25 May, 2020 | The Week in Tax
- The Small Business Cash Flow Scheme
- Inland Revenue’s guidance on the sharing economy
- Employees claiming home office expenditure
Transcript
With the move to Alert Level Two, there’s some level of normality being restored, and most businesses are now able to operate. But for many, the COVID-19 pandemic represents a major hit to their business and cash flow.
So, one of the measures that they probably welcome is the most recent one announced by the Government, the Small Business Cash Flow scheme (which wasn’t actually included in the Budget estimates and hasn’t yet been costed formally).
Now, this scheme had a rather chequered start when the legislation enabling it was accidentally released and then passed by Parliament ahead of time. But now the details have been fleshed out and it has been up and running since May 12th. For one month until June 12th businesses with 50 or fewer full-time equivalent employees can apply for a loan.
Eligible businesses and organisations can then get a one-off loan with the maximum amount being $10,000 plus $1,800 per full-time equivalent employee. There’s an annual interest rate of 3%, but no interest will be charged if the loan is fully repaid within one year.
Now, the scheme is being administered by Inland Revenue, which seems odd because it’s not its core business. But if you think that it already administers the student loan scheme, then giving it the responsibility to manage the Small Business Cash Flow is not unreasonable.
The scheme was put together very quickly when it became apparent that the business finance guarantee scheme arranged with the banks under which the Government underwrote 80% of the risk was not delivering funding to small businesses quickly enough.
It is already – in terms of demand – a huge success. By Friday of the first week of its launch more than 33,000 business had applied for a loan, and 31,000 loans had been approved. So far, just under $600 million dollars has been approved for lending. There are about 400,000 businesses in New Zealand with 50 or fewer full-time equivalent staff who are eligible. So the Government is looking at a potentially horrendous amount of borrowing.
If you work through the Inland Revenue website, you’ll see the calculation of the loan is tied to the wage subsidy scheme. In fact, you can apply for the loan, even if you haven’t applied for a wage subsidy. The reference to the wage subsidy scheme is there just simply to provide a rough and ready calculator of the amount that’s available.
Under the terms and conditions, the loan must be repaid within five years and the interest rate is 3%. But if you are late with an agreed repayment, use of money interest, which is now 7%, will apply in addition. So effectively there’s a 10% rate for late payments.
As I said, the scheme is open until 12th of June. It’s looks like it’s going to have a huge take up.
And it does raise an interesting point that given the difficulties small businesses have had accessing financing from banks – despite the Government agreeing to underwrite 80% of the risk – this scheme was still needed. And the question arises that once everything settles down and we return to business as normal, whenever that is, whether there is a role for a similar type of scheme to exist for small businesses in the future. In America, the Small Business Administration runs a hugely successful small business loan scheme. Something I think the policy advisers at MBIE should be considering is maybe a permanent iteration of this scheme.
How Inland Revenue is coping
Moving on, Inland Revenue has continued to operate as best as possible through the pandemic. Its call centres have been very hard hit with having to deal with the effects of social distancing. Quite apart from that, Inland Revenue has found itself with additional responsibilities in the aforementioned Small Business Cash Flow Scheme and also assisting the Ministry of Social Development in administering the wage subsidy scheme. What happens is the MSD calls Inland Revenue to confirm details regarding the applying business’s tax affairs. And once those are confirmed, the wage subsidy is then approved or declined as appropriate.
As a result, Inland Revenue has stopped answering the phones on its dedicated line for tax agents and its call centres have, as I mentioned, reduced staffing because of social distancing measures. But it has been responding very, very quickly using its online features and particularly its myIR feature.
Inland Revenue’s recommendation is if you want to make contact, the best way is through the online myIR service. And furthermore, if you get a response from Inland Revenue, you can actually reply to that response. Previously, replying to IR used to trigger a new response and a new inquiry. So there’s a lot of favourable stuff happening in the background with Inland Revenue.
Inland Revenue has also been upgrading its website as part of its Business Transformation programme. It is splitting off the technical matters such as tax policy and legislation, Tax Information Bulletins, the various formal determinations, interpretation, statements and other technical documents that it issues.
Inland Revenue’s main website actually makes really clear reading, and it’s been adding explanations of various areas of interest where it will be focusing its attention.
Tax and the sharing economy
One of the features it has recently added is a section on the sharing economy. The sharing economy is described “as any economic activity through a digital platform such as a website or an app where people share assets or services for a fee.”
It goes on to explain that such activities are obviously still subject to income tax and GST and you need to consider the implications of that.
