Tax News

Inland Revenue is checking wage subsidy claims.

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.

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:

  1. welfare transfers (for low-income households), or
  1. 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.

Inland Revenue wins Frucor tax avoidance case in Court of Appeal

16 Sep, 2020 | The Week in Tax

  • Inland Revenue wins Frucor tax avoidance case in Court of Appeal
  • New Inland Revenue guidance on taxation of crypto assets
  • Labour’s tax and small business election policies announced

Transcript

Late last week Inland Revenue won a tax avoidance case in the Court of Appeal against Frucor Suntory New Zealand Limited.

The background facts are complicated, but basically the case involved an advance of $204 million dollars to Frucor in exchange for a fee and some convertible notes issued by Frucor to Deutsche Bank. There was a related party payment from Frucor’s then Singapore based parent for the purchase of the shares from Deutsche Bank.

Over a five year period Frucor paid Deutsche Bank $66 million dollars on an interest only basis. Inland Revenue argued to this was a tax avoidance arrangement and for the 2006 and 2007 income years disallowed deductions to the extent of $10.8 million and $11.6 million respectively.

Frucor won this case in the High Court in 2018, a decision which actually raised a few eyebrows in the tax advisor industry because it seemed similar to the arrangement struck down involving the big Australian banks about 10 years ago.

Unsurprisingly, Inland Revenue appealed and have now won in the Court of Appeal. Under the arrangement, Frucor had apparently achieved interest deductions totalling $66 million. But in the court’s view, it had not incurred a corresponding economic cost for which Parliament intended deductions would be available. $55 million as a matter of commercial and economic reality of the claimed interest was in fact a repayment of principal borrowed and not an interest cost. The Court concluded that the funding arrangement had tax avoidance as one of its purposes or effects and was this was not merely incidental to some other purpose. The overall purpose of the funding was provision of tax efficient funding to Frucor.

The only bright spot in this decision for Frucor is that the Court of Appeal agreed the High Court was reasonable to find that the shortfall penalties for a tax avoidance arrangement (which can be up to 100% of the tax avoided) should not have been imposed by Inland Revenue.

The key lesson here – and it’s going to be of importance looking forward if Labour forms the next government, given its announcement for a higher personal tax rate – is that the courts are still very much onside with striking down tax avoidance cases where they consider the arrangements are not seen to be in line with Parliament’s intention. And Inland Revenue has made aggressive use of tax avoidance provisions in section BG 1 of the Income Tax Act, and until Frucor’s High Court victory, it had not lost a case involving a tax avoidance matter for something like 10 years.

So aggressive tax planning is very much still under the gun for Inland Revenue and the courts are supportive of that approach, even though it might look as if all the necessary legal form has been satisfactorily met. So that’s just a warning for the times ahead. I think we’re going to see Inland Revenue make more use of anti-avoidance provisions in other areas as it returns to normal after its attention was diverted responding to the COVID-19 pandemic in the early part of this year.

Taxing crypto assets

Moving on, Inland Revenue has issued some updated guidance on the tax treatment of crypto assets. There’s nothing especially new here. It is confirming that crypto assets are to be treated as a form of property and that in each case it will look carefully at what are the circumstances behind the acquisition and disposal of the relevant crypto asset.

The guidance does expand a little bit more on what we’ve seen previously in this area.

Inland Revenue has said very clearly that it will look at the purpose for acquiring the crypto assets. And it is pretty straightforward in saying that if your purpose when acquiring crypto assets was to sell or exchange them, you will need to pay tax when you do so.

Inland Revenue will look very carefully at your purpose at the time you acquire crypto assets. The guidance repeats the key point, which is often overlooked, that it is the purpose at the time of acquisition that matters. If that purpose changes later on, that is not relevant. If you plan on selling or exchanging your crypto assets at some time in the future, then you have a purpose of disposal. It doesn’t matter how long you plan to hold onto them before doing so. Your main purpose can be to sell or exchange them even if it takes a few years. Then, of course, you’ve got to have supporting evidence of what your intention was at the time of acquisition.

And one of the things the guidance points out is the nature of the crypto assets being acquired. And in particular, does it provide an income stream or any other benefits while being held? (By the way, benefits isn’t clearly defined). Now, Inland Revenue’s view is that if you have crypto assets that do not provide an income stream or any other benefits, this strongly suggests you acquired them for the purpose of selling or exchanging them. This is because the only benefit you get is when you sell or exchange those crypto assets. And that, by the way, is similar to Inland Revenue’s position on gold bullion.

But just because you’ve got crypto assets that do provide an income stream or other benefits, for example, staking, that doesn’t mean that you didn’t acquire them for the main purpose or sending of sale or exchange. Somewhat helpfully, there are a number of examples of how the Inland Revenue sees these rules working.

