21 Mar, 2022 | The Week in Tax
- The Finance and Expenditure Committee reports back on the tax bill relating to the interest deduction limitation rules
- Inland Revenue releases a swathe of consultation documents relating to GST apportionment, the gig economy & tax avoidance
- New trust reporting standards released
Transcript
If a week is a long time in politics, then the three weeks since our last podcast feels like a decade. If you think I’m exaggerating, Inland Revenue’s latest Agents Answers notes that more than 100 policy and remedial changes are expected to take effect on or before 1st April.
Aside from this, there are also the ongoing COVID support measures. Applications for the second COVID support payment opened on Monday 14th and next Monday 21st of March applications open for a top up loan from the Small Business Cashflow Scheme. In addition, in the wake of the disruption caused by the ongoing Omicron wave, Inland Revenue has effectively delayed the due date for filing March 2021 income year tax returns until 31st May.
This extension also applies to certain elections, which would normally be due by 31st March, and such elections include filing controlled foreign companies and Foreign Investment Fund disclosure forms, making subvention payments relating to the 2021 tax year, and look through company elections for new companies or companies that were previously non-active. That’s all-good stuff and helpful to those tax agents who have been hit by Omicron and their schedules disrupted.
Limiting interest deductions for residential property investors
As I said, it’s been a busy period since our last podcast. The Taxation (Annual Rates for 2021-2022, GST and Remedial Matters) Bill, introduced on 8th September 2021, was reported back to Parliament on 3rd March.
Now this is the bill, which by way of a supplementary order paper, contains the controversial interest limitation and deductibility rules for residential investment property. The bill also has a number of other important measures relating to the treatment of cryptoassets, and GST in particular. It’s an important bill which must be passed by 31st March I believe, as part of the normal Parliamentary supply process.
Cryptoassets are an extremely fast-moving area. As the report of the Finance Expenditure Committee notes, there are already over 15,000 different types of crypto assets. And as a result, the Committee has recommended changes to definitions, in particular, removing the fungibility requirement for the cryptoasset definition. Its now going to add a definition for nonfungible tokens, or NFTs, which are all the rage at the moment.
There was also a recommended change to the GST apportionment rules to make it clearer the new apportionment rules do not target people who are property developers. I’ll talk a bit more about GST apportionment a bit later in the podcast.
But of course, the big and most controversial part of the bill, is in relation to the interest limitation rules. Broadly speaking, there are some changes around the fringes, but nothing significant. And that’s what I would expect with the Government’s super majority. It will push through these changes.
One of the things of note and which will be disappointing to some, is that submissions that the definition of new build should include improving, renovating or repairing existing buildings, dwellings and extensive remediation of uninhabitable dwellings, were not adopted.
The Committee did not consider these to be new builds and should not receive tax incentives by exempting the activities from interest limitation rules. However, the Committee considered the new build exemption should apply in some circumstances where “remediation of an existing dwelling prevents it from falling out of available housing supply.”
The Committee went on “In expanding the exemption, we aim to make these rules as clear and objective as possible, so would avoid using subjective terms such as ‘uninhabitable’.” A wise move there.
They therefore suggest the new build exemption would apply to existing dwellings in two specific situations. These are where a dwelling has been on the earthquake prone buildings register but remediated and removed from the register on or after 27th March 2020, or a leaky home has been substantially, at least 75%, reclad. They say there are verifiable criteria available which would allow for clear application of a new build exemption.
They also have agreed that there needs to be some changes to rollover relief provisions in relation to transfers to and from trusts and parents co-owning property with their children. The later has become particularly controversial with reports in the media about how the bright-line test has affected parents helping their children into a house.
An example given, where parents become co-owners of a property with their adult children and later sell a part share of the property to the children. The parents would be disadvantaged if the period subject to the bright-line test for any remaining share they own restarts on the date of the sale. There’s going to be an amendment to change that.
One of the other things, of course, that happened whilst I was away cycling part of the Tour Aotearoa – highly recommended by the way – is that National made its proposals around changes to the tax thresholds. There’s commentary from the National Party in the Minority Report on the lack of action in that area. And as you might expect, ACT also takes a view that these changes aren’t needed at all. So, politics will carry on as normal
Simplifying GST
Moving on, Inland Revenue has been busy kicking out a number of consultation documents. An important one was on 8th March, which relates to GST apportionment and adjustment rules, which I mentioned earlier. Inland Revenue is looking at policy options for reforming and simplifying these rules.
This is actually very important because these rules are very complex. One concern in particular, is that although GST does not tax most private assets, such as dwellings, an issue arises where some private assets may be used by a GST registered person to make taxable supplies. For example, when a person is working from a home office. Or a GST registered person may own a holiday home, which they also rent out as a taxable supply of guest accommodation.
There is an argument the use and disposal of those private assets may be in the course of furtherance of a registered person’s taxable activity. So that could lead to a GST liability when those assets are sold or an apportionment adjustment if there is a decreased percentage of taxable use.
Now what Inland Revenue have pointed out is, and what’s well known, is that many registered persons are unaware there could be such GST consequences. And what it’s suggesting is that we need to look at proposing a revision of the rules and simplification.
