Tax News

More on the state of Inland Revenue’s Business Transformation

15 Feb, 2021 | The Week in Tax

  • This week more on the state of Inland Revenue’s Business Transformation programme
  • Grant Robertson’s warning to property speculators
  • Inland Revenue’s latest view on tax avoidance.

Transcript

Inland Revenue for the past five years has been involved in a huge upgrade of its capabilities, what it calls its Business Transformation project.  This has been described by Treasury as “complex, high risk and fiscally significant”. The budget for the project is $1.8 billion and it’s now into its final stages with the expectation that it will all be complete by early 2022.

Given the sheer scale of the project, Inland Revenue has been monitored very closely on its progress by Treasury and it also has to provide regular reports to Cabinet.

The transformation status update for October and November 2020 has been published, and it makes for interesting reading.

The status of the programme is said to be light amber overall, which means that there are minor issues in some areas that can be resolved at the programme level.

What would be encouraging to Cabinet is that the project as of 30 June 2020, is $120 million dollars under budget. The cumulative spend to 30 June 2020 is $1,122 million and Stage Four, which is expected to be completed next year, is expected to cost a further $296.5 million.

IT projects will always attract a fair amount of criticism because they can and do overrun on costs substantially. It’s perhaps an unfair comparison, but it was interesting to see this morning that the costs to date of the Covid-19 tracer app have been estimated to be $6.4 million so far. Now in fairness, the Covid-19 tracer app involves a significantly smaller scale of complexity than designing a system that’s going to manage the tax affairs of six, seven or eight million taxpayers and has $80 billion plus running through it each year.

But at this stage, it would be fair to say that Inland Revenue seems pleased with the project’s progress so far given its budget and expectations. Although the latest update does state, “The temptation to overstretch Inland Revenue capability should be resisted until Business Transformation is closed.” In other words, we can do a lot more now, but don’t be expecting us to do heaps more straight away.

But the more interesting document released at the same time was the Programme Business Case Addendum on Business Transformation.

What makes this particularly interesting is it gives more detail about what’s been happening and sets out more reasons why the project is needed and the economic benefits for the Government.

These programme business cases are prepared annually, the previous one was prepared in October 2019 and this one in October 2020.  The most significant update is to the economic case. The commercial and management cases have also been updated, but no changes have been made to either strategic or financial cases for the project.

Digging into the document, you get an idea of Inland Revenue’s improved capabilities. It talks, for example, at some length about how it responded to the implementation of the Small Business Cash-Flow scheme. The scheme went live at one minute after midnight on 12th May 2020. Now it was 39 working days after the initial decision to begin some work, and then was just 10 working days from when the Government confirmed its intention on April 25th to when the scheme was launched.

In its first five to 10 minutes, it received 43 applications and by 1.20 AM, i.e. just a little bit more than an hour or so after it was launched, it had already received 600 applications. As of 9th October 2020, Inland Revenue had received 104,000 applications and approved $1.6 billion in loans. As I’ve said before and am happy to say again, the Small Business Cash Flow Scheme is a very successful scheme and Inland Revenue do deserve a lot of credit for getting this up and running so quickly.

There’s a few wee snippets of things in the system that will need to be improved. The tax system overall. For example, you may remember that back in 2019 it emerged that a considerable number of people – 1.5 million in total – had the incorrect prescribed investor rate. Now, Inland Revenue got onto this and sent out 1.5 million letters saying, “Hey, you’ve got the wrong rate, either too low or too high so you need to contact your KiwiSaver provider to change it”, but only 15 per cent did so.

Fortunately, the law has been changed so that overpaid tax can now be credited, whereas previously if you’d overpaid under the prescribed investor rate regime, you lost it. So, that’s a good result.

But more importantly, and picking up a point I made last week, that the Inland Revenue tax policy work programme includes a look what is going on with charities –  the donations tax credits process has been revamped. For the year to 31 March 2020, Inland Revenue identified 31,000 claims worth $23 million that were either an error or fraud in its view. And of that, 3,000 claims totalling $4.1 million were referred to audit teams to investigate.

So Inland Revenue’s ability to pick up and identify errors earlier and respond more quickly has been enhanced as a result of Business Transformation. Again, what you would hope to see and so far, so good.

The document sets out what Inland Revenue sees as the main benefit areas for the Government and who it calls “customers.” (In this document, customers are referred to 32 times and taxpayers just once). The main benefits are that it’s going to be easier for taxpayers, and the revenue system is much more resilient. You do wonder what could have happened to the old system given its state if a determined hacker had had a go. The Government now has greater ability to implement policy and that’s very significant.

And then it gets into more nonmonetary and monetary benefits which is where it gets particularly interesting. It says the compliance effort has been reduced for small to medium sized businesses. Now, the methodology here is a little outdated. Inland Revenue hasn’t run an up to date survey, but it does estimate that the median time SMEs spent on meeting their tax obligations was 36 hours back in 2013. It’s expecting that Business Transformation will reduce that by 10 to 26 hours a year. And the cumulative value of the time saved will be over $1.3 billion dollars. It will run a new survey on this later this year.

The big expectation is that the amount of assessed crown revenue will increase $2.8 billion 30 June 2024. And that’s a result of the efficiencies brought into the system, allowing earlier identification of non-compliance as well as easier compliance.

So far, Inland Revenue estimates that to 30 June 2020 it has achieved $280 million of that $2.8 billion. This means over the next four financial years to 30 June 2024 it expects to achieve nearly $2.6 billion dollars of additional revenue.  In the year that ends on 30 June this year there will be another $290 million found. Then it substantially jumps up over the next three years with $600 million in the year to June 2022, $750 million in the year to June 2023 and almost one billion dollars in the year to June 2024. That’s a fairly significant amount of money coming in over the next three or four years, which Grant Robertson will be very grateful about. So Inland Revenue has made a rod for its own back, if you like, in terms of these ambitious additional tax revenue it expects.

Now, the other big benefit, and this is a source of some controversy when I spoke about before Christmas, is the cumulative administrative savings Inland Revenue expects to deliver. By June 2024 these are supposed to amount to $495 million.

Now, as of the date of this report, it’s ahead of target, having achieved savings of $118 million compared to the target of $95 million. But it fell short by some $23 million of its target of $80 million for the year to June 2020. Inland Revenue is therefore hoping to save a further $370 million in the next four financial years, so the pressure will be on in that regard. So again, you can expect the Government and ourselves to be paying particular attention to how that is progressing.

