we should have some form of de minimis threshold. I’ve seen suggestions raising between $15 and $50,000.
In response to this proposal Inland Revenue officials have asked “What’s to stop people setting up a number of trusts to maximise the advantage of the differing thresholds?” Well, two things. One, first of all, practically the cost involved of establishing these trusts, you would typically not get much change out $2-3,000 plus GST. But more importantly, you then have ongoing costs involved because following the Trusts Act 2019 coming into force in early 2021, trustees are much more conscious of their obligations including providing information to beneficiaries.
But more importantly, if someone established ten trusts like that and then divided up assets and income producing assets so as to maximise any potential threshold that would run square head on into Inland Revenue’s existing anti-avoidance provisions. Therefore, in practical terms, I think Inland Revenue’s arguments about the risk aren’t really a starter. There is also the question that there are there are increasing compliance costs involved with running trusts now as I just mentioned.
There’s also something Inland Revenue tends to glide around in my view and that’s its very, very narrow view of Section 6A of the Tax Administration Act. This states Inland Revenue’s duty is to collect the highest amount of revenue that is practicable over time, bearing in mind the costs of compliance. Keeping that in mind some form of de minimis seems a not reasonable approach. Otherwise, trustees may feel that they are obliged to do a load of distributions to beneficiaries just to minimise the tax payable.
I have actually encountered scenarios where trusts were established which could have done that and minimise the tax payable but didn’t do so for a variety of reasons. So it could be that inadvertently Inland Revenue may trigger the trustees to actually distribute income at lower tax rates than they were doing previously. I’m certainly watching to see how the Select Committee responds to this point.
Deceased estates potentially unfairly penalised?
The second point about the 39% tax rate increase is how it will apply to estates of deceased persons. The proposal is the 39% rate will apply to a deceased estate after 12 months have passed since the person died. Now, my immediate reaction to that proposal when I read it was that period was way too short, and that has been confirmed in subsequent discussions with other tax practitioners and lawyers. In fact, right now I’m involved with the tax affairs of an estate where more than three years has passed since the death of the deceased person.
The majority view of the lawyers I’ve spoken to on the matter is the minimum period should be at least 24 months and probably somewhere between 36 and 48 months would be much more realistic. I would be interested to see what happens here; particularly about just how many law firms do make submissions on this. I’ve made the law firms I work with aware of the issue and recommend they do submit. Select committees sometimes hear a lot from the same people, but they are always particularly interested in hearing from people who don’t normally submit but are doing so in this case on the practical basis “Our experience is this would be not a good move” or “We would support it”, whatever.
Anyway, submissions on this bill close next Friday. If you have concerns about any of these measures I’ve discussed, make a submission to the Finance and Expenditure Select Committee using this link.
The IMF holds forth on cryptocurrencies
Now moving on, this week the International Monetary Fund, the IMF, released a working paper on the taxation of crypto currencies. https://www.imf.org/en/Publications/WP/Issues/2023/06/30/Taxing-Cryptoc… This is an absolutely fascinating paper, it’s actually one of the most interesting papers on the taxation of cryptocurrencies than I have seen since crypto assets moved into the mainstream over the last five years.
In short, the IMF’s view is that tax systems need updating to handle the challenges posed by crypto assets, particularly in relation to their anonymity and their decentralised nature. And these, in the IMF’s view, make it hard to establish and maintain effective third-party reporting systems such as we use here in the banks or the international OECD’s Common Reporting Standards on the Automatic Exchange of Information.
It’s a very readable paper which starts by pointing out that after basically starting from zero in 2008, the market value of crypto assets peaked in November 2021 at about USD3 trillion USD (nearly NZD5 trillion). Although estimates vary because the surveys are self-selected, maybe perhaps 20% of the adult population in the U.S. and 10% of the adults in the U.K. hold or have held crypto assets. And the number of global users could be as many as 400 million people. On the other hand, although USD3 trillion sounds like a lot, it’s only about 3% of the global value of equities.
But the paper notes the potential for disruption, which is one of the founding ethos of Bitcoin and the crypto asset world, is quite significant. There are all sorts of questions around the tax impact of all these colossal capital gains suddenly arising and then the potential impact of losses, now that USD 3 trillion valuation is down to around $1 trillion. What’s going to happen with those $2 trillion of losses? Are they being claimed?
The paper really is very, very interesting in covering a whole number of topics. And basically it sums up the problem as being tax systems were not designed for a world in which assets could be traded and transactions completed in anything other than national currencies. It has some interesting comments about the effect of crypto billionaires. Apparently 19 were on the Forbes list, the richest list in America in April 2022. In an interesting aside the paper comments about “a loosely defined sense that much wealth channelled into crypto escapes proper taxation appears to have become part of the wider mood of dissatisfaction around the taxation of the rich.”
Blockchain efficiencies for tax administrations?
Yes, there are certainly crypto billionaires, but a lot of ordinary people probably piled into crypto because they saw an opportunity to realise substantial gains. How they declare those is of course where this paper is focussed on. It also notes that much is made of blockchain technology and it the working paper notes that the information blockchains contain on the history of transactions is actually remarkably transparent which
“might ultimately prove valuable for tax administration; and the use of smart contracts (self-executing programs) within blockchains, for example, might in principle help secure chains of VAT compliance and enforce withholding.”
What this paper picks up on is concerns I haven’t seen too much discussion of around the VAT (value added tax) or GST consequences of transactions using crypto. The paper’s section on externalities picks up on an issue which has is often raised in relation to crypto, and that’s the carbon effect of mining. It notes that the associated carbon emissions are cause for considerable concern including an estimate that in 2021 Bitcoin and Ethereum mining used more electricity than either Bangladesh or Belgium and were responsible for generating 0.28% of global greenhouse gas emissions. It suggests there maybe should be a charge on mining in relation to that effect.