The proposals include a principal payment purpose test for assets purchased for less than $5000 GST exclusive. For assets above that threshold a de minimis test is proposed. If the registered person’s taxable use of the asset is less than 20%, the asset is regarded as non-taxable. No input tax deduction could be claimed on purchase, but critically no GST would be accounted for on a sale. The flipside of this is an 80% rounding up rule. Assets with 80% or more taxable use would be deemed to have 100% full taxable use. So therefore, there would be a full input tax deduction with only small amounts of non-taxable use. This is an important paper and worth reading in detail.
Taxing the gig economy
Another paper which came out two days later, was on the role of digital platforms in the taxation of the gig and sharing economy.
This paper contains proposals intended to make it easier for people earning income through digital platforms, the gig and sharing economy to comply with the tax obligations. It’s looking for feedback on how GST should apply in those rules, and whether there are opportunities to reduce compliance costs in the tax system for people earning in the income from the gig economy. As the paper notes the gig economy is now a substantial and increasing part of the modern economy.
The paper looks at what’s going on and how the current tax system deals with the gig economy. In my view the tax system currently doesn’t deal very well with the micro and small businesses. Just as an aside, in relation to this, I do wonder whether it’s time for the tax system to introduce a nil rate band for income tax purposes. This is something we see in other jurisdictions, for example across the Ditch, in Australia.
As the current legislation stands, every dollar that is earned must be taxed. And I do wonder, that might have been appropriate when inflation was low, but now seems to represent an unnecessary burden, particularly when the rate of tax in the first $14,000 is only 10.5%. The question is how much tax would it cost? How much is involved in calculating that and collecting it? Again, I recommend a good thorough read of this paper.
Minimum standards for trusts
On 7th March, an Order was made setting out the minimum standards for financial statements to be prepared by trusts in relation to new disclosure requirements.
These are actually in force for the current tax year and will be required to be complied with when we start preparing tax returns for the year ended 31st March 2022.
And there’s a special report that sets out what trusts are required to comply and what’s expected to be prepared. Basically, the minimum requirement will be to prepare a statement of profit loss and a statement of financial position. This is part of the wider information gathering that Inland Revenue wants, but also in this particular case on trusts, when you look at the new Trusts Act, which took effect earlier this last year, there’s an expectation for trustees to provide and prepare more financial information.
So again, that’s an effective increase in compliance costs, yes, but also something which is part of a wider need for transparency and full disclosure in the trust regime.
Preventing avoidance of the new top tax rate
Now, if all that wasn’t enough to be chewing over, on Wednesday Inland Revenue released a consultation document on top tax rate avoidance prevention proposals. It’s proposing some measures that limit the ability of individuals to avoid the 39 or 33% personal income tax through use of a company structure.
Now these are what we call integrity measures, there to support the integrity of the tax system. They are to be expected. But what’s interesting here and what’s going to cause some controversy, is a proposal that the sale of shares in a company by a controlling shareholder will be treated as giving rise to a dividend for that shareholder to the extent that the company and its subsidiaries have retained earnings.
This is to counteract the 11-percentage point differential between tax paid at a company level at 28%, and tax paid at the individual level at 39%. What concerns the policy advisers is that companies will not be making distributions of dividends, but by selling the shares and the shareholder usually realising what is a tax-free capital gain under present legislation, this issue of that 11-percentage point differential can be avoided.
Accordingly, one of the measures in this consultation document is to address that. There are a few other matters in the paper which I’m still digesting. So what I propose to do is talk about it at more length next week.
Well, that’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax 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 te wiki. Have a great week.
17 Apr, 2021 | The Week in Tax
- Cryptoassets under the spotlight
- 10 years of compulsory zero rating for land transactions
- A warning for trustees moving to Australia.
Transcript
New Zealand houses aren’t the only asset class that has exploded in value over the past 12 months. A report by the Secretary General of the OECD to the G20 finance ministers and central bank governors in Italy earlier this month noted that since he last reported to them in February 2021, the overall market capitalisation of virtual currencies has gone from just over US$1 tln to US$1.8 tln.
Now, quite apart from that near 80% increase, the growth has been almost five-fold since September 2020, when the market capitalisation was US$354 billion.
There are two things to note about this fantastic growth in value. Firstly it is going to attract keen interest from the tax authorities who will want their cut of the gains that have arisen. And of course, the tax authorities are still struggling to keep up with the pace of change in this sector. And Inland Revenue is no different from the rest.
There are some rulings in preparation at Inland Revenue including an updated release on how it views the treatment of cryptoassets. But its general position remains that cryptoassets will be taxable, with rare exceptions on the basis that rather akin to gold bullion, the value can only ever be released by sale, so therefore they must have been acquired with a purpose or intent of sale.
The thing is though, the whole cryptoassets sector is rapidly becoming ever more complex and new instruments are being developed, which point to Inland Revenue’s argument as not necessarily being sustainable. So that’s one point that people must be noting when preparing their tax returns for the year ended 31 March 2021. Now I’m sure we will see people coming forward who have substantial cryptoassets gains and are wishing to make the right tax declaration.