But there’s one controversy about Business Transformation that I think’s important. The whole project cost has been enormous. And one of the concerns I would have about this is that New Zealand businesses – that is New Zealand owned businesses – have by and large not had a great deal of input into this.  According to this report, about where it is spent between July 2014 and 2020 and where Inland Revenue spent more than $500,000 on contractors and consultants providing services across Business Transformation the total percentage spend on New Zealand companies was 36%.

Now, if you include companies/contractors resident for tax purposes in New Zealand, then the total New Zealand percentage spend rises to 73%. In other words, although the Government has passed money through Inland Revenue to a business which is overseas owned, that income, by and large, will be taxed in New Zealand. To give you some idea of just how much might be involved according to Inland Revenue’s June 2020 annual report the total spend for contractors and consultants was just under $183 million.

That’s down, by the way, from $206 million dollars in the June 2019 year.

Now just picking up a point from my time on the Small Business Council, this is an area where we saw a lot of frustration from small businesses. They felt they could not get through to deliver services to the Government because of what they saw as excessive gatekeeping and bureaucracy involved in the industry.

New Zealand has a great IT industry just picking up and getting that point about the Covid-19 app that cost $6.4 million which is absolute peanuts. Apparently in Britain, they’ve spent £10 million on one app which was abandoned and do not appear to have anything that works as efficiently as our app. So, the capability is here.

And I feel that there was a great missed opportunity with Business Transformation. Hopefully going forward the percentage of New Zealand businesses that do get involved with the tail end of this work or new work as it arises, will be increased.

But the overall state you can take from this report is Inland Revenue considers Business Transformation is moving in the right direction. We’ll need to pay attention to whether it will achieve its ambitious goals. But certainly, it feels it has the tools available to achieve what the Government will want, that is additional tax revenue to pay down the massive debt that’s been run up because of Covid-19 and no doubt the huge spend going forward for maintaining our infrastructure and health services, as well as regular costs such as superannuation and education.

Robertson on property speculation

Moving on, the Finance Minister Grant Robertson made a speech to the BNZ on Tuesday, about the forthcoming Budget Policy Statement. In the course of his speech he said,

But we can do more or more to manage demand, particularly from those who are speculating New Zealanders are seeing family members being crowded out of the opportunity to purchase a home of their own by speculators and investors.

The housing boom and the resulting pressure on the rental market and vastly increased prices is a concern to the Government as it is getting shot at from all sides. So clearly, this statement from Grant Robertson was a reminder that Inland Revenue does have the tools, which I’ve just explained, it feels it can do a lot more to look into the speculators.

And that leads on to the inevitable discussion of the bright-line test, which to quickly recap applies when any residential property is sold within five years of acquisition. The sale will be taxed unless an exemption applies.

Now, the bright-line test is one of a number of other property taxation clauses within the Income Tax Act. There is Section CB 6 which taxes property bought with an intention or purpose of sale.  The problem with the tax laws around the taxation of property is the absence of a comprehensive capital gains tax. There’s a lot of subjective clauses involved. The bright line test is very largely unique in that it very specifically says if this happens, then it’s taxable subject to exemptions.

On the other hand, section CB 6, which I just mentioned, talks about purpose or intent. There’s also section CB 12 which taxes a subdivision which involves work not of a minor nature.

And so, of course, you’ve got these subjective phrases.  And just to compound those issues is that when you drill into these sections, sometimes they will apply if that particular activity happens within 10 years of acquisition, but maybe within 10 years of a building being completed, the timeline isn’t always the same.

And the exemptions that may be available because it’s a residence or business premises for example, vary as to who can use them. For example, there are four possible exemptions available to someone who’s taxable under section CB 12, which is a subdivision which is not of a minor nature. But two of those exemptions don’t apply if the person involved is a trust.

And so these inconsistencies and details around the varying times of which rules may apply and when give plenty work for people like myself. But notwithstanding that, they also point to the need for a complete rethink of those rules to bring clarification and some form of internal consistency. Why should one exemption apply to a property owned by a trust, but another exemption not? You would expect it to be consistent across the board. Now that it so happens that Inland Revenue does have such a project on its on its policy work programme. So, we can expect to see something maybe later this year or early next year.

Updating Inland Revenue’s view on what is tax avoidance

And finally, with the increase in the tax rate to 39% coming up, it’s timely to consider the implications of trying to take steps to mitigate that. The Income Tax Act has a number of tax avoidance provisions which Inland Revenue can apply.  Sections BG 1 is the general anti avoidance provision and for those with very long memories who may recall the Penny Hooper case, involving a couple of surgeons, this was the provision applied.

Inland Revenue has got an Interpretation Statement on anti-avoidance but it was issued in 2005. It has now released an updated version for consultation.

And that update came with a five page information sheet, which when something like this comes with an information sheet, you know you’re in for some particularly dense reading.

There’s too much to cover right now so I’ll pick it up at a later podcast when we have had a chance to consider it closely. But this is a reminder that the temptation will be to start making plans to mitigate the impact of the 39% rate. But you need to be aware of Inland Revenue’s possible response.  I’d therefore recommend every tax advisor has a close look at what this new draft interpretation statement is saying.

Well, on that happy note, that’s it for this week. Thank you for listening. I’m Terry Baucher you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. Until next week, ka kite āno.

A look ahead at the expected big tax themes in the coming year

26 Jan, 2021 | The Week in Tax

  • A look ahead at the expected big tax themes in the coming year.
  • The arguments for taxing property, a wealth tax, what might Joe Biden’s presidency mean for international environmental taxation and how will Inland Revenue respond.

Transcript.

Welcome to 2021. So what lies ahead in the tax world this year? Well, firstly, housing will remain an issue and I expect we will see steady calls for radical action on this front, including a demand for a capital gains tax. I actually think it’s gone beyond the point at which a CGT would have an impact.

In terms of tax measures, as I’ve said previously, restricting interest deductions including applying the existing thin capitalisation rules to investment properties might help to even the playing field between investors and first-time buyers, a group to which the Government appears to be paying particular attention.

Susan St. John has called for the Risk-Free Rate of Return (which is similar to the Foreign Investment Fund fair dividend rate rules) to apply to investment property. And her suggestion was recently echoed by Professor Craig Elliffe, who was a member of the Tax Working Group.