The various sharing-apps it discusses are obviously the ride sharing or sometimes called ride sourcing, such as Uber, Zoomy or Ola.
Then there’s short stay accommodation, including renting a room or a whole house unit. So that’s Airbnb, Bookabach or Holiday Houses. Then there’s sharing assets, for example cars, caravans or motor homes. And those who come through platforms such as Yourdrive, Mighway, Parkable, MyCarYourRental and Sharedspace.
Finally there’s people who in the gig economy are using platforms such as Pocket Jobs, Fiverr, Air Tasker, WeDo, Askatasker, Deliveroo and Mad Paws. Very creative names there.
All these platforms are covered by the sharing economy and they’re all subject to income tax, and GST if the value of your services exceeds $60,000 in any 12-month period.
Inland Revenue’s website sets out what is fairly standard guidance as to how it expects the rules to apply.
What it also sets out is what are not considered part of the sharing economy, and that includes online selling or classifieds such as Trade Me or eBay, cryptocurrency exchanges which are dealt with completely separately, and peer to peer financing or crowdfunding. Now these still have income tax and GST obligations, but slightly different rules apply.
As I said, this guidance from Inland Revenue is really clear in setting out the rules. There should be no reason for people not complying.
As Inland Revenue gets back to a normal, what I expect will happen is that its investigators and staff will basically be told to kick over every rock around to see what’s under there. So you can expect a tightening of the rules and increased examination of the cash economy, using cash to avoid tax.
Ride-sharing apps, by their nature are outside the cash economy. But I think one of the things Inland Revenue will be doing is sending requests to the ride sharing app platforms asking for details of who in New Zealand is using the respective platform.
In summary, the rules are set out there very clearly. And behind them is the unspoken threat that Inland Revenue will be looking at this sector as things return to normality.
More on home office expense claims
And finally, we recently discussed the treatment of Home Office expenditure.
It so happened I was interviewed for the Cooking the Books podcast of the New Zealand Herald about this matter this week. There was an unfortunate misstatement in the article, which initially suggested that people would be entitled to a $15 per week tax refund.
That is not correct. An employee can’t claim a deduction for home office expenditure, but they can apply to their employer for reimbursement. And Inland Revenue has issued a temporary determination valid until September, under which payments of up to $15 per week can be made to an employee and they will be treated as exempt income for the employee. If you have any questions, as always, you know where we are.
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. Please send me your feedback and tell your friends and clients. Until next time, Kia Kaha, stay strong.
4 May, 2020 | The Week in Tax
- Inland Revenue releases a determination on payments to employees for working from home
- COVID-19 tax measures legislation is introduced
- Provisional tax is due 7th May
Transcript
This week, Inland Revenue releases a determination on payments to employees for working from home. The COVID-19 tax measures legislation is introduced and in case you forgot, Provisional tax is due Thursday 7 May.
A little earlier this month, I outlined the rules regarding employees claiming a deduction for home office expenditure, and I suggested that Inland Revenue should issue a ruling on the matter to help clarify the position. It was quite clear that many employees were unaware of the position. And likewise, employers were not sure of their own obligations.
Therefore, I’m very pleased to see that Inland Revenue has followed through and on Wednesday issued Determination EE002: Payments to employees- for working from home costs during the COVID-19 pandemic.
Now this Determination is described as a temporary response to the COVID-19 pandemic and applies to payments made for the period from 17th of March to 17th of September 2020.
What the Determination does is explain the rules that apply where employers have either made or intend to make payments to employees to reimburse costs incurred by their employees as a result of having to work from home during the pandemic. And it notes that realistically
…many employers will not be in a financial position to make additional payments to employees during the COVID-19 pandemic. This Determination is not intended to suggest that employers make such payments to employees.
The Determination explains only the employer can claim a deduction for such expenditure, but they can reimburse employees for their costs and such payments would be exempt income for the employee. It’s not binding on employees and employers who can work out their own allocations and allowances within the rules.
Critically, and very usefully, the Determination sets out the amounts Inland Revenue regards as acceptable. Under the Determination an employer who pays an allowance that covers general expenditure to an employee working from under because of the pandemic, can treat up to $15 per week of the amount as exempt income of the employee. And this amount applies on a pro-rata basis if the payment is made fortnightly i.e. $30 per fortnight or $65 per month if you make a single monthly payment. Anything above that $15 per week threshold, unless they can prove that the actual costs are higher, the excess would be taxable Income and subject to PAYE.
Additional payments can also be made for the cost of furniture and equipment, and that’s to recognise the fact that an employee might incur a depreciation loss on furniture and equipment used in a home office, which because of the employee limitation, they’re not allowed to claim that deduction.
