This week I’m joined by Shamubeel Eaqub, a partner at the boutique economic consultancy Sense Partners.
Shamubeel is a regular commentator on economics and is the author of several books including Generation Rent.
Terry Baucher (TB): Kia ora Shamubeel, welcome to the podcast. It’s been an interesting week, we’ve had three major reports on the true tax rate paid by the wealthy on their economic income. What have you made of all this? Are we any the wiser after these three reports?
Shamubeel Eaqub(SE): I think we are much wiser. I think we’ve all always suspected that the rich were not required to pay tax on a lot of their incomes. But we didn’t know how much income or how much wealth there was. So, the report by IRD in particular, I think was really useful to get a much better understanding of the survey of high wealth individuals and families. Just how rich they were and just how much income they were earning from wealth alone. The report that came out the previous week from Sapere and OliverShaw Consulting I think was really poor.
I think the official report laid bare those conjectures and I think fairly largely lobbying efforts that was done in the Sapere report.
(TB): Yes, the Sapere report was something, I’ve described it elsewhere as fairly indigestible. You had the complete difference in the conclusions the Sapere report reached that broadly speaking the wealthy were paying a fair amount of tax in line with middle income New Zealand. By contrast the reports from Treasury and Inland Revenue which show a completely different picture, with Inland Revenue concluding the median income tax rate on economic income was 8.9%, I think that raised a lot of eyebrows.
SE: It did. I mean the reports from Inland Revenue and Treasury didn’t show that the rich are not paying tax on the income that is taxable. What it showed was our tax system simply does not ask rich people to pay tax on the income that they earn. Most of the income earned, of course, is from capital. Wealth begets wealth and that huge amount of income, almost all of the income comes from that. You know, the wealthy becoming wealthier and they’re not paying tax on it because we don’t ask them to.
I think there was a sort of misconception that somehow the wealthy are sneaking around and not paying tax on what’s required of them. Although we suspect that they might do that as well. This report wasn’t really about that. But, you know, tax minimisation is a thing. There’s a whole profession that’s out there to help rich people do it very well, people like you, Terry. And then there was the other bit, which is, I think, a bigger and more pertinent question, which is “What counts as taxable income, and should that be taxed?”
TB: Yes, and that’s at the heart of this whole thing. It’s not controversial to be looking at the question of the distinction between economic income and taxable income, because I’ve seen other jurisdictions consider the same issues. On Wednesday, I was on Radio New Zealand’s The Panel. A panelist argued bringing in economic income into the equation isn’t right, because it’s not taxed and we’re also talking about gains not realised. But as you know, we do tax certain instruments on an unrealised basis. But broadly speaking, there is no controversy about looking at the economic value to determine what is a fair or what is a true rate of tax.
SE: There isn’t. And I think the norms will change over time as well. And at a particular point in time, income taxes were thought to be ridiculous, but they’re now the norm. There is nothing to say that there is no one form of income or wealth or a taxable base that we can’t tax. To me, it feels a little bit strange to think that just because we’ve got a system now, which defines taxable income as a particular way, that’s the only thing that we can possibly tax. That’s not true, as you know, when it comes to, for example, things like foreign shares, we have a foreign shares deemed rate of return regime, and that actually works pretty well because it takes a lot of the complexity away and you pay tax on the return that you’re likely to make on the asset that you have invested overseas.
We do tax [unrealised gains] already, it’s not like we don’t. We also do it on things like rates, which is calculated by reference to the value of our houses. So, it’s not like there is any reason why we should think that there can be no connection between wealth or the income earned and wealth. This whole thing that somehow it’s terrible we’re taxing unrealised wealth. As if these are poor people and they can’t afford to pay a tiny amount of that wealth by selling some of those assets or borrowing money or deferring it to a future point. There are so many ways we could design a system that would work quite well.
But to me, these [arguments] are just distractions. But these distractions are going to be really coordinated and very powerful because you know what? There’s a lot of money on the line.
TB: Were there any surprises for you in the numbers that came out?
SE: No, it wasn’t surprising. I think for most New Zealanders, the surprise would be just how rich the rich are.
TB: Yes. I figured that we might see something around the 10% mark because we knew other overseas jurisdictions had seen that. There’s that White House report from America where they actually have a capital gains tax and an estate tax and a gift tax. And they still think that the true tax rate on the economic income of the top 400 families in America is 8.2%, which is quite astonishing, really. Again, it illustrates the effect of what we tax and what we don’t tax although, the American system is riddled with particular exemptions. I do think you’re right, the scale of the wealth at the top end of these 300 odd families being collectively worth about $85 billion, I think that did take a few by surprise.
SE: Yes. I mean, it’s an extraordinary sum of money. And, you know, that is well beyond the conception of what any normal New Zealander could hope to have. And I think quite often when you think about the proposition to people when it comes to tax policy, particularly any taxes on wealth, they think that one, their wealth is going to be targeted or two, they might one day become wealthy.
But we’re not talking about that. We’re talking about, you know, a scale of wealth that there is very little chance that any normal New Zealander will ever achieve that kind of wealth.
TB: Yes, you’d have to have bought thousands of Bitcoin back in 2010 to match some of the numbers we’ve seen here. What do you think about the fact the median age of the respondents was 67? I think that was a little older than I was expecting to see. What can we read into that?
SE: I think it shows people who have made it, who worked hard, got lucky because luck and hard work are the two things that are the key ingredients for becoming quite wealthy. And sometimes intergenerational as well. I think it shows there was a bunch of people who came through that period of the economic reforms which made some big winners and losers, and some of them did spectacularly well.
And we see that, right. We know we know some of these individuals who are out there in that kind of age group. They’re quite visible and well known. It doesn’t detract from all the work they might have done. It’s more that I think they lived through a period of time which created opportunities that were quite unusual.
TB: Is that a moral, do you think, then, going forward for all of us, just come back to your point a few minutes ago, that people say “Well, so-and-so has made X and we can as well.” Or are we different economy, different times?
SE: Well, I think we will mint new billionaires and multimillionaires over time. They will be the Rod Drurys, and the Peter Becks, as well as the Stephen Tindalls and other people.
So there are different ways and some people are at the right point at the right time with the right skills and all those bits that make that magic. But the reality is, in a country of five million people, not all five million of us will have that magic.
TB: Indeed.
SE: A vanishingly small number of us will ever have that. So, I don’t think it’s a model that’s replicable, per se. It’s, of course, nice to have that aspiration that we should try and improve ourselves. We should start businesses; we should try and do well. We should create jobs. But actually, for most of us, we’re not going to achieve and attain those kinds of numbers, that kind of wealth.
TB: Actually on wealth one of the things that I was intrigued to see Inland Revenue had looked at was the impact of inheritances. And this saw $411 million that had been transferred in what they call sizeable gifts, which is more than $25,000. But that was over a 50-year period, which isn’t terribly significant. I think that if memory serves right, half of that happened in the decade between 2010 and 2020.
What do you make of that? We’re not talking about old money being passed down from generation to generation, are we? Or maybe the money is still locked up in trusts. Did that surprise you? Because it was a surprise to me. I was expecting to see bigger numbers than actually popped up.
SE: Yes, I think there are now a lot of family offices for the truly wealthy families. It doesn’t make sense to give the money away. It’s much easier to keep it locked up because you get the economies of scale from running a family office, which gives you the ability to create even more wealth for future generations.