The Tax Working Group looked seriously at the question of applying a Risk-Free Rate of Return to investment property.  It estimated the revenue from applying a rate of 3.5% would be approximately $1 billion in the first year and was expected to rise to $2 billion per annum within 10 years. The expectation would be that such a move would,

“tax a currently undertaxed asset class more adequately and act as a curb to burgeoning house prices. Westpac economist, Dominick Stephens calculates that a 10 per cent CGT would reduce house prices by nearly 11 per cent. It is unclear what effect the RFRM, but it should stem the increase. But it’s not clear what effect a Risk Free Rate of Return method would have, but it should stem the increase.”

Now, tied to the question of housing is the issue of wealth inequality, and I expect we will continue to see calls for a wealth tax. Over in the UK just before Christmas, their Wealth Tax Commission released a report recommending a one off wealth tax for the UK, which it estimated could raise about £260 billion over five years. What was particularly interesting about this commission is the depth of the research into the topic.

Quite apart from the final report, the Commission produced a series of other working papers on the design and operation of wealth taxes around the world. And these, in the commission’s own words,

“represents the largest repository of evidence on wealth taxes globally. To date, it comprises half a million words across more than 30 papers covering all aspects of wealth, tax design and both in principle and practice.”

Just to put that in context, I estimate the Tax Working Group’s consideration of wealth taxes amounted to perhaps 10,000 words in total. So we are looking at a very significant amount of research.

Now, one other thing to keep in mind about the British Wealth Tax Commission was that it called for a wealth tax, even though the United Kingdom has a capital gains tax and an inheritance tax. Instead, it recommended a thorough review of those existing taxes.  The Commission also went for a one-off tax rather than an annual wealth tax, which is the common type of wealth tax currently and what the Greens propose.  The Commission saw that there were quite a few practical issues around the operation and an ongoing wealth tax.  These issues together with political pressure, has meant that the use of wealth taxes has declined throughout the OECD.

The Tax Working Group also concluded that an annual wealth tax would have enormous practical issues in implementation, which is why it did not recommend it.

But what the Wealth Tax Commission’s research makes clear is just how unique New Zealand’s approach to the taxation of capital is. It’s well known that New Zealand does not have a comprehensive capital gains tax, but that’s not entirely unique within the OECD. Switzerland, for one, does not have a capital gains tax.

Where New Zealand is unique, is that it does not have comprehensive taxation of capital in any form. Switzerland has a comprehensive wealth tax. In fact, the tax it raises from wealth taxes represents one per cent of GDP, which is the highest of any country with a wealth tax. Wealth tax revenue amounts to 4% of the Swiss tax take so it’s an important part of the Swiss tax system,

Wealth taxes in the OECD do not raise significant amounts of revenue and that’s one of the reasons they’ve been declining in use. The Wealth Tax Commission’s papers are well worth reading. A particularly interesting one is about the political economy of the abolition of wealth taxes in the OECD, which those who want to promote taxation changes would do well to read closely.

I think pressure will continue to mount on the Government on the taxation of wealth because of this ongoing anomalous position where we don’t tax capital on transfers by way of an inheritance tax or even a stamp duty, and not tax increases in value generally will feed into the debate around inequality.

And there’s an interesting point a client made to me on this topic. It’s been a long-standing New Zealand policy to attract high net worth individuals to come to New Zealand. Such immigrants may well qualify for a four-year tax holiday on their non-New Zealand investment income. These people being wealthier tend to have very diverse investment portfolios.

So anyway, the taxation of wealth, whether through a capital gains tax and/or a wealth tax or some other mechanism, is going to remain on the agenda.

A week before the British Wealth Tax Commission issued its report, our Government declared a climate change emergency, joining 32 other nations who have made such a declaration.

Now in my first podcast of last year, I said that the role of environmental taxes as one of the tools in the meeting our emissions targets will become ever more important.  And that remains the case.

But we now have a new American president, and one of the first actions of President Biden after his inauguration was an executive order confirming the United States would re-join the 2015 Paris agreement. Now, several people have pointed out this may well act as an indirect trigger for the government to take further action on reducing emissions.

More than a few columns have pointed out that there is a discrepancy between the government’s declared intentions and the actual steps being taken to reduce emissions and meet our commitments under the Paris agreement. One estimate is that New Zealand exceeded its national share of consumption-based emissions by more than a factor of 6.5.

So this year I expect we should start to see some movement on taxing emissions more thoroughly and a place they might well start because the transport sector is the biggest source of emissions is to change the taxation of motor vehicles, maybe by following the UK’s example of applying FBT on the basis of emissions.

The government should also look at eliminating anomalies in the tax system, which effectively penalise low carbon activities such as employers paying FBT on providing free public transport. Another would be as a paper prepared for the NZTA suggested was maybe applying FBT to employer provided parking.

Biden’s inauguration could mean swifter resolution to the issue of international taxation. I think this is one where we will have to wait and see because there will be fierce lobbying in the US by the so-called GAFA –  Google, Apple, Facebook and Amazon. I think progress will be made, but it will be slower than people expected.

And finally, the third trend I think we’ll see this year is Inland Revenue coming out from its rather inward-looking attitude in recent years as it completes the final stage of its controversial Business Transformation programme. With the immediate requirement to respond to the COVID pandemic now over, (please people remember to scan) Inland Revenue can get back to its more regular work.

Already before Christmas we started to see a number of new initiatives including one in relation to following up on the information Inland Revenue received under the Common Reporting Standards on the Automatic Exchange of Information.

Another is reviewing all transactions potentially within the bright-line test. You may recall that Inland Revenue fired out emails to tax agents advising “These clients appear to have made transactions within the bright-line test” which caused quite a stir. I expect we’ll see more work going into that space, which coming back to the start of the podcast ties into the taxation of property.

And finally, I think we’ll also see more activity going after the so-called cash economy. I think we’ll see Inland Revenue start following up on cash transactions, such as tradies offering a discount for cash.

So we’re going to have a busy year ahead, as always, and I will bring you the news as it develops. Next week, I’ll take a closer look at Inland Revenue, and its annual report which was released just before Christmas.

In the meantime, that’s it for today. I’m Terry Baucher and you can find my podcast on 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.

A look back at the biggest tax stories of 2020

15 Dec, 2020 | The Week in Tax

    • The response to Covid-19
    • The ongoing debate about taxing capital
    • Inland Revenue’s response and how well is its Business Transformation programme going?

Transcript

This is the last podcast for the year so we will be taking a look back over the main tax stories for 2020.  It’s no surprise that the response to COVID-19 will feature very heavily but looking back, the thing that stands out is how rapidly events developed and then the sheer scale of what we were dealing with.