But the other matter, which is of concern to tax authorities, is trying to keep track of all of this. As is well known, the OECD has developed in recent years the Common Reporting Standards on the Automatic Exchange of Information. And what the Secretary General for the OECD said in his tax report to the G20 finance ministers and Reserve Bank governors, is that the OECD is designing a “tax reporting and exchange framework that will address the tax compliance risks associated with the emergence of cryptoassets and reflecting the crucial role the crypto exchanges play as intermediaries in the cryptoassets market.”
Now, the proposal is that basically they want to bring cryptoassets into the common reporting standards and in exchange for information. So that’s going to be quite complicated. One of the attractions of cryptoassets is they are supposedly off the grid or under the radar of the tax authorities, and, how shall we describe it, that the reporting requirements are a little bit more relaxed.
Anyway, the OECD is preparing detailed technical proposals on this, on a new tax reporting framework. And it is intending to deliver a proposal to the G20 later this year. As usual, we’ll bring you news on that when they when it happens.
After ten years, there is still confusion
Moving on, it is 10 years since compulsory zero rating of land transactions was introduced. From 1st of April 2011 most sales of land and buildings between GST registered persons became zero rated for GST purposes under what we now call compulsory zero rating provisions. If these apply, then the land transaction must be zero rated.
Now the provisions were introduced to prevent what was seen as a trend towards “Phoenix fraud”, whereby a vendor did not pay output tax on the sale of property to Inland Revenue but the purchaser claimed a GST refund. The suggestions were that the annual loss in GST was in the tens of millions of dollars.
Now, it’s important to note that this is between GST registered persons and what it did was fundamentally shifted the GST risk on transactions involving land buildings from Inland Revenue to the parties involved. And as an excellent little report on the matter from PWC points out, that wasn’t always fully appreciated by parties to transactions, particularly those who were seeking to claim an import tax deduction on the purchase.
After 10 years these rules should be relatively well known now. However, there’s still quite a lot of issues emerging on that. And I regularly encounter the issue where a GST registered purchaser has bought land from what they understood to be an unregistered person, only to find out afterwards that the vendor either is or should have been GST registered. Now that often comes up when they file a GST return and claim the input tax credit. Now, the result is they don’t get any input tax credit and that purchaser is understandably very upset. The last such case I handled the vendor finished up paying almost $400,000 as a consequence of getting that GST status wrong.
And it seems surprising this should be happening because the standard sale and purchase agreement does have specific provisions on the whole schedule declaring the GST status of the parties involved. I mean, one of the risks is that the GST position of one party depends on the GST profile or information of the other party. So it’s not often that that level of tax detail is required in tax transactions, but they are for compulsory zero rated land transactions.
The report from PWC has useful little tips for vendors and purchases. But the key point it makes is parties have got to take extra care with this. They’ve got to make sure that the GST status of both parties is absolutely clear and understood at the time the agreement was entered into. Otherwise subsequently, it gets very messy and expensive and the only people who win are lawyers and accountants with fees, trying to sort out the mess. Inland Revenue is quite happy about all of this because, as I said earlier, it has shifted the risk.
So generally speaking, if something goes wrong, it gets its cut and leaves it to the other parties in the transaction to sort themselves out. So again, pay attention if you’re involved in the purchase of land and buildings. It’s a compulsory zero rated transaction for GST purposes. Pay attention and make sure all the Is are dotted and the Ts are crossed.
A warning for trustees
And finally, just another reminder popped up with a new client coming to me this week, with a common issue, and that is the status of trustees who move to Australia.
Now as the Australian tax legislation for income tax purposes, deems a trust to be resident in Australia, if any trustee is a tax resident of Australia. So you could have a trust with seven, nine, 11, whatever number of trustees. But if one of those trustees is resident in Australia, then the trust is deemed to be resident in Australia and the consequences, particularly around capital gains tax, become potentially very severe.
There’s a slight anomaly in this position because often individuals that move from New Zealand to Australia qualify as what the Australian tax legislation calls a temporary resident.
And what that means is rather like our own transitional residence exemption. Non-Australian sourced income and gains are not taxable in Australia, but trusts are not covered, or companies are not covered by that exemption. So there is the situation where an individual who receives a distribution from a New Zealand trust is not going to be taxable on that in Australia, but if he is a trustee of that trust, making the distribution to him or her, then the trust is now within the Australian tax net.
So this new client is a reminder for anyone moving to Australia and they are either a trustee or have a power of appointment over trustees, then they need to resign as the trustee and revoke/transfer that power to another person who is not an Australian tax resident.
Given the sheer number of trusts we have in New Zealand, approximately half a million at last estimate, this is going to be a quite common scenario. So even if it is just a family trust holding a former residential family home in New Zealand, they could well be landed with a whole heap of Australian tax issues.
So anyone moving to Australia should take advice on the tax implications of you doing so and make full disclosures to your advisors. It is like the mess ups we see with the compulsory GST rating and land transactions. It’s astonishing how people are rather casual when explaining their circumstances to their advisers and often with very expensive consequences.
Well, that’s it for today. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients until next week, Ka kite āno.
12 Oct, 2020 | The Week in Tax
- Inland Revenue is checking wage subsidy claims
- A look at the Australian Budget
- Why GST rate cuts don’t work
Transcript
The Wage Subsidy, Wage Subsidy Extension, and the Resurgence Wage Subsidy schemes are all now officially closed for further applications. And as you may well be aware, these involved some significant sums of money. In total, there were more than 750,000 applications received across the three schemes together. That includes nearly 250,000 self-employed individuals. And to date, $13.9 billion has been spent on the schemes.