So, I wasn’t super surprised because there was no great incentive to dilute your wealth and to give that money away. I’m not really clear on what the definitions were in terms of those inheritances. Was it really money being gifted or was it the returns that are given to family members? There are lots of different ways that you could think about that. But my sense is that there is no great tax incentive for [the wealthy] to give the money away. There is no kind of reason for why you shouldn’t have the trusts and structures going on in perpetuity.
So was Thomas Piketty right?
TB: I see that Thomas Piketty has been quoted on Newshub about the report.
We know that Piketty is David Parker’s favourite economist or one of his favourites. Do you think this vindicates what Piketty has been saying?
SE: But I think it confirms what we know to be true, wealth begets wealth. To be very rich, it’s very helpful to begin by being very rich. And we also know that because of the way that our tax system is designed, it is designed for the many rather than for the few.
So, you know, inevitably you’re going to see the critique that this is the politics of envy and all that kind of stuff. But actually, when you jump back and ask the question ‘What is income and what should be taxed?’ it does take you away from that idea of envy. And actually, your income is very large and you’re not paying the same share as everybody else. Why is it that because you are wealthy, you are exempt from this income that you earning?
I think this was the core fundamental of the kinds of things that Piketty has been arguing for, why is this unearned income, this accident of birth? Why is it that you have some God given right to keep that protected from the rest of society? Why is it that that wealth, that income is not part of the wider taxation system in a society that you choose to participate in?
TB: I guess a response to that would be, well, we pay most of the tax anyway. It’s a small group, the numbers being pushed say the top 2% or 3% pay 26% of the tax. So the probable counter might be, ‘Well, we are paying enough anyway. We are paying our share.’ What would you say to that? Again, I guess it’s a question of how we define income, isn’t it?
SE: I think so. And I think, it’s also entirely possible to counter that with saying, ‘Well, if you also pay 20% like the rest of us, then, in fact, that future reality might be that all of us pay 15%.’
TB: The broad base, low-rate approach, broadening the base and lowering the rate. Yes.
SE Exactly. So, the alternative features are not just that they pay more. It might be that they pay more and the rest of us pay less. And again, this still goes back to the fundamental question of what is income and what we choose to define as taxable income.
And I think that’s really what came through that entire work. It wasn’t really about wealth. I mean, for me, it was really about asking the question of what do we actually consider to be income? And why is it that our tax system deliberately and specifically excludes some forms of income? Just because they happen to be the domain of the rich.
A ground-breaking report
TB: The report has been described as groundbreaking and not because of its methodologies, because those are fairly common. We were talking earlier that there seem to be three different methodologies and Treasury got down to nine different calculations of effective average tax rate, which I think was testing the patience of even the most dedicated of us.
What marks this report out as groundbreaking in my view, is we’ve actually got really good hard data, to work on for a change. And so it’ll be interesting to see how this plays out around the world.
SE: As you know, Terry, this is not new in the sense that there’s been other countries, particularly the US, where they’ve really kicked this off trying to find out what’s going on, because, you know, the domain of the very rich is quite opaque.
They can keep things opaque because they’re very rich and they have very good lawyers and very good accountants. And also, people are private because they don’t want people to know how much money they’ve got. But the groundbreaking nature of this study was very much that now we have real data based on an extraordinarily high rate of response.
TB: I think it was 93%. And, you know, fair’s fair, to be honest when the project was announced, there was a lot of immediate pushback on this. But 93% compliance, I think, is something I would expect that’s actually better than Inland Revenue were hoping for at the start of the project.
SE: I think it’s excellent. I mean, we know that there is a large enough population to give us a really good understanding of what this group of people look like. But I think it also speaks to something about it’s not like these people are necessarily trying to hide things, right?
When you see these kinds of numbers come out, there’s always a tension that all the rich are trying to hide things or they’re not trying to pay their fair share.
My sense is that that’s not really what the high rate of participation shows. I think what it shows is that people are relatively open. I mean, of course, there’s always a risk of not complying with Inland Revenue’s requests. But to me, it shows that even the very rich families, they do feel there’s a civic responsibility participating in society, that they want to be part of New Zealand and a tax system that is fair and transparent.
At least for me, the signals were very positive that these very high net worth individuals and families, they wanted to share that information so that we could have an open conversation about what is it that we want to do. Because the reality is that if we make changes on things like capital gains or wealth taxes, it’s not going to be just those families that will be affected, it will be a wider group of people. And having that transparency and openness does make it easier for us to have those conversations.
I think the study is really helpful because those studies give us real data and also just showed us the distribution of New Zealand. You know, the 99% of New Zealanders will live very different lives to that top 1%.
So how did the rich get rich?
TB: Yes, indeed. Just on the distribution in the report was there anything of interest to you about the range of the sources of that wealth? There’s some property, new technologies. Anything stood out for you in that data?
SE: Well, I mean, to me it was more that there was such a variety. I think that’s cool, right? It shows that to be filthy rich, there isn’t a common formula. There’s lots of different ways people have become filthy rich. Some of it because of, you know, like just being at the right time, at the right place in the right industry or having the right whatever. But it wasn’t all property. It wasn’t all one thing.
TB: Now the property thing is really interesting. I think on average each of the 311 families held 22 properties. But the analysis and modelling by Inland Revenue showed the capital gains weren’t all from property, they represented a range of things, portfolio investments, but mainly their own businesses that they had built up.
And that actually was something I thought was quite encouraging because you take that and the fact that we did not see a lot of inheritances being passed down and you got the impression that there were people who could come in and start at the bottom and have huge success. You mentioned Peter Beck earlier. Rod Drury of Xero would be another example of that. Stephen Tindall with The Warehouse, three different types of industries there. None of those are traditional industries, by the way. They’re not farming, or forestry related, but they’re all very wealthy people as a result of that. I guess people might say it shows a more diverse economy and the opportunity existing in that. So, I was encouraged by that.
SE: I think so. I think for most New Zealanders, the story of wealth creation kind of goes to a housing type story, right? Actually, there are a lot of people who’ve made a lot of money by starting businesses, selling businesses, or keeping businesses and growing them. And that to me is what creates economic vitality. That’s what creates a better New Zealand, right? That’s what creates more jobs.
I mean, of course we need homes. But you know what? It’s such a passive way to create wealth. Businesses are exciting because you’re creating jobs and changing lives through providing livelihoods. That, to me, is enormously more satisfying and exciting. Seeing a lot of that in the very high net worth individuals tax statistics, I think was very encouraging.
But it’s also true that not only do they make money by being in business, they continue to invest in businesses. So, it’s not like, there are these rich families that are sitting there with all this money sitting idle. We know they’re using that money all the time. They’re always looking for the next big opportunity. Of course, they don’t get it always right. But the reality is that, you know, I’ve been involved with businesses startups with these high net worth individuals, and they are the ones who back people. They’ll say ‘Here is a cheque for $1,000,000. I’m going to back you.’ And that is hugely powerful.
TB: That was something I came across when I was on the Small Business Council, the access to venture capital in New Zealand is surprisingly good. There is a fair amount available, and it is these wealthy people reinvesting in businesses. They go looking for the next Xero, the next Rocket Lab. And again, that’s encouraging.
What next?
So, what next? If you’re the Finance Minister or the Prime Minister, you’ve got this report and you say, ‘Right, here’s what we’re going to do.’ What would be the three things you would say to address the issues these reports have thrown up and improve our tax system?
