30 May, 2022 | The Week in Tax, Uncategorized
- Will the IRD be able to deliver the cost-of-living payment?
- Potentially unwelcome GST surprise for farmers selling up.
- The latest developments from the OECD
Transcript
In the wake of the Budget, a Cost of Living Payments bill was introduced and has now been enacted. As part of the enactment a supplementary analysis report was released giving background to the proposed $350 payment. And this supplementary analysis has some very interesting commentary.
It appears the Cost of Living Payment was put together very much at the last minute as a response to the adverse effects of inflation on low to middle income households. According to these documents, this report was finalised on May 4th, barely two weeks before the Budget was delivered, which is very late in budget terms.
According to the document, Inland Revenue recommended against being the delivery agency for this Cost of Living Payment. The reason it gave was that it was concerned, that being asked to administer the payment would significantly impact its services to customers – taxpayers in plain English.
“The addition of this payment to their portfolio of services Inland Revenue already delivers will compromise Inland Revenue’s already stretched workforce and affect the taxpayer population, including the families and individuals that the payment would be intended to support them.”
Inland Revenue correctly identified that as soon as the announcement was made, they would get contacted about it which would put strains on their systems. It calculated a maximum of approximately 750 full time equivalent staff would be required to handle the payments to be made in the weeks of 1st August, 1st September and 1st October. Now, to put that in context, Inland Revenue staff as of 30th June 2021 was 4,200 full time equivalents. It would therefore need to use the equivalent of 18% of its staff to handle the delivery of this Cost of Living Payment. Quite clearly this would put strains on its system. The $816 million appropriation for the Cost of Living Payments includes $16 million to Inland Revenue for delivery of the services.
It’s therefore likely that Inland Revenue will need to hire additional staff, presumably contractors, on a short-term basis. And as we’ve discussed previously, the issue of contractors hit the courts with the Employment Court ruling that the contractors were not employed by Inland Revenue although I understand that decision is being appealed.
It also seems the Inland Revenue poured a bit of cold water on how the payments would be structured. According to the report, 55% of the total payments to be made will be to the middle 40% of households, 20% would be made to the bottom 30%, and 25% would go to the top 30%. There would be an estimated 478,000 households with children and 610,000 households without children who would receive a Cost of Living Payment. Although around 60% of all potentially eligible recipients will have annual income below $70,000, 10% would have family income of between $70 and $100,000 and 30% will have family incomes over $100,000.
And this led Inland Revenue to point out that potential equity concerns could arise because using individual income to calculate the eligibility for the payment rather than household income may result in different outcomes for households with the same income level. For example, a single person earning $100,000 won’t receive a payment, but a household with two people working who each have income of $50,000 would both receive the payments.
There’s also some analysis regarding how the eligibility is dependent on a person’s prior year’s income, which means the tax returns for the March 2022 must be filed. The paper notes that by the time Inland Revenue begins making payments on 1st August, it expects to have already raised individual tax assessments for approximately 3.2 million individuals, about 75% of individual taxpayers. But that leaves about 500,000 individuals, who may not initially receive the payment between the August to October payment run period because they haven’t filed their tax return. And this includes people who file through tax agents and have in theory until 31st March 2023 to file last year’s tax return.
This underlines a point I made in last week’s Budget commentary that you can probably expect tax agents to come under more pressure to get tax returns done on time so that those people who think they’re eligible may get a Cost of Living Payment. Overall, it’s some interesting insights into the administration of these systems and the Budget process.
GST pitfalls for the unwary
Now moving on, GST is probably the best example you can find of the broad-base low-rate approach to taxation policy. But even though it’s a highly comprehensive tax, that does not make it a simple tax. In fact, it’s full of pitfalls for the unwary. And I’ve been alerted to one which may affect farmers who are selling up.
Back in 2020, Inland Revenue caused some consternation when it issued Interpretation Statement IS20/05 on the supplies of residences and other real property. The Interpretation Statement reversed a long-established policy since 1996 on the sale of the farmhouse where the farmer might have used part of the property for their taxable activity, for example a home office in the homestead. Previously Inland Revenue’s position was that the sale of a farmhouse would generally be a supply of a private or exempt asset and not subject to GST.
However, in IS 20/05, Inland Revenue reversed that position and now said that the sale of the dwelling would have been useful for families who would now be subject to GST. The example the Interpretation Statement gave was if a GST registered farmer was claiming an automatic 20% deduction for farmhouse expenses, an Inland Revenue would expect that the property was therefore being used 20% of the time in the taxable activity and consequently sale of the farmhouse would be a supply in the course or furtherance of a taxable activity and therefore subject to GST.
This change has caused some consternation although some relief was given in the recently enacted Taxation Annual Rates for 2021-2022, GST, and Remedial Matters Act. This included a provision which allowed a deduction for the private use portion of a sale. Coming back to that 20% example I mentioned a moment ago, if 20% of the homestead was used for farming business and 80% for private purposes, there would be an adjustment for the output tax of 80% of the private portion. But that would still mean that 20% of the current value of the farmhouse at the time of sale would be subject to GST, which would be an increased tax burden for many farmers and undoubtedly a surprise for some.