In the podcast on Friday 16th March, I suggested some actions Inland Revenue could take in response to coronavirus following a week in which first Italy then the UK and finally Australia announced special measures throwing around huge sums of money.  By the following Friday we had the first COVID-19 support package including the first iteration of the wage and subsidy scheme.

From then on it was a frantic blur until late May with barely a week passing without one new measure after another.  Most of those did what they were intended to do: get money into the economy and keep people employed.  Some were more successful than others. The Business Finance Guarantee Scheme for example did not work as anticipated with only $176 million lent to 834 businesses by the end of August.

The Small Business Cashflow Scheme on the other hand was a huge success in getting money out to small businesses very quickly. Currently over $1.6 billion has been lent to close to 100,000 businesses and the Government is now working on making the scheme permanent.

Some of the tax measures that have been announced – such as increasing the provisional tax threshold to $5,000 or increasing the low value asset write off temporarily to $5,000 – are measures that probably would have happened sometime soon, possibly even this year it being an election year.  What COVID-19 did was make the Government bring forward those measures and put them into effect much sooner than otherwise might have happened.

It’s also worth pointing out just how well the Ministry of Social Development and Inland Revenue handled the distribution of funds under the various wage subsidies. The Small Business Cashflow Scheme meant that the billions of dollars got very quickly to where it was needed and both organisations deserve credit for making that happen. However, it undoubtedly put Inland Revenue under considerable strain and we’ll talk about that a little later on.

The immediate legacy of the response to COVID-19 is of course the Government’s books being shot to bits.  Interestingly the latest figures show the tax take has not fallen significantly and the deficit is more down to expenses increasing sharply such as the wage subsidies.

The impression is that the economy has come through the crisis in better shape than was anticipated way back in March.

For all that, the Government faces deficits for the foreseeable future so we had the somewhat unusual situation of it running an election campaign with a promise to increase the income tax rate to 39% for income over $180,000. The increase in the income tax rate to 39% is expected to yield about $550 million a year but I suspect we may find it yields more than that because the economy has been in better shape than expected so far.

Aside from the Opposition, Labour’s proposal also got criticised from various sectors saying that the response was inadequate given the scale of the problem. There was also criticism, and this is going to be a continuing theme, that the income tax increase primarily on labour and earnings was not really where tax changes were needed.

Notwithstanding those issues, there are a number of complicated flow-on effects from increasing the top income tax rate to 39% – such as resident withholding tax and fringe benefit tax. Then of course there are the significantly increased powers for Inland Revenue in respect to requesting information from trustees.

This is something which is going to give trustees and beneficiaries pause for thought before they get involved in aggressive tax planning.  The Government has made it clear that if it sees such activity it will increase the trust tax rate to 39%, something which Inland Revenue recommended should be done.

So the immediate impact of COVID-19 and the Government’s response has been the major tax story of the year.

The second big tax story has been the ongoing capital taxation debate which is something I suspected might happen.  Writing at the start of the year I suggested that although the Government had said in April last year it would not introduce a capital gains tax, that would not mean the end of the story.

And so it proved.

Throughout the year, particularly in the wake of COVID-19 and an unexpected housing price boom, there has been a string of stories looking at the question of taxing capital either in the form of a wealth tax as proposed by the Greens or more recently an extended bright line test.

In one recent article I suggested if the bright-line test is to be extended, a ten year timeline would be consistent with the other land taxing provisions in the Income Tax Act.  (Unsurprisingly how that ten year timeline is measured can differ between the various provisions).

What Geof Nightingale from the Tax Working Group pointed out in the same article , was that it would be fairer to have a comprehensive capital gains tax at a rate of 33% rather than the muddled approach to capital taxation we have presently and the previously mentioned complexities of increasing the top rate to 39%.

But they are in a position to make quite some noise about it, so the Government will find this story isn’t going to go away.  So, throughout 2021 and beyond there will be a steady stream of stories about what are we going to do about house prices and what role will tax have to play.

The final tax story of the year is the role of Inland Revenue; how it managed its response to COVID-19 and then going forward, how well is its Business Transformation programme really going?

As I mentioned previously Inland Revenue’s immediate response to COVID-19 deserves praise.  It took action to help clients running into difficulties with payments of tax, including a number of measures which effectively wrote off interest on overdue tax where the taxpayer had been adversely affected by COVID-19. It administered the Small Business Cashflow Scheme very efficiently and it worked very closely with the Ministry of Social Development on the wage subsidy schemes.  At its peak Inland Revenue was handling over 15,000 requests for verification from MSD each day in relation to the wage subsidy scheme.

At a tax conference during the year, I asked Inland Revenue representatives there whether they would have been able to manage all the additional demands that came on them because of COVID-19 without Business Transformation, and their response was that it had given them the additional capacity and flexibility to manage the demands put on them.  In particular the upgrade of the computer systems meant they could actually physically cope with what was coming at them

So far so good, but as listeners will know, in recent weeks I’ve raised questions around what exactly has been going on with Inland Revenue in relation to its audit and investigation performance in view of the fact that hours spent on investigation had fallen by two thirds over the past five years from over 680,000 annually to just over 240,000. That led to an interesting response from Inland Revenue Deputy Commissioner Sharon Thompson on the matter.

That exchange caught the eye of Auckland barrister and ex Inland Revenue investigator Riaan Geldenhuys.  What he pointed out was that Inland Revenue was actually under some strain in delivering Business Transformation even before COVID-19 hit.

Riaan noted that in the Minister of Revenue’s regular reports to Cabinet on the progress of Business Transformation in July 2019 then Minister of Revenue Stuart Nash had noted that there were strains emerging because of the unprecedented response to Inland Revenue’s rollout of automatic assessments for all people on PAYE.

Now as you might expect, COVID-19 has exacerbated those strains and in his July briefing to Cabinet this year the Minister of Revenue noted that because Inland Revenue had had to divert staff from audit and collection to maintain services “no new audit or debt collection cases will be opened and existing disputes will be managed as judiciously as possible.” The report then went on to note that “Inland Revenue’s ability to support customers is currently stretched to capacity.”

Now of course an unexpected event like COVID-19 will have some flow-on effects, but what has also emerged from these reports to the Cabinet is that the projected administrative savings that Inland Revenue promised the Government as part of the business plan for the Business Transformation programme have been completely wiped out.

The projection was that Inland Revenue would realise administrative savings for the period ending 30th June 2024 amounting to a total of $495 million. According to the latest report provided to Cabinet in July, none of those administrative savings are now expected to be realised[1] so that’s a $495 million dollar hit to Inland Revenue’s bottom line and effectively the Government’s by extension.