The Determination actually offers two options: a safe harbour option in which an employer can pay up to $400 to an employee and it would be treated as exempt income. Alternatively, the employer can reimburse employees for the actual cost of furniture and equipment purchased for use in a home office.
The Determination also usefully summarises the impact of a previous Determination EE001 relating to telecommunication usage plan costs under which to $5 per week can be paid is exempt income if the plan is used for the job. Otherwise, then you take an apportionment basis depending on the amount of business use involved.
Finally, the Determination sets out what evidence is needed to support the payments. For the safe harbour option of $400 reimbursing for home office equipment and furniture, no evidence is required if that’s the only amount paid. In relation to the $15 per week for other expenditure (such as additional heating and power costs), again, no evidence is required. And similarly, for the telecommunications usage plan costs of $5 per week. In every other instance you would need to provide evidence or have evidence available to support the payment made.
Now this is a temporary measure, it was signed off on April 24th and released on April 29th and it only applies for payments between 17th March up until 17th September. But it’s a good measure and helps clarify a position with a lot of uncertainty around it. Inland Revenue would have been working flat out behind the scenes on this one.
Tax loss carry-back legislation
Moving on, the legislation for the tax and other COVID-19 related measures was introduced into Parliament on Thursday. Now, the tax part of this covers the temporary loss carry-back regime and also gives the Commissioner of Inland Revenue a temporary discretionary power to modify where appropriate due dates and timeframes or other procedural requirements under the various Inland Revenue acts.
The tax loss carry-back regime ad inserts a new section IZ 8 into the Income Tax Act 2007 and the legislation on this amounts to nearly 5 ½ pages, so it’s quite involved. They’ve also put in an anti-avoidance provision, section GB 3B to counter any possible tax avoidance or abusive use of the loss carry-back measure.
As previously discussed, small businesses with a 31st March balance date are probably not going to really benefit from this scheme, but let’s wait and see. Obviously, if you’ve got a balance state, which is not to 31st March, say, for example, to 30th September 2020, this measure is more likely to be of greater use. So, it’s almost a question of suck it and see what we can do around that. But at least we now know the relevant legislation.
Intriguingly, some have suggested that maybe an alternative position might have been to have an extended income tax year or double tax year that is treat the period from 1st of April 219 through to 31st March 2021 as a single tax year. That’s an interesting response. I have seen something similar in the UK when a loss carry-back regime was introduced. How much use is made of it we’ll just have to wait and see.
The Commissioner of Inland Revenue has also been given a temporary discretionary power for the period from 17th March 2020 until 30th September 2021. These are included in new sections 6H and 6I of the Tax Administration Act 1994. Now those temporary sections may be extended in duration, but they give Inland Revenue the ability to do as we’ve discussed in recent weeks and extend the timelines for filing tax returns or clarify what are the COVID-19 implications for tax residency.
I still think we probably may finish up with some specific legislation on these issues, but at least Inland Revenue now has the tools it needs to respond quickly to issues as they arise.
Looking ahead to the Budget
What next? Well, the Budget is in two weeks on the 14th of May. We may see some more tax measures but probably it will focus on Government spending, over the next four-year period and what measures it plans to apply to start paying for all of this. My understanding is that the long overdue income tax threshold changes I’ve previously suggested are now off the table. No doubt people will be making submissions behind the scenes on what they would like to see.
Intriguingly, the COVID-19 legislation released on Thursday included reference to a Small Business Cashflow Scheme which is to be administered by Inland Revenue. [As has been reported elsewhere this was a mistake although I was aware beforehand that something might be in the pipeline.] The scheme is probably a counter to complaints that small businesses have been making about the difficulties of accessing bank finance under the Business Guarantee Finance Scheme, which was announced a couple of weeks ago. We’ll soon see, and I’ll report further if there’s any interesting tax matters which come out of it.
Provisional tax is due
Finally, a reminder that the third instalment of Provisional tax for the March 2020 income tax year is due Thursday, 7th of May. Now, if you can pay that, you should do so. Hopefully, businesses will be in a position to do so as well those with regular sources of income, such as overseas pension schemes.
But if you can’t pay your provisional tax tell Inland Revenue quickly so that it will then apply the concession relating to use of money interest. And if you’ve got any issues around what you think your tax bill is going to be or how you’re going to manage it, get in touch with your tax agent or contact Inland Revenue directly through your myIR account and let them know what’s going on.