Apparently Inland Revenue is now indicating that it may reconsider its position in its Interpretation Statement, which is a classic example of the military maxim “Order, counter-order, disorder”. But until that point is clarified, farmers who are selling their farm should be aware of this potential liability and seek advice on that transaction.
How the OECD influences our tax policy
And finally this week, a couple of updates from the OECD. Firstly, it released its annual report on the taxation of wages. This includes its tax wedge analysis, which looks at the difference between labour costs to the employer and the corresponding net take home pay for the employee. Basically, the tax wedge is the sum of the personal tax income tax payable by the employee plus any employee and employer social security contributions plus any payroll taxes less any benefits received by an employee. (I think ACC is included for these purposes).
As can be seen New Zealand, scores very highly with a tax wedge of 19.4%, which is the third lowest in the OECD. The average in the OECD is 34.6%.
What this tax wedge measure also points to is the significance of Social Security and payroll taxes in other jurisdictions. One of the criticisms of the Government’s proposed social insurance scheme is it would be the first real Social Security tax that New Zealand has. It seems from early feedback this is one reason employers are pretty reluctant about the scheme. But even if the scheme was introduced, we’d still be down the lower end of the tax wedge.
Now the second OECD report was titled Tax Cooperation for the 21st Century. This was prepared by the OECD for the G7 finance ministers and central bank governors when they met recently in Germany. It’s particularly interesting because it picks up on what’s been happening with the adoption of the Two Pillar solution for international taxation we’ve talked about recently.
The OECD was asked to prepare was a report that would focus on the further strengthening of international tax co-operation and what recommendations it has in this field. This is looking beyond the implementation of the Two Pillar solution which makes it very significant, in my view, about the future administration of international tax.
For example, a key recommendation is tax administration should be seen as a common mission by tax authorities rather than a potentially adversarial exercise. The development of international cooperation is one of the biggest themes in international taxation in the 21st Century and is also probably one of the least understood. And I will repeat what I’ve said beforehand, most people are oblivious to the amount of information that is being shared by tax authorities at all levels. China, incidentally, has just signed up to the mutual agreement and protocols on that. So every major jurisdiction in the world is cooperating or looking to cooperate on international tax at some level. This is why this paper is important because it starts to map out and where that international co-operation might be going.
The report focuses initially on corporate tax saying there needs to be a reliable framework for cross-border investment. As just noted, tax administration should be seen as a common mission. There should be a collaborative approach with early and binding resolution.
The impact of going digital is emphasised and that it needs to speed up to improve engagement with taxpayers. There are also recommendations beyond corporate tax about moving to real time data availability for taxpayers and tax administrations to make efficient use of evolving technologies while maintaining data privacy and confidentiality.
The issue of data privacy and confidentiality is a developing area where taxpayers are starting to push back against tax authorities because they are concerned, rightly, whether everything is secure as it should be. Furthermore, some are, understandably, not too happy about information sharing.
Finally there’s a recommendation that advanced economies should commit to supporting developing economies so that they can fully benefit from the policy changes. This means building capacity which is going to be needed, especially for the implementation of the Two Pillar solution. Overall, this is a relatively brief but fascinating paper with potentially significant implications.
And just incidentally, on the international Two Pillar solution, the Secretary General of the OECD has now indicated that he expects that implementation will be delayed by a year until 2024. That doesn’t surprise me, given the scale of the project, because there’s a lot of legislation that needs to be put in place by the middle of next year at the latest. Inland Revenue have only just started consultation on the matter.
Still, the Two Pillar project has moved on quicker than some cynics might have expected. But as I’ve said previously, politics is likely to get in the way, particularly the upcoming US Congressional midterm elections. Anyway, as always, we shall bring you the news as it develops.
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!
16 May, 2022 | The Week in Tax
- Inland Revenue consults on the OECD Pillar Two GloBE rules for New Zealand and has a new CEO
- Working for families consultation
- A look ahead to next week’s Budget
Transcript
Last year, the G20 and OECD agreed on a two pillar solution to the issue of international taxation and in October 2021, this two pillar solution was endorsed by over 130 countries in what is deemed the OECD sponsored Inclusive Framework. New Zealand was one of the signatories to that endorsement.
Inland Revenue has now released an issues paper looking at how these so-called GloBE rules (Global anti Base Erosion) would operate. Now as this is an issues paper it does not represent government policy. Instead, Inland Revenue is putting the matter out for consultation because the government has not yet decided whether in fact it will adopt Pillar one or Pillar two, and in fact is also not ruled out adopting a digital services tax. So, this issues paper is a basis for formulating policy to be taken to the government. It therefore partly represents a background paper, but also explains how the rules would operate.