SE: Well, if I were truly a politician in New Zealand, you know that I would have already sent out a poll asking a small group of people what they think about more taxes because we do politics by polling in New Zealand. And the polls will show that nobody, no New Zealander wants more taxes because they’re afraid that they might one day be rich, and they might be asked to pay tax on it.
So, you know that that the self-interest, that greed, that fear of missing out of a potential future, which is I think almost impossible, I think that would motivate most polls and they would show that people don’t want more taxes. And as Finance Minister, if I were truly in Cabinet today, I would see those polls and say ‘Bugger it, I’m not going to do anything. Bury this thing.’
That is the sad reality, it’s heartbreaking that we have seen very little action when it comes to tax policy in New Zealand for decades. Because you know what? We just don’t have the steel and the political consensus across the community to do anything different.
TB: Yes, I think that’s it in a nutshell. I mean, I think Jim Bolger’s ‘Bugger the pollsters’ is something that should be adopted when it comes to tax. Because the politicians, and it’s interesting, doesn’t matter which side, they run away from the issue.
I know I’m a broken record on this. I’m looking at what’s coming down the track, what the Tax Working Group saw was coming down the track. We’ve got demographics working against us with ageing, higher superannuation costs, greater health care demands and now climate change.
The Climate Change Commission in its report released yesterdaybasically said ‘We can’t buy our way out of reducing our emissions, we need to diversify.’ And that report, when it talked about tax, made repeated mentions of tax incentives for better investment to address these issues.
So, it seems to me that like it or not, politicians are going to have to address these facts or simply say, well, ‘You can’t have anything because we need to protect these unrealised gains.’
SE: You know, I was probably being overly pessimistic. But I think the thing is, in the current moment in time, the crisis still feels like it’s two or three or four or five political cycles away.
If you make changes on tax policy today, inevitably you will see whoever’s in power next undo them. So there will be no enduring tax policy because we don’t have consensus in New Zealand. Do we have a pressing need to shift our tax policy? Of course, we do because of demographics and because of climate change, because of large infrastructure deficits, we know that we need to change things. But we also know that New Zealand has an extraordinary reactionary political system. There is no leadership, it is reactionary. And so, unless there is a crisis, until something really breaks, we’re not going to change.
TB: So you don’t think Cyclone Gabrielle, or the Auckland floods are a breaking point?
SE: Not at all. I mean, they might cost the government, you know, a maximum of $15 billion in the scheme of things. That’s nothing spread over three or four years.
You know, the Government’s tax take per year is $100 billion. Those costs are at the margins. So that’s not enough. It’s when you’ve got Cyclone Gabrielle happening every year or every other year when people can’t get access to insurance, when we’ve got coastal properties that are being inundated, when we’ve got erosion that’s taking away what we’ve previously valued as multi-million-dollar bachs. That’s when you’re going to start to really strike those pressure points, because we haven’t actually planned for any of this stuff.
TB: Those are all happening right now, actually. I mean, Tairawhiti East Coast region, I think Cyclone Gabrielle was the fourth major event that warrants special tax treatment inside 12 months. But as just said, it’s now receding into the background. Maybe it’s not so much our politicians, it’s also our media cycle just isn’t adapted to that.
SE: I think it’s less about the media cycle, it’s also what we want to hear as citizens, as engaged people in politics, people who are engaged in the civics of the country. Are we actually engaged in grappling with these big structural issues? And the answer is no. And I think the conversations that we have on public policy in New Zealand are, by and large infantile.
You know, they are by and large led by people who are lobbyists and people who are actually biased with a huge amount of self-interest because it is a small group of people who do everything. There’ll be the tax experts who are providing expert advice to people to minimise their taxes and the same people who are going there to try and design a business tax system. Well, I don’t know, man can you really trust them?
TB: Well, reputational risk here, but yes, I think self-interest is a problem. But let’s just be bold, let’s say you’ve decided ‘Bugger the pollsters’ what would you do?
What tweaks would you do if you were looking at something that might take the population around along with you? What would be the first thing to do.
A tax switch?
SE: You know, I think one would be relatively easy in that you would do a tax switch. You would implement a land tax and you reduce something like GST. That switch would be quite immediate and it would create a much better balance in New Zealand. It wouldn’t capture the very high net worth because it’s not about that, but it would create the introduction of a wealth tax. We already have the mechanisms for that with things like the rating tools.
But, you remember with the Tax Working Group, the land tax was one of those things that was identified as a good tax to have, because we know that not only would it incentivise better use of our land that we have, but it’s also that one asset that can’t run away, like unlike many of the other types of assets that people hold. So that would be the big thing.
But fundamentally for me, it’s really around if you really want to change tax policy, you’re going to have to create consensus. And you know, we can’t do that until we have some kind of bipartisan agreement about, one, what the issues are, and two, that we fundamentally either need to have higher taxes or we simply cannot have all the services that we have promised ourselves.
Now, that’s a really hard conversation to have. You know, you look at the quality of our political leaders. They’re not engaged in any of that debate. You know, most of our political leadership is engaged in the politics of who’s going to do the least.
TB: It’s a very small target strategy.
SE: It’s sort of, if you ask me what needs to change, I think the change that needs to happen is not that you need to jump in and make lots of changes, because the reality is that the knee jerk reaction will be to reverse those through a change of government. I think the change that requires us to have is actually creating something like the Climate Change Commission that creates this conversation. Some of those public policy issues that take the politics out of it.
TB: So, are you saying there should be the equivalent of the Climate Change Commission, a Tax Policy Commission that alongside David Parker’s Tax Principles Act, but sits there and pushes out the reports and saying, ‘This is it, guys, this is what we can do.’ In other words, a semi-permanent tax working group.
SE: Except of course it must have powers and it must have the ability to hold the politicians to account. Quite often what we do with things like the Climate Change Commission is we give them the power to design, but we don’t give them the power to actually fund or hold the powerful to account.
It’s not going to be very hard, right, because no politicians want to give the power away to somebody else. There will be no independent body that they’re going to give the powers away. The only one that they’ve really done that with is the Reserve Bank, and I think they’ve been regretting it ever since.
TB: Yes, I was thinking of the Reserve Bank too. I think that’s probably as good a point as any to leave it there.
Shamubeel, thank you so much for being on the show. Really appreciate your insights on this. I hope I don’t feel so pessimistic, but to be frank, we probably have good reasons for people to be sceptical about what will change anyway.
That’s all for this week. I’m Terry Baucher and you can find this podcast on my website or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next week, kia pai to rā.
The Government introduces a surprise fringe benefit tax exemption
The potential implications for New Zealanders from the UK’s Spring Budget
Inland Revenue has now formally launched its campaign to improve tax compliance in the construction industry, which I first mentioned a couple of weeks back. Under the heading, “Take the stress out of tax” it is promoting a tax toolbox for tradies.
This is intended to provide the rules, resources and tools to enable people to get their tax position correct. Proclaiming “We’re here to help”, there’s a series of pre-recorded online seminars covering the most common topics, such as an introduction to business, a GST workshop and employers’ responsibilities. There’s also offers for more direct contact, such as a business advisory or social policy visit. And then there’s a reminder that people can also talk to tax agents or use accounting software to, “take the pressure off.”
The background notes released comment that 42% of construction industry taxpayers who are behind either in tax payments or in filings have a tax agent. So, the role of tax agents is seen as important and obviously Inland Revenue is hoping that the role of agents will expand.