So the position to be mindful of if you’re involved in holding crypto assets, is that the default position is almost that any funds realised on a sale or exchange are going to be taxable. To counter that, you’re going to need to show good records at the time of acquisition of what your intention was and what type of assets you acquired.

But this is the current position and we have to work with it. And so my advice is be very clear in recording what your intention is when you acquire crypto assets. And if you haven’t done that, it’s too late. Inland Revenue’s default position with crypto assets is that any sort of exchange is going to be taxable.

Election 2020 tax policies

And finally, Labour has now come out and announced its tax policy, the centrepiece of which is a new top income tax rate of 39% applying to income above $180,000. It’s also said that there will be a freeze on fuel tax increases, no new taxes and no further income tax increases for the entire next term of government.

The other point it’s raised is, is it going to continue to work with the OECD to find a solution on the taxation of multinationals? It’s prepared to go ahead with the implementation of a digital services tax, which present projections estimate would raise between $30 and $80 million yearly.

As can be seen there’s not a lot of tax involved with multinational taxation, but it’ll be a popular measure because it’s something that keeps coming up in conversations I have with people on the issue of taxation. People are always saying multinationals should pay more. But they’re not a bottomless well, and opportunities to tax them are limited.

The digital tax space is where there could be some movement. But that’s very much dependent on how the OECD goes. And as I’ve mentioned in the past, the Americans have pretty much brought that particular pathway to stop earlier this year by basically saying they weren’t going to cooperate or be involved

With the proposed income tax rate increase to 39%, we’ve been there before. I thought if Labour was going to raise the top tax rate, it would be to 39% percent. Crossing the 40% threshold would be a psychological barrier too far. We haven’t had an individual tax rate of more than 39% for over 30 years. 1988 was the last time the tax rate was above 40% when it was 48% as I recall. It’s expected to raise 550 million dollars.

There’s already a lot of talk going around about making use of trusts and companies to get around the increase. My understanding is they’re going to look at trusts and the trust tax rate. Conceptually, the trust tax rate should really rise to be equal to the top personal tax rate. And that’s the story in Australia, the UK and the US as well. But my understanding is trusts will be looked at to find out exactly how many trusts really would be caught by that, because there are trusts settled for minors and orphans and other charitable or semi charitable purposes.

But even if nothing happens in that space, I’ll just remind you about the first item this week, the Frucor case and the Inland Revenue’s approach to tax avoidance. Last time we had tax rates at 39% we ended up with the Penny-Hooper decision. That’s the case involving dentists who used a company to trap income at the company tax rate, which was then 33% and then then lowered to 30% instead of the personal 39% rate was struck down as tax avoidance. You can see that happening again.

So, yes, Labour seems to have opened an opportunity for tax planning. But my answer to that would be ‘Proceed with great caution’, because Inland Revenue has a big stick in the form of an anti-avoidance provision.

The other thing of note from Labour is that it’s campaigning on extending applications to the Small Business Cashflow Scheme to 31st December 2023 for ‘viable’ businesses.  And it’s also promising to extend the interest free period of loans under the scheme from one year to two years, which would be very welcome for small businesses. Labour will also look at a permanent iteration of the scheme, which is something I would support.

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.

This week I spoke with Josh Taylor, director and co-founder of tax pooling company Tax Traders.

6 Jul, 2020 | The Week in Tax

Josh co-founded Tax Traders with Nicola Taylor eight years ago aiming to bring the benefits of tax pooling to all taxpayers. It’s been hugely successful since then growing year on year at around 40%.  Currently Tax Traders is working with over 400 accountancy firms around the country including the preferred provider for Deloitte and the tax pooling business partner of Chartered Accountants Australia and New Zealand.

Transcript

Morena Josh, welcome to the podcast, thanks for joining us.

Josh Taylor
Thanks, Terry. Great to be here.

Terry Baucher
Our lives have been dominated by Covid-19 over the past few months.  When did you realise that this was going to be much bigger than anyone was thinking at the time?

Josh Taylor
It’s a good question. I don’t know if it’s bigger than anyone was expecting. I think it got really big, really fast about the middle of March. That’s when it really started to bite for us after the OCR drop on 16th March to 0.25%

The financial markets reacted almost instantly. And that’s when it gets interesting for us as we sit between a lot of fund managers. They are a source of funding for people who can’t pay their tax on time or who are looking for additional time to pay. And what we saw as the money supply and that side of the market really started to shrink, people got very nervous. “What don’t we know? What does the government know that we don’t know?” Because an OCR drop of that magnitude, we haven’t seen that before. Where are things going?

So that’s when it probably started for us. And the intensity stayed pretty high for two to three months. I think we’re starting to see that ease off now.

TB
I mean, so you’re working fairly long hours then.