To recap, the purpose of the GloBE rules is to ensure that affected multinational groups (MNEs) pay at least a 15% tax on their income in each country where that income is reported for financial reporting purposes. It’s initially intended to apply to MNEs if their annual turnover exceeds €750 million per annum in two of the last four years. It’s estimated to initially apply to approximately 1500 multinational groups worldwide, of which approximately 20 to 25 are based in New Zealand. The OECD estimates that the global revenue gains under Pillar two will be in the order of US$130 to $185 billion annually, which represents about 6 to 7.5% of global corporate income tax revenues.
The paper is split into three parts. Part one is a general overview with Chapter one giving the background on the initiative and on its intended purpose. Chapter two has a summary of the rules in general, and chapter three raises the question which may seem odd ‘Should New Zealand adopt the GloBE rules?’ Part two then explains the proposed rules in more detail, and part three then covers all specific issues form a New Zealand perspective,
The paper is quite comprehensive running to 84 pages so there’s quite a bit of detail to go through here. Fortunately, we’ve got quite a good period of consultation because consultations open until 1st July. Normally we only have a 4-to-6-week period for consultation.
Now, as I said, what may seem a rather strange question is whether New Zealand adopts the rules is a key part of the consultation. The official view is that if a critical mass of countries do adopt or are likely to adopt the global rules, then officials would recommend New Zealand take steps to join them. Officials take the view that they see no benefit, or not much benefit, in New Zealand going it alone and adopting global rules without a critical mass.
Three questions are put to submitters on this issue.
- Do you think New Zealand should adopt the GLoBE rules if a critical mass of other countries does or is likely to do so?
- Do you have any comments about what a critical mass of countries would be?
- Do you have any comments on the timing of adoption?
Now my response would be ‘yes’, New Zealand should, because it’s part of being a good corporate global citizen. Obviously, there’s a likelihood of additional revenue gains, although according to the paper the potential gains are said to be modest.
What would represent a critical mass of countries? Well, that’s a difficult one. I guess the key country to being involved would be the United States. But as you know, they’ve always ploughed their own furrow on this matter. And politics are such that the Midterm Congressional elections may mean that the Republicans are able to block change on this. Like we’ve said in the last couple of weeks when discussing possible wealth taxes, it all comes down to politics. But certainly, if the majority of the 130 countries that have endorsed it do sign up, you’d think that we would want to go ahead even if the United States didn’t. But it would be disappointing, obviously, if America did not.
And then about the timing of these rules this is actually quite tight. Under the Pillar 2 proposals, there is an income inclusion rule which will impose the top up tax on the parent entity in a multinational group. Now under the OECD timeline that should be enacted during 2022 in order to be effective in 2023. And then there’s another part, the under-taxed profits rules, which should come into effect in 2024. I think that timeline is pretty optimistic. I would be expecting to see it slide out a bit, but who knows what the international mood is on this? Maybe progress happens much more quickly than we expect
Anyway, this is an important paper and there’s a lot to consider here. Maybe the gains might be modest, but it is part of the change in international taxation, which will have ripple effects all the way through the tax world
Issues for the recycled ‘new’ IRD CEO
Moving on, Inland Revenue has a new CEO, Mr. Peter Mersi, who has been appointed for five years with effect from 1st July. He takes over from Naomi Ferguson, who has been the CEO of Inland Revenue for the past 10 years and has seen the department through the Business Transformation project.
As it transpires, Mr. Mersi, who is currently the CEO at the Ministry of Transport was a Deputy Commissioner at Inland Revenue at the start of the Business Transformation Project back in 2012. And prior to that he also spent some time at Treasury where he was the Deputy Secretary, Regulatory and Tax Policy branch.
So, although he’s coming from a Ministry of Transport background, Inland Revenue is not unfamiliar territory for him. It will be interesting to see how the organisation develops under his direction and governance of whichever hue will want to cash in on the benefits of the Business Transformation project.
And of course, one of the areas that he and the department will be involved in will be the implementation of law changes such as the proposed GloBE rules we’ve been talking about. And one thing he will need to ensure alongside the Minister of Revenue is that the Department continues to remain adequately funded. And I point to the troubles of the United States Internal Revenue Service, which has had its problems with enforcing the controversial FATCA rules which I mentioned a couple of weeks back.
It seems from another report from the United States Treasury Inspector General for Tax Administration, that the IRS is struggling with funding and its enforcement is falling off as a result. This led the Inspector General to comment. “The trending decline in enforcement activity is likely causing growth in the overall Tax Gap as taxpayers are less likely to be subject to an examination.”
The numbers of what the IRS call examinations, what Inland Revenue terms risk reviews, have fallen by between 55% and nearly 60% in the past five fiscal years. It bears to keep in mind that our IRD is actually a very efficient organisation, which, to borrow a phrase, you mis-underestimate at your peril. But as the example of the IRS shows, if funding falls away the opportunity opens up for the unscrupulous to evade tax.
‘Consulting’ on WfF
There’s a lot going on at the moment, partly because we are in the run up to the Budget next week. Something that’s been underway is for a few weeks now is a public consultation on Working for Families tax credits. This is being handled by the Ministry of Social Development and Inland Revenue. It’s part of a government review of working for families.