There’s also a reminder that Inland Revenue has access to data, which, as it puts it, means “We have a good handle on what happens in the construction industry”, adding it’s never too late to do the right thing. And it goes on to suggest people should come forward if they’ve forgotten some income of past tax returns or maybe have overinflated their expenses.
This is a welcome initiative by Inland Revenue. The phrasing of the campaign “Take the stress out of tax” is a classic example of speaking softly but carrying a very big stick. My view is that too many people either underestimate or are unaware of just how much data is available to Inland Revenue. This campaign phrasing also touches on something of a paradox I’ve experienced when dealing with clients with tax arrears. They’re often relieved to discover after discussing the matter the position is nowhere near as bad as they had feared, and they can now sleep easier. And I expect I’m not the only tax agent to have observed that.
It will be interesting to see the outcomes from the campaign. And as always, we’ll keep you updated with developments.
Exemption from FBT for bicycles, e-bikes, e-scooters … and mobility scooters
Now, two weeks back, I discussed the so-called apps tax. This is part of the Finance and Expenditure Committee report back on the Taxation Annual Rates for 2022-2023 (Platform Economy and Remedial Matters) Bill (No.2). The updated bill included some provisions around the proposals to charge GST on services supplied by the likes of Uber and Airbnb. The bill also included clarifications to a proposed fringe benefit tax exemption for the use of public transport.
As part of the bill, over 400 submitters, including myself, made submissions proposing some form of FBT exemption for e-bikes and e-scooters. The officials report declined the submissions commenting,
“Our overall conclusion is that a specific FBT exemption for bicycles would increase the distortion between the taxation of transport benefits and other fringe benefits, reducing the overall fairness and coherence of the tax system and giving rise to integrity risks, impacting on the fiscal cost.
If Parliament wanted to increase the uptake of cycling to help achieve improved health outcomes and assist New Zealand to achieve emissions reductions, it would instead recommend a more transparent and potentially targeted subsidy specifically designed to achieve considered policy outcomes.”
This is Inland Revenue’s boilerplate for “Nah, go away. We don’t like subsidies and special tax exemptions.”
That was then. But in what has become something of a pattern following Chris Hipkins’ elevation to Prime Minister, this week the Government has released a Supplementary Order Paper for the bill, which now introduces an exemption from FBT for bicycles, e-bikes, e-scooters and mobility scooters.
According to Revenue Minister David Parker the Government “considers that there is a public good to be gained from encouraging low emission transport” and “This measure will support New Zealand’s shift to more sustainable transport options and encourage employers to provide further sustainable and climate-friendly transport options for their staff.”
The bill includes a regulation making power which would specify the maximum cost of the exemption and the specifications to qualify. When I made my submission, I suggested a cap of about $4,000 should apply. It will be interesting to see what will be the maximum available under the exemption and how many employers make use of it, which will come into force on 1st April.
An English Budget and why it’s interesting here
On Wednesday night, the British Government unveiled its Spring Budget. This is a far less dramatic affair than the Autumn Statement last September, just after the Queen died, which led to the downfall of Liz Truss. This time the Chancellor of the Exchequer (Finance Minister) Jeremy Hunt has gone for something rather more cautious in its approach with one or two twists.
I was actually surprised there weren’t any moves around restricting the availability of non-residents to make use of the Personal Allowances exemption, or just generally increase the taxation of non-residents. That’s something I’ve seen other countries do. Australia is a very good example of where that happens. A cynic might say that’s because some of those non-residents are Conservative Party donors. But cynicism aside, given the financial pressures that the British government faces, not kicking over the stone and looking, is a bit surprising,
For example, there weren’t any changes to the controversial non domiciled or “Non-dom” scheme which gives a tax advantage on foreign income for people who are not tax-domiciled in the UK (including Prime Minister Rishi Sunak’s wife). (Most New Zealanders would qualify for this exemption).
But what has perhaps attracted a fair bit of interest here was an excellent proposal, to provide and support up to 30 hours each week of free childcare support for working parents with children now aged between nine months and three years. Basically, free childcare will be available from between the ages of nine months and when children go to school. The National Party has recently announced proposals boosting childcare access.
There is a kicker to this in that it’s not available to anyone whose adjusted income is above £100,000. Basically, if someone earns more than £100,000, then all of those childcare costs they might have received are clawed back. Essentially, they don’t get back into the same net position until their income rises to £191,000. A 100% effective marginal tax rate will apply.
Now, you might well say, and I have to agree with you, that income of over £100,000 is a nice problem to have. However, it highlights a similar issue we have in our tax system in relation to clawback of Working for Families tax credits that effectively people on what modest incomes face higher than expected marginal tax rates. The clawback kicks in at a rate of 27 cents per dollar of income above $42,700.
I would hope whoever’s in Government will look seriously at this question of the clawback, the amount applicable and the threshold.
Of more direct interest to some New Zealanders is a change to what is known as the Lifetime Allowance Charge. Now, this is a controversial move that was brought in some years back because Britain has generous tax exemptions for pensions contributions. Consequently, some had accumulated very substantial pension pots tax free. To counter this, the Lifetime Allowance Charge was introduced, which imposed a charge which could be as high as 55% where the accumulated funds were above a threshold (£1,073,100).
The Lifetime Allowance Charge will be removed from 6th April and will be abolished in a future finance bill. Apparently up to 1.4 million people were caught by this. I know of several clients within this group. So they were considering their options about when and how to withdraw funds from their UK pensions. The removal of the charge means they may wish to reconsider their options.
But the other thing that was particularly interesting to me is, and I think for our economy at wide was the decision to allow full expensing for capital assets acquired up to £1 million per year. Under this “Investment Allowance”, a first year allowance of 100% will be available up to the £1 million threshold. The idea is to encourage investment.
This is a topic that comes up in discussions down here. But what caught my eye was a graph produced as part of the background papers showing the net present value of all OECD countries plant and machinery capital allowances as of 2021.
As you can see under the present previous tax treatment, the UK would have been 33rd in the OECD. By going to full expensing, it moves up to be jointly top of the OECD. However, what caught my eye is that New Zealand is bottom of the OECD.
The question therefore arises whether we ought to be looking at our capital allowances regime. A similar type of initiative would be expensive, there’s no doubt about that. That’s one of the main reasons cited against such initiatives. But on the other hand, Britain has made this move because it wants to boost productivity and we know we’ve got problems with productivity.
So, here’s another challenge for the Finance Minister, Grant Robertson, to be considering right now. How do you boost our productivity? Is something similar to the UK investment allowance worth considering? We will see how that plays out in the UK. I see speculation about what might be in our budget in May is already emerging. Increasing capital allowance deductions is something I’m sure is under consideration. However, I’m also, to be honest, sceptical that we’ll see anything in the Budget.
And on that note, that’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients.
Until next time kia pai te wiki, have a great week!
Inland Revenue about to target 80,000 over incorrect Cost of Living Payments
What about a tax-free threshold?
Last week I discussed some of the submissions made on the latest tax bill and in particular the implications for persons providing accommodation through Airbnb or ride sharing via Uber or a similar app. Reading the comments to the transcript it appeared to me there is some confusion around these proposals. So, this week I thought I’d look at these proposals in a little bit more detail as I didn’t actually cover off the Taxation Annual Rates for 2022-23 Platform Economy and Remedial Matters) Bill (No 2) to give its full title at the time of its (re-)introduction.