Josh Taylor
Yep. Through the lockdown from 16th March it was regular 80-90 hours a week. What it did was it threw up a whole lot more work for us. And it’s interesting looking through the emails the other day and a couple days after the OCR announcement, we had Inland Revenue call the various tax pooling companies and say, “Look, we want to get you on a phone call as an industry just to talk about what what’s happening, where we see things going. We’re mindful that some people may struggle to make payments that are due on 31st March.  We want to be mindful of that and see what we can do to help.”

This was four days later over a weekend, by which time we’d already drafted two submissions to Inland Revenue about how they could respond and what options they might be able to take through this Covid period. So, we were already churning out material for them before there was any legislation on the table or any announcement.

We were contacting politicians, multiple points within Inland Revenue and engaging with other government departments like MBIE.  So, there’s been a huge additional workload and a lot of that’s been driven around wanting to get greater certainty for our clients on the options they have.

We’ve had a situation where the money markets didn’t quite stop functioning, but it really did slow down. People are thinking “How do we manage our way through this?  On paper we know that we’ve still got good businesses, but we need to keep the cash going so that we can get through this year and out the other side.”

And so at least from a tax perspective, which is where we operate, we’ve been doing what we can. There’s been a very high workload to get that which we’ve managed now but it has been a bit of a trying time.

TB
Bit of an understatement there. I’m interested in what you’re saying about Inland Revenue and that during this time you have worked very closely alongside them to an extent you wouldn’t normally do.  It’s also interesting to hear that they were on the phone to you as an industry saying, “Hey, we can see something’s happening here how are we going to react to that?” How was it working with Inland Revenue? Because I imagine there were frequent contacts at various levels throughout the period.

Josh Taylor
You know, look, it’s been interesting with a couple of caveats. An organisation the size of Inland Revenue certainly isn’t going to speak with one voice and you’re going to have different pockets within it. So dealing with it did pose some challenges.

The front-line people we’ve been engaging with from the tax pooling side, were very responsive, very helpful, very open to ideas. We had people from Inland Revenue contacting us saying “We’d like to hear your thoughts on what we can do. We’d like to get all the ideas into the mix so we can consider what can happen.”

So, I think a lot of what we saw with the front-line staff was the best of Inland Revenue.  In talking with accountants as we do every day, their feedback was the same.  Inland Revenue got a lot of respect in terms of their willingness to remit use of money interest and provide quite favourable terms to taxpayers.

At the same time we saw some kind of challenging behaviours where very early on, Inland Revenue signaled to us there would be the ability for the deadlines to pay 2019 tax to be extended. They were aware that people had terminal tax to pay for 2019, but the legislation that was on the table wasn’t going to be sufficient to enable taxpayers who had missed provisional payments for the 2019 year to tidy that up and get a reduction in the use of money interest costs. The use of money remission legislation only applied to payments made after the 14th of February this year, so it wasn’t going to help provisional payments for the 2019 year that were otherwise not paid.

So Inland Revenue said, “Look, we think the best way for us to resolve that is by expanding the remit of the tax pools for this period”. And we had that signal to us that’s where they were heading towards the end of March, early April. But they caveated it by saying, look, we need enabling legislation to make it happen.

Now, the legislation to make that happen was passed at the end of April, but it then needed an Order in Council. It took them until the end of the start of the second week of June to get that Order in Council in place. And without that Order in Council, we were within a week of running out of time for the 2019 year.

So, although the change was signalled pretty early,  to actually get it wrapped up and tidied up, took them right to the eleventh hour, which probably created a bit more stress and pressure than was needed. I mean, we got there in the end. So that’s a big tick. But could we have got there a bit easier? I would like to think so and I think there are people within Inland Revenue who would like to think the same as well. Some things just take a bit longer. But there are probably some lessons learned there.

TB
Absolutely. Now there was a story that the tax pooling team within Inland Revenue is relatively small. What size is it now? It must have been extended to cope with the strain. It could not be doing what they did with the resources they had if the story I heard that were only two or three in that team was correct.

Josh Taylor
Yeah, so there’s a couple of teams that manage tax pooling. There’s a core team of two or three people in Upper Hutt which does the processing. And historically, it’s been that size but it’s important, I guess, to highlight the improvements from the START system that we’ve seen rolled out aggressively over the last couple of years. It’s automated a number of processes that under the old computer system were a manual process.

So in past times we’ve seen transfer backlogs because of the sheer volume of work and it’s taken maybe three to five weeks to process transactions.Now those are happening overnight, in fact, instantaneously, really as soon as we schedule a transfer, no matter how many thousands of transfers, it all happens instantly.

So Inland Revenue has really scaled up its capacity. And so, for that for that 95, 98 percent of transactions that are straight down the middle, they go through very quickly now. So, it is efficient from Inland Revenue’s perspective.