It’s interesting to look at what we’re being asked here compared with a typical Inland Revenue consultation, which has a lot more detail and is quite focussed.
The basic question that’s been posted is what do you like about Working for Families? Is there anything you want, don’t want changed? How do you think it can better support low income working families, families changing hours shift, working part time hours and those with care arrangements? What concerns do you have? And if you could change one thing about working families, what would it be? Now those are a set of questions are really not directed at professionals, but I hope that it gets a lot of good buy-in from the public.
In relation to concerns which I would raise one would be about how accessible it is. As my colleague, Professor Susan St Jones has pointed out, the in-work tax credits are a problem because they’re not available to everyone. And then there is the abatement rates and the resulting very high effective marginal tax rates which people on Working for Families suffer. They actually have the highest effective marginal tax rate of any taxpayer in the country. So those are areas where I think should be the focus for improvement.
Tinkering with WfF
Speaking of Working for Families, the Budget is next week, and I expect that there will be some tinkering going on with Working for Families based around the background papers to the consultation. They seem to be pointing towards an increase in payments being announced or being implemented in the Budget. Of course, with the cost-of-living issue, the Government probably will be keen to do something on that matter.
New Zealand budgets are actually really quite boring from a tax perspective. They’re not like budgets I used to see in Britain, for example, where tax measures came out from left field and were not always very coherent in what they’re trying to do. They certainly contained a lot of tinkering which kept us on our toes.
We’re not likely to see much like that next week. Bill English was one for sneaking in quiet tax increases or changes such as imposing employee contribution superannuation tax on KiwiSaver employer contributions, or withdrawing smaller allowances that were meant for children, the so-called “Paper-boy tax”.
One tax issue which has been hammered away at in recent weeks is fact that the tax thresholds have not been increased or adjusted since 2010. Eric Crampton of the New Zealand Initiative had a look at this. He considered what had gone on with the thresholds and where as a result the average tax burden had shifted. He made some educated guesses as to where those thresholds should be now.
But there is actually some information floating around which would give us a more reasonable direction of what the thresholds should be if they had tracked along with inflation. These are the ACC thresholds for the upper limit of earnings on which the maximum 80% of income that may be paid out under a claim is based.
Back in 2010, when income tax rates were last adjusted, the ACC threshold was $110,018. As of 1st of April this year, it’s now $136,544. And so that increase over time over the period represents just over 24.1%.
So if you applied that 24% increase to the tax thresholds, this would be the position
| Tax rate |
Current thresholds |
Adjusted thresholds |
| 10.5% |
$0-$14,000 |
$0-$17,375 |
| 17.5% |
$14,001-$48,000 |
$17,376-$59,573 |
| 30% |
$48,001-$70,000 |
$59,574-$86,870 |
| 33% |
$70,000-$180,000 |
$86,871-$180,000 |
| 39% |
>$180,000 |
$180,000 |
(Note I’ve not adjusted the $180,000 threshold as it has only been in effect since 1 April 2021).
So that gives you some indication of what’s been going on. I think Governments of both sides have been, quite frankly, underhand in not adjusting for inflation. It isn’t just the tax thresholds, they’ve also done it in their other areas, such as Working for Families, where the threshold for abatement kicking in at $42,700, which is well below the $59,500 odd I suggested would be the upper limit to the 17.5% threshold. It will be interesting to see if anything is said or done about tax thresholds next week, but it’s a point that will certainly be addressed one way or another before next year’s election.
Talking of inflation, Inland Revenue has released a CPI adjustment to the square metre rate for dual use premises. This is where you can base a deduction for home office on a square metre rate. This has been set for the year ended 31st March 2022 at $47.85, which has been adjusted for 6.9% inflation in the 12 months to March 2022. So that’s a little useful thing to keep in mind when you’re preparing tax returns for clients who work from home or have a home office.
Rich entertainers avoiding tax
And finally, what have the Rolling Stones got to do with tax? Well, apparently this week is the 50th anniversary of the release of their magnum opus, Exile on Main Street. And the title is a deliberate reference to the fact that the Rolling Stones in 1971 decamped to the south of France because they were in trouble with UK tax authorities and facing very significant tax bills. At that stage, tax rates in the UK in some cases topped out at 98%.
So they went to France to record this album which is regarded by many as their creative peak. There’s a great story in The Guardian about what happened, including this fantastic quote ‘People took so many drugs, they forgot they played on it’.
Tax troubles and musicians go hand in hand. There are plenty of stories about various musicians and actors who’ve got themselves into terrible trouble with tax authorities and either finished up in jail, such as Wesley Snipes, or decamped elsewhere, like the Rolling Stones.
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!
9 Feb, 2022 | The Week in Tax, Uncategorized
- Terry Baucher looks at what’s ahead in the world of tax this year and finds some big issues
- some lingering from the past
- and some new ones to be grappled with
Transcript
2022 is only four weeks old, but as was the case last year and in 2020, COVID-19, this time in the form of the Omicron variant, will dominate the news and fiscal policy.