Overall, the paper does not propose solutions. It is a working paper which is really raising all the issues. Now, it notes which I’ve mentioned recently, that the OECD has introduced its Crypto-Asset Reporting Framework, which is to extend the Common Reporting Standards reporting to the crypto world. But in the IMF’s view, “implementation remains some way in the future and in any case will not in itself resolve the issues challenges proposal posed by decentralised trading.”
Overall, a very comprehensive and readable paper which brings a big picture thinking to the issues the taxation of crypto crypto presents. I highly recommend reading it.
Government tax revenue behind forecast
And finally this week, the Government released its financial statements for the 11 months to 31st May. Of note immediately was that total tax revenue of $102.8 billion was $2 billion below forecast. Now $1.87 billion of that shortfall related to lower corporate income tax. GST was also $104 million below forecast and also another note that the economy is slowing down.
On the other hand, the rise in interest rates means that the amount of resident withholding tax collected on interest is $242 million ahead of forecast. Incidentally, the withholding taxes on dividends are also $12 million higher than forecast. That latter point may be in reference to what we discussed at the opening of the podcast, with the trustee tax rate rising to 39%, some more dividends are being paid ahead of that rate taking effect.
Government core expenses at $145.6 billion were actually $120 million below forecast. Interest costs were just under $6.6 billion, $134 million higher than the Budget estimate. Overall, the government debt rose by $5.1 billion to $73.3 billion, but net that’s the equivalent of 18.9% of GDP. The Government is still in the black. Overall, based on 2021 numbers, its net worth of $170.4 billion, which is roughly 44% of GDP, keeps it as one of the few OECD countries with a positive net worth.
There’ll be plenty of talk about budget deficits, etc. going forward in the election campaign. And we’ll be paying attention to what the parties say on tax. But it’s probably just worthwhile keeping it in context that the Government’s balance sheet is reasonably solid. You wouldn’t want it to be running away rapidly, but when you look at what’s going on in the United States where they basically cobbled together ad lib budgets to just paper over the cracks until the next crisis emerges, we are in a reasonably strong position.
How that balance sheet is maintained and used to brace ourselves for the impact of climate change is a major challenge. I think we now have a major issue in terms of having to basically fund adaptation by having to fund moving people out of at-risk areas. Cyclone Gabrielle rendered 700 homes unliveable. That could add up to maybe a billion dollars. Although a billion dollars in the context of $145 billion government spending is well under 1%, a billion dollars year in, year out is money that is not going into other areas that people want for health, education, etc. So anyway, the Government’s books are in reasonably good shape, but there are strains ahead.
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.
As is well known, income tax thresholds have not been increased since October 2010. What also gets overlooked is that the GST threshold of $60,000 was last adjusted in April 2009. And this week, Stuff ran a story about Kristen Murray, who has petitioned Parliament to have the GST threshold increased to $75,000.
She argued in her petition that the lower threshold is crippling small businesses. Inland Revenue disagrees but Kristen has gained the support of BusinessNZ, who supports regular indexation of tax thresholds.
A BusinessNZ economist noted that the effect of inflation means that the $60,000 threshold set back in 1 April 2009 should now be roughly about $82,000. Now the driving principle of the GST system is a broad based, low-rate principal approach and a reasonably low threshold is consistent with that approach.
GST came into effect on the 1st of October 1986 and the threshold set then was $24,000.
Looking at the table above it has actually more or less kept pace with inflation based on where it started – until now.
Notwithstanding that, given that it’s now 14 years since it was last adjusted, some form of increase to the threshold is not unreasonable. And the number of businesses a threshold change could affect is quite significant.
According to Inland Revenue data supplied to Parliament’s Finance and Expenditure Committee in 2022 there were 264,457 taxpayers who are GST registered, but with turnover of $60,000 or less. There’s another 27,000 or so with turnover between $60 and $75,000. So, as we said, increasing the GST threshold could take a large number of taxpayers theoretically out of the GST net.
But GST has an interesting effect and it’s also seen officially as a main pillar against tax evasion because of its comprehensive nature. Pretty much everyone finishes up paying GST somewhere along the line, even those within the cash economy. They still finish up paying GST when they’re purchasing supplies, food, petrol and the like. So, there would be a natural reluctance on the part of Inland Revenue to increase that threshold substantially. But to repeat an earlier point after 14 years, it’s not unreasonable.
By the way, Kristen’s suggested $75,000 threshold would actually bring it in line to the Australian threshold, which is A$75,000. I think one of the things they could also borrow from Australia is perhaps allow for quarterly GST returns.
There are therefore risks about the GST threshold being too high and the base being narrowed, but if they kept it too low then businesses may deliberately hold back from growing and crossing the GST registration threshold.
Over in the UK, where the equivalent of GST, value added tax or VAT, registration threshold is £85,000, there is in fact a very noticeable drop-off effect around that threshold.
The reason possibly might be because once you are VAT registered, you’re charging VAT at 20%, so businesses that can’t see themselves growing substantially quickly pass that threshold may be quite reluctant to effectively increase prices by 20%.
Now, I’m not aware of any such evidence here in New Zealand. And I think the issue, which Kristen pointed out, compliance is a bigger issue for micro-businesses. With compliance there comes a point where there is an irreducible minimum. Whether we’re at that point there know I don’t know. As I mentioned earlier, offering opportunities around quarterly reporting would perhaps help. And these days, the advent of software programs such as Xero, MYOB, and Hnry do help micro-businesses manage their tax much more effectively.