There’s a support team at Manukau which handles the exception queries. I don’t know how many people are in that team, maybe two or three people seem to be in there. Things can get a bit bogged down there depending on the complexity of the transaction. So, you could see another week or two to work things through. But Inland Revenue have been investing in their capacity in this space, which is a good news story.

TB
That’s great to hear. Now, you touched on 2019 and the data suggests there’s still a lot of people who have outstanding obligations for the 2019 tax year. So how is Inland Revenue providing assistance for those people to pay through tax pooling? What’s the story there after these eleventh-hour changes finally came through?

Josh Taylor
There’s actually some commentary on Inland Revenue’s website released on 14th April with about eight different case studies around the 2019 year.

But as I mentioned before, because of the way the legislation’s been drafted it applies for payments that are due after 14th February 2020. Now, Inland Revenue has the discretion to remit use of money interest. What that means is that if you’ve got a payment that was actually due on the 7th April, Inland Revenue can remit that use of money interest if they think you meet the criteria. So that’s classically that’s the case for a taxpayer whose provisional tax is under $60,000 and has paid their uplift on time.

Inland Revenue have been very clear though, that this exemption won’t cover a taxpayer who hasn’t paid their provisional tax uplift on time so is incurring use of money interest from the first provisional tax payment date   which was before 14th February.  It also can’t help the situation where you’re a taxpayer whose residual income tax is over $60,000 and all tax is due by that third provisional tax date.  This is either 7th May 2019 (31st March balance dates) or 28th July 2019 (30th June balance dates) and again, because those two dates are before 14th February 2020, such taxpayers are not eligible for the use of money remission.

And again, the challenge here is that for all of those taxpayers, 2019 was a profitable year unaffected by Covid. But now they’re trying to pay it in a period that’s affected by Covid. And IRD, acknowledge that they are aware of the realities of business. You know, you’re paying for last year’s tax with this year’s income which is getting squeezed.

Inland Revenue needed to do something. And so, they’ve looked at it and decided the easiest way to manage is to expand the scope of our tax pooling rules and provide a different window of time for 2019 payments.  So, you’ve now got until 21st July to apply to a tax pooling company to square up any outstanding 2019 tax.

All that information’s on our website if you’re in that position.

The numbers we’re seeing suggest there is quite a substantial portion of 2019 tax outstanding. But what IRD has done here around the tax pools gives another nine months or so to pay. That’s going to be your best bet to tidy it up without incurring other interest and penalty costs.

TB
And this payment would involve your tax pooling rates of interest which are substantially lower than Inland Revenue’s 7% rate.

Josh Taylor
Absolutely, depending on how we structure it and there’s a couple of ways we can do that.  You’re looking at interest rates probably somewhere between 3 to 4 1/2%. And no [late payment] penalties added in. Again, the contrast to these rates being that if you don’t use a tax pool, you can be liable for that 7% use of money percent interest all the way back to 7th May 2019 which is obviously going to cost more.

TB
That leads nicely on to my next question.  I often tell clients about tax pooling and one of its big advantages is how it can assist with short term cash flow issues, just like we’re talking about. So how are clients using tax pooling? What happened once the impact of the pandemic became very clear? What do people do in that situation?

Josh Taylor
So we’ve seen three pretty clear examples of how they’ve used it specifically in relation to the pandemic. We’ve got a couple of examples that might be helpful and give that some context.

The first one was a large client in the forestry sector. And come the middle of March, as the financial markets started to get very constrained forestry was one of the areas, along with tourism, that felt the impact of Covid very quickly. And so for this client they had had a very profitable 2020 financial year but then coming into April forestry has stopped working.  But their mills and everything else they’ve still got going, incurring substantial overheads on a weekly basis running into hundreds of thousands of dollars.  And it wasn’t clear what their traditional bank funding could do for the sort of cash crunch that they and everyone else was experiencing.

What they were able to do is say, “Look, we’ve got about $8 million of tax that we’ve paid which is sitting in a tax pool. With the benefit of hindsight, we wouldn’t actually have paid that tax because we kind of need the money in our business now and IRD doesn’t require us to file our return until March 2021. So we’ve got a window of time where we can actually pull that money out of the tax pool and use it in our business just to keep working capital going. And we’ll repay it back into the tax pool before we file our 2020 tax return in March 2021.”

So, they contacted us. We were able to help them using what we call our Deposit Plus facility. You’ve made a deposit, but you need the money back. We were able to fund it back to them at a cost of around 3%. And they’ll repay that once they’re through this period before they file their return.  So it’s a little bit like the loss carry back the IRD introduced, except in this case, they didn’t even need to have a loss to get the money back into their business.