14 Apr, 2020 | The Week in Tax
- More on Inland Revenue’s criteria for relief as a result of the COVID-19 Pandemic
- The fringe benefit tax lesson from David Clark’s misadventures
- The pros and cons of a Financial Transactions Tax
Transcript
This week, Inland Revenue has been updating its guidance as to the measures that have been introduced by the Government to help in the short term and longer term with the response to the Covid-19 pandemic.
In particular, Inland Revenue has given more guidance about what its position is around the remission of late filing penalties and use of money interest for tax that is paid late.
The position that has been set out and circulated in some detail to tax agents is as follows. In order to be eligible for remittance, customers – that deathly phrase – must meet the following criteria. They have tax that is due on or after 14 February 2020, and their ability to pay by the due date – either physically or financially – has been significantly affected by Covid-19.
They will be expected to contact the Commissioner “as soon as practicable” to request relief and will also be required to pay the outstanding tax as soon as practicable.
As to what “significantly affected” means, Inland Revenue’s view is this is where their income or revenue has been reduced as a consequence of Covid-19, and as a result of that reduction in income or revenue, the person is unable to pay their taxes in full and on time.
Now a couple of things to think about here.
“As soon as practicable” will be determined on the facts of each case according to Inland Revenue. So that as long as the taxpayer applies at the earliest opportunity and then agrees to an arrangement that will see the outstanding tax paid at the earliest opportunity or be paid over the most reasonable period given their specific circumstances, then that test will be met.
However, what you also need to know is that this is very much on a case by case basis, so that if Inland Revenue thinks you’re trying to pull a fast one, they will deny remission and you will be up for the late filing penalties and use of money interest.
Now, in terms of applying for remission of use of money interest, Inland Revenue is saying it would try and minimise the amount of information it normally asks to be provided, accepting that these are unusual times. But they want people to continue to file their GST returns. So in other words, you may not be able to pay your GST on the regular time, but you should still file it, so that gives them information as to what’s going on.
Obviously, if things have really dived into a hole for a taxpayer, filing a GST return may be a means of getting a refund. Although if you owe tax to the Inland Revenue, that would simply be swallowed up and applied to any arrears.
But in terms of information, Inland Revenue are saying they would expect to see at least three months of bank statements and a credit card statement, any management accounting information and a list of aged creditors and debtors. Inland Revenue goes on, we may not ask for that all that information in every case, but it should be available if we do ask for it.
For businesses, they will be looking to see and to understand what your plan is to sustain your business. You may not be able to get all that information to them; they’ll work around that. So, they’re clearly trying to be as flexible as possible.
Obviously some people were already in trouble before 14 February, so they can ask to renegotiate their existing instalment arrangement with Inland Revenue. Very simply,what will happen is that you enter into an arrangement with Inland Revenue that you’re going to pay X amount at a regular time to meet your liabilities. Inland Revenue have said in some cases they will accept a deferred payment start date.
They may partially write off some of the debt because of serious hardship but expect the remainder to be met by instalment or a lump sum. They may also even write it off completely due to serious hardship. It’s all going to be done on a case by case basis. So that’s the most important takeaway.
Inland Revenue’s communications around remission of late payment penalties and use of money interest are a little confusing, in that it seems to say that anyone paying late will be able to get remission of use of money interest on late payment penalties. That is not the case. It must be Covid-19 related and you must demonstrate that.
As it is being done on a case by case basis, be aware that if you don’t meet the standards that Inland Revenue are expecting to see, they won’t grant you the remission. So that’s the key take away at the moment.
Now, in previous podcasts I have raised the possibility of the 7th May provisional tax and GST payments being postponed. The problem is that Inland Revenue doesn’t have the authority to do that, even though it sounds like a great idea. With Parliament essentially in recess, it’s not something that can be done quickly either. So that’s probably something that longer-term legislation may need to be introduced to give Inland Revenue the flexibility to deal with unexpected events.
It probably felt it had enough flexibility to manage the situation in the wake of the Canterbury earthquakes, but as this Covid-19 pandemic has shown, when it happens nationally, not just regionally, then extra powers or extra flexibility may need to be granted statutorily.
A quick note on Inland Revenue. Remember that it is closing all online and telephone services and their offices as of 3p.m. today. This is to finalise Release Four of their Business Transformation Program. As I said in last week’s podcast, I agree they should continue to do this. They’ve probably put a lot of work in place beforehand, and it’s going to be more disruptive for them to postpone it. So at a time when productivity does fall away a little bit – it’s after the 31 March year end and it’s around Easter – this is as good a time as they’ll ever get to do it. Services will be back up and running from 8a.m. next Thursday.