Tax responses to the pandemic
What exactly the Government’s fiscal response to Omicron will be is not yet clear. There’s no mention so far of a new round of Resurgence Support Payments or a general wage subsidy. And now, since we’ve moved into the red traffic light setting as of midnight on 23rd January, there’s concern many employees will soon be unable to work because they’re either sick or self-isolating from Omicron.
So what support is available? Well, at the moment it’s just the Leave Support Scheme or the Short-Term Absence Payment scheme. These have replaced the wage subsidy. The Leave Support Scheme is a payment for when a person or a dependent is required to self-isolate due to Covid-19 either because they’ve been exposed to it, or they’re considered high risk if they were to contract it. The Short-Term Absence Payment, on the other hand, is designed to help employees who are self-isolating while they’re awaiting the result of a Covid-19 test. In order to be eligible for the Leave Support Scheme the Short-Term Absence Payment the employee needs to be unable to work from home.
The Leave Support Scheme is paid at a rate of $600 a week for full time workers, those doing more than 20 hours a week, and $359 a week for part time workers, i.e. less than 20 hours a week. The rules around these payments are set out in the Covid-19 guidelines, and for the moment, that’s all that’s available. And by the way, both payments are administered by the Ministry of Social Development and will be made regardless of the financial position of the employer.
Industries such as hospitality, tourism and the performing arts sector have all been hit hard and will be affected by the move to the red traffic light system. But at present, nothing in the form of an updated Resurgence Support Payment or something new has been mentioned.
Any response to this issue is clearly a matter of politics although it will have a fiscal impact. Bernard Hickey, the economic commentator and journalist, has put together an analysis of the impact of the Covid-19 support to date and who has benefited from that, and the numbers are quite eye watering. In his daily newsletter, he says that the government’s interventions to print $58 billion through the Reserve Bank and give $20 billion in cash to business owners helped make owners of homes and businesses $952 billion richer since December 2019. This is one of the greatest transfers of wealth New Zealand has ever seen. It’s also highlighted the pressure on those at the other end of the scale. The poorest New Zealanders now owe $400 million more to MSD and need twice as many food parcels as they did before Covid-19.
Now as I said most of this is political, and we’ll see if the optics of such huge changes will affect how the next form of fiscal support will be designed. Will it be as generous, or, as many people have said, should the funds be going directly to employees and those infected rather than through their employer?
Taxation of capital
More importantly, the never-ending issue of the question of the taxation of capital will re-emerge on this. We’ve already had discussions with one or two other people in the policy space around what we think could be happening in the year ahead and the question of inequality and taxation of capital has popped up again. Although it seems incredible to think the last election wasn’t so long ago, there’s an election next year, and I imagine there would start to be some jockeying around positioning for that.
So Omicron and Covid-19 and God forbid, any further variants, will play out on the economy. What type of support the Government gives and how it funds it will have tax implications. It might be, for example, the Government might have a look again at whether it allows the carry back of tax losses. They were going to push ahead with, a permanent scheme, but dropped it for fiscal costs. They may have a think again because the fiscal cost might not be so great as expected or feared, and can actually be concentrated on sectors which are getting hit hard anyway. So that’s something to look out for. So, watch this space and we’ll bring you news of developments throughout this year as they happen.
International tax reform
The next area I think we will see, and again repeating a theme from last year, will international tax reform and following through with the implementation of the agreement on the taxation of the largest multinationals and the digital tech giants. This year the detail of that agreement is to be worked out. The OECD released last week the transfer pricing guidelines for multinational enterprises and tax administrations for 2022.
140 odd jurisdictions have committed to the reforms of digital taxation and will be working on making sure that it meets these pretty ambitious deadline to be in place by the end of the year, so we’ll see a string of developments in that field.
How our tax system is run
And finally, on the domestic front, the issue which I think will dominate is what next for Inland Revenue now it’s completed its Business Transformation? Basically this is about how the tax system is run. Now, this may sound like a dry topic, but there’s already been quite a bit of manoeuvring around what is the future of tax administration.
On this, I would recommend reading a paper prepared by Business New Zealand in conjunction with tax experts (some of whom included members of the Tax Working Group, such as Robin Oliver) on the future of tax administration. I understand sometime soon we’ll see a Government Green Paper on tax administration, which would explore what tax administration could look like in future and how to make best use of Inland Revenue’s completed Business Transformation project.
What Business New Zealand and its working group have done, is put together a roadmap including a series of revised tax principles applicable for tax administration. This is talking about the delivery of tax policy and administration, not about actual tax policy settings, per se.
One of the things that’s stands out from this paper is that Business New Zealand, and from my initial discussions with Inland Revenue on the topic, see Inland Revenue moving more to focus on system management and partnering and assisting a wide range of participants in the tax system other than taxpayers themselves. This is a bit of a change in the whole approach. Inland Revenue is no longer adopted a top down “It’s my way or the highway” around how tax is administered and delivered.
The paper sets out seven tax administration principles. Firstly, “The purpose of ongoing reform is to reduce the risks and costs for all participants in the tax system and improve national wellbeing”. Nothing too controversial about that, totally agree.