The next example was a commercial landlord with four shopping centres. They had a 7th May provisional tax payment. But through that period, we were locked down so the cash flow just stopped as the tenants aren’t paying them. So if the tenants aren’t paying, it’s very hard for them to pay their bills. So again, they were saying, “Look, we know we’re going to be taxable for the March 2020 year, but we don’t actually have the cash flow to make that 7th May tax payment.” And because they’ve been profitable, they didn’t meet the definition for the use of money interest remission as they were outside that criteria.

Again they contacted us and said: “Give us five months, we think by October 2020, things will be back up and running so we can pay it off then”. So, we funded this debt payment for them again at an interest rate of under 3%. The nice thing about finance, though, is that it does mean that if they get to October and things haven’t quite come right, we can easily extend for another couple of months. So, they do still have some extra flexibility there.

In the final example we saw was with self-employed and smaller tax payers who maybe only have $10,000 of provisional tax to pay. We saw a lot of them financing their 7th May provisional tax payments as well. This gave them certainty, it allowed them to say “We’ve dealt with the tax. We’ve bought ourselves some time to get through this cash flow crunch that we went through during lockdown once we’re through that period.” And you know, for some people it’s three, or six months and for  others it’s a bit longer. But it helps them get through this period and then they can deal with the tax once the cash flow starts to move again. So these are the sort of examples of what we’re seeing going on.

TB
Fantastic. That really demonstrates the flexibility of tax pooling.  Now you touched on the tax loss carry back scheme which has been brought in.

For some of us it didn’t seem immediately clear how it might help clients with 31 March balance dates.  In fact, tax pooling could probably come through and help out in those cases. Would you like to clarify how that could work out?

Josh Taylor
Sure. There’s a couple of areas where the overlay of tax pooling, really helps make the loss carryback regime work better. The first is obviously if you’re not already paying your tax into a tax pool, it’s a great idea to start doing that because everything about loss carry back regime is going to become easier if you’ve got your money in a tax pool as it provides you more flexibility.

The reason that flexibility is important is because if you’re paying tax directly to Inland Revenue and you estimate a loss under the loss carryback, it actually takes you out of the concessionary uplift regime. You are then into the estimation regime and you are going to be liable for full use of money interest across all your provisional tax payment dates.

Now, if you’ve made those payments into a tax pool, all that you’re doing when claiming the loss carryback is pulling your money back out of a tax pool. You don’t need to advise Inland Revenue to do that, so you can actually preserve your uplift status and still have access to your credits without losing the ability to remain in the uplift regime. So that’s the first important point.

The second one is that through tax pooling, you’re able to reinstate any overclaimed tax credits at a much lower cost. So, we would be able to talk about interest rates around 3 or 4% versus Inland Revenue’s 7% interest rate. When you’re estimating the loss to carry back, there’s obviously a little bit of guesswork. It’s not going to be an exact science. You could easily end up claiming too much and then needing to repay it. So obviously, repaying at a lower cost is better.

And finally, even if you’re not in a loss or you don’t nicely make the definition of a tax loss, you can still actually pull your money out regardless, like that forestry client I mentioned.  Looping back to your start point, Terry, because of the way these balance dates fall like you said, for most of the 31 March 2020 balance date taxpayers Covid was a significant hit for maybe a week or two of that year. So I wouldn’t expect too many people to be in a loss for the March 2020 year or if in the worst case of it would be a very small loss.

Now, the temporary loss carry back lets you offset a loss in one period against the profit in the prior period. If you’ve got a small loss in the March 2020, you can claim that against 2019. But a small loss isn’t really helpful for you right now because a small loss is only going to mean a small amount of money back in your business. What you need is a big amount of money back in your business right now. So that’s not going to be that useful.

If you had a profitable 2020 and then you’ve been looking at 2021 in estimating the loss, it’s hard to know exactly what 2021 is going to look like. Now we’re talking to a lot of people. One retail client did three months’ worth of business in the last month.  So, you know there’s some interesting dynamics in the market at the moment. Could be a loss, might not be a loss. You know, again, if you end up claiming too much, you’re then going to have to pay it back anyway. So although it’s a good idea having the loss carry back, I just don’t think it’s going to be a silver bullet.

TB
Yeah, that’s my thoughts on it. I think it’s something we do need in the system, but right now it’s a bit of a head scratcher as to exactly how it will work.

So, what are you seeing now? I mean, there the 28th June provisional tax payments have just gone through.  What are they like compared to previous years?

Josh Taylor
I was just looking at those numbers. And what we’re seeing are two stories going on. If we look at some of our clients, the payments they’re making this year are almost unchanged from what they were making twelve months ago. So that’s their part of the economy sailing through relatively untouched by Covid.

Then we’ve got the other half of it who are taxpayers who are very much impacted. And the ones we’ve seen, particularly around the construction sector where they were paying provisional tax last year, they’re not paying tax this year.

So, there are these two stories going on. And I think what we don’t know yet is just what the overall weighting of the economy is. Are we seeing half the economy going the same as it always has, and half the economy is very much impacted?  Or is 70% of the economy is going along fine and is it 30% that’s impacted?