Just a final quick note on that – remember, if you’ve got a return or e-file in draft or any draft messages in your MyIR account, those will be deleted. So you should complete and submit them before 3p.m. today.
FBT surveillance
Moving on, there’s a useful little tax lesson from David Clark’s – the Minister of Health – misadventures, and it’s in relation to the photograph that’s been widely circulated of his van sitting isolated in a mountain bike park.
We’re going to see more of Inland Revenue going through social media and picking up signage on vehicles and then matching that signage to its records about fringe benefit tax.
What happened there, someone obviously saw David Clark’s van which had his name and face written all over it and passed it on to a journalist and the story ran from there.
That already happens to some extent with Inland Revenue already looking at people’s use of work-related vehicles. In particular, the twin cab use, which I’ve mentioned before, is something that I know Inland Revenue is now starting to look more closely at in terms of FBT compliance.
You get chatting to Inland Revenue officials and investigators and they’ll have some great stories about how taxpayers have accidentally dobbed themselves in by driving their work-related vehicle towing their boat to, say, a wharf opposite the Inland Revenue office in Gisborne was one story I heard.
So David Clark’s misadventures should be a highlight that if you’ve got a sign written vehicle and you are claiming a work related vehicle exemption, don’t be surprised if Inland Revenue starts matching up your Facebook profile, for example, with your FBT returns and asks questions. This is part of the brave new tax world we live in and is something we will see a lot more of.
Financial transactions tax
Finally for this week, I mentioned in last week’s podcast I did a Top Five on what I saw as the possible future tax trends post Covid-19. One of the things I talked about was greater use of artificial intelligence and data mining and information sharing by Inland Revenue – just referencing back to my previous comment by David Clark and FBT.
I also discussed the likelihood of new taxes coming in. And one of the taxes I commented on was a financial transactions tax and that perhaps that it’s time might come.
But the drawback, as I saw it for a financial transactions tax, is that it needs to be applied globally. And one of the readers asked the following question
“Why does a FTT need to be universal? In the context of your article, I read global as meaning why can’t the New Zealand government apply for all transactions in New Zealand, especially for money leaving the country?”
It’s a good question and so I dug around a bit more on the topic. A financial transactions tax sometimes also called a Tobin tax after the economist who first mooted it, is a tax on the purchase, sale or transfer of financial instruments.
So as the Tax Working Group’s interim report said, a financial transactions tax or FTT could be considered a tax on consumption of financial services.
And FTTs have been thought of as an answer to what is seen as excessive activity in the financial services industry such as swaps and the myriad of very complex financial instruments. Some people consider many of these as just driving purely speculative behaviour and a FTT could be something that would actually help smooth some of the wild fluctuations we sometimes see in the financial markets.
Now, the Tax Working Group’s interim report thought the revenue potential of a financial transactions tax in New Zealand was likely to be limited “due to the ease with which the tax could be avoided by relocating activity to Australian financial markets.”
And this is what I meant by saying a FTT had to apply globally. If you’re going to have a financial transactions tax, you need to have it as widely spread as possible across as many jurisdictions. Otherwise, you’ll get displacement activity.
Now, it so happens I’m looking at Thomas Piketty’s Capital in the Twenty First Century, and he had an interesting point to make about a FTT. And that is that it is actually a behavioural tax, because, as he has put it, its purpose is to dry up its source. In other words, think of it like a tobacco tax. The intention there is not just to raise revenue, its primary function is to discourage smoking.
So a financial transactions tax has the same effect. It drives down behaviour that you don’t want while raising money. But the fact it is driving down transactions means that its role as a significant producer of income for the Government is limited.
Piketty suggests its likely revenue could be little more than 0.5 percent of GDP. The European Union when it was considering a FTT of 0.1% thought it might raise the equivalent of somewhere between 0.4% and 0.5% percent of GDP. (about EUR 30-35 billion annually in 2013 Euros). 0.5% of GDP in a New Zealand context would be maybe $1.5 billion. Not to be ignored, but still not a hugely significant tax.
The other issue that the Tax Working Group were concerned about – and I think this is something that we really want to think about in the wider non-tax context – is that any relocation to Australia, for example, would reduce the size of New Zealand capital markets.
And I think this is a long-term structural issue in the New Zealand economy we ought to be considering more seriously – in the wake of what comes out of the initial response when Covid-19 pandemic ends, how the economy looks going forward. This will be one of the issues to look at.
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. Please send me your feedback and tell your friends and clients until next time. Happy Easter and stay safe and be kind. Kia Kaha.