By the way, the Covid-19 leave support scheme is still open to affected organisations for employees required to stay at home because of the Covid-19 risk or employees who couldn’t work at home. That was at the same level of $585.80 for those working 20 or more hours per week, and was a maximum of four weeks per employee. The scheme was repeatable, so you could apply more than once. Now hopefully that scheme will no longer be required as we’ve now all down to Lockdown Level One.
Meantime, Inland Revenue has said it will be starting to audit and review those businesses that did take the wage subsidy and applied the money as they should have done. Was all the money paid through to its employees? Were any unusual employment scenarios dealt with correctly? How did they treat it for income tax? Remember, it was non-deductible to an employer but income for a self-employed person. And it was not subject to GST. Finally, was the subsidy all paid through to employees and PAYE correctly applied?
Now there are some questions emerging as to whether it was paid to employees and PAYE applied. There have been some cases where that has been found not to be the case. So we expect that Inland Revenue will be using its new tools and casting its eye over claims. Checking to see that employers – which it knows received the wage subsidy – did also pay/meet their PAYE obligations.
Inland Revenue will probably also be checking whether in fact, the applicant did suffer a 30% drop. They may feel that the GST returns, for example, might not support that there has been a drop in income. So as always, it’s a question of just staying alert and being aware that the questions will be asked. The wage subsidy schemes were high trust regime, and it appears that that trust has been rewarded in most cases. But undoubtedly there will be a few fringe persons that didn’t follow through as they should. And they should expect to hear from Inland Revenue in due course.
Now, related to the wage subsidy scheme was the Small Business Cashflow Scheme, which is still open for applications up until 31st December. And the Labour Party has promised that it will be extended for a further two years while a permanent regime is designed. The current Revenue Minister, Stuart Nash, said in a recent debate with Andrew Bayly the National Party spokesperson for Revenue and Small Business, he was very comfortable if companies or businesses had applied for the loan and then just simply parked it in a bank account. He felt that at this stage it was important to give those businesses some comfort that they had something there because we’re not through all of this yet. Who knows how businesses are going to react post-election and particularly during the Christmas slowdown. So that’s encouraging to hear.
As I’ve said before, I’m a fan of the Small Business Cashflow Scheme, and I would like to see a permanent iteration brought in. Funding for small businesses was something we considered when I was on the Small Business Council. Funds were usually very easily available if the borrower had equity elsewhere. But for small businesses that didn’t have access to a mortgage or equity, accessing debt finance was more difficult. And access to finance is something that small businesses will need as they, as always, lead the post Covid-19 recovery. So, it’s good to know that at this stage, the government is keeping that scheme going.
Aussie tax changes
Across the ditch, the Australians had their Budget this week and there were some interesting points came out of it.
The latest estimate is that the underlying cash deficit is forecast to be A$214 billion dollars (11% of GDP) for the year to June 2021, which is some A$220 billion dollars worse than the last pre Covid-19 forecast in 2019. The Australians, like all governments around the world, have thrown a lot of money at the matter. The increase in spending is four times bigger relative to Australia’s national income than it was during the global financial crisis. Spending is expected to rise by 9.5 percentage points of income in the two years to June 2021.
Net debt is forecast to reach A$900 billion (42.8% of GDP) by June 2023. Which is some $540 billion more than the pre Covid-19 forecast. But here’s the interesting thing, and this is something that Gareth Vaughan picked up this week. The forecast payments forecast for the June 2023 year on that A$900 billion dollars are A$17.3 billion dollars, whereas it paid A$19 billion interest in the June 2019 year on, much, much lower figure debt figures, only $300 billion or so. In other words, as Gareth pointed out, the cost of borrowing has dropped so much that it is now relatively insignificant.
Now, there’s a lot of interesting tax measures in the Australian budget. They’ve brought forward some tax cuts backdated from 1st July with a one-off benefit provided to low- and middle-income earners of A$1,080. They are allowing businesses with turnover of up to A$5 billion dollars to deduct the full amount of any eligible capital assets acquired since the date of the budget on 6th October which is in use or installed prior to 30th June 2022. Now is a massive investment boost which dwarfs anything I’ve ever seen before. But we’re in unprecedented times.
There’s a loss carry back regime and that again targets companies with turn over up to A$5 billion dollars. They can elect to carry back tax losses from the 2019-20, 2020-21 or 2021-22 tax years to offset previously taxed profits in the 2018-19 or later tax years. We have a similar scheme here, as you might be aware, and understand there is work going on in the background now for a permanent iteration of that loss carry back scheme.
The Australian tax regime has a number of concessions for small businesses subject to their annual turnover. And what they’ve done is increase access to those concessions by increasing the annual turnover threshold from A$10 million to A$50 million dollars.
It’s sometimes proposed that New Zealand should have a specific tax regime targeting small businesses. However, the view of Inland Revenue and Treasury, and to be frank, myself, would be that keeping it simple is a better approach. But at the same stage I think there are things that could definitely be done for micro businesses who don’t have access to all the right support and accounting. A more flexible approach to exemptions, and maybe giving some fixed deductions, would actually be a more efficient approach.
