Government announces a new business loss continuity rule

  • Government announces a new business loss continuity rule
  • US drops ‘safe harbour’ demand as progress made on new international tax framework
  • UK Budget has inheritance tax and capital gains tax implications for Kiwis and includes surprise Corporation Tax increase

Transcript

At last week’s International Fiscal Association conference, Revenue Minister David Parker announced that the Government would be proceeding with a new business continuity test to enable tax losses to be carried forward. The general rule is that for tax losses to be carried forward, at least 49% of the shareholding in the company must remain the same between the date the losses arise and when the losses are to be used.

Now, this is regarded as one of the most stringent loss continuity tests in the world, and it has been seen as an impediment for businesses trying to obtain capital in order to innovate and grow their growth.

Companies in their early stages may rack up a lot of losses, but if they want to attract capital and investors shareholding changes may mean a loss of accumulated tax losses. So there’s been pressure for some time to think about easing these restrictions and adding a what we call business continuity test.

The Government announced as part of its initial Covid-19 response last year that they wanted to have a new regime in place. And work has been going on in the background since April last year. They’re now saying that the legislation will be introduced later this month in a supplementary order paper for the tax bill currently going before Parliament, the Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill.

The idea is a similar business test will now be able to apply, and even if the 49% threshold might have been breached, the company may continue to carry its losses forward after a change in ownership as long as the underlying business continues. Now, similar tests apply in Britain and in Australia, and the Australian test has been used for the purposes of designing our legislation.

The principle is that losses will be carried forward unless there’s a major change in the nature of the company’s business activities.

In determining this, you’d look at the assets used and other relevant factors, such as business processes, users, suppliers, market supply to and the type of product or services supplied.

There is an expectation that the test will run for the time from the ownership change, which brought about a 49% breach of shareholding continuity, as we call it, until the earliest of the end of the income year in which tax losses are utilised or at the end of the income year, five years after the ownership change. This is subject to one or two exceptions as well as a specific anti avoidance measure to prevent possible manipulation of the rule.

The rule would appear to be retrospectively applicable from the start of the current tax year or 1st April, 2020 for most businesses. But that’s not absolutely specifically spelt out, but is implied by the commentary we’ve received. We’ll know for sure when we see the final legislation in the next week or so.

This is a very positive measure. It’s been one that businesses have been asking for for some time, particularly those in their high growth tech sector, where they rack up a lot of losses during  development before switching to substantial profitability. But they’ve been unable to attract or had difficulty attracting investors because of the existing loss continuity rules.

The fiscal cost is actually quite modest. It’s estimated to be about $60 million per annum, which still does beg the question that perhaps this could have been addressed much sooner. It’s certainly been on the wish list for a lot of investors for some time and was a matter we raised on the Small Business Council.  It’s a good development and I imagine that it will be taken up with some enthusiasm.

The US changes its tune

Moving on, I’ve recently discussed the issues around the taxation of digital companies, particularly in relation to Facebook’s stoush with the Australian government. The OECD, as I mentioned in previous podcasts, has been working through what it called a new global framework and two options to this Pillar One and Pillar Two.

This week, there was a major development with the US Treasury Secretary, Janet Yellen, (the equivalent of the finance minister), telling G20 officials that Washington was going to drop the Trump administration’s proposal to allow some companies to opt out of the new global digital tax rules. And this was clearly seen as an impediment to getting these rules through. But the fact that these have now been dropped and that the US is no longer advocating for a safe harbour in relation to Pillar One is very important.

So that’s a very positive development. As I said, in relation to the Facebook and Australia stoush, some form of taxation probably would have been a better approach to the matter than what has been proposed by the Australian government.

UK Budget implications

And finally, on Wednesday night, our time, the UK Budget for 2021 was released. Now, this is of more importance to Kiwis than people might realise because of the global reach of UK capital gains tax and inheritance tax in particular.