The key part of the Bill is the platform economy sometimes also known as the digital marketplace. Now there are two parts to the proposals that are contained in the bill. The first, and what I think is relatively uncontroversial, is the implementation of an OECD Information and reporting exchange framework. This would require New Zealand based digital platforms to provide Inland Revenue with information annually about how much users of those platforms had received from relevant activities.
Inland Revenue would then use that information as part of its administration in the tax system. In other words, checking to see that people who receive payments have returned those payments. It would also share the information with foreign tax authorities where that information related to non-residents. This is intended to take effect from 1st January 2024.
Although this is still to be passed into law, earlier this week New Zealand was part of a group of 22 jurisdictions who signed a multilateral competent authority agreement for the automatic exchange of information under the OECD Model Rules for Reporting by Digital Platforms.
So that process is proceeding even as the legislation is passing through Parliament.
As I said, I think this is relatively uncontroversial. It is supported by the likes of the Chartered Accountants Australia and New Zealand. Interestingly, however, BusinessNZ was less enthusiastic about the proposals although I think it’s largely concerned about compliance costs.
It requested a delay in the introduction of the OECD based and reporting exchange framework, which isn’t going to happen because we’ve already signed the agreement to say we’re going to deliver it.
BusinessNZ also asked for Inland Revenue to undertake a quote, “clearer cost benefit analysis to ensure there was a clear understanding of the likely net benefit of the platform economy changes on the New Zealand economy”. That’s a little bit surprising but probably reflects BusinessNZ’s concerns about compliance costs.
However, it’s the second part of the proposal which generated most of the criticism and pushback from submitters that I referred to last week. The Bill proposes that the current GST rules on electronic marketplaces which apply to remote services and certain imported goods now be extended to “listed services”, which would include supplies of accommodation through Airbnb and other booking services, ride-sharing, beverage and food delivery services and services that are closely related with these services. These changes are intended to take effect from 1st April 2024. There’s a bit of lead time but it’s not that far off.
What these proposals are intended to address is an issue where some of the services provided would normally be subject to GST. But because they’re being passed through these electronic marketplaces, apps, that’s not necessarily happening. And a concern of Inland Revenue and the Government is …
“Ïf this was to continue, it could have adverse consequences for the long-term sustainability of the GST system and place traditional suppliers of these services who are charging and returning GST at a competitive disadvantage. It could also undermine New Zealand’s broad based GST system.”
You may recall that the Hospitality Association was one of those that supported the changes because of this risk.
What the bill does to address these concerns is require operators of electronic marketplaces such as Airbnb, Uber and the likes to become the deemed supplier of or for GST purposes where they authorised the charge for the supply of listed services to a recipient.
What will happen is the person who actually provides the services (what’s termed “the underlying supplier”, such as the driver or someone providing accommodation to Airbnb), would be deemed to have made a supply to the operator within the market electronic marketplace, i.e. Airbnb, Uber or other rideshare operator. That particular supply would be zero rated for GST purposes so that the underlying supplier wouldn’t be paying GST directly, but instead it would be the operator of the electronic marketplace who would be deemed to be supplier and making supplies of listed services of 15%.
Example 4: Listed services performed, provided, or received in New Zealand Charlotte is based overseas and is looking for accommodation in New Zealand for an upcoming holiday. She uses an electronic marketplace to book accommodation in a bach in Queenstown. Under the proposed amendments, as the accommodation provided through the electronic marketplace is in New Zealand, the marketplace operator would be treated as the supplier of the accommodation and would need to account for GST.
Now where the person who actually supplies the accommodation to Charlotte is registered for GST, then the transactions between them and the marketplace provider would be zero-rate for GST purposes.
But if that person wasn’t GST registered, there’s going to be something termed a flat rate credit scheme which requires the app or marketplace operator to pass on as a credit, a proportion of the consideration charged for listed services.
Example 8: Basic operation of the flat-rate credit scheme for marketplace operators Henry provides taxable accommodation through an electronic marketplace where the marketplace operator is responsible for collecting and returning GST on these supplies. Henry notifies the operator of the electronic marketplace that he is not a registered person for the purposes of the GST Act. Charlotte books accommodation that Henry provides through the electronic marketplace for $200 plus GST for the stay. The marketplace operator collects GST of $30 on the supply of the taxable accommodation that they are treated as making to Charlotte. Knowing that Henry is not a registered person, under the proposed amendments, the marketplace operator applies the flat-rate credit scheme and calculates: GST of $30 at 15% of the value of the supply, and the input tax deduction of $17 for the flat-rate credit at 8.5% of the value of the supply. The marketplace operator would be required to deduct input tax of $17 from the $30 of GST payable to Inland Revenue and pass on the $17 to the underlying supplier as a flat-rate credit. The marketplace operator would pay the remaining $13 to Inland Revenue, and this would be the net GST collected on the supply of the accommodation.
This example illustrates where I think BusinessNZ and some of the other submitters have a case about the potential complexities and compliance issues.
Notwithstanding these issues the critical point from Inland Revenue and the Government’s perspective is the proposals put everyone on a level playing field as far as GST is concerned. We will probably end up with more people registering for GST.
The net effect of this, according to the accompanying Regulatory Impact Statement, was about an extra $47 million in GST annually, but I’ve seen estimates that could run as high as $100 million. There is undoubtedly some complexity coming into the system, but I am of the view that in terms of business impact I don’t believe it’s going to be quite as harmful as submitters suggested. I think other factors like the state of the world economy are more important in that case. But we’ll watch to see how what happens with the submissions process.
The expected errors emerge
Moving on, we’ve covered in the past the controversial Cost of Living payments. It emerged this week as part of the annual review of Inland Revenue by Parliament’s Finance and Expenditure Committee that it considers between 70 and 80,000 people may have been incorrectly paid some or all of that $350 Cost of Living payment.
According to the new Commissioner of Inland Revenue, Peter Mersi at least 12,000 people were incorrectly paid the first tranche of $116.67 because of a “coding error”. Apparently, all these people had a negative portfolio investment entity balance, and as it was the only income they had they weren’t actually eligible. But somehow this wasn’t picked up in time.
And then, as been previously discussed, payments were made to others who had left the country but hadn’t apparently updated their details according to Inland Revenue.
Since the first payments went out on 1st August, Inland Revenue has been checking people’s eligibility and as a result, the number of payments made has fallen as they remove what they consider ineligible persons. The first payments on 1st August were made to 1,480,000 people. The second tranche on 1st September went to 1,422,000, and the final payments on 1st October went to 1,384,000. So over the time of the payments, 96,000 fewer people received a payment for the third instalment compared with the first instalment.
So far, 177 people have returned payments and Inland Revenue is about to contact up to 80,000 about potential overpayments.
Separately, there’s another 75,000 who haven’t received any of these payments, even though they aren’t eligible. And the reason they haven’t done so is they’ve yet to supply Inland Revenue with bank account number details.
Now, as I’ve said previously, I thought mistakes were inevitable given the scale of what was happening. I was more concerned about systemic coding issues where there seem to be groups of people that shouldn’t been receiving payments were reported as having received payments. And Inland Revenue has now acknowledged that one of those groups was this group with negative portfolio investment entity income.
I was also concerned about the fact that Inland Revenue estimated it would need somewhere between 750 and 1,000 staff to process the exercise. This bears out a concern I have about Inland Revenue being under resourced. I’m hearing stories that there’s a lot of overtime being carried out by Inland Revenue staff which indicates there’s still a potential staff resourcing issue. No doubt we will hear more about these payments, and we’ll update you on future developments.