Secondly, “The tax system is built to assist those who voluntarily comply, with robust enforcement for those who do not.”
I wholeheartedly agree with that. Voluntary compliance is undermined if Inland Revenue does not throw the book at those who are not complying.
One of the issues raised in this paper and which has been picked up in other papers on tax administration I’ve seen from around the world, is that sometimes this means tax authorities have to take an approach to a particular sector or area of enforcement where it might not necessarily see there’s a lot of money in it for them. For example, the fringe benefit tax issue around the infamous twin cab Ute. Inland Revenue has said, “Well, yeah, we think there’s an issue there, but we don’t know whether it’s worth our while”. Under this tax administration principle, it’s, “No, you really do need to look at that, there are wider integrity issues as to why you should do so”.
Three. “Everyone understands their rights and obligations through clear, unambiguous legislation and guidance.”
Very strong support of that principle. And as we talked about last year, one of the pressures that’s coming into the tax system is we’re getting less clear legislation and guidance. This is because the Government is doing things a little bit ad hoc as it responds to pressures, inevitable pressures sometimes, but the tax policy process has not been as robust as it could have been.
And there are two obvious example to talk about here. Firstly, the interest deduction rules and secondly, the proposals to ask high wealth individuals to provide more details about their assets and how they’re held. Both those policies have been done one would argue, a little bit on the hoof, and this certainly caused pushback as a result.
Following through on this, the fourth principle is “Tax rules are designed and administered in a way which reduces compliance and administration costs.” And again, everyone can get behind this. Business NZ paper points out this is something that’s actually much more important for small businesses and microbusinesses where the costs fall heaviest on them, and often they don’t have the tools in terms of the resources to manage their tax liabilities.
The fifth principle is “Tax policy proposals are critically evaluated against the ability to automate outcomes.” Very straightforward. No issues there.
Sixthly, “A well-functioning tax system recognises the role and importance of intermediaries.” Now, regular listeners of the podcast will know that sometimes as tax agents, we felt unhappy about how Inland Revenue had interacted with us and about how the Business Transformation process was implemented.
And what this paper points out is intermediaries such as tax agents and other software designers are incredibly important to the tax system going forward. To be fair to Inland Revenue, that seems to be also coming through on what I’m hearing from them. A very important change there and a welcome one, too.
And finally, “Taxpayers and intermediaries are held responsible only for matters within their knowledge or control.” This is a fair point setting some boundaries so that taxpayers are not held accountable for errors beyond their control or knowledge. This might happen because sometimes information wasn’t available or can never be made available to a taxpayer or an intermediary. At present the tax system can come down hard on the reporting person because they should have known, when in fact they may not have done or could not have done.
The paper suggests for example that Inland Revenue which has better knowledge should be responsible for advising taxpayers and intermediaries of incorrect tax rates and tax codes. So this is an issue of increasing fairness in the tax system.
Now I understand that Inland Revenue is going to produce a Green Paper for discussion and is considering holding a symposium later this year to discuss these matters. Although it sounds like an arcane topic it’s certainly, going to be quite an important issue for the year going forward. And as always, we will bring you developments as they happen.
Well, that’s it for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and send me your feedback and tell your friends and clients. Until next time, kia pai te wiki, have a great week.
20 Dec, 2021 | The Week in Tax
- A record tax take ahead, never mind COVID-19
- A ground-breaking international tax deal
- Property taxation
Transcript
On Wednesday, the Government released its Half Year Economic and Fiscal Update (HYEFU) on what was announced in May’s Budget back in May. From a tax perspective the Government’s tax take – the fiscal outlook – is expected to improve over the forecast period to 30 June 2025. Although the HYEFU expects things to weaken in the current year to June 2022, it is seeing quite stronger than expected tax revenues coming through.
Treasury expects over the five-year period for core Crown tax revenue to increase by $36.6 billion or $7.3 billion each year. This is expected to be in line with the expected economic growth. Core Crown tax revenue will remain at about 29% of GDP over the period. What it will mean is even though they expect a slight downturn in in the year to June 2022, core Crown tax revenue is expected to exceed $100 billion dollars for the first time.
Now one reason for the Government’s expected increased tax take is a stronger outlook for the labour market, but it’s expecting employees’ wages to rise. As a result, fiscal drag will lead to a higher tax take. Fiscal drag is when an individual’s tax rate increases as their income crosses a rate threshold. For example, over $48,000, the tax rate jumps from 17.5 to 30% and then at $70,000 it goes to 33% and then over $180,000 it goes to 39%.
The fiscal drag effect is expected to be quite strong. It also implies that, at least for this forecast period, the Government is not planning on making many adjustments to those thresholds, which have not been adjusted at all since 1 October 2010, other than the introduction of the new 39% rate this year.
There is also an interesting snippet about the rise in the amount of GST that’s been collected. That is apparently a by-product of the lockdowns and the inability to travel overseas. People are therefore spending more in New Zealand, whereas if they go on holidays, that spend happens outside New Zealand and there’s no GST for the Government.