Earlier this year an academic article in the New Zealand Journal of Taxation Law and Policy[2] was critical of Inland Revenue’s Business Transformation programme.  The author thought that Inland Revenue had prioritised staff reductions rather than strengthening its ability to improve collection of taxes, particularly in the area of the cash economy.

On top of these issues of cost overruns and poor audit performance, there’s a growing problem of strains in the relationship between Inland Revenue and tax agents.   Tax agents are increasingly exasperated by Inland Revenue’s actions in directly contacting clients about various tax issues ostensibly in the name of better communication.  More often than not these calls result in confusion and duplicated costs which are often not recoverable.

So, this combination of cost overruns, lower audit and investigation work and a strained relationship with a very significant group of stakeholders, is something which is going to need careful monitoring by the new Minister of Revenue David Parker.  We will be watching with interest.

Well, that’s it for this year.  Thank you to all my guests and to all my listeners and readers. I really appreciate your feedback and your patience in sticking with me throughout a tumultuous 2020.  I suspect it will be well into 2021 before things settle back into what we might call normal.

Until then 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 year have a safe and enjoyable Christmas.  Ka kite āno.

[1] “The re-planning of organisation design changes may have implications for Inland Revenue’s ability to realise the administrative savings. The savings have already been removed from outyear baseline funding so the challenge for Inland Revenue is to manage within a reduced funding level. These savings are part of the funding available for transformation. It is too early yet for Inland Revenue to say what the implications will be.” (Para 59)

[2] Not available online publicly

How audit insurance can help when Inland Revenue come calling

7 Dec, 2020 | The Week in Tax

Terry Baucher talks to Rod Spicer about insurance cover for tax audits and assessments for filed returns – what they do cover and what they don’t.

Transcript

This week, I’m joined by Rod Spicer, the associate director of claims and underwriting at Accountancy Insurance, which is the leading tax audit solution in Australia and New Zealand. Rod is a chartered accountant with more than 30 years’ experience and has worked at Accountancy Insurance since 2013. He is responsible for the operations of the claims department, policy wording development and the management of large and complex claims.

Kia ora, Rod, welcome to the podcast. Thank you for joining us. Now tell us a bit more about Accountancy Insurance. How did it start and what’s its role for tax agents like myself and my colleagues?

Rod Spicer
So Accountancy Insurance was born in Australia, which is where I’m currently residing, by our founder a man called Pat Driscoll who saw a niche, or a spot in the market for a tax audit insurance. There’s obviously been some of the products there in the past, however, we developed the product initially for Australia and got that up and running and then took it over to New Zealand a number of years ago now, and in more recent years into Canada.

We’re currently operating in three different countries, all within the Commonwealth. The reason for that being that all Commonwealth countries, or certainly those three, have reasonable or reasonably compliant tax systems, as well as reasonable similarities in terms of income tax, GST and the like. So we’ve been able to adapt our policy to each of the three countries and onwards and upwards, hopefully.

So in New Zealand, we have an office with about 10 staff based in Auckland and it’s been there for a number of years now. We handle the claims side of things online out of Australia from an administration point of view.

But we’ve sort of been for the ride, if you like, with Inland Revenue over recent years, which has certainly been interesting. Going way back to the Penny and Hooper days. It was probably just about when we first started up that it hit the road, so to speak, and we went along for the ride. And I think there was a herd scheme and a couple of big things way back in the day.

But I think in recent years, Inland Revenue, as a result of their whole transformation programme – I think you might know a bit more about that than me – seemed to sort of go off the rails a little bit. And they probably pulled back from an audit perspective in some respects, but certainly in recent times we’ve seen activity there again, albeit that this year we all know that with Covid and what happened etc. I think Inland Revenue certainly took their foot off the pedal for a while, but we’re currently seeing them come back with a few new initiatives and we’re seeing a lot of GST verifications, GST refund reviews and audits, amongst other things at the moment.

TB
Oh right. Yes, the audit hours have dropped away since 2015 – from about 680,000 in the year to June 2015 to about 240,000 in the year to June 2020. So there has been a falloff in activity. But you’re saying right now we’ve got a spike going on in GST verification. That’s interesting to hear that’s picked up because I would have thought that would have been there all the time, regardless of what’s happening.

Rod Spicer
I probably should qualify that to say during the Covid months, that was all they were doing, they had to keep something ticking over, I think. Just to keep people on their toes, I think is a way to put it. But yes, and I probably should say that’s been consistent, certainly last financial year to 31 March 2020. And then given that Covid was sort of hitting exactly around the new financial year start time, that has been the one constant. And the majority of our claims, certainly in the four or five months after March, were GST reviews in the main.

But now that has been supplemented in recent times, in recent weeks by what you’re probably going to talk about as well – a campaign for want of a better word on the bright-line property rules, which is sort of playing itself out at the moment in various different realms. And we’ve also seen – and this happened last year back in November, because Inland Revenue and the New Zealand Government (same as Australia) signed up to all sorts of international data sharing arrangements. And they’re all being flooded with offshore bank account information.

And what we saw with Inland Revenue in November 2019, there was a first wave, and a lot of them weren’t even audits, they were just an opportunity to self-review and voluntary disclose if you hadn’t disclosed offshore bank accounts that you were supposed to. Some had a questionnaire, or some went straight into more detailed information, but it certainly just stopped then. So, there was a whole bunch of activity in November and then effectively nothing happened.

But in November 2020 we saw the exact same thing happening again. Slightly different letters. Some of them even delved into overseas life insurance policies that obviously, you know, the data dump Inland Revenue got – Rod Spicer has a life insurance policy in England or Switzerland or wherever – and we want to know about it as well as the bank account. So we’ve just now seen another spike in claims being lodged for these type of letters.

Look, some aren’t covered because they’re just a warning, an alert, information. You don’t have to do anything if you think your return is correct. But it certainly gives taxpayers an opportunity to voluntarily disclose if they think they’ve made an error or haven’t disclosed. But it doesn’t take too much to work out that Inland Revenue already know what the answer is. They’ve already got the information, so they’re just giving taxpayers a chance to voluntarily disclose. And if they don’t, I would expect audits or some sort of risk review or something to come as a result of that, because they’ve obviously already got the data sitting in the system from whoever gave it to them.

TB
Excellent. That’s really handy what you’ve done there because you just described the complete gamut of types of letters or enquiries we would see from Inland Revenue covering risk reviews, GST reviews to enquiry letters to full blown audits. Now delving in a little bit more about the detail of how a policy might work, basically, the policy covers most enquiries from Inland Revenue, doesn’t it? That’s the idea if you take out one of these policies, whether through a tax agent, it covers just about all enquiries from Inland Revenue?