To recap, anyone who owns property, commercial or residential in the UK is subject to capital gains tax on a disposal of that property.  So this would affect the some 300,000 Britons or people of British descent like myself who live here in New Zealand. But it also affects Kiwis who come back from their OE but have retained a property for whatever reason in the UK.

The other significant UK tax issue, which I’m seeing a lot more of, is Inheritance Tax. And this applies globally to anyone who has a UK domicile (which is a different concept from tax residency) or assets situated in the UK. Inheritance Tax applies at a rate of 40% on the value of an estate greater than £325,000 (what we call the Nil Rate Band).

But the UK budget has frozen the Inheritance Tax nil rate band at £325,000 right through until 2026. The annual capital gains allowance is also going to be frozen for a further five year period.

One of the things that is perhaps not really appreciated is anyone who is deemed to have a UK domicile are taxed for Inheritance Tax purposes on their global assets. And with the fall in the value of sterling to below two dollars to the pound, combined with the incredible rise in the value of New Zealand property, what I’m seeing is that people now have potentially significant Inheritance Tax issues. Property prices in the UK have not accelerated anywhere near to the fashion that has happened here. To give you an example, I came across this week a client with a London property valued in April 2015 at £775 ,000. Its current value is just £765,000 pounds. In other words, over six years it’s gone backwards. Compare that with what’s going on in the New Zealand market.

So there’s an increasing number of New Zealanders and Britons who have potentially Inheritance Tax liabilities. And they also will face capital gains tax if they decide to dispose of those properties.  One of the things that’s also increasingly coming into play will be the information sharing under the Common Reporting Standards and The Automatic Exchange of Information. This means the UK HM Revenue & Customs and Inland Revenue here will have a greater understanding of who owns property in which jurisdiction.

So, as I said, this British budget may seem far away, but it’s actually incredibly important to a significantly greater number of people than you might imagine.

There’s also one other thing that’s come into play, which has been a surprise to the tax community and that is the British Government have signalled an increase in the corporation tax rate from its current rate of 19% to 25% for businesses with net profit in excess of £250,000 from 1st of April 2023. That’s a very significant increase. The other thing that the British have also kept in place is what they call a diverted profits tax, of which remains at 6%. This is an anti-avoidance measure aimed at multinationals.

Incidentally if Grant Robertson and Treasury are looking for ideas the UK also has a bank corporation tax surcharge of 8%. This is something which if introduced here would probably be quite popular.

The proposed increase in corporation tax rates is a surprise. But I think this is something that’s gradually become inevitable.  In the wake of both the GFC and Covid-19, government budgets are so badly shot that they need to restore them with significant tax increases at some point. Whether any such increases flow through here to the extent of what’s just happened in the UK remains to be seen. But as always, we’ll keep you abreast of developments.

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. Until next week Ka kite ano!

Tax styles of the rich and famous

Tax styles of the rich and famous

1966 and all that: The chequered history of entertainers, sports stars and tax

What have William Shakespeare, The Beatles, The Rolling Stones, U2, Norman Wisdom, Richard Burton, Boris Becker, Lionel Messi, Christian Ronaldo and Bobby Moore all got in common?  They are but a few of the many, very many, actors, entertainers and sports stars who have found themselves in trouble (sometimes bigly) with the taxman.

One reason entertainers and sports stars run into money and tax problems so frequently is that they work in an industry where vast sums of money can be generated practically overnight from all around the world.  Consequently, musicians and bands probably have some of the most complex tax affairs outside of multinationals.  It’s therefore unsurprising many engage in elaborate tax planning and it’s equally unsurprising this sometimes comes unstuck with expensive consequences.

This Top Five looks at actors, musicians and footballers who left a tax legacy as well as an artistic one.  Moreover, these tax legacies remain highly relevant today.

1. “Know you of this taxation?” (Henry VIII).