6 Apr, 2020 | The Week in Tax
- More on Inland Revenue’s response to COVID-19
- Inland Revenue is closing down next week
- How might COVID-19 affect tax in the future?
Transcript
In today’s article, more on Inland Revenue’s response to the Covid-19 pandemic. Inland Revenue is closing down, but only temporarily, and what lies ahead in the tax world.
Inland Revenue grudging guidance on late filed tax returns
This week has been the first full week of the lockdown. So, we’re all settling down into some sort of routine and Inland Revenue has provided further guidance around the application of the time bar rule and its right to review tax returns after they have been filed.
The guidance that has been issued has not, as I had hoped last week, given a blanket extension of time for filing the March 2019 tax returns, which were due by March 31st. Instead they set aside some criteria where in four years time Inland Revenue might be considering a review of a tax return and the scenario where it would not do so because the return had been filed late as a result of the 2020 Covid-19 Pandemic. Basically, these rules will apply if the return was due before 31 March, but instead is filed by 31 May.
The criteria are relatively specific in that if in four years time, 31 March 2024, Inland Revenue will close any review or compliance activity for any March 2019 tax return, which was filed after 31 March 2020, but before 31 May 2020, has no other exclusions from the standard time bar rule, that is, there’s no fraud or willful omission or income which should’ve been declared has been omitted. There’s no dispute going on, it does not involve tax avoidance, and doesn’t have tax in dispute of greater than $200 million. A very specific set of criteria there. I can tell you that that last one is rather redundant because anyone who was dealing with a tax
return of that size would have made damn sure it was filed by 31st March so there was never any issue around the time bar applying.
This concession does read a little like the sign in a bar which says credit will only be extended to anyone over 85 who is accompanied by both their parents. I find it rather grudging. I think it just stores up issues for arguments three or four years down the track, which are unnecessary.
This is a highly unusual situation. Inland Revenue has rather glided right past the fact that we have been ordered to shut down by the government. For a government agency to still be insisting that filing deadlines should be continued to be met as if nothing was happening, is frankly a little unrealistic.
I’d still like Inland Revenue to come out and give a flat concession, saying that they would extend the basic times for filing elections and tax returns to, say, 30th April, if not as far as 31st May.
Just as an aside, I noticed that for large multinationals, they are required to file a Basic Compliance Package and Inland Revenue, in the same notification I just referred to – talking about late filing dates – told the multinationals that a decision has been made to extend the timeframe for filing Basic Compliance Package to 30th June 2020.
I’m trying to understand why it is that small businesses get no such concessions when we’re not always as well resourced, while larger multinational organisations who have access to the best tax advice, get a three-month extension of time. That’s a sort of left hand not talking to the right hand and not thinking about what they’re doing.
Thinking of rorting the wage subsidy – don’t
There has been quite a lot of discussion amongst tax agents about the wage subsidies and eligibility for the wage subsidy, which does apply to shareholder employees and also to independent contractors. But several agents in discussions have been wondering whether, in fact, some of the applications they’re receiving, are shall we say, gilding the lily.
This scheme is quite generous, it is designed to help everyone through the Pandemic and there’s no doubt that everyone has taken a massive hit to their business. It could be accused of being overgenerous, but that said, I would caution people about trying to push the boundaries on this one. I think the general backlash against businesses that are seen to have rorted this system will be quite strong. And the Finance Minister made it clear that people who made false declarations would be prosecuted.
Use of money interest and late payments
We’ve still not heard anything about a reduction in the use of money interest rates. Rather amusingly, an article in the April edition of the Tax Information Bulletin noted that an Order in Council has been made to ensure that the Commissioner’s use of money interest paying rate cannot be set at a negative rate. In other words, they had to pay something. Rather redundant in the current circumstances.
The position is that Inland Revenue has said that it will be effectively wiping interest and penalties. But these are only on Covid related circumstances that caused the late payment, and it has essentially reserved itself the right to look at everything on a case by case basis. Again, we’re still waiting to hear if they’re going to delay the 7 May provisional tax and GST payments, something I think should be done as a matter of course.
Inland Revenue shutdown for Release Four
Moving on, Inland Revenue is about to close for seven days, from 3pm next Thursday 9th April, and will reopen on 8am, Thursday 16th April.
This is part of Release Four of its Business Transformation programme.
It’s a good time for it to be done over Easter. This was well planned in advance and will probably take the strain off their systems because clearly Inland Revenue is still trying to sort out the working remotely thing out, as we all are.