Both National and ACT look to follow the Australian model of proposing income tax cuts to help individuals and both parties propose a temporary increase in the depreciation threshold to AUD$150,000.
Why GST cuts don’t work
ACT has also proposed a 12-month temporary cut in the GST rate from 15% to 10%. Now, cutting GST rates is something that has been tried around the world. Interestingly, the Tax Working Group, when it was putting its proposals forward last year for the capital gains tax reforms, was against GST reductions.
“This is because lowering the GST rate would not be as effective at targeting low- and middle-income families as either:
- welfare transfers (for low-income households), or
- personal income tax changes (for low- and middle-income earners).”
And that’s the main criticism of what’s proposed by National and ACT – that the proposals don’t put money in the pocket of lower income earners who historically do spend it. That’s where I sit on this matter. I think the tax cuts as proposed are at the wrong end of the scale and should be targeting much lower income earners because they are the ones that need the money most and would spend it.
But interestingly, the rate cut in the GST has been tried overseas before. Britain tried this in December 2008 when it temporarily reduced its rate of Value Added Tax (VAT) or GST from 17.5% to 15% for 13 months. And it turned out that this had some initial effect, according to research.But at least part of the pass-through effect of a cut was reversed after only a few months.
The main issue with GST cuts is whether, in fact, the full effect of the rate cut would flow through to customers. Between 2009 and 2012, France, Finland and Sweden each reduced their VAT rate on dining in at restaurants. But in all cases, significantly less than half the tax cut was passed through to customers.
Germany is the latest to give a GST cut a go. It introduced a temporary six months rate reduction on 1st July. Now, that’s expected to cost €20 billion, but the actual boost to German GDP is estimated to be just €6.5 billion, or basically a third of the tax shortfall.
So all the research seems to point out that although in theory a GST rate cut could work to boost spending, particularly in New Zealand, where we have one of the broadest GST systems in the world, the evidence is it may only provide a temporary uptick, but that the main beneficiaries are retailers who don’t pass on all the cut.
And again, that comes back to the point I made just now, and that is if we are wanting to boost spending, then giving money to people to spend seems to be the best approach. Not indirectly through tax cuts but targeting low- and middle-income earners.
Well, that’s it for this week. I’m Terry Baucher. And you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening. And please send me your feedback and tell your friends and clients. Ka kite āno.
21 Sep, 2020 | The Week in Tax
- How a common GST mistake cost a client $450,000
- NZ tax residents must report income on worldwide basis
- Labour’s tax policy announcement does nothing for inequality or the inequities in the tax system
Transcript
GST is frequently touted as a simple tax, and I think that’s partly because there’s only one rate and it applies across the board on almost all goods and services consumed in New Zealand. But like any taxes, it has a number of hooks in it which frequently trip people up.
Some of these hooks shouldn’t be tripping people up because they’ve been known about for some period of time. But surprisingly, I still come across this particular issue time and again. And it’s really quite concerning that it still does happen.
The issue will almost invariably involve land. It’s where someone has purchased land from an individual and then decides that it’s perfect for a development activity or whatever, and then sells that across to a company or sometimes a trust which is registered for GST which then claims an input tax credit.
This is where things go off the rails. The issue is that the supply from the individual/another company who initially purchased the property to another party which is “associated” with it means that for GST purposes, the GST input tax claim that can be made is limited to the amount of GST paid by the first person.
Now, this provision, section 3A of the GST Act, has been in place since October 2000. It applies to transactions between “associated persons” which given the wide definition in the associated persons rules is very likely applicable when there are common shareholders/trustees/settlors.
What section 3A is designed to do is to stop someone buying a property then on selling it at an inflated price to an associated GST registered entity, which then picks up an increased input tax credit. And the rule basically says that the GST input tax is limited to the amount paid by the original purchaser. And since that purchaser often purchases it off a non-GST registered person, that amount is nil.
And I see this quite a bit. I’m surprised some lawyers and accountants haven’t really got across a measure which is now 20 years old.
The latest example I’m trying to describe is that the individual purchased the property, and then after advice from a lawyer – that for asset protection and business purposes – it would probably be better that the land be sold to a company to carry out the proposed development. That itself is not unreasonable advice. Problem was the lawyer overlooked the impact of GST and the client who is new to New Zealand didn’t get tax advice at the right time, which is another common mistake.
The company actually did get an input tax credit and refund of $450,000. You might well ask why did the Inland Revenue let a GST input tax claim of that amount go through? Fair question but it’s a complicated story.
Anyway, Inland Revenue then took a further look at it and then said, “Oh, no, you’re not entitled to that refund”. So now the client has to find $450,000 dollars and pay it back. They’re not best pleased which is understandable. And I think that is something that should provoke some fairly sharp questions between the client and their lawyer. But it is a common issue I keep seeing.
So, the golden advice here is get advice from your accountant and other advisors before you make the acquisition or get into the project. If you don’t, because you’re trying to save on professional fees, you might well find that trying to save two or three thousand dollars in advice has, like this particular client, just cost you $450,000. Get advice on any GST related transaction because GST has a lot more hooks to it than people realise.