Despite his colossal cultural legacy, we know very little about the real Shakespeare.  We do know that between 1597 and 1600 he appears in several rolls for the “lay subsidies” for the St Helen’s Bishopgate parish in London.  Lay subsidies were a form of local wealth tax on local householders.  The lay subsidy roll contained an estimate of a person’s wealth and the amount assessed.

It appears that in 1598 Shakespeare defaulted on his lay subsidy for the year of 13 shillings and four pence.  It’s not known whether this debt was ever paid but since about this time he bought into the Globe Playhouse for £70, he was surely not short of money.  This has led to much conjecture about whether Shakespeare was one of the first known tax avoiders of the entertainment industry.

Like so much else about the man, we’ll never know the truth about Shakespeare’s finances.  I can’t help but wonder if the quip in Henry VI“The first thing we do, let’s kill all the lawyers” might reference some dud tax advice he received.

2. From Abbey Road to Exile on Main Street.

It appears The Beatles were pioneers in tax planning for musicians.  Very early on in their career they were introduced to accountant Harry Pinsker who specialised in the entertainment area.  (Pinsker’s first reaction was that “they were just four scruffy boys”).

One of Pinsker’s recommendations was a songwriting company Lenmac through which their earnings would be channelled.  He successfully argued the company’s income should be taxed as trading income rather than investment income which would have incurred higher taxes.

Even so, the very high tax rates of the mid-60s (more than 90%) prompted George Harrison to write Taxman.

“One, two, three, four, one, two

Let me tell you how it will be
There’s one for you, nineteen for me
‘Cause I’m the taxman, yeah, I’m the taxman”

Pinsker ultimately suggested the formation of Apple Records as a tax effective means of managing the band’s revenue.  His efforts did not go unnoticed by the Beatles.  During rehearsals of their final album Let it Be, the band started singing Harry Pinsker instead of Hare Krishna.

The Rolling Stones weren’t as well managed as The Beatles and in 1971, facing huge tax bills, they moved to the south of France where they recorded one of their greatest albums: Exile on Main Street. The title was a deliberate reference to their tax exile.

Having also fallen out with Decca Records and their manager Allen Klein, the band took control of their affairs at this time by forming their own record company.  They also established a Netherlands company to shelter their income.  This started a trend which other bands including U2 would follow.

The Rolling Stones move into tax exile didn’t attract much criticism at the time, perhaps because the rates of tax they then faced were so high.  Forty years on attitudes have changed.

U2 were in town recently and their tax practices have drawn increasing criticism.  Lead singer Bono has been accused of hypocrisy after he was linked to the Panama Papers.

In 2015 Bono and U2 were criticised for making changes to shift royalties through the Netherlands to take advantage of a special concession.  Now it appears this concession is ending.

If U2 still haven’t found the perfect tax structure they were looking for, The Rolling Stones should remind them “You can’t always get what you want.”

3. The slapstick clown with a tax lesson for crypto-asset investors.

Contrary to his clownish on-screen character, Wisdom was a very shrewd investor, and this ultimately resulted in one of the more notable and still influential tax cases of the 1960s.

In 1961 Wisdom invested in silver ingots as a hedge against a possible devaluation of the British Pound, eventually realising a profit of £48,000 (about £800,000 today).  At a time of very high personal tax rates Wisdom claimed the profit was a tax free capital gain (the transaction occurred prior to the introduction of capital gains tax in Britain).

Wisdom won in the High Court but in 1968 the Court of Appeal in Wisdom v Chamberlain (Inspector of Taxes) determined that the transaction was in the nature of trade and therefore taxable.  Wisdom paid the tax due and outraged by the high taxes then went into tax exile in the Isle of Man where he lived until his death in 2010.

His case is often cited when considering whether a transaction is of a revenue or capital nature.  In 2017 Inland Revenue cited it in a “Question We’ve Been Asked” on whether the proceeds of the sale of gold bullion would be income. (The short answer is almost certainly).

Inland Revenue also consider some crypto-assets to have similar characteristics to bullion. It is therefore probably only a matter of time before some crypto-asset investors will need to acquaint themselves with Wisdom v Chamberlain and Norman Wisdom’s unwilling tax legacy.