The half year forecast also includes estimates of the impact of tax policy changes and the big one here is the denial of interest deductions for residential property investors. Over the period to 30 June 2025 this is expected to bring in over $1.1 billion. As you’re aware the interest deductions are limited to 75% as of now and then gradually over time deductions will be removed in full. For the period to June 2022 the impact is estimated at $80 million, and that rises to $490 million in the period to June 2025. Of course, there’s an election in between now and then and the legislation hasn’t been finalised, but we will see how that plays out over the forecast period.
These half year forecasts are interesting, they’re indicative only, and things can change quite rapidly as we found out in the last couple of years. And of course, there’s a risk another development in the pandemic will have some impact.
Still, it’s interesting to dive in and see how the tax take is expected to track over the next few years.
Income Tax on the Wage Subsidy
Moving on, and speaking of the pandemic, Inland Revenue has just issued a reminder about the tax treatment of wage subsidy and leave support payments that have been made to taxpayers by the Ministry of Social Development. If these payments didn’t pass through PAYE, then self-employed taxpayers and other individuals who received a wage subsidy or leave support payment, have to include these payments in their income tax returns. So that includes most self-employed people, but it also includes shareholder employees, partners and trustees, shareholders in look-through companies and some students and home-based childcare providers.
The fact that Inland Revenue is issuing a reminder now about what has to be included in the tax return when tax returns for many people were due on 7th July is interesting. It indicates quite a few tax returns are still outstanding and also they may be seeing mismatches between what’s been reported to them by MSD and what’s been filed. A person might have received a payment under one of these various support schemes but doesn’t appear to have been reported or included it in their tax return to March 2021.
No doubt there will be more COVID-19 developments next year. Looking back on the year, obviously COVID-19 dominated the news. Although the big wage subsidy burst happened last year, but with the progressive lockdowns the wage subsidies and resurgence support payments were all made available this year and I think we can expect that to continue. So that was clearly a story which never seemed to be out of the news.
International tax reform starts in earnest
What were the really big tax stories for the year? Well in my view there are only two that stand out. The first is the international agreement by the G20/OECD on the future of international tax. I mean, this is a huge development. 136 countries signed up to a new international framework which takes into account the rapid digitalisation of the world economy that has happened. It also starts to try and draw a line under the tax competition that has gone on for the past 40 to 50 years.
To recap quickly the agreement consists of two pillars. Pillar One is aimed at ensuring that profits are more fairly distributed between countries with respect to the largest multinational enterprises. Those are companies with a turnover greater than 20 billion euros, about $30 billion. And then there’ll be a reallocation to jurisdictions where the customers and users of those services are located. This is supposed to reallocate something like USD125 billion of tax annually. New Zealand will be one of the beneficiaries of that, particularly in relation to the likes of Google and Facebook.
Pillar Two is the one that puts a floor on the tax competition by introducing a global minimum tax corporate tax rate of 15%. At the moment, this rate is said to be a maximum, and I know the Biden administration wanted it higher. But Europe and the Irish in particular, are not keen on a higher rate. And as I mentioned when I talked about this with Craig Elliffe, there are some countries, such as Nigeria, who are not happy and did not sign up to the agreement.
So the deal isn’t completely over the line yet, but 136 out of 140 participants have agreed to it and things are starting to move along. The main plan is there will be a multilateral instrument for signing by the middle of the year. And if all things go according to schedule, the new rules will take effect from 1st of January 2023.
I agree with Craig Elliffe that this is probably just the start of international tax reform. I think the pandemic coming in the wake of the Global Financial Crisis means that governments are really looking very hard at their tax revenue and tax base and will be looking to try and basically eliminate the use of tax havens and aggressive tax planning. So it’s very much “watch this space.”
Using taxes to restrain house prices
Then the other story, which I mentioned earlier, because we already know something of its fiscal impact, is the ongoing struggle of the Government to try and rein in house prices and restore some equilibrium between investors and first home buyers.
We saw this with the dramatic and unheralded introduction of the restriction on interest deductions for residential property investors. This has come into effect from 1st October and will progressively mean that after 31st March 2025, no deductions will be available.
This was a very dramatic step that was mitigated by allowing interest deductions to continue for new builds. Clearly, the idea is to divert investment into new builds and indirectly then bring down house prices. How that plays out nobody knows, really. Clearly, some form of circuit breaker needed to happen. Whether this is the right one, only time will tell.
The other measure that came in with it as well was the increase in the bright-line period from five to ten years. Again, there’s a carve-out for new builds, and I wonder whether that may create unintended consequences.
The controversial legislation is still progressing through Parliament, and the Finance and Expenditure Committee is now working its way through all the written and oral submissions it’s received and heard on the matter.
Undermining the GTPP
But the other thing this move highlights is the deterioration in the Generic Tax Policy Process (the GTPP). New Zealand tax policy experts are very proud of the GTPP. There’s nothing really similar to it and around the world tax practitioners in other jurisdictions admire it because it sets out a framework under which tax policy will be developed.