I have a couple of other GST cases going on at the moment where people who said they were GST registered turned out to be not registered, or vice-versa and that has got lawyers at ten paces throwing writs at each other over whose client picks up the GST warranty.
NZ residents must report global tax income
Moving on, another common error I come across is people misunderstanding their income tax obligations where they have assets in more than one jurisdiction. I frequently encounter a position where a New Zealand tax resident also has property or other income source in the United Kingdom, Australia, wherever, and has been complying with that jurisdiction’s requirements to file a tax return.
This often happens involving assets in the UK. A person might have to file UK a tax return because they’ve got a rental property over there. But although they’ve complied with their UK obligations, they overlook the fact that as tax residents of New Zealand, their income is reportable taxable on a global basis. So they should be reporting the UK income here as well.
And that’s the bit that often gets forgotten about. Most people seem to be aware there’s a rule against double tax. And they seem to think that by filing a tax return in the country in which the property is situated, they have met their obligations and it’s only taxable in the country in which it’s situated. It’s not, it’s taxable worldwide.
Inland Revenue issued in July a very good Interpretation Statement 20/06 which sets out all the rules overseas rental properties. But I daresay this particular case won’t be the last time I’ll come encounter a situation where someone has reported income overseas, but not in New Zealand.
And it’s a good insight into always try and catch up regularly with your clients and take the opportunity to ask questions, because more often than not, if you don’t ask, you don’t find out. And then something happens after which everyone is going “Oops!” and no one is terribly happy about how that plays out.
Labour’s tax policies
And finally, last week, Labour announced their proposed income tax policy, increasing the top income tax rate to 39% for income in excess of $180,000. This has not been terribly well received, partly and very obviously from those who are likely to be affected. They’re not going to be happy about that. And that’s understandable. Who likes paying more tax? Let’s be frank about it.
But also, more importantly, leaving aside partisan issues such as Labour activists saying it’s too timid, the interesting issue to me is how other people have come out and said it really doesn’t do anything to address the issues of inequality and distortions in the tax system. It’s also been dismissed as just a drop in the ocean in terms of addressing deficits.
There’ve been two such articles in the past week that raised these issues. The first was from Jonathan Barratt a senior lecturer in taxation at Te Herenga Waka — Victoria University of Wellington. And he basically said that both Labour and National are really not doing anything to address questions of inequality. The tax base is too narrow, it benefits the wealthy and punishes the poor. And his key point was that neither major party seems to want to do anything about it.
I do have a view that the “Four legs good, two legs bad approach” to discussing taxation over the last 30 odd years hasn’t helped any constructive conversation in this matter. Also, property has become such an important asset for so many people where sometimes the untaxed growth in the value of the asset exceeds a person’s annual earnings, it’s therefore understandable people are reluctant to have that precious nest egg taxed.
Also coming out and having some fairly harsh, but fair, commentary on Labour’s tax policy was Geof Nightingale, of PWC, who’s been a previous guest of the podcast, but more importantly was a member of the last two tax working groups.
And he begins his article by calling it “Brief and predictable, but disappointing”. And he goes on to point out the 39% rate turns us back to the tax settings at the end of the 20th century when we last increased the top tax rate to 39% rate. The policy “makes the existing equity and efficiency distortions in our tax system worse and will have no significant impact on income or wealth inequality”.
Now, Geof was one of those who backed the introduction of comprehensive capital gains tax. What he’s pointed out here is that the increase in the tax rate to 39% is a progressive move but only in relation to employment and personal services income. It’s quite possible if you’ve got investment income, which is in a portfolio investment entity it’s taxed at 28% and it’s held in a trust it’s going be taxed at 33%.
I really do struggle to understand why Labour is not looking closely at the trust tax rate. It was known to be an issue the last time the top tax rate was 39%. But I suspect they may well come back to that if they get re-elected. There are anti avoidance measures in place, as Geof has said. But the whole point is that the zero percent rate on capital gains still applies and investment returns and capital gains because of the amount of money sloshing through the system now are likely to increase.
So, as he said, one solution is of course, a capital gains tax, which in his view and mine spreads the tax burden more equitably across the economy. And it could also allow lower personal tax rates. What’s often forgotten in the wake of what happened at the end of the Tax Working Group, was that lower tax rates were part of the whole package including capital gains tax. National of course will not do anything in that space. It’s saying it’s sticking to opposing capital gains tax and ruling out tax increases.
So Geof’s article was really quite swingeing in its criticism and fair enough in that regard. He concludes
“Here we are then, a government that wants a second term faced with a major fiscal crisis but backed into the dead end of a 20th century tax policy. Predictable but disappointing.”
Well, that’s it for this week. I’m Terry Baucher. And you can find his 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. Hei konei ra!
31 Aug, 2020 | The Week in Tax
- COVID-19 related measures for tax losses and AirBnBs
- National releases its small business policy
- Is a capital gains tax back on the agenda?
Transcript
Friday was the due date for the first instalment of Provisional ax for the year ending 31st March 2021, Provisional tax is going to be payable by anyone whose net tax for this year will exceed $5,000.