From what we can see, we don’t have enough data to be able to make a judgement call on that. But the pleasing thing to see is there is a reasonable portion of the economy which does seem to be continuing on relatively unaffected by Covid. So hopefully that can help provide a carry through momentum.

TB
Let’s hope so. Well, I think we’ll leave it there. Thank you very much, Josh, for coming on. So that’s it for this week. Thank you again to my guest Josh Taylor of tax pooling company Tax Traders.

I’m Terry Baucher and 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 time have a great week. Ka kite āno.

The Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill introduced covering purchase price allocation, taxation of land, feasibility expenditure and trusts

8 Jun, 2020 | The Week in Tax

  • The Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill introduced covering purchase price allocation, taxation of land, feasibility expenditure and trusts
  • Inland Revenue phone issues
  • Last week for applications for the small business cashflow scheme

Transcript

After a frenetic period of activity with COVID-19 related measures coming out almost daily, it’s reassuring to see a normal tax bill turn up with the introduction into Parliament of The Taxation (Annual Rates for 2020-21, Feasibility Expenditure and Remedial Matters) Bill.

Now, this is a sort of standard type of tax bill we see twice a year. There’s usually one introduced in May and another in November. And typically, these bills will deal with some policy matters that have been on the table for some time, plus tidy up remedial issues. So, this Bill is a sign of nature healing and a return to normal.

This Bill has a number of measures which will be both welcomed and not welcomed across the board. Firstly, there’s a measure up to encourage investment by allowing businesses to take a deduction for feasibility expenditure incurred in investigating or developing a new asset, or process, even if that process is actually abandoned and never implemented. Until this bill there was some doubt that any of this expenditure would be deductible.

And there are two parts to this measure which are welcome. Firstly, for small and medium businesses, qualifying expenditure on feasibility expenditure, which is less than $10,000 a year, will be immediately deductible in the year of expenditure.

Where the expenditure is above that $10,000 threshold, then a business would be able to claim a deduction spread over five years for the expenditure it incurred on investigating this new asset, process or business model. And this deduction will be available even if the planned project is abandoned.

There are several other measures in the Bill. One which won’t be welcomed is in relation to what we call purchase price allocation. And this happens when parties to the sale and purchase of assets with differing tax treatments for the purchaser and vendor allocate the sale prices between assets to maximise the tax advantage.

This has been a running sore point for Inland Revenue because you could actually find that for the same asset, the purchaser and the vendor have adopted completely different tax treatments. This bill is designed to ensure the treatment for the asset is consistent across the board and it’s expected to raise $154 million dollars over four years.

There are more rules relating to the taxation of land, particularly in relation to investment property and speculators. What is particularly targeted here are attempts to get round the provisions which apply where someone has a “regular pattern of buying and selling of land”.  In these circumstances the transactions are deemed to be taxable.

The Bill proposes to extend the regular pattern restrictions which apply for the main home, residential and business premises, to a group of persons undertaking, buying and selling activities together, rather than looking at the regular pattern of a single person.

So that will introduce more complexity into an area which is already very complex, because a lot of the matters relating to the taxation of land involve defining rather subjective terms such as “work of a minor nature” or “a regular pattern”. What is a “regular pattern”? What is “work of a minor nature”? These are issues that have dogged the taxation of land for some time. And dare I say it, a simpler answer would have been a comprehensive capital gains tax. Then everyone’s on the same treatment. But I guess it’s probably too soon to talk about that.

There is a measure to help dairy and beef cattle farmers who because they’re taxed under the rules for the herd scheme have unexpected taxable income because their herds have been culled as part of the attempt to eradicate Mycoplasma bovis over the past few years.

Now, what will happen instead is that income, which would normally be taxed in a single year, will now be able to be spread forward over six years. Farmers who have been affected by Mycoplasma bovis will be relieved that this measure will take some of the pressure off them.

Some of the Bill’s measures had already been in the public domain for consultation for some time, but others have not. There is some interesting legislation in relation to the taxation of trusts, which I had not expected to see. One of these to watch out for is if a beneficiary is owed more than $25,000 at the end of a tax year, then he or she will be deemed to be a settlor of the trust. And that has quite significant tax ramifications.

So there’s a lot in this bill, and over the coming weeks I’ll pick out particular aspects and discuss in a little bit more length.

Worsening client service

Moving on and another sign that we’re returning to normality, complaints about Inland Revenue not answering the phones are back in the press.

In part, Inland Revenue’s business model actually does not want to encourage phone calls. It rather would deal online with people. And in fact, to be fair to it, matters are being responded to very quickly through the Inland Revenue myIR online portal.