But in terms of GST and tax administration, I think the next big step would be to zero rate all supplies between GST registered businesses. That would help put an end to the merry go round which goes on right now where a GST registered business charges another GST registered business GST, collects and pays that GST to Inland Revenue, while the GST registered business, which has just paid GST, then claims it back from Inland Revenue. Overall, there’s no net GST effect. I therefore think moving to zero rate such B2B transactions is a logical step. How far away that is, I don’t know. It doesn’t appear to be on Inland Revenue’s work programme at this point.
At the moment, we’re left with the only other adjustment that might help microbusinesses would be to increase the GST threshold. As I said, my view is something like that should happen soon, but we’ll have to just wait and see.
Airbnb, GST and unintended consequences
Moving on, and still on GST, I came across a case this week where a residential property owner couldn’t let the property so decided to change his approach and started letting it out as an Airbnb. Airbnb letting represents taxable supplies for GST purposes. He was GST registered for another activity and he did include the Airbnb income in his GST returns.
The issue has now popped up that he wants to sell the property. And it looks like unless he is selling to a GST registered person when compulsory zero rating will apply, then he has inadvertently given himself a GST problem. If he sells the property, which remember was originally a residential property to a non-GST registered purchaser, the sale price the price will become GST inclusive, which basically will bite into his margin.
This is a good example of paying attention to what’s going on around your activities and that you should always seek advice when you propose to do something that may have GST implications. Tax is full of unintended consequences and for this particular taxpayer, I’m afraid there probably is a huge unintended consequence of basically surrendering the equivalent of 13% (the GST inclusive portion of the sale price) on a residential property sale. He was already carrying on a GST activity already and Airbnb just represented additional taxable supplies. So, for anyone thinking of switching from residential property letting to Airbnb that’s a trap to watch out for.
The Great Tax Debate – “Think of the consulting fees!”
And finally, on Friday night I was part of the Great Tax Debate organised by the Tax Policy Charitable Trust, where I and several other tax practitioners debated the proposition: A wealth tax is the best solution to wealth inequality.
I was the leader of the affirmative team, and I was ably assisted by Mat McKay of Bell Gully and Sladjana Freakley of EY. Opposing us were Robyn Walker of Deloitte, Simon Coosa of Minter Ellison, Rudd Watts and Jeremy Beckham of KPMG. Professor John Prebble, one of THE gurus of New Zealand tax, chaired the debate. We had a lot of fun on the topic including an interesting Q&A session where someone asked, “Has EY gone woke?” The answer, of course, is no.
In the end thanks mainly to some pretty shameless populism including an appeal to the base instinct of the tax consultants in the audience, “Think of the consulting fees!”, we in the affirmative team sneaked home. Before the debate started everyone was asked to register their position as a yay or nay. And then the net movement from that would determine the winner. And we managed to move the dial several points in our favour. But before the Green Party start jumping up and down celebrating “We told you people wanted a wealth tax”, over 60% were still against a wealth tax.
As I said, it was a lot of fun with plenty of laughs all around. The question about whether EY has gone woke raising one of the bigger laughs. I’d like to thank the organisers, the Tax Policy Charitable Trust, hosts Bell Gully, Professor Prebble, my team-mates, Mat and Sladjana and our opponents, Robyn, Simon and Jeremy together with the 80 plus attendees in the audience for a fun night. We hope to see more of these debates in the future.
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.
Inland Revenue about to target 80,000 over incorrect Cost of Living Payments
What about a tax-free threshold?
Last week I discussed some of the submissions made on the latest tax bill and in particular the implications for persons providing accommodation through Airbnb or ride sharing via Uber or a similar app. Reading the comments to the transcript it appeared to me there is some confusion around these proposals. So, this week I thought I’d look at these proposals in a little bit more detail as I didn’t actually cover off the Taxation Annual Rates for 2022-23 Platform Economy and Remedial Matters) Bill (No 2) to give its full title at the time of its (re-)introduction.
The key part of the Bill is the platform economy sometimes also known as the digital marketplace. Now there are two parts to the proposals that are contained in the bill. The first, and what I think is relatively uncontroversial, is the implementation of an OECD Information and reporting exchange framework. This would require New Zealand based digital platforms to provide Inland Revenue with information annually about how much users of those platforms had received from relevant activities.
Inland Revenue would then use that information as part of its administration in the tax system. In other words, checking to see that people who receive payments have returned those payments. It would also share the information with foreign tax authorities where that information related to non-residents. This is intended to take effect from 1st January 2024.
Although this is still to be passed into law, earlier this week New Zealand was part of a group of 22 jurisdictions who signed a multilateral competent authority agreement for the automatic exchange of information under the OECD Model Rules for Reporting by Digital Platforms.
So that process is proceeding even as the legislation is passing through Parliament.
As I said, I think this is relatively uncontroversial. It is supported by the likes of the Chartered Accountants Australia and New Zealand. Interestingly, however, BusinessNZ was less enthusiastic about the proposals although I think it’s largely concerned about compliance costs.
It requested a delay in the introduction of the OECD based and reporting exchange framework, which isn’t going to happen because we’ve already signed the agreement to say we’re going to deliver it.
BusinessNZ also asked for Inland Revenue to undertake a quote, “clearer cost benefit analysis to ensure there was a clear understanding of the likely net benefit of the platform economy changes on the New Zealand economy”. That’s a little bit surprising but probably reflects BusinessNZ’s concerns about compliance costs.