Now in the past, we’ve covered the ability to use tax pooling to give more flexibility about payments of tax, and that’s going to be particularly important for the current tax year, given our ongoing uncertainties arising from the COVID-19 pandemic. My recommendation to clients at this moment is to adopt a conservative approach. Look at paying the first instalment of tax due today but keep watching your progress and how your turnover is going. And if matters move into a tax loss position as a downturn comes through soon, then we will take steps to mitigate or deal with the next two instalments of Provisional tax.
But what if you already know you’ve got losses this year and it’s not likely to get much better for the current year? Say you’re a restauranteur or you’re in the tourism business. These are two sectors which are very clearly hit hard by the pandemic and the various lockdown measures.
Well, one of the measures introduced as part of the government’s response to the pandemic was the ability to carry tax losses back. Under this measure, if you have a tax loss for the 2020 or 2021 income years, you can carry those losses back one year. And the idea is that if you carried back to a profitable year this will mean you have overpaid tax in the prior year, and that tax can be released to help smooth your time through this ongoing pandemic.
And for most larger companies the tax loss carry-back regime is pretty straightforward. Carry back the loss one year, get a tax refund at 28% percent, and then you’ve got funds, which you can either use to meet other bills you may be behind on, or bring it forward and apply it against your current tax year liabilities such as GST or PAYE, depending on how dire the situation might be.
But one of the problems that’s emerged with the tax loss carry back rules affects a lot of smaller companies where their shareholder is also an employee. And under the rules that apply to these companies, these companies can pay out their profits to a shareholder-employee who is then responsible for the tax.
For example, say a company makes a profit of $100,000. Instead of paying tax at 28% it instead distributes it as a salary to a shareholder-employee and he or she is taxed on it at their relevant marginal rates. For someone on $100,000 with no other income, that roughly works out to about $24,000. So, there’s a tax benefit to shareholder-employees because of the gradual increase in tax rates for individuals.
But the problem that’s emerged wasn’t really addressed in the current legislation. What do you do if you carry a loss back for a company with a shareholder employee? The carried back loss is not much used to that particular company because they’ve already reduced their profit to nil by distributing it to the shareholder-employee.
And by the way, I note there was a Radio New Zealand report noting that about $2 billion dollars in wage subsidies has been paid to companies that do not appear to have paid any company income tax. It’s highly likely many of those companies have shareholder employees and it is the shareholder employee who has paid the tax using the mechanism I just explained where the whole or substantial amount of the company’s profit is paid out to the shareholder-employee.
So the tax loss carry back rules don’t work too well for small micro businesses that use a shareholder-employee mechanism. And it’s something we’ll need to be looked at if there is a permanent iteration of these rules, which I believe should happen.
But it’s also why the small business sector and accountants have not looked on this particular measure with a great deal of enthusiasm yet. Because of those complexities how do we deal with these tax losses that are brought back? Do you rewrite the whole position in the prior year? And then what does that do for other matters that are related to that person’s income, such as social assistance, ACC earner levies? The amount of ACC you may claim if you have an accident is dependent on your salary as a shareholder-employee.
So, there’s a lot of complicated issues to work through. But the tax loss mechanism is there. It works very well for companies which don’t have shareholder-employees and individuals trading for themselves or trusts can use the loss carryback rules in either the 2020 or 2021 income years.
Converting from short-term to long-term rental accommodation.
Moving on, Airbnbs in the tourism sector will also have been hit very hard by the pandemic and the collapse in overseas tourism and the substantial decline in domestic tourism. So what has happened is some of these Airbnbs have reversed a trend that was developing, and have moved back into providing longer term residential accommodation.
As always, there’s a tax consequence to that and for GST purposes it means that if the GST activity is stopped, then the person is required to de-register for GST. Part of the de-registration process will mean a deemed supply of the goods that were brought into the business. You’re deemed to have sold them and pay GST output tax on the way out. And if you’ve claimed a big input tax credit for, say, a whole property, moving it over to Airbnb, that means that you could have a substantial output tax payable on de-registration, as it’s done at a market value.
Now, under the GST Act, there is a provision that where someone is no longer carrying on a taxable activity they are obliged to let the Commissioner of Inland Revenue know within 21 days of their taxable activity ceasing, and then that registration must be cancelled unless there are reasonable grounds to think the taxable activity will be carried on within 12 months. So, this could apply if you think that within 12 months-time, we could be back up and running again.
What Inland Revenue has done is extended this twelve-month period to 18 months through a special COVID-19 determination which has just been issued and this will apply until 30th September 2021. So you now have 18 months, a lot more flexibility about whether you’re going to resume your Airbnb activities or drop out of the picture completely.
Just a caveat though – if you are currently using a property for residential accommodation, but you anticipate going back to making taxable supplies in Airbnb, you have to do what’s called a change in use calculation. This is basically an apportionment of the value of the property brought into the GST net over the expected time it’s being used for taxable activities. A little bit complicated, but you produce one of those calculations as part of your GST returns.
Political tax policy
Yesterday National released its small business tax policy. In terms of tax rates it has come straight out and said it does not plan on increasing taxes or introducing any new taxes.
Other than tax rates, National’s tax policy has a number of other measures. Firstly, they’re going to lift the threshold for the purchase of new capital investment from $5,000 to $150,000 per asset. That is you can take a complete deduction for an asset costing up to $150,000. Now apparently this only applies to “productive assets” so there’s a question as to what that might mean. It’s a temporary two-year change. Something similar has been done overseas.