Rod Spicer
Pretty much, our policy’s structured as a master policy.

It’s held nominally in the name of the accounting practice. So our client is effectively the accounting practice and the accounting practice then offers their clients an opportunity to participate in that group master policy held by the accountant. The client chooses to participate. They pay the premium and then they’re effectively endorsed as an insurable interest on the accountant’s policy for the policy period. So each accountant has a common expiry date. It’s not like a client pays today, and one pays next week, and the week after that. They’ll all still have the same expiry date, whatever that might be, month on month, every accountant has got a different date.

We deliberately have a very wide definition of what a tax audit is, but it has to be from a government revenue authority. And other than Inland Revenue, the only other real revenue raising authority in New Zealand that I’ve come across is the Customs Department, where they’re obviously claiming customs duty. And we’ve got a couple of claims on duty, on tobacco imports and stuff like that. But there are no province-based tax collecting authorities or states or whatever, it’s just Inland Revenue.

But the definition is very wide of what a tax audit is. And in its most pure and simple form, it’s any enquiry, review, examination, investigation or audit where there is a compulsion to respond. And it is about a lodged return with Inland Revenue linked to the tax collecting function of the New Zealand government. So that could be a phone call, an email, a letter. It could just start with an official enquiry via a telephone call and it could end up in a risk review that expands into an audit. It’s all the one matter from an Audit Shield perspective.

You can’t get a risk review and then take out Audit Shield in case it becomes an audit if IR don’t like what they find in the risk review. So every risk review letter says this is not an audit, but from an Audit Shield perspective, it is an audit. And that’s to the advantage of the accountants and their clients, because that definition is very wide and basically covers all enquiries from Inland Revenue where you are compulsorily required to respond.

So we don’t deal with warning, alert, fishing expedition type letters and the recent bright-line property mail out, which I know got a fair bit of press, and we’re probably going to see some more detailed information. Inland Revenue just sent out a mass list of clients saying we think you have bright-line property rule exposure. There’s nothing in your tax return. You haven’t lodged your return yet. The form’s overdue. No detail, no nothing there. Where they’re going wrong there – well, if you haven’t lodged the return yet and you’re going to lodge it and it’s going to include a bright line, that’s not a claim under Audit Shield because you haven’t even lodged the returns yet. Versus yeah, this is from a return from a year or two ago. We don’t believe bright-line applies and we’re going to tell IR why. That would be a claim on face value – once you work out what the property address was. They didn’t tell you in the first place this week, as we’ve seen.

So that’s broadly how we assess things from a client perspective. The amount that a client or the accountant can be covered under the policy depends on their turnover and business groups. We cover entities up to $100 million in turnover. We don’t cover listed entities or subsidiaries of global groups turning over more than $100 million as a global group. So it’s a small, medium enterprise type policy. It’s under $100 million turnover around, and we only cover New Zealand returns. So if your client is a New Zealand client who operates in Australia, and lodges Australian tax returns, Audit Shield in New Zealand doesn’t cover the Australian tax returns. But they could take out cover through their accountant in Australia.

TB
Fantastic. A great summary. So just as you alluded to there, it covers anyone who is a client of an accountant. So it can range from the individuals who’ve got tax returns, including rental income from overseas, all the way up to a large corporation as long as the turnover was under $100 million. So it’s very broad. How many clients, how many accountancy firms have you got in New Zealand now? Has business been expanding?

Initially we had zero and we currently have – because I checked before today’s session – 550 active participants, active accountants in New Zealand at the moment.

TB
That’s about 10% of all tax agents in New Zealand. I think there’s about 5,000 odd tax agents in New Zealand. So you’ve got plenty of scope for market expansion.

Rod Spicer
It’s like anything Terry, not every accountant is interested. I often chuckle when our business development manager says “I spoke to this accountant and they reckon they never get tax audits”. So I said, well, it’s not about what you’ve had in the past, it’s about what you’re going to have in the future. It’s irrelevant. And anyone who thinks in today’s electronic world of data matching, you might have got away with a lot of things in the past, or your clients did, or you weren’t on the IR radar.

But as we saw by the International Exchange of Information and the bright-line tests, they’re getting their data from other sources that everyone feeds into Inland Revenue. Banks, EFTPOS machines, point of sale, credit card, they’re all linked. I don’t know how many claims I’ve seen where the business under audit is perceived to be in the cash economy, if you like. Where do I get the data from? Well, all sorts of different sources, lifestyle, assets of the proprietors versus the amount of income that they’re declaring, banking records, all sorts of different things.

So IR’s tentacles extend a lot further than they used to in the past, so to say “I never get audited, my clients don’t need it”. Well, who knows what the future’s going to hold?  But I don’t expect the Inland Revenue and the New Zealand Government to be looking for less of a take from audit activity versus more in the next few years would be just my common man observation of most governments as a result of Covid-19.

TB
Do you think any particular group sees a lot of activity relative to others, or is that just across the board?

Rod Spicer
It’s a hard one for us because we try to keep the process as simple as possible with our accountants. We don’t want to bog them down in data so we don’t capture what industry each of their clients is in. Otherwise it would just be another layer of work that they’d have to do for what real benefit to them? Be great for us. I get that. You can look at ABC Builders Proprietary Limited or ABC Cafe Propriety Limited, it doesn’t take much to work it out. But we’ve seen the campaigns, if you like. So the property and construction campaigns, the IR letters will head that up.

They’re doing a compliance programme in property and construction, in fruit picking, in cafes and restaurants, cash economy type attention businesses.

So we see those campaigns, they come and go. But that’s sort of the flavour. Over the years, you can see the target areas where the Inland Revenue focus is on, and they are in your traditional industries where there’s a perception that maybe the cash economy is more rife than it is in other industries. It doesn’t take too much to work out those type of businesses.

TB
Just on the cash economy, is there a difference in what claims you might see in Australia and those from New Zealand? Because here I get the sense that because our GST is so comprehensive, the powers that be are a little, I wouldn’t say relaxed, but they don’t seem to be as concerned as I’ve seen the ATO reports are, about the extent of the cash economy.