However, it’s the second part of the proposal which generated most of the criticism and pushback from submitters that I referred to last week. The Bill proposes that the current GST rules on electronic marketplaces which apply to remote services and certain imported goods now be extended to “listed services”, which would include supplies of accommodation through Airbnb and other booking services, ride-sharing, beverage and food delivery services and services that are closely related with these services. These changes are intended to take effect from 1st April 2024. There’s a bit of lead time but it’s not that far off.
What these proposals are intended to address is an issue where some of the services provided would normally be subject to GST. But because they’re being passed through these electronic marketplaces, apps, that’s not necessarily happening. And a concern of Inland Revenue and the Government is …
“Ïf this was to continue, it could have adverse consequences for the long-term sustainability of the GST system and place traditional suppliers of these services who are charging and returning GST at a competitive disadvantage. It could also undermine New Zealand’s broad based GST system.”
You may recall that the Hospitality Association was one of those that supported the changes because of this risk.
What the bill does to address these concerns is require operators of electronic marketplaces such as Airbnb, Uber and the likes to become the deemed supplier of or for GST purposes where they authorised the charge for the supply of listed services to a recipient.
What will happen is the person who actually provides the services (what’s termed “the underlying supplier”, such as the driver or someone providing accommodation to Airbnb), would be deemed to have made a supply to the operator within the market electronic marketplace, i.e. Airbnb, Uber or other rideshare operator. That particular supply would be zero rated for GST purposes so that the underlying supplier wouldn’t be paying GST directly, but instead it would be the operator of the electronic marketplace who would be deemed to be supplier and making supplies of listed services of 15%.
Example 4: Listed services performed, provided, or received in New Zealand Charlotte is based overseas and is looking for accommodation in New Zealand for an upcoming holiday. She uses an electronic marketplace to book accommodation in a bach in Queenstown. Under the proposed amendments, as the accommodation provided through the electronic marketplace is in New Zealand, the marketplace operator would be treated as the supplier of the accommodation and would need to account for GST.
Now where the person who actually supplies the accommodation to Charlotte is registered for GST, then the transactions between them and the marketplace provider would be zero-rate for GST purposes.
But if that person wasn’t GST registered, there’s going to be something termed a flat rate credit scheme which requires the app or marketplace operator to pass on as a credit, a proportion of the consideration charged for listed services.
Example 8: Basic operation of the flat-rate credit scheme for marketplace operators Henry provides taxable accommodation through an electronic marketplace where the marketplace operator is responsible for collecting and returning GST on these supplies. Henry notifies the operator of the electronic marketplace that he is not a registered person for the purposes of the GST Act. Charlotte books accommodation that Henry provides through the electronic marketplace for $200 plus GST for the stay. The marketplace operator collects GST of $30 on the supply of the taxable accommodation that they are treated as making to Charlotte. Knowing that Henry is not a registered person, under the proposed amendments, the marketplace operator applies the flat-rate credit scheme and calculates: GST of $30 at 15% of the value of the supply, and the input tax deduction of $17 for the flat-rate credit at 8.5% of the value of the supply. The marketplace operator would be required to deduct input tax of $17 from the $30 of GST payable to Inland Revenue and pass on the $17 to the underlying supplier as a flat-rate credit. The marketplace operator would pay the remaining $13 to Inland Revenue, and this would be the net GST collected on the supply of the accommodation.
This example illustrates where I think BusinessNZ and some of the other submitters have a case about the potential complexities and compliance issues.
Notwithstanding these issues the critical point from Inland Revenue and the Government’s perspective is the proposals put everyone on a level playing field as far as GST is concerned. We will probably end up with more people registering for GST.
The net effect of this, according to the accompanying Regulatory Impact Statement, was about an extra $47 million in GST annually, but I’ve seen estimates that could run as high as $100 million. There is undoubtedly some complexity coming into the system, but I am of the view that in terms of business impact I don’t believe it’s going to be quite as harmful as submitters suggested. I think other factors like the state of the world economy are more important in that case. But we’ll watch to see how what happens with the submissions process.
The expected errors emerge
Moving on, we’ve covered in the past the controversial Cost of Living payments. It emerged this week as part of the annual review of Inland Revenue by Parliament’s Finance and Expenditure Committee that it considers between 70 and 80,000 people may have been incorrectly paid some or all of that $350 Cost of Living payment.
According to the new Commissioner of Inland Revenue, Peter Mersi at least 12,000 people were incorrectly paid the first tranche of $116.67 because of a “coding error”. Apparently, all these people had a negative portfolio investment entity balance, and as it was the only income they had they weren’t actually eligible. But somehow this wasn’t picked up in time.
And then, as been previously discussed, payments were made to others who had left the country but hadn’t apparently updated their details according to Inland Revenue.
Since the first payments went out on 1st August, Inland Revenue has been checking people’s eligibility and as a result, the number of payments made has fallen as they remove what they consider ineligible persons. The first payments on 1st August were made to 1,480,000 people. The second tranche on 1st September went to 1,422,000, and the final payments on 1st October went to 1,384,000. So over the time of the payments, 96,000 fewer people received a payment for the third instalment compared with the first instalment.
So far, 177 people have returned payments and Inland Revenue is about to contact up to 80,000 about potential overpayments.
Separately, there’s another 75,000 who haven’t received any of these payments, even though they aren’t eligible. And the reason they haven’t done so is they’ve yet to supply Inland Revenue with bank account number details.
Now, as I’ve said previously, I thought mistakes were inevitable given the scale of what was happening. I was more concerned about systemic coding issues where there seem to be groups of people that shouldn’t been receiving payments were reported as having received payments. And Inland Revenue has now acknowledged that one of those groups was this group with negative portfolio investment entity income.