And it’s a good idea although it is a question, of course, of what will and won’t meet the definition of ‘productive’. But you could see some fairly substantial plant and machinery being purchased and as a means of getting investment into productivity in the economy it’s a measure to be to be welcomed.
National proposes increasing the Provisional Tax threshold from its current $5,000 to $25,000. I’m not so sure about this one, because one of the reasons the threshold stayed at $2,500 for a long time was concern that if it was increased substantially taxpayers might forget they’ve got terminal tax to pay and find themselves short of funds. And obviously that risk increases the greater the threshold, so $25,000 is extremely generous.
It would also have an impact on the Government’s cash flow, by the way, because it would drop quite a lot of people out of the provisional tax requirements. So the Government’s income, so to speak, was will be reduced temporarily before these payments will then come in at terminal tax time. I think $25,000 is too generous, $10,000 is probably manageable. Still it’s a measure in the right direction.
Next, they want to raise the GST threshold from $60,000 to $75,000. Big tick for that, the GST threshold hasn’t been increased since 1 April 2009. So it’s well overdue and on an inflation basis $75,000 is about right.
Businesses will be allowed to write off an asset once its depreciated value falls below $3,000 as opposed to continuing to depreciate it until its tax value reaches zero. Really good measure here. Should be done straightaway regardless of who’s in power. Keeping a track of all these assets when they’ve fallen below that threshold is hard and causes needless complexity. So I like that a lot.
I also like this next one – change the timing of the second Provisional Tax payment for those with a 31 March balance date from 15th January to 28th February. That’s really quite sensible. It’s bizarre it’s in the middle of January when we’re all supposedly on holiday and it’s not a great time for cash flow. February makes a bit more sense.
Ensure the use of money interest rates charged by Inland Revenue more properly reflect appropriate credit rates. So right now, if you overpay your tax Inland Revenue will pay nothing. National are saying, well, we want something that’s a little bit more realistic than that. It’s not a bad move and it certainly would be popular with small businesses, but it’s rather based on an assumption that taxpayers would be using Inland Revenue as a bit of a bank. They won’t. A better option in this case would be tax pooling which takes care of a lot of those issues.
Increase the threshold to obtain a GST tax invoice from $50 to $500. A very generous upper limit there. I’m not sure I’d go as high as that, but that $50 threshold below which you don’t need to have a full GST invoice with all the required details on it has not been changed since 28th September 1993. So an increase in the threshold is welcome. I’d say $150 might be a better option.
Implement a business continuity test rather than an ownership test for carry-forward of tax losses. Moves in this space are already happening but the measure is to be welcomed.
Next and also welcome, review depreciation rates for investments in energy efficiency and safety equipment. That’s not a bad idea. And then consolidate the number of depreciation rates to reduce administration costs. That’s another big tick from me on that, because there are so many different rates and there’s options to probably get it wrong more often than right. And the level of micro detail required probably isn’t really appropriate for small businesses.
So those measures I think are mostly all welcome. And frankly, they’re sort of pretty much apolitical. Whoever is in power should be adopting almost all of those proposals.
Just a matter of time?
And finally, talking of parties’ tax policies, the Greens released as part of their tax policy, a proposal for a wealth tax to apply on net wealth over $1 million. Earlier this week, former legal practitioner, Human Rights Commissioner and retired Family Court Judge Graeme MacCormick picked up on the Green Party’s proposal when he wrote about the question of a wealth tax. He suggested a one percent levy on net assets of more than $10 million per person.
He also argued that it was time for the wealthy to step up and help out in this the crisis. He was sceptical of the idea of the trickle-down effect, that wealth trickles down and dissipates out through the country. He was of the view that basically we’ve got 30 years to show that hasn’t happened.
One of the interesting points he raised was that New Zealand not only doesn’t have a comprehensive capital gains tax, it also doesn’t have an estate tax or a gift tax nor a wealth tax. It’s highly unusual in the OECD for one jurisdiction to be not have at least one of those taxes applying on a comprehensive level. Some have capital gains tax and no wealth tax or estate tax. Others have a wealth tax, but no capital gains tax and some like the UK and the US, have capital gains taxes and estate and gift taxes.
The position varies across the OECD, but New Zealand is pretty unique in not having either a comprehensive capital gains tax, estate tax, gift duty or wealth tax.
Wealth taxes have fallen out of favour in the past few years, but they’re back on the agenda because, as I discussed with Radio New Zealand panel and Patrick Smellie of Business Desk, the pandemic and Thomas Piketty has opened the door on that.
And I was very interested to see this week that former Reserve Bank governor Dr Alan Bollard said in his presentation to the New Zealand CFO summit that, like it or not, given the scale of the borrowing the Government has had to engage in, capital gains tax may be an unpalatable option for governments to consider as they want to pay down the debt.
So this matter of capital taxation hasn’t gone away. We’ll hear more from other politicians no doubt, Labour and New Zealand First have still to release their tax policies. But we’ve still got another seven weeks to go to the election so there’s plenty of time for discussion on that.
Well, that’s it for this week. Thank you for listening. I’m Terry Baucher and this has been The Week in Tax. Please send me your feedback and tell your friends and clients until next week. Ka kite āno.