The call centres are under pressure as they always come under pressure this at time of year. But the pressure has been exacerbated by the fact that Inland Revenue have got to try and maintain social distancing and have a lot of staff working from home.

Unfortunately, it’s a fact of life that at this present time, Inland Revenue isn’t really in a position to answer phones as promptly as possible. It’s partly, as I said, the result of COVID-19 requiring some physical restrictions which has made it difficult for Inland Revenue to actually have everyone where they want them.

In addition, Inland Revenue has prioritised responding to matters COVID-19 related, that is, applications for debt remission, wage subsidy enquiries and the Small Business Cashflow Scheme. The pressure is such that Inland Revenue has basically turned off answering the phones on the dedicated tax agent line. We have a habit of ringing up and then asking about several clients at one time because it takes tax agents some time to get through even on a dedicated line. And that doesn’t really fit well with how Inland Revenue is operating at the moment.

The delays are frustrating, but it’s a fact of life. And I would expect this to be continuing for at least another six weeks or so, possibly longer.

Inland Revenue the banker

And finally, one of the additional things that Inland Revenue is currently dealing with is the Small Business Cashflow Scheme. This is where businesses can borrow up to $10,000 plus $1,800 per full time employee from the Government at 3% but if the loan is repaid within a year, it would be interest free.So far, more than 69,000 small businesses have applied for almost $1.2 billion in lending under the scheme but note applications close next Friday. So, if you qualified for the wage subsidy and you believe your business is sustainable, you might want to check this out separately. It’s possible it could be extended. Update: After this was recorded on Friday morning the Finance Minister announced an extension of the scheme until 24th July.My view is the Government should look at introducing some form of permanent variation of the scheme when everything settles down.  Research that we on the Small Business Council received last year, indicated that access to finance for businesses with five or fewer employees was difficult.  About 45% or about 31,000, of the 69,000 applications under the scheme have been made by businesses with five or fewer employees.It seems to me that the response to the Small Business Cashflow Scheme indicates that it is meeting an unfulfilled need. You may recall the Government agreed to underwrite 80% of the lending under the Business Finance Guarantee Scheme administered by the banks. But the take up on that has been disappointing.

There’s a number of factors going on there. But it does seem that the banks were quite happy to socialise the risk and privatise the profit. And certainly, reports I’ve heard are that the application processes were very cumbersome and off-putting for small businesses. For example, I had one tax agent advise me that a bank had requested projected cashflow statements for two years going forward. Well, in this climate, three months is a long way off.

Anyway, a variation of the Small Business Cashflow Scheme is something that I think the Government should investigate. In the United States the Small Business Administration runs a variation of this scheme which could be of interest.

Well, that’s it for this week. I’m Terry Baucher, and you can find this podcast on my www.baucher.tax  or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. Thanks for listening. And until next time, Kia Kaha stay strong.

A controversial extra relief for the newly unemployed

2 Jun, 2020 | The Week in Tax

  • A controversial extra relief for the newly unemployed
  • Are redundancy payments overtaxed; and
  • Record numbers apply for instalment arrangements with Inland Revenue.

Transcript

According to a Statistics New Zealand report this week, job numbers dropped by a record 37,500 in April. This is the worst fall in employment on record. So naturally, the Government is still under pressure to ameliorate the impact of these job losses.

And its latest measure is a special relief payment beginning on 8th of June. From that date, anyone who has lost their job since March 1st because of the Covid-19 pandemic will be paid $490 a week for anyone who lost full time work and $250 per week for losing part time work. These payments will last for up to 12 weeks and will not be taxed.

Now, the scheme announced is similar to the Job Loss Cover payment introduced by the National Government in the wake of the Canterbury earthquakes in 2010 and 2011.  It also has a number of similarities to the ReStart package for workers who lost their jobs in the Global Financial Crisis in 2008. So these are undoubtedly welcome measures for those affected.

The controversy has arisen because beneficiary advocates have pointed out it appears to discriminate against the existing unemployed people. Furthermore, the fact that the payment that is being received of $490 dollars per week is almost double the $250 a week (after tax) that someone on the current Job Seeker payment would receive, implicitly acknowledges that the current level of benefits being paid is too low. This is a point that was made by the Welfare Expert Advisory Group report last year, which actually recommended benefits be increased at a cost of over $5 billion.

One of the other features, which beneficiary advocates might question, is that people who qualify for this payment but have partners who are still working may still be eligible for the payment so long as their partner is earning under $2,000 per week. Anyone who’s been involved with the existing treatment of beneficiaries will know that there are often very harsh cases coming into play where a couple’s income is aggregated, and that benefits are often struck down because a person has formed a relationship or is deemed to have formed a relationship during the period.

So the gap between the generosity of this new measure and the existing rules is quite marked and has drawn criticism.  How that will play out is largely a political matter. But it points to something that I’ve talked about previously –  we do need to look at our welfare settings and particularly the interaction with the tax system.