I was also concerned about the fact that Inland Revenue estimated it would need somewhere between 750 and 1,000 staff to process the exercise. This bears out a concern I have about Inland Revenue being under resourced. I’m hearing stories that there’s a lot of overtime being carried out by Inland Revenue staff which indicates there’s still a potential staff resourcing issue. No doubt we will hear more about these payments, and we’ll update you on future developments.
Tax-free thresholds and where bracket creep hurts most
I’ve talked previously about a tax-free threshold. And this week, I and other several other tax advisers spoke to Susan Edmunds at Stuff about the idea.
Tax free thresholds are common overseas. Australia has an exemption for the first A$18,200. Britain has a personal allowance of £12,570 and France has an exemption of €10,225. But here in New Zealand as is well known, every dollar is taxed. And partly as a result of the cost-of-living crisis questions have been raised as to whether it’s time to change.
The Tax Working Group did quite a bit of work in this space and it’s my view, as I expressed to Susan, the time’s probably come for small exemption. I was thinking of in the order of $5,000, which was also the number the Tax Working Group landed on.
But the downside is such tax-free thresholds are expensive. For example if you were to exempt the first $14,000 of income, which is currently taxed at 10.5%, would cost $4.7 billion a year. So, there’s a significant trade-off involved.
And there’s another issue that the Tax Working Group identified, which is that a significant proportion of that benefit could also go to secondary income earners in households which were above the median income. Is that something we actually want?
Deloitte partner Robyn Walker talking to Susan Edmunds made the points ‘What are we trying to address here? Is a tax-free threshold the best tool to do so?’ I entirely agree with this. For example, if we’re talking about the cost-of-living, then maybe controversial or not, it may make more sense to consider specific payments, such as happened with the Cost of Living payment.
Robyn also discussed the idea with RNZ’s The Panel. One of the things she mentioned is that there’s a tool on the Treasury website where you can do your own modelling and calculate the effect of different changes to tax rates and you can see the cost of making changes to rates and thresholds.
But discussions around a tax-free threshold and changes to thresholds aren’t going to go away. And a particular point, both Robyn, myself and others keep making is that there’s a lot of pressure on the group earning between $48,000 and $70,000 where the tax rate jumps from 17.5% to 30%. In our view this is the group that probably needs most relief and where politicians should be focused on improvements.
The politicians are undoubtedly working in the background on this issue. National’s got its plan which is to index the thresholds. What Labour has got in the works, we don’t know, but I’m pretty certain they’re planning something.
A winning idea
Finally this week, congratulations to Vivien Lei, who is this year’s winner of the Tax Policy Charitable Trust Scholarship Award. Vivien is currently Group Tax Advisor with Fisher Paykel Healthcare. Her winning proposal was how to change New Zealand’s environmental practices by introducing an impact weighted tax regime. Under this model, organisations would be taxed on their net positive or negative impact on the environment. A very interesting proposal.
Now we’ve had past winner Nigel Jemson on the podcast and I’m very pleased to say that Vivien will be joining us before the end of the year to talk about her submission.
Thousands here could be potentially subject to UK Inheritance Tax.
Airbnb and Uber are not happy about a GST law change.
GST for all its complexities, is the best example of the Broad Base Low-Rate tax principle, a single rate of 15% applied broadly. However, one of the ongoing controversies with GST is around its application to food and other basic necessities. New Zealand’s approach is at odds with many other countries, such as Australia or the UK, where food is not subject to GST (or VAT, as the UK calls it).
Frequently we see commentary that it would be a good move to help lower income earners by removing GST on food. This has been suggested as a response to the current cost of living crisis. I am opposed to such moves and many GST specialists are also in the same camp. Firstly, I don’t think this move is effective as proponents believe, and secondly, if the issue being addressed is low income, then it is better, in my view, to give more income to that target group rather than using a tax measure which would benefit more people, including some who we probably think don’t need assistance.
A report released yesterday in the UK regarding the impact of the withdrawal of the so-called tampon tax bears out these concerns of myself and other GST specialists about introducing GST exemptions. In the UK, VAT of 5% used to apply to tampons and other menstrual products until January 2021, when it was abolished. Prior to its abolition, VAT specialists predicted that the full benefit of abolition would not be reflected in lower prices. And a report by Tax Policy Associates bears this fear out. According to the report, at least 80% of the savings from the tax savings was retained by retailers. In fact the report questions whether any of the benefit of the removal of VAT ever passed through to lower prices.
Professor Rita de la Feria the chair of tax law at the University of Leeds was one of those who warned beforehand of this likely outcome. Commenting on the report she noted this was not only predictable but predicted. In her view “we have to stop confusing policy aim with policy instrument and we also need to stop using tax policy instruments to signal we care about the policy aim.”
Those are wise words and should be kept in mind next time you hear calls for tax changes for ostensibly very sensible reasons. In tax, even with well-meaning policy, there are always unintended consequences and tax is not always the most appropriate mechanism. Sometimes direct action, such as giving payments to those affected, or supplying tampons for free is the best approach.
How UK tax law applies to NZ residents
Staying in the UK, next week the latest Chancellor of the Exchequer, Jeremy Hunt, Grant Robertson’s equivalent, will be presenting the Autumn Statement. He is expected to introduce a number of tax changes and tax increases in an effort to try and restore the UK’s finances. Hunt, incidentally, is the fourth chancellor this year, whereas Grant Robertson is only the fourth New Zealand finance minister this century. So that gives you a measure of just how much upheaval has been going on up there.