Tax-free thresholds and where bracket creep hurts most
I’ve talked previously about a tax-free threshold. And this week, I and other several other tax advisers spoke to Susan Edmunds at Stuff about the idea.
Tax free thresholds are common overseas. Australia has an exemption for the first A$18,200. Britain has a personal allowance of £12,570 and France has an exemption of €10,225. But here in New Zealand as is well known, every dollar is taxed. And partly as a result of the cost-of-living crisis questions have been raised as to whether it’s time to change.
The Tax Working Group did quite a bit of work in this space and it’s my view, as I expressed to Susan, the time’s probably come for small exemption. I was thinking of in the order of $5,000, which was also the number the Tax Working Group landed on.
But the downside is such tax-free thresholds are expensive. For example if you were to exempt the first $14,000 of income, which is currently taxed at 10.5%, would cost $4.7 billion a year. So, there’s a significant trade-off involved.
And there’s another issue that the Tax Working Group identified, which is that a significant proportion of that benefit could also go to secondary income earners in households which were above the median income. Is that something we actually want?
Deloitte partner Robyn Walker talking to Susan Edmunds made the points ‘What are we trying to address here? Is a tax-free threshold the best tool to do so?’ I entirely agree with this. For example, if we’re talking about the cost-of-living, then maybe controversial or not, it may make more sense to consider specific payments, such as happened with the Cost of Living payment.
Robyn also discussed the idea with RNZ’s The Panel. One of the things she mentioned is that there’s a tool on the Treasury website where you can do your own modelling and calculate the effect of different changes to tax rates and you can see the cost of making changes to rates and thresholds.
But discussions around a tax-free threshold and changes to thresholds aren’t going to go away. And a particular point, both Robyn, myself and others keep making is that there’s a lot of pressure on the group earning between $48,000 and $70,000 where the tax rate jumps from 17.5% to 30%. In our view this is the group that probably needs most relief and where politicians should be focused on improvements.
The politicians are undoubtedly working in the background on this issue. National’s got its plan which is to index the thresholds. What Labour has got in the works, we don’t know, but I’m pretty certain they’re planning something.
A winning idea
Finally this week, congratulations to Vivien Lei, who is this year’s winner of the Tax Policy Charitable Trust Scholarship Award. Vivien is currently Group Tax Advisor with Fisher Paykel Healthcare. Her winning proposal was how to change New Zealand’s environmental practices by introducing an impact weighted tax regime. Under this model, organisations would be taxed on their net positive or negative impact on the environment. A very interesting proposal.
Now we’ve had past winner Nigel Jemson on the podcast and I’m very pleased to say that Vivien will be joining us before the end of the year to talk about her submission.
This week we take a close look at Inland Revenue’s Annual Report for the year ended 30th June 2022. It begins with an overview of how Inland Revenue “has contributed to the well-being of New Zealanders”. There’s a summary of the highlights and key results for the year including a summary graphic illustrating the composition of the $100 billion of tax revenue raised during the year and the areas in which it was spent. The highlights note that Inland Revenue exchanged financial account information with more than 70 countries and has information sharing arrangements with more than 17 agencies. This is something that people always need to keep in mind just how much information Inland Revenue has access to and how much it shares.
The overview declares “we interact with a range of customers on tax and provide payments that are critical to people’s wellbeing.” You’ll note the use of the word “customers”. In fact, “customer” or “customers” is used over 660 times in the report, compared with a mere 30 mentions of “taxpayers”.
I have great reservations about describing taxpayers as customers. I can appreciate there are some benefits from this approach in terms of helping Inland Revenue staff understand the need to provide better service to taxpayers. But the repeated use of the term customers implies a voluntary transactional relationship and ignores the power dynamic. Actually, tax is compulsion. We are compelled to pay tax and we can’t exactly say to the Inland Revenue, ‘Your service is terrible. I’m switching providers to the Australian Tax Office’.
Whatever the description, Inland Revenue considers it’s dealing with three groups of customers; individuals, families and businesses. This, however, overlooks the important role of tax agents who interact with Inland Revenue on behalf of these groups daily. However, tax agents are only mentioned nine times throughout the whole report. It’s a long-standing complaint of myself and other tax agents that the Business Transformation process underestimated the important role of tax agents in enabling the smooth running of the tax system. Accidentally or not this summary of who Inland Revenue sees as its customers rather reinforces our point.
Anyway, moving on, the next section within the report expands on Inland Revenue’s story for 2021-2022 outlining the benefits of its transformation of the tax and social policy system. After a brief look at the year ahead, we then get into the detailed analysis of how Inland Revenue performed against key measures and indicators, its organisational capability, and finally the departmental financial statements. Lots of juicy stuff here, in fact too much for one podcast.
Inland Revenue’s major achievement for the year is the completion of its Business Transformation programme, which was officially closed on 30th June this year. The project was completed on time and under budget and as a result, Inland Revenue is on track to save $100 million in administration costs annually. Furthermore, at the end of the Transformation Project, Inland Revenue handed back $458 million to the Crown. The programme was initially budgeted at $1.5 billion and came in at just over $1 billion. Given the notorious history of some I.T. projects such as Novapay, this is a significant achievement. So well done, Inland Revenue.
Business Transformation, of course, has enabled Inland Revenue to proceed with its auto-assessment process. As the report notes, previously, approximately 1.4 million people who were potentially eligible for a tax refund never applied. This year tax refunds were sent to 1.65 million taxpayers and as of 30th June, $602 million had been refunded. Apparently, it now costs on average $1.35 to process a tax return, compared with $2.33 back in 2015-2016. So that’s a significant improvement.
Business Transformation has also meant that many taxpayers now use Inland Revenue myIR portal to communicate with Inland Revenue and handle their tax affairs. There were over 60 million user sessions in the June 2022 year, and that’s a growth of 140% since 2019. Overall, 80% of taxpayers say they find it easy to deal with Inland Revenue, which is about the same as last year.
Although Inland Revenue encourages the use of its digital platform, it is aware that not everyone has ready access to computers. It’s good to see that this year it has been working with the likes of the Citizens Advice Bureau to ensure that those who are at risk of being digitally excluded always have a chance to engage with Inland Revenue. That’s something to be applauded and we hope that will continue.
There’s some interesting commentary on the impact of Business Transformation for small businesses. The report notes that approximately 90% of businesses in Aotearoa New Zealand have five or fewer employees. Inland Revenue’s hope was that this group would especially benefit from Business Transformation. However, the compliance effort for this group has not reduced as much as Inland Revenue had hoped.
According to an Inland Revenue survey in 2021, SMEs said they spend an average of 31 hours a year on meeting their tax obligations. Now, this is five hours fewer than in the survey’s baseline year of 2013. But the introduction of mandatory pay day finding from 1st April 2019 means that businesses spend as much time complying with PAYE obligations now as they did in 2013. Overall, though, 60% of small business owners felt that the time their business spends on tax matters was acceptable and that’s up from 55% in the previous survey.
The core role of Inland Revenue is the collection of tax. And this is the first year the total tax take has exceeded $100 Billion, up 7.3% on 2021. However, the overall amount of tax debt increased by 10.5% to $4.8 billion at 30th June 2022. And there are some concerning numbers in here. As of June 2022, 55,888 people who received Working for Families were in debt, which is a 27% increase on the June 2021 year.