Rod Spicer
I definitely I agree with you. I read all reports, in Australia and New Zealand, obviously, and I agree. The Australian Government Tax Office is far more belligerent on the cash economy in Australia, and Phoenix activity where, you know, companies disappear, and Mr Smith starts up the next day with the same looking company doing the same thing, and things like that. There’s definitely audit activity in that space. But I agree it’s not as much as Australia, but again, population relevant to the size, I suppose again would come into it. But, you know, the ATO have stringent active campaigns dedicated today to the black economy, they have a black economy taskforce in Australia. So there’s no Inland Revenue task force on the cash economy that I’m aware of.

TB
You know, the numbers in Australia are quite astonishing, even allowing for the scale of the Australian economy, basically five to six times bigger than New Zealand. The amount of money that’s said to be circulating through the black economy is AU$22 to AU$23 billion, is one number I’ve seen. That is way, way in excess of any estimate here. It’s thought the best estimates here are about a billion dollars per year, by the way. So that is quite a difference, even allowing for scale. And I do wonder if Inland Revenue here are perhaps underestimating what’s going on. But who knows?

Rod Spicer
If they ramp up their campaigns again, then we’re here to support the accountants. Obviously, you can’t take out Audit Shield after an audit or a review or enquiries have already happened. The client must be on cover under the accountant’s policy, at least one business day before any first form of notification comes to why the taxpayer client or the accountant in whatever form that may be. Now, obviously, at times there can be some allowance for postal delay. But if we see clients taking out Audit Shield very close to the date of notification, then we do have to ask some questions on occasion around the circumstances, just to make sure that there’s no prior knowledge or anything like that involved. But it’s pretty rare that it pops up. I won’t say if it never does, but it can.

TB
I’m sure. So how do you see things playing out from here? Do you think Inland Revenue has now got through its blip with Covid and Business Transformation, or is it still sort of shaking itself down?

Rod Spicer
I think come 2021 I expect to see increased audit activity. So maybe I turn the question around to you, Terry, because you’re probably more knowledgeable on New Zealand ongoing government and what their projected tax take and new tax rules are going to be. But if there’s going to be new tax rules introduced, they’re not going to come into play for some time. And then people are going to lodge a return and there’s going to be audit activity. But I would have thought how’s the New Zealand budget looking Terry? Good, bad, indifferent?

TB
Interestingly, the tax take, according to the financials for the June 20 year was only down about a billion dollars on expectation. And it’s difficult to make comparisons because of the change in accounting brought about by Business Transformation. So the tax take has held up pretty well, but they’ve spent a lot of money is the key thing on the other side. You know, billions went out –  $12 billion –  on the wage subsidy. By the way, the wage subsidy enquiries are not covered by the policy, are they?

Rod Spicer
I’m glad you mentioned that Terry. Audit Shield, at the risk of stating the obvious, is a tax audit insurance policy, it’s about revenue collecting by the New Zealand Government through Inland Revenue. So Covid brought about new things that no one had ever seen before, in Australia, Canada, New Zealand.  Tax audit insurance policies have traditionally never covered government benefit audits, grants, welfare payments and things like that. Then all of a sudden government started handing out money left, right and centre as subsidies to try and prop up business and the economy. So it wasn’t about the tax take. It was about money flowing out of the businesses. Our policy doesn’t cover government benefits, grants, subsidies. Initially Inland Revenue wasn’t even in charge of it. But it seems that they took over from whatever department was initially doing it. And then the other one of interest that’s popped up a few times is the government loan scheme that businesses can get.

Now that was first offered via banks and then that didn’t work, so it got moved to Inland Revenue. So I’ll admit we have seen audits of the wage subsidy and the loans and the loan scheme. But I’ve only seen them and had to tell the accountant, look, that’s not covered for the reasons that we said. So we put out a company announcement in April to say these things weren’t covered. But we’re now in November, so we don’t expect the accountants to remember a bulletin right at the start of Covid that Accountancy Insurance put out.

But we’re certainly still telling them about it when it pops up. No, that type of matter isn’t covered. However, sometimes where there’s smoke, there’s fire, Terry. And if those subsidy or wage scheme matters escalate, expand, move in scope into things like GST or income tax, for example, or PAYE matters or something, then on face value, it’ll be covered from that point in time onwards, not the wage subsidy or the lone scheme maters.

TB
You actually took the words right out of my mouth because I was going to ask if you had seen any instances where an enquiry about a wage subsidy claim or a loan under the small business cash flow scheme had led to, or appears to have led to a further claim in relation to another tax.

Rod Spicer
We’ve just been talking about whether we’ve seen any wage subsidies or the government loans scheme as a result of Covid result in further audit activity on income tax or GST or PAYE lodged return. I’d have to say so far, no, but I’d be surprised if we didn’t see something in the future in the New Year along those lines, would be my expectation at this point in time.

TB
I suspect you are probably right there. I also suspect that the sort of people that may get picked up on that probably were people who’ve never had an audit before and may rue that point. I think that’s a really good place to leave it Rod. Thank you so much for your time today. We here at Baucher Consulting have used Accountancy Insurance for a number of years now. I think it’s an excellent product which has saved our clients a lot of heartache. So, I can recommend you talk to the guys there. Thank you very much again. Rod, you have a great day.

Well, that’s it for this week. I’m Terry Baucher. You can find this podcast on our 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.

The new Minister of Revenue’s first speech set out the Government’s tax objectives including a possible digital services tax

30 Nov, 2020 | The Week in Tax

  • The new Minister of Revenue’s first speech set out the Government’s tax objectives including a possible digital services tax
  • Could the bright-line test be extended? And watch out for existing tax provisions
  • A reminder about back-dating GST registration

Transcript

The new Minister of Revenue, David Parker, made his first public speech in his role last week at the Chartered Accountants Australia and New Zealand Tax Conference. The speech introduced himself, gave a bit of his background in business and in government. He then outlined the Government’s expectations over what is to happen over the next three years.

And in talking about the Government’s priorities over the short term he mentioned that one of the first items of business for the Cabinet, was making improvements to the Small Business Cashflow Scheme so it continues to provide ongoing support.

Now, the latest is that close to 100,000 businesses have taken out loans with total lending of $1.6 billion. So, it’s been a huge success. I’m a big fan of the scheme which fills a hole we identified on the Small Business Council.

The new measures approved by Cabinet: extending the scheme for three years, increasing the interest free period from one year to two, and broadening how the loans may be applied, such as for capital items are estimated to result in additional lending of about $130 million for small businesses.

What the Minister has also asked for is further advice on changes to the scheme that will allow more businesses to benefit from it, including adjusting the eligibility criteria for the loan

On the tax side of matters the Minister confirmed that the Government will progress the promised new top personal tax rate of 39% on income over $180,000. And that new top personal rate will apply from 1st April 2021. The plan is to have it legislated and in place before the end of this year.