I regularly advise New Zealanders and migrants from the UK about UK tax matters. Frequently there are ongoing issues for them and inevitably complexities creep in.
Based on my experience, there are probably thousands of New Zealanders and family trusts who may unwittingly have UK tax obligations. There are also former residents from the UK who are now living here who misunderstand the relationship between the UK and New Zealand tax treatments of investments. So here’s a quick summary of those people who may be affected by UK tax and the differing tax rules between New Zealand and the UK.
Firstly, if you have property in the UK, then UK capital gains tax will apply to any disposals. There are strict timelines about reporting those disposals which are unrealistic in my view, but they still apply. CGT will apply even though the disposal might not be taxable for New Zealand purposes. By the way, the bright line test does apply to overseas property.
If you were renting a property out in the UK then you must report that income both in the UK and in New Zealand. However, for New Zealand purposes, any UK tax paid will be given as a credit against your New Zealand tax payable.
As should be well-known transfers of, or withdrawals from UK pension schemes are subject to New Zealand income tax. I don’t agree with that policy but it’s the law. In addition, if you are receiving a pension from the UK then the UK pension scheme should not be deducting any PAYE. You will need to apply to H.M. Revenue and Customs through Inland Revenue to get any refund of any such tax deducted. By the way, Inland Revenue will not give you a credit for any tax deducted, it wants the tax paid here. That’s the procedure under the double tax treaty and you’ll have to go and get the PAYE back off HMRC, which can be a very frustrating experience, believe me.
But potentially the most significant tax that will apply, which is also the least known, is Inheritance Tax. Inheritance Tax applies firstly to any assets situated in the UK. So, if a New Zealander who worked over in London, bought an investment property there before moving back here, that property is in the UK Inheritance Tax net.
Secondly Inheritance Tax also applies on a global basis to all assets wherever they’re situated if you are “domiciled” or deemed to be domiciled in the UK. Domicile is a complicated concept which I am not going to get into now. But basically, pretty much anyone born in the UK who’s migrated here in the last ten years or so probably still is domiciled for UK tax purposes. If you were a Kiwi and you spent more than 15 years in the UK, you may also be deemed to be domiciled in the UK. If so, Inheritance Tax applies at a rate of 40% on all assets over the first £325,000. (The price of New Zealand property means that this threshold is comfortably exceeded).
In my experience, many migrants and returning Kiwis are completely unaware of the potential impact of Inheritance Tax. For example, UK Inheritance Tax law does not recognise de facto relationships (apparently much to the relief of several politicians a partner in a London law firm once told me). I once dealt with a scenario where the New Zealand resident survivor of an unmarried couple had to pay over £50,000 of Inheritance Tax on her share of a jointly owned New Zealand property after her Scottish partner’s death.
Finally, the UK has a trust register which arrived in the wake of anti-money laundering legislation and its use has been greatly expanded. Any trust which has property in the UK must register. Furthermore, any trust which has a UK source of income such as bank interest must register if it has beneficiaries, including discretionary beneficiaries who are resident in the UK. This is a common scenario I’ve seen. It appears this registration requirement applies even if no distributions have ever been made to the UK situated beneficiaries. There’s some controversy about that particular provision because it appears New Zealand trusts may even have to file UK tax returns even if all the UK income is being distributed to New Zealand beneficiaries.
So that’s a quick summary of some of the UK tax issues which I commonly encounter. I’ll look to update this summary next week if there are any developments from the Chancellor’s Autumn Statement. Now is maybe time to have a look at your position to see if, in fact, you might potentially have a UK tax issue. And also keep in mind that Inland Revenue is currently running an initiative where it is checking on people’s potential tax obligations from their overseas investments.
“We want to remain tax-free”
Finally, this week and back to GST, Airbnb made a submission to Parliament’s Financial Expenditure Select Committee complaining about the proposal for it to charge GST on all accommodation bookings made through its platform.
In its submission, it warned this would stifle the country’s economic recovery and cost the economy up to $500 million a year.
Now this measure was introduced in the Taxation (Annual Rates for 2022-23, Platform Economy, and Remedial Matters) Bill (No 2). Airbnb along with Uber, also affected by the new proposals, unsurprisingly, think the law changes are unfair. On the other hand, the Hospitality Association was amongst those submitting in favour of the change. Chief executive Julie White said a third of its membership consists of commercial accommodation providers adding “and a consistent frustration of theirs is a lack of level playing field when it comes to services like Airbnb”.
The comments from Uber and Airbnb are unsurprising to me. But what I did find of interest about the bill was there have been quite a considerable number of submissions made 820 so far, and quite a few from individuals who would be affected. To quote one, “this law change will result in fewer bookings to me and significantly impact my retirement plans. This will have the additional impact of higher costs of vacations for New Zealand families who are largely for larger families and cannot afford to stay in a hotel.”
Another submitter thought “This action will have a huge negative impact on a new form of tourism at a very personal, localised level.” I’m personally not sure that the impact will be quite as dramatic as those submitters suggest, but it is interesting to see the reaction to what might be seen as a relatively straightforward GST proposal.
As is often the case, many other submitters took the opportunity to push for other changes, such as several suggesting for the removal of FBT on the provision e-bikes to employees.
There was also criticism of the complexity of the interest,limitation and bright-line test rules. One submitter noted that the commentary to the bill had more than 28 pages devoted to remedial provisions for this legislation, and he concluded correctly, in my view, “it is simply not appropriate to expect most landlords to be able to apply the detail of tax law of this complexity.”