A few things to note about the Inland Revenue shutdown is that the MyIR online services will also be unavailable, as well as the offices being shut, the phone lines will be closed. And there is something else. If you’re thinking about filing your tax return in early because you think you’re due a refund, you should make sure you have filed it by 3pm on 9th April. Otherwise if you have a return or e-file in draft or any draft messages in a myIR account, these will be deleted as part of the upgrade. So, if you’re filing returns, or sending messages through the MyIR portal, get it done before Thursday.
What lies ahead – the future of tax
And finally, what lies ahead in the tax world as a result of the Covid-19 pandemic? Well, my Top Five looks at the fallout of the Covid-19 pandemic. I put forward five tax changes I think we will see over the coming years. Here’s a quick teaser.
I think in the short term, tax rates will rise. We will see the re-emergence of a very strong debate over the taxation of capital. And that means capital gains tax will be back on the table. Environmental taxes will rise in importance. The corporate tax rate around the world will rise and the OECD BEPS initiatives will come through very quickly. And finally, the power and reach of tax authorities will increase – the stuff we see with FATCA and the Common Reporting Standards – we’re going to see more of that.
Here’s the whole article.
So 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. Please send me your feedback and tell your friends and clients. Until next time, Kia Kaha, stay strong.
24 Feb, 2020 | The Week in Tax
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- Changing tax thresholds and capital gains tax are back on the agenda
- Inland Revenue warns the hospitality industry
- OECD estimates international tax reform could be worth USD100 billion annually
Transcript
Last week began with Simon Bridges, the National Party leader, outlining the party’s proposed economic platform for the coming year. And in that speech he alluded to the expectation of tax cuts before, in what was possibly a casual use of language, he said that persons on their average wage should not be paying a third of their income in tax.
This prompted a bit of a pile on because it was quickly pointed out that someone earning the average wage of about $65,000 per annum pays on average 19.2% in income tax. And in fact, some nerd calculated only a person earning $3 million or more, would actually have an average income tax rate of 33%.
And this is a reflection, as I explained to Wallace Chapman and the Radio New Zealand panel on Tuesday afternoon, of our progressive tax system. As your income rises, the tax rate rises starting at 10.5% before reaching 33% on income over $70,000. But the point I made is that the rates jump quite sharply from 17.5% to 30% at the $48,000 mark. And so, the question should be whether those thresholds and rates are appropriate.
And interestingly, when looking at this in preparation for speaking to Wallace Chapman, I went back to just see how often the tax thresholds have been changed. As I explained, 33% cent has pretty much been baked in since 1989 with the exception of the period between 1999 and October 2010, when it was increased to 39% before dropping back slightly to 38%. The threshold has varied obviously during that time, but over the past 30-year period, the top rate threshold has only been adjusted six times by my reckoning. Six changes of thresholds in 30 years is actually quite surprisingly low.
Many other countries adjust for inflation. Britain does. And it’s a mandate in the UK tax legislation that if you are not adjusting income tax thresholds, you must specifically legislate to not do so. My view is that something like that should be in our tax legislation, because otherwise politicians are able to claim tax cuts when in fact we’re dealing with something which is no more than an inflationary adjustment.
But the tax pressure point for people is not, in my view, around the 33% top rate, even if it is perhaps low by world standards. But on that threshold, around the $48,000, when someone moves from 17.5% to 30%. That’s quite a significant jump of twelve and a half percentage points and quite a lot of other things are happening at the same time. Working for families’ abatements are kicking in at 25 cents on the dollar for income above $42,700 dollars. For someone who’s on or near average wage or possibly a bit below and maybe receiving working for families’ tax credits, they have a quite significant jump in their marginal tax rate jump.
They go from 17.5% to 30% and then they have an effective 25% on working for families’ abatements. And it’s not inconceivable they might also have a student loan in which case they lose another 12% of their income anyway if it is just over $20,000. So, it’s not impossible for someone earning around $50,000 to have an effective tax rate of 67 % or more. That is 30% income tax, 12% on the student loan and 25% working for families’ abatement.
We’re going to see something this election from both sides of the spectrum about tax and this is an area where I believe the parties that want to sell their tax policies on need to focus on. It’s that low to middle income earner, moving up through thresholds who is definitely most in need of some form of tax adjustments.
Then at the same time, no fewer than three separate bodies popped up with the capital gains tax issue. And I can probably now say I told you so. Because those who listen to the podcast will know that I said at the start of this decade, not so long ago, that I expect that capital gains tax debate to re-emerge. I have to be honest; I didn’t think it would happen so quickly.