Overdue student loan debt has also increased by 17.6% to $2 billion. This is apparently mostly due to only 24.5% of the overseas based student loan borrowers making their required repayments this year.
Inland Revenue wrote off $688 million of debt during the year. That’s down from the $812 million written off in 2021. Write offs of GST and individual income tax debt made up 58.8% of that total value.
Now the report admits that “The total amount written off is lower this year, due in part to Inland Revenue prioritising COVID-19 support work over proactive debt collection work.” The report then notes that “overdue tax debt grew at a comparable rate to tax revenue. It was 4.6% of tax revenue, compared to 4.5% in 2020–21 and 4.5% in 2018–19. This is a good result, considering how difficult the environment has been.” That’s probably fair comment. Inland Revenue has had to deal with an enormous amount of other projects such as the COVID 19 Resurgence Support Programme as well as getting ready for the cost of living payments, which happened after the end of the year.
But what action is it taking about trying to collect all this debt? Well, during the year $2.38 billion of debt was put under instalment arrangements involving approximately 120,000 taxpayers. As of 30th June, $491 million has already been repaid in full. And it’s then also started a programme in November 2021 targeting those with bigger debts. This involves around 1,350 businesses with debts totalling $356 million. And that’s apparently generated about $90 million of repayments so far.
It also pulled out the big stick and commenced the liquidation process against 759 companies, resulting in 163 companies being liquidated through the High Court. Another 592 companies went into liquidation, owing tax debt after the Inland Revenue initialised the process. Now some of these liquidations are inevitable, to be frank. Although Inland Revenue is trying to work hard in this area I definitely think there’s room for further improvement.
One of the key metrics I’m always interested in is Inland Revenue investigations activity. There’s an admission that it …
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“…didn’t undertake as many interventions as usual as we didn’t want to put more pressure on customers during a difficult year. We paused some investigation activity and focused on ensuring the integrity of our COVID-19 support products.”
Consequently, Inland Revenue only met one of its four measures for investigations category. Whereas last year it achieved three out of four.
One measure is the ‘Percentage of customers whose compliance behaviour improves after receiving an audit intervention.’ The target is 85% but the actual measurement achieved this year was 69.6%. I don’t quite know how they’ve measured that, but it’s a little bit concerning because pretty much my experience is if someone from Inland Revenue turns up and there’s an audit, behaviour generally improves afterwards. I think this measurement may be a by-product of overdue debt existing.
On the other hand, it did meet the measure for ‘Discrepancy identified for every output dollar spent.’ Now the target is $7 per dollar but Inland Revenue achieved a return of $9.88. “We have assessed additional tax or protected the integrity of the tax system to the value of $1.12 billion. This has exceeded expectations.” Although I find the phrasing of that a little opaque.
Intriguingly, that measure has been retired and is not being used in the current year. I’m not sure why, but we will watch with interest as we won’t know what the new measure is until next year’s report is released.
As part of its usual compliance activity Inland Revenue ran a number of compliance campaigns for specific sectors and compliance issues. For example, it ran campaigns about tax residency, disclosing offshore income and basically ensuring people meet their international tax obligations. According to the report, these campaigns targeted some 7,000 taxpayers and their tax agents and resulted in voluntary disclosures totalling $100 million in omitted income in the past two years. That’s not $100 million of tax, the best-case scenario would be maybe $40 million of tax. But anyway, still a good return for Inland Revenue.
I think we can see more of this campaign. Inland Revenue, as I mentioned earlier, shares information with 70 countries. This is an area it was starting to pay attention to before the Pandemic and is now returning to this area with the launch of a new offshore tax programme in June 2022. So, watch this space.
Now the key to any organisation is its people. And Inland Revenue has been through a massive amount of change in the past five years. As of 30th June, its workforce is now 3,923, which is down 1,327 or 25% since June 2018.
During the year, 787 people left Inland Revenue and it hired 539. Over the past five years, some 3,881 people have left Inland Revenue, which is 74% of the workforce as of July 2017. That is a massive churn and I have concerns about that.
The average length of service in years has dropped this year to 14, compared with last year’s 15.5 years. A lot of people have left and Inland Revenue’s staff turnover this year was 18.7%. Rather worryingly, the total turnover rate for people working in tax technical roles at 30th June 2022 was 16.4%. Although that’s lower than the 18.7% for the whole organization, it is well up on last year’s 1.3%.
Inland Revenue staff are actually very highly valued outside the public sector. My understanding is Inland Revenue is pretty competitive on wages. Seeing so many gamekeepers turning into poachers is not something we really should see. hence my concerns about what’s going on.
Page 100 onwards in the report looks at the state of morale and health in the report in Internal Revenue, and it’s very mixed. Some of the metrics are better than the public service generally. For example, 96% of staff can work remotely, which is well above what the rest of the public sector.
The report has a breakdown of employee ethnicity and the proportion of roles held by people with different ethnicities. Now, actually, Inland Revenue pretty much reflects the diversity of modern-day Aotearoa. 66% of its staff are European, compared with 70% of the population generally, 12% are Māori, which is below the 16.5% of the general population.
A bit more concerning though is looking at the proportion of leadership roles. When you get up to senior management, 96.4% are held by Europeans. Even the team leader and general management roles are all over 80%. So, there’s work to be done there.
But something which really caught my eye and is a matter that needs to be discussed more widely is a disclosure under Schedule 6 of the Public Service Act 2020. This requires Inland Revenue to report on situations where the Commissioner has delegated any of the Commissioner powers outside the public service. In other words, it said to people, ‘You can act in our capacity’.
In previous years the disclosure has involved Westpac and Callahan Innovation. But this year, for the first time, it includes Madison Recruitment Ltd. The disclosure reads
“Inland Revenue engaged Madison Recruitment Ltd to provide contingent labour to help with the introduction of the Cost of Living Payment and to provide additional support with other specific tasks due to the ongoing impact of COVID-19. The first Madison personnel began undertaking their engagement in June 2022. To enable the Madison personnel to fully undertake the engagement, the Commissioner delegated some powers to those Madison personnel. This delegation has been operating as intended in line with the contractual arrangements with Madison Recruitment.”
I have major reservations about this because it shows that Inland Revenue is perhaps under-resourced if it is taking on temporary labour. I don’t believe an organisation such as Inland Revenue with the powers available to it, should be taking on temporary contract labour. I can see there might be a business case for doing so, but as I said earlier there’s an issue with mounting overdue debt and the drop off in investigations activity.
We also have this staff churn that’s going on at Inland Revenue. Losing 75% of your workforce over five years, is not something I think is healthy for an organisation. Staff changes are inevitable and healthy. But 75%, I’m not so sure about that. So, this one of the major concerns I have coming out of this report.
Summing up the report is a mixture of the good, the not quite so good and the concerning. One of the not quite so good is a rather bumpy relationship with the tax agents, as I mentioned previously. But I understand the new commissioner Peter Mersi has been meeting with representatives of the professional bodies and no doubt this point has been discussed. In fairness, the ongoing huge challenge of dealing with a pandemic and its aftermath have not helped.
My great concern is the level of staffing and the state of morale at Inland Revenue. As I mentioned, there’s been considerable turnover of staff in the past five years, and I don’t believe the delegation of powers to Madison Recruitment is acceptable. I think it threatens Inland Revenue very well-deserved for reputation, for privacy and security of taxpayer information. It may be a temporary measure in order to help handle the Cost of Living payments, but judging by the report overall, I think Inland Revenue should be consider whether its current staffing levels are sufficient.