Incidentally, the same submitter suggested that because the interest limitation measures had been introduced partly in response to rising house prices, now house prices were falling logically the interest limitation measures should be repealed. It’s a fair point, and he wasn’t the only one to make it. But somehow I can’t see that happening. To leave off where we came in this is another situation where the policy aim and policy instruments have got confused.
Change on the way for GST recordkeeping requirements
A clear-eyed dissent by a Supreme Court justice
Tax revenue exceeds $100 billion for the first time
Over the next few months, GST registered businesses will receive a stream of information from Inland Revenue explaining new recordkeeping requirements for GST purposes, which will take effect from the 1st April next year. These changes relate to what information needs to be shared or retained to support GST input tax claims.
These changes are permissive in nature, and existing invoicing practises and systems which are compliant with the previous GST rules will still remain compliant with the new information rules. The new rules are less prescriptive about the information required to support a GST input tax claim.
The key purposes of these changes are to try and reduce compliance costs for businesses and facilitate the introduction of e-invoicing. The changes will be done by way of requiring the supplier and recipient of a taxable supply to retain a minimum set of information relating to that supply. The current rules, which required formal documents such as tax invoice, credit notes, debit notes etc. to support input and output tax will be repealed.
One of the most noticeable changes will be that there will no longer be a requirement for an invoice to have the words ‘Tax Invoice’ in a prominent place. Tax invoices will now be caught termed ‘taxable supply information’ and the former debit and credit notes which had to be issued when a correction was made, will now be termed ‘supply correction information’, which is better terminology as it actually reflects what’s going on.
There are also changes to the buyer credit created tax invoice regime which are now called ‘buyer created taxable supply information’. And these changes have already come into effect and actually are pretty helpful because you now no longer need to get Inland Revenues permission to operate the buyer created taxable supply information.
There will be a minimum set of information required to be retained in business records under the new rules for a taxable supply. According to Inland Revenue these rules are generally consistent with the requirements of commercial contract law relating to invoicing and recordkeeping. The requirement to hold a tax invoice in order to claim an input tax deduction is now replaced with the requirement to have business records showing that GST has been borne on the supply.
Now key information for both a supplier and a recipient of a supply of goods or services is that of, ‘supply information’. This includes, at a minimum, all the following information:
– the name and registration number of the supplier,
– the date of supply,
– a description of the goods or services, and
– the amount of consideration for the supply.
Helpfully, the low value transaction threshold for taxable supplies has been increased from $50 to $200. And that is part of a drive to simplify recordkeeping requirements for a large number of low value transactions.
There are now three value thresholds for the general meaning of taxable supply information and the information requirements for each of these are mutually exclusive. The thresholds are:
– Supplies exceeding $1,000,
– Supplies between $200 and $1,000,
– and then those for supplies not exceeding $200.
All these changes come into effect from 1st April next year, although, as I mentioned, the changes to the buyer created taxable supply information have already taken effect. As noted, existing systems will still remain compliant. So, there’s no need to dramatically go out and change everything to meet the new requirements. Inland Revenue will continue to release information about the changes over the coming months.
Supreme Court justices display worrying lack of tax knowledge in key decision
Last Friday, the Supreme Court released its decision in the case of Frucor Suntory New Zealand Ltd v Commissioner of Inland Revenue. This case has been watched with some keen interest by tax professionals. It relates to a series of transactions that took place in 2003, as a result of which DHNZ, a predecessor to Frucor Suntory, claimed interest deductions totalling $66 million in respect of an advance made by Deutsche Bank.
Inland Revenue sought to restrict the interest deductions totalling just over $22 million dollars claimed for the 2006 and 2007 income years on the grounds the funding arrangements constituted tax avoidance. Just for good measure, they also levied shortfall penalties totalling $3.8 million for the two years because they considered the tax avoidance was abusive.
The case reached the High Court in 2018, which ruled in favour of Frucor which was something of a surprise at first sight for those not familiar with the facts. Inland Revenue unsurprisingly appealed the decision and in 2020 the Court of Appeal held that the deductions did represent tax avoidance. However, the Court of Appeal did not accept the criteria for shortfall penalties had been met, so both parties were unhappy with their decision and naturally both appealed to the Supreme Court.
Last Friday it ruled by a 4 to 1 majority that the arrangement did represent tax avoidance and the shortfall penalties were correct as the tax position adopted by DHNZ (Frucor) was unacceptable and abusive as DHNZ acted with the dominant purpose of obtaining tax advantages.
Now, in some ways, the Supreme Court’s ruling is unsurprising. New Zealand courts have taken a fairly hard line on what is perceived as tax avoidance for the last 15 years or so. But there’s still a number of points of interest here. Firstly, you will note the length of time involved: the transaction happened in 2003. The assessments, which are the subject of the appeal, were for the 2006 and 2007 tax years. And there’s nothing I’ve seen yet explaining why it took nearly so long to reach the High Court. Under the principle of justice delayed is justice denied it’s concerning to see the amount of time involved.
Then there is the imposition of shortfall penalties, which seems harsh. If you are taking something all the way to the Supreme Court, you know you’re arguing on the margins. Nine judges looked at the matter and five said no shortfall penalties were appropriate. The only four that did think they were appropriate were the ones that mattered most because they were all on the Supreme Court. And you often see this in in court cases, the lower courts rule one way and then the Supreme Court says, nope, it’s the other way, and that’s the end of it.