We had the Helen Clark Foundation releasing a paper on housing affordability in which it proposed a capital gains tax. There was an interesting snippet in there, which highlighted one of the reasons why our housing is so expensive, but I think also should be of great concern to us economically. The report said and I quote,
Loose regulation of mortgage lending. Buyers in New Zealand are borrowing up to 7.5 their income, compared to 4.5 times in the United Kingdom has allowed prices to inflate rapidly.
Seven and a half times income is a quite frightening statistic in my mind, because it means that those people who are taking mortgages at that level have absolutely no margin for error if – actually it’s not if it’s when – interest rates rise. So, the hope obviously from that group of people is that the equity in the house keeps ahead of the potential risks that they have an interest rate rise and that their earnings rise substantially to bring down that income ratio.
Then we had Dominic Stephens of Westpac. He highlighted the problem that house price inflation has picked up, again, as he predicted, with the non-implementation of a capital gains tax.
And finally, we had the United Nations Special Rapporteur Leilani Farha from Canada damning New Zealand’s housing crisis, calling it a perfect storm.
And she called for a capital gains tax as well. So, an interesting trifecta of opinions on the matter.
And like I said, at the start of the year, we’re going to see more about this. This issue isn’t going to go away. Whether or not capital gains tax is an appropriate tool for resolving the housing matter is obviously up for debate. I think it’s one of the tools that should be in the box. But I’m also wondering whether there are other options that need to be engaged as well from the tax side. But never mind that issue. That debate is going to keep strengthen over the coming years.
Moving on, we got an email from Inland Revenue who do like to keep in communication with everyone much more now under their upgraded system. It told us, quote, “We’ll be contacting your clients in the hospitality industry to thank them if they’ve been keeping their books in order.” Which I thought was a marvelously passive aggressive way of saying ‘if they’ve been keeping good books in order, great. If not, we’ll be asking questions’. And the email actually goes on to say, “we’ll also be encouraging our clients to put their records right if they’ve left anything off their past tax returns”.
Passive aggressive tones aside, this is something we’re going to see a lot more of. Inland Revenue is going to get very specific about targeting particular industries and it’s going to be very vocal about what it’s going to do and how it will go about it. The message will be sent out to tax agents, hospitality industry associations, etc. They’ll be told, ‘We’re going to look at this, so pass the word along to your members’.
And to be honest, I think that’s a good approach because to apply Gresham’s law, bad money will drive out good. Those sorts of operators who are undercutting other taxpayers who are fully compliant are a risk to the whole sector as well as simply leeching off the system, in that they expect the full availability of public services but aren’t prepared to contribute fully to that. And that, incidentally, is Inland Revenue’s messaging.
I see that, by the way when I get communications from the UK’s H.M. Revenue and Customs they have the same slightly passive aggressive tone to them, saying if you’ve not paid your tax on time, then you are not funding hospitals, roads, schools, etc.
So the messaging from tax authorities is changing in this area. But the key takeaway here, and you can’t say you weren’t warned, is that if you’re not compliant Inland Revenue will be asking questions. And I really do say that it is a question of will, not if. It would be foolish to pretend because compliance in the past has been monitored inefficiently that it will continue to be the case. That most definitely isn’t the case. Everything I see in my interactions with Inland Revenue at either an operational level or talking at the higher policy level points to much more sharply tuned tools being employed more quickly to deal with matters like this.
And talking about dealing with matters of tax compliance or in this particular case, tax avoidance, the Organisation for Economic Co-operation and Development has just published an estimate of what it thinks will be the potential benefits from reform of the digital economy.
Several matters came out of this. We have this ongoing what they call the Pillars 1 and 2 approach and so far, according to the latest report given to the G20, they are still confident they can nut out something on this matter by the end of the year. Now what is obviously going to get the tax authorities and governments interested, is that the OECD estimates the combined effect of Pillars 1 and 2 as potentially bringing in up to 4 % of global Inc corporate income tax revenues, which is equivalent of U.S. $100 billion dollars annually.
The interesting thing they also say which will also encourage buy in from governments, is that the revenue gains are expected to be broadly similar across high, middle and low-income economies.
A 4 % increase in corporate income tax take here in New Zealand would amount to if my calculations are correct over $650 million annually based on the current income company income tax take of $16.4 billion. That’s a very tidy sum of money.
I have to say, I doubt whether in fact we would benefit as much as that. We’re very much a price taker in these matters as those who deal more in this international tax space have pointed out. So, I think the benefit will be substantially less than $650 million annually, but still very much worthwhile for our government to buy into the OECD’s approach. But we shall have to wait and see, and I will keep you informed as news emerges.
Well, that’s it for the week in tax. 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.