4. Gone for a Burton.

Richard Burton was probably too busy being one of the great actor hell-raisers of the 1960s to be paying attention to the price of silver bullion.  Yet, he too has left a tax legacy, one of particular relevance to many of the thousands of Britons currently living in New Zealand.

Burton became a tax exile in the late 1950s after taxes had reduced his earnings of £82,000 for 1957 to £6,000.  (Allegedly he subsequently remarked “I believe that everyone should pay them [taxes] — except actors.”)  Burton moved to Switzerland where he lived until his death in 1984.

Burton was buried in Switzerland, apparently in a red suit together with a copy of Dylan Thomas’ poems.  However, many years earlier when he was married to Elizabeth Taylor, Burton had acquired two burial plots for himself and Taylor in the Welsh village where he had been born. And this proved extremely costly for Burton’s estate.

Inland Revenue argued successfully that the presence of the burial plots together with his Welsh themed funeral meant that Burton had never lost his UK tax domicile.  Accordingly, his estate worth just over £4 million had to pay a total of £2.4 million in Inheritance Tax.

In my view Inheritance Tax represents the greatest tax risk to anyone either born in the UK or who owns assets situated there.  The lesson from Richard Burton’s death is that Inheritance Tax could still apply many years after a person has left the UK.

5. England, One; HM Inspector of Taxes, Nil.

November 22 was the anniversary of when England won the Rugby World Cup in 2003.  In the wake of England’s unexpected defeat by South Africa I saw a perhaps rather too gleeful tweet asking if 2003 was destined to become English rugby’s equivalent of England’s sole football World Cup win in 1966.

On the other hand, the RFU’s Treasurer possibly breathed a sigh of relief after the final as apparently the squad stood to win bonuses totalling over £6 million.

Anyway, back in 1966 the English Football Association rewarded its world cup winning squad with £1,000 each.  (About £15,000 in current terms or only 30% of the English Premier League’s current AVERAGE weekly wage of £50,000).  Enter the Inland Revenue stage right in the form of HM Inspector of Taxes Mr Griffiths. He considered the amounts paid to England’s captain Bobby Moore and cup-final hat-trick hero Geoff Hurst were taxable as they formed part of their remuneration.

The case finally reached the High Court in 1972 where Mr Justice Brightman ruled the £1,000 payments were non-taxable as they had the “quality of a testimonial or accolade rather than the quality of remuneration for services rendered”.  A convincing one-nil win then.

Other footballers haven’t fared so well against the taxman: Lionel Messi and Christian Ronaldo are unquestionably two of the greatest players of this generation, but their tax planning has not matched their sublime footballing skills.  In 2017 Messi had a 21-month jail sentence for tax fraud commuted to a fine. This was in addition to a voluntary €5m “corrective payment” he and his father had made in August 2013. Earlier this year Ronaldo was fined €18.8 million for tax evasion and given a suspended 23-month jail sentence.

5B. Beware the Ides of…November?

Finally, 22nd November, was also my father’s birthday.  It’s actually a pretty momentous, if not infamous, day in history.  Most notably in 1963 when President John F Kennedy was assassinated (with both Aldous Huxley and C.S. Lewis also dying on the same day the obituary writers had a very busy day).  Charles de Gaulle was born on this day in 1890 and Angela Merkel became German Chancellor in 2005.

There’s a tax connection in convicted tax evader and serial tax exile Boris Becker who was born on this day in 1967 and the obligatory Kiwi connection is the death in 1982 of the pioneering aviator Jean Batten.

Lastly, Margaret Thatcher resigned on this day in 1990 (as a result of, you shouldn’t be surprised to hear, a Conservative Party split over Europe).  This was not only a pretty funny 60th birthday present for Dad but also something of a rich irony as he was a staunch Thatcher supporter.  Miss you Dad.