Minister Parker then said “the new 39% rate will need to be supported with integrity measures to address issues like people sheltering income in trusts to avoid the top tax rate. I’m receiving advice from officials on the necessary integrity measures.” So that’s a coded warning that although they haven’t increased the trust tax rate from 33% to 39%, it’s clearly something they may well consider.

And there’ll be other matters in hand to support the new rate which obviously, we’ll have to wait and see. These potential measures are something I would like the Government and Inland Revenue be very transparent about because the situation that developed the last time the tax rate was at 39% was only finally resolved by the Penny Hooper case. I think this is unsatisfactory because it creates uncertainty about the boundaries of acceptable tax planning.

Parker then went on to talk about improving our tax system and the taxation of multinationals stating

Our preference continues to be an OECD led multilateral solution rather than a proliferation of digital services taxes. However, success at the OECD is not guaranteed and has been blocked for some time. We are seriously considering implementing a DST in the event the OECD project fails to reach agreement within a reasonable timeframe.

And in talking about this, he referenced the fact that local New Zealand companies “deserve a level playing field when doing business. We don’t want to force New Zealand competitors into dodgier tax minimisation strategies to compete”. So the Minister is pointing the finger very firmly at the digital giants and their ability under present rules to order their affairs where they pay little or no tax in New Zealand which, as he put it,  “This is a legal fiction that is divorced from modern reality and needs to be fixed”. So I think we can expect to see more action in this regard from the Minister of Revenue and Inland Revenue.

The Minister finished his speech with a line which I’m pretty certain was written by the Honourable Deborah Russell MP, who’s a big Star Trek fan:  “Let’s all crack on with it so our people can live long and prosper even in the midst of a global pandemic.” Indeed.

Capital gains

Moving on, one of the matters that wasn’t mentioned by the Minister in his speech directly, but has been boiling over this week has been the question of taxing capital gains and the role of tax in dealing with the housing crisis and house prices.

The Minister of Finance has said that he has already requested Treasury to explore the options about extending the bright-line test. In the exchange of letters between the Minister of Finance and the Reserve Bank Governor, Adrian Orr, the Reserve Bank Governor, pointed out he would be happy to talk about fiscal measures, which would include tax changes.

This, of course, has prompted a lot of speculation about what’s happening. And the ACT party then went straight out and said, is the Government looking to bring in a capital gains tax by stealth?

Of course, the Prime Minister last year ruled out a capital gains tax on her watch. The thing is, though, the bright-line test is already in existence, so it’s hardly it would be a new tax to extend its scope. That happens with taxes all the time. And yes, it would also be bending the position a little bit.

Now, under Section CB14, where a person sells land within 10 years of acquisition, any gains from that sale that are not taxed under other provisions and this would include the bright-line test will be taxable if at least 20% of the gain results from one or more factors that occurred after the land was acquired. Those factors include a change or a likelihood of change in the operative district plan.

Section CB14 almost certainly applies to properties which are rezoned for higher density or may have been brought into the special housing areas if you remember those.  It’s a little applied provision. And in fact, the Tax Working Group recommended that it be repealed but it’s still on the books.

It has a couple of stings in its tail. It applies, as I mentioned, for land sold within 10 years of acquisition. But if you occupied it as a residential home, normally under the Income Tax Act, you will be fine. However, in this particular provision, the sale is not exempt unless the purchaser acquires it for residential purposes. So that means if someone whose house may have gained value because of a zoning change, such as the Auckland Unitary Plan, sells it to a developer or, and this is the tricky part, you actually decide to move on and sell it to a trust or another entity, such as a look through company, for example, to rent out the property, that sale/ transfer will be taxed under this provision. There’s a deduction of 10% of the gain allowed for each year of ownership.

Now, what this provision points out and what the ongoing debate around, what do we do about taxing wealth (you may recall the Deutsche Bank report I mentioned last week), is that our current rules are all over the place. We have very specific rules, such as the Foreign Investment Fund regime, which apply. But then in relation to land transactions, we have a series of rules that apply, mostly for disposals within 10 years, but in other cases indefinitely if there is an intent to purchase for a purpose of disposal.

And so, one of the arguments in favour of a capital gains tax is actually Simplification, believe it or not, because of these overlapping rules. Picking your way through these is a minefield with plenty of traps where I and other accountants get plenty of work when people misunderstood the implications of the bright-line test and other land taxing provisions.

So, I’ve never bought the argument that capital gains taxes are too complex.  All taxes have a certain level of detail. But capital gains tax basic principle, you buy something which you sell and you’re taxed on the difference is fundamentally easier for people to grasp than, say, trying to explain the operation of the Foreign Investment Fund rules. But the politics are what they are. So a capital gains tax is probably not going to happen.

But I think we will see Inland Revenue making extensive use of provisions such as CB 14 to pick up transactions that have not previously been taxed. And we know they’re going through all transactions where a transfer has happened within five years, the bright-line period, where there is no obvious answer that it’s been a residential property sale to a new home-owner.

So watch this space there’s going to be plenty of activity from Inland Revenue in that area and the debate will continue to rage. I think the Government will find it has to make a movement on this space. It’s also worth remembering that the bright-line test was introduced in response to housing pressures and was introduced by a National government. So there is, in theory, a possibility of cross party support for a measure. It probably won’t happen, politics being politics.

But as I said, I think the dam is under increasing pressure and will break unless something is done to relieve the pressure of expectations of younger generations who are presently locked out of the housing market.

Backdating GST registration

And finally, a quick reminder from Inland Revenue about GST registrations. Generally speaking, the date of GST registration is the date an application is made. But in exceptional circumstances, those registrations can be backdated.

And Inland Revenue have issued a Standard Practice Statement on the effective date of GST registrations and what you can do about backdating a GST registration.

The key thing is, you got to have the supporting relevant documents, bank statements, tax issues, tax invoices issued and copies of contracts, and you’ll need to explain what was going on with your taxable activity and why your registration wasn’t filed sooner.

The fact Inland Revenue has drawn attention to this issue means that obviously it’s been receiving a few such applications or they’re looking at situations where people probably should have been registered for GST sooner.

Well, that’s it for this week. Next week, I’m going to be joined by Rod Spicer from Accountancy Insurance. We’ll be talking about the role of insurance in handling Inland Revenue audits and what Inland Revenue activity they are now seeing.

Until then, 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.