Overall, I would give Inland Revenue a pass mark for what has been another difficult year. The impression I have is an organisation right now in transition and under understandable stress. It could not have handled the many COVID-19 related issues it’s faced in the past two years without the benefit of Business Transformation. So, getting that project finished on time and under budget is a massive achievement. At the same time, the Pandemic and the continuing cost of living crisis has pointed to some ongoing weaknesses, which I think the new Commissioner will need to address urgently. We will be watching with interest.
Earlier this week, Nicola Willis, National’s finance spokesman, released information she had obtained from Inland Revenue regarding the cost-of-living payments. Included in this information was the fact that some 6,629 payments were made to individuals with overseas mailing addresses. Now it is possible that some of those persons did actually meet the criteria of being tax resident and also physically present in New Zealand at the time of the payment, however it seems more likely most of those payments were made to ineligible recipients.
This data supports anecdotal evidence I’ve heard from other tax agents who have reported examples of non-resident clients receiving the payment. And the fact that a significant number of payments were made to apparently readily identifiable non-residents is concerning is concerning and points to a potentially systemic error.
Nicola Willis also asked a number of questions regarding ineligible recipients. According to written answers provided by the Minister of Revenue currently, Inland Revenue is not aware of any recipients who were either in prison or under the age of 18, which is a bit reassuring.
It also emerged that 49,300 payments were made to persons who only declared investment income. Now that’s an interesting statistic itself, but as an Inland Revenue spokesman noted, the eligibility conditions did not prohibit payments to such persons so long as they met the three key criteria of their income being under $70,000 are tax resident and are physically present in New Zealand at the time of payment.
In the wake of the fallout from the first payment cycle in August, Inland Revenue has tightened up its processes before the second wave of payments made at the start of this month. As a result, the number of people receiving cost-of-living payments dropped by about 54,000. These types of checks apparently included Inland Revenue screening and questioning people who accessed their myIR accounts from an overseas Internet address.
MyIR is likely to be an extremely useful tool for Inland Revenue for spotting potential discrepancies. I do know one case where they noted that some numerous changes had been made to a draft return before it was finalised and when the return was subsequently investigated it turned out that the changes had been aimed at maximizing the available foreign tax credits in excess of what was allowable.
In relation to the cost-of-living payments errors were inevitable given that they would be made to an estimated 2.1 million recipients. For me, the bigger issue here is whether Inland Revenue is properly resourced. It estimated it required between 750 and 1,000 staff to deliver the payments. This is the equivalent of nearly 25% of its headcount of 4210 as of June 2021. The questions I’d be raising is why are so many additional staff required, particularly when you consider that Inland Revenue has just completed a $1.5 billion Business Transformation programme?
There’s also the question that there does seem to be a systemic error in relation to those payments made to individuals with overseas mailing addresses. In short, this is disappointing and shouldn’t really have happened. No doubt we’ll hear more about this as National is firing lots of questions on the matter at the Minister of Revenue, its MPs address on average somewhere between 80 and 100 written and oral to the Minister of Revenue each month.
Doomed, but an important point made
Moving on, last year I discussed a Taxation Review Authority (“the TRA”) case in which the taxpayer wanted assessments to be amended to reverse the effect of the over-taxation of a lump sum payment of $150,000 she had received from the Accident Compensation Corporation. This payment represented backdated compensation in respect of the previous compensation, which she should have received over the period April 2014 to September 2017. Instead, the back dated compensation was eventually paid as a single sum and subject to PAYE.
At the time, the taxpayer argued that this represented over-taxation as the payment should have been treated for tax purposes as having been derived on the accruals basis and spread over the income years to which the payment related. The Taxation Review Authority dismissed her challenge, but she has taken her case to the High Court who heard it late last month.
Her appeal was pretty much doomed from the start because currently there is no authority for the payment to be treated as she wishes, although conceptually I believe it’s a reasonable approach. And it transpired that it was a doomed appeal because the High Court declined to exercise its discretion to extend the time for her to file an appeal against the TRA decision.
But as I said, I think the point she is making is valid. Subsequent to the TRA case I obtained information from ACC under the Official Information Act about how many people had received backdated compensation.
And it turns out hundreds of people each year do receive such payments. I therefore took the matter up with Inland Revenue and Parliament’s Finance and Expenditure Committee. I understand that Inland Revenue officials are currently reviewing the treatment of lump sum payments made by ACC and the Ministry of Social Development with a view to reporting to ministers in the coming months. I’ll update you on any developments as they emerge, but that does sound hopeful.
Global tax reform effort broad but it stutters
Yesterday, the OECD released its annual publication on tax policy reforms. This provides comparative information on tax reforms across countries, and this edition focuses on the tax reforms that were introduced or announced during 2021. This 2022 edition has the largest country coverage in its history. It covers the tax policy reforms made in 71 member jurisdictions of the OECD/G20 inclusive framework on the Base Erosion and Profit Shifting on international tax reform and includes all 38 OECD countries.
The report (not available as a download) breaks down into four parts. The first looks at the macroeconomic background and includes an overview of developments in the global economy. Part two presents the latest trends in tax revenues and in the composition of taxes and also identifies how these were affected by the arrival of the pandemic in 2020. Part three provides detailed description of those tax reforms that were introduced in calendar year 2021. Part four is a special feature which examines measures countries have introduced in response to rising energy prices and also has some policy recommendations.
The key policy trends identified are that personal income taxes and Social Security contributions reduced in most countries, as policymakers tried to boost economic growth and promote equity. That said, changes in personal income tax rates were less common than in previous years. Measures were targeted towards low- and middle-income households, particularly those with children aimed at promoting employment and providing in-work benefits.
Corporate income tax rates were cut in four countries. And the general convergence of corporate income tax rates across the countries continues. However, the big development last year was the agreement of 137 jurisdictions to the Two Pillar solution to reform international tax rules. Now, that seems to be stalling at the moment, but still, as I said, represents a major development.
With regard to VAT (Value Added Tax or GST), not many changes happened last year other than the reversal of most of the temporary VAT reductions introduced in the wake of the pandemic in 2020.
In the field of environment related taxes, the OECD report some progress, but at a slower pace than previously. The effect of carbon prices remains low overall because of the temporary cuts to energy taxes that started to come in with effect towards the end of 2021.
In relation to property taxes there were some measures introduced promoting progressivity and fairness. These predominantly involved tax rises either through increases in tax rates or base broadening measures. The bright-line test being extended from 5 to 10 years last year is one such example of that. The report points out that such measures are often trying to promote the efficient use of existing housing stock as well as greater fairness of property taxation, a long running theme of this podcast.
Part Four on the support measures introduced by governments to try and protect households and firms from the impacts of high energy prices is interesting reading. Here in Aoteaora New Zealand, the major energy issue has been the impact of petrol prices. Fortunately, because of our high renewable sector, we’ve been somewhat shielded from the impact of higher energy prices. But if you’ve seen reports coming out of Europe and Britain in particular, you will know that some horrific energy price rises are either on the horizon or are happening right now.
The OECD report recommends a shift towards more targeted measures aimed at helping those on lower incomes. This “may require improvements to existing transfer and social welfare systems.” So as often with a lot of the stuff we see coming out of the OECD it’s very interesting to see international trends and consider those in a New Zealand context.
Well, that’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients.
Until next time kia pai te wiki, have a great week!