Unusually, these payments are not being taxed, whereas benefits are actually taxed. Now, the net effect is intended to be the same, but still it’s an interesting distinction. So whether it points to – as has been hinted at – there’s going to be some further changes and significant changes at that, in the benefits and welfare system remains to be seen.

For the moment, the important thing is for those who are directly affected now, this new payment will come as a relief for them as it’s intended to do so. And leaving aside the politics of it all, we shouldn’t be scapegoating those who’ve been unfortunate enough to be affected by the scale of the pandemic. Let’s look to try and improve the system for everyone, but don’t blame those who are caught up in it right now.

Speaking of redundancy, this week, I spoke to Madison Reidy of Newshub about the tax treatment of redundancy. Currently, redundancy is treated as a extra pay for tax purposes,  subject to pay as you earn and taxed at normal rates. That is, it’s fully taxable to the recipient. The PAYE that’s applied is based on the combined total of the redundancy and the annualised value of the PAYE paid to an employee in the previous four weeks.

Now, as Madison and I discussed, the tax treatment of redundancy is pretty harsh. Actually it’s harsh in two ways. Firstly because it’s taxed at a time when you may have to be reliant on it for an unknown period of time. The second point is that for some people the lump sum may be taxed at a higher average tax rate than would normally apply to them. This would be particularly true of lower income earners, say, earning around the $48-50,000 mark, where most of their income is being taxed at 17.5%. They may receive a redundancy payment which would be taxed at 33 percent. And the current system makes no concession for that.

It hasn’t always been the case. But our tax rules have been pretty hard on redundancy since 1992 when the rules were changed and redundancy became fully taxable. There was a period between 2006 and 2011 when a credit was given up to a maximum $3,600. But that was withdrawn in April 2013. Ironically, it was going to be withdrawn from April 2011, but then got extended for a further period to 1st of October 2011 following the Canterbury earthquakes.

But the treatment of redundancy seems harsh compared with what happens across the ditch in Australia, where the first A$10,638 dollars is tax free. And then A$5,320 dollars per year of service is also treated as tax free. So substantial payments can be received and, depending on the length of service, may not be taxed in Australia at all.  It does have to be redundancy. Accumulated leave and sick leave would be subject to tax in Australia. Over in Britain, the first £30,000 of redundancy is tax free.

It seems to me that we ought to be looking at this question of redundancy and whether, in fact, the rules are appropriate.  There’s going to be a lot of redundancy paid out over the next few months. We haven’t seen the full impact of the pandemic on employment yet. And therefore more people, sadly, will be losing their jobs. And at the moment, they’re going to get hit very hard with the tax on their redundancy and that’s going to cause some grievances.

As an aside, the treatment of lump sum payments under PAYE is a problem not just for redundancy. Retiring allowances are treated the same way. And most egregiously in my mind, are ACC payments. Sometimes people get in a dispute with ACC over the amount that’s due to them. When those disputes are resolved in their favour, then ACC may make several years of payments all at one go.  These are just simply treated as an extra pay and taxed as if it is the recipient’s normal income income.

What that might mean is say, for example, four years arrears at $20,000 a year or $80,000 might be taxed all at once,. The average tax rate which would apply on this payment is therefore much higher than would have applied if the person had received the payments when they should have done. This is a running sore in ACC, which again, governments have talked about changing but not followed through.

And finally, Inland Revenue is reporting a massive jump in the number of people applying to pay their tax off in instalments.

According to Inland Revenue, in March 2020, there are 104,443 payment instalment arrangements in place, compared with 41,014 in March 2019. The amount of tax that’s under instalment has gone from $659 million to $1.167 billion. I suspect this number will rise again in April.

Now Inland Revenue has been very proactive in accepting instalment arrangements, but it is a sign of the scale of what’s going on at the moment that so many more taxpayers are now under an instalment plan. It has doubled in one year. And possibly we may see it may have tripled once we see the April figures.

I’ve talked about instalment arrangements previously and what you need to do is get in front of Inland Revenue as quickly as possible. Explain what’s happening and give them a plan as to how you’re going to deal with it. Don’t put your head in the sand.

Just bear in mind that although at the moment Inland Revenue is being fairly generous about what is COVID-19 related or not, it may well take a second look at this. And that may mean that some people who were trying to set up instalment arrangements prior to the arrival of the virus may still be stuck with having to pay use of interest at 7% on the unpaid debt because it was a pre COVID-19 debt.

Whatever the case, the key thing in dealing with Inland Revenue is communication. Don’t put your head in the sand. Deal with the matter. You’ll find that at this stage, they’re responsive to requests.

Well, that’s it for this week. I’m Terry Baucher, and you can find this podcast on my www.baucher.tax  or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. Until next time, Kia Kaha, stay safe.