But most interesting of all is the strong dissent by Justice Glazebrook in the Supreme Court now. Dissenting justice judgements are often very interesting reads, and I suspect Justice Glazebrook’s will be read and examined in quite considerable detail, given what she rebutted completely the principles adopted by the other four justices. Just for the record it’s worth noting that before she became a judge back in 2000, Justice Glazebrook was a tax partner in a law firm. She’s actually one of the co-authors of a book on the financial arrangements regime. In fact, the first edition, published back in 1999, is still had not yet been updated. So she’s got a good background in tax.
But the paragraph, I think is going to raise a few eyebrows is the penultimate one of her judgement.
[247] “The majority say that the dominant purpose of the arrangement in this case was to reduce the tax liabilities of Frucor. This despite the fact that the whole reason for the restructuring was to ensure that Danone Asia did not incur tax liabilities in Singapore, unlike the position before the refinancing where direct debt funding was provided by Danone Finance. Given that, before the refinancing, Frucor was deducting interest payments roughly equivalent to the amounts it claimed deductions for under the current arrangement, it is difficult to see how its purpose could have been to achieve a result it was already receiving (deductibility of interest) and thus difficult to see its dominant purpose as being to reduce its tax liabilities or to achieve an illegitimate tax advantage in New Zealand.”
Now that’s quite some paragraph, I have to say I don’t think I’ve seen for a while a judgement where you’ve got such completely opposite views on between the judges.
You often see differences in interpretation, but here there’s a very marked difference on the core of the case. Justice Glazebrook has questioned how it is tax avoidance in New Zealand when you consider that the real purpose of the restructure was to resolve a tax problem for the offshore parent.
It will be interesting to see feedback from other, more experienced legal practitioners and tax specialists who work in this space about this decision. As I said, I find Justice Glazebrooks dissent there quite strong, and I suspect it will generate quite a bit of commentary.
Hiding the effect of fiscal drag
Moving on, the Government published its financial statements for the year ended 30th June 2022 on Wednesday. As you no doubt are aware by now these turned out to be better than expected and have generated quite a bit of chatter around the overall tax burden and the implications for next year’s election.
From a tax perspective, what’s interesting to see is the strong rebound in company income tax. The forecast in the 2021 Budget was that corporate tax would be just over $13 billion. By the time of this year’s budget in May the estimate had risen to $17.25 billion. In fact the total for the year was just under $19.9 billion.
For individuals the tax source deduction payments (PAYE) are up. Two factors are at play here: the well-known one of fiscal drag or bracket creep which means as people’s wages rise, they cross tax thresholds and their tax increases. On top of that, you’ve got the introduction of the new 39% tax rate. Those two combined, according to the commentary to the financial statements, represented about $1 billion of extra tax.
You have to dig very hard to find out what is the effect of bracket creep or fiscal drag, because that’s not being reported in the budget statements. You can draw your own conclusions as to why that is so. But we do know that when it was included in the 2012 Budget the effect was between 0.1 and 0.2% of GDP.
At a rough guess the current effect of fiscal drag would be somewhere around $500 Million a year.
The GST take rose to $43 billion gross with the net GST for the year being $26 billion through. Overall, as I mentioned at the top of the podcast, tax revenue, including indirect taxation, exceeded $100 billion for the first time at just under $107.9 billion.
So, lots of excitable chatter about what that means politically for tax cuts and other changes. Speaking on RNZ’s The Panel yesterday afternoon, (about 12 minutes in) I reiterated what I have said elsewhere that we need to do more about the tax brackets at the bottom end because that’s where the effects of fiscal drag are the hardest. The non-indexation of income tax and Working for Families thresholds means there are people on say $50,000 a year & receiving Working for Families who are on an effective marginal tax rate of 57%.
Roasting the idea of GST exemptions
Obviously what went on over in the UK has also attracted attention. This week the UK Government abandoned its higher rate tax cuts in the face of extreme political pressure from all sides, including Conservative MPs. It’s been very interesting and entertaining to watch a really classic example of the “Order, Counter-order, Disorder” maxim. And I do wonder how Prime Minister Liz Truss and her [Finance Minister] Kwasi Kwarteng are going to survive.
And finally, speaking of the UK, one of the things that comes up in discussions about how do we help with the cost of living is a not unreasonable suggestion on the face of it, to remove GST on certain foods. Now I’m in the GST purist camp here. I don’t believe we should do that. To repeat a point I’ve made several times, if you are trying to help people who have not enough income, give them more income. Any changes to the GST system such as zero-rating food benefits everybody and therefore are also more expensive as a consequence. And that idea of targeted assistance is consistently noted by the Tax Working Group and also the Welfare Expert Advisory Group.
But there’s another reason why you wouldn’t want to do it unless you wanted some inadvertent laughs. And that is the absurdity of the distinction which happens at the point where you are trying to determine whether a particular product is zero rated or standard rated. Now, Britain, with its VAT (value added tax) regime, has produced a number of very entertaining cases on this. I think people may be aware of the Max Jaffa case, which involves the distinction between a biscuit (standard rated) and a cake (zero-rated).
But this week I was alerted to one which is even more spectacularly hilarious, and it involved marshmallows of unusual size, which really sounds like something a line from The Princess Bride. A VAT tribunal case ruled that marshmallows of an unusual size are 0%, but standard sized marshmallows were standard rated at 20%. As one commentator noted, it’s sometimes very difficult to decide whether a VAT case is indistinguishable from satire.
This case involved a £470,000 dispute between Innovative Bites Ltd and H.M. Revenue Customs about the product “Mega marshmallows”. The VAT tribunal ruled that mega marshmallows were zero rated because they have to be roasted before they could be consumed and therefore not a standard rated snack.
On that bombshell, that’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.taxor wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients.
Until next time kia pai te wiki, have a great week!