But the problem is that this process has been eroded steadily in recent years, and the area causing this erosion is the ongoing conundrum over the taxation of capital. We have a problem in New Zealand with an immense misallocation of resources to our housing market, which has a number of unintended consequences as seen by people like Max Rashbrooke and Bernard Hickey. The Government as well, I think is worried about what’s happening in that sector, and even the banking sector seems quietly concerned at how much money is in the property sector.
The bright-line test was introduced only six years ago, and its introduction was a surprise that didn’t go through the Generic Tax Policy Process. And we’re seeing more of this with governments introducing tax legislation a little bit on the hoof. The interest limitation rules are probably the best such example even though there was a process where we were, as experts, asked for our input. But the Government had already said what it was going to do, we were merely commenting on the how that would happen. Under the Generic Tax Policy Process the Government will begin by asking we’re considering doing X, should we? What are the pitfalls and the best way of implementing our proposal?
But the interest limitation rules aren’t the only area where some people are concerned about what’s happening with GTPP. The other policy, which is also drawing some controversy, is the introduction of section 17GB of the Tax Administration Act. This is targeted at the wealthy, and it compels them to provide evidence of their financial wealth, together with a breakdown of their structures, to Inland Revenue for the purposes of determining tax policy.
Now this legislation was introduced on the quiet without any discussion about it beforehand. And again, some people have seen that this is eroding the Generic Tax Policy Process. And that move has stirred up some protest and there’s persistent talk of perhaps a legal action being taken against the legislation.
But again, you might say that comes back to the issues of the taxation of capital which is an area where I think there’s a weakness in the tax system. The taxation of capital is not comprehensive, and we need to think further about how we want to do that, and how would that tie in with ideas of inequality. Within the tax system if we are following the principle of a broad base, low rate, but we’re excluding part of the base, how does that impact the tax rate?
New Zealand is very reliant on labour taxes. I mentioned earlier about what the expected revenue to come in from PAYE and also from GST which is a fantastically efficient tax. But is that a broad enough tax base? Well, that’s a debate which I think is going on right now. I’m seeing the same debate elsewhere around the world about taxation of wealth and the expansion of GST and no doubt those will be themes that we will continue to see next year.
Well, that’s it for this year. My thanks to all my guests this year, and also to all my listeners, readers and commenters on the transcripts. Thank you so very much for tagging along and listening to me ramble on about tax.
We will be taking a break now and we’ll be back on Friday, 21st January. Until then, Meri Kirihimete, me te tau hou, Merry Christmas and a Happy New Year.
13 Dec, 2021 | The Week in Tax
- Inland Revenue enlists the help of the Chinese tax authorities in a tax evasion case
- OECD report reveals the impact of COVID-19 on tax revenue
- Inland Revenue turns off its old computer system
Transcript
The Taxation Review Authority last week upheld the Commissioner of Inland Revenue’s assessments on unreported income from property transactions. There’s nothing particularly unusual about the facts of this case at first sight. The taxpayer was involved with the purchases and sales of five properties. He arranged the purchase of bare land, the construction of a house on the land and then sold the house.
He maintained he was only a manager and was actually acting under a power of attorney for Chinese nationals and merely managing the properties and receiving payments for services such as arranging the land development and transactions.
But the Commissioner decided to take a look at his affairs for the three tax years ending 31 March 2014, 2015, and 2016. And it transpired that in fact, he wasn’t acting as a manager, but he personally controlled the transactions, and he made the profit from proceeds of each property over and above the management fees he had returned in his tax returns. These transactions all pre-date the introduction of the bright-line test, so the Commissioner assessed him on the basis that the properties were acquired with a purpose or intent of sale.
Ultimately, the amount that was assessed after deductions over the three years turned out to be over $1.6 million. In addition, because he had only been returning the management fees, he had actually also claimed working for families tax credits of just under $9,000 to which he wasn’t entitled. The commissioner took the view all this represented tax evasion and imposed shortfall penalties of initially 150% of the tax evaded but reduced by 50% for a first offence. Even so these penalties amounted to $407,000.
So far this is relatively routine. Inland Revenue are tracking property transactions and if something gets suspicious, they’ll look to see if a pattern emerging.
What caught my eye about this one is the Commissioner’s investigations included obtaining information from the People’s Republic of China under the double tax agreement we have with the PRC. As a result of that enquiry the registered proprietors of the land said, “Hey, we’ve got no knowledge of our involvement in these property sales, and we have not received any benefit from these sales”.
Now, one of the great unknowns that I think people aren’t aware of is how much information sharing goes on between tax authorities. But this is the first one I’ve seen where it’s been clearly acknowledged that the Chinese tax authorities in the People’s Republic of China have been involved.
So, there’s a warning for people to be very aware that Inland Revenue information gathering powers are enormous and they have discretion to ask overseas tax authorities for information in relation to any enquiry. Undoubtedly, the Chinese tax authorities would have been very interested in this as well because they would have people at their end who may have been involved in tax evasion.
A couple of years back, I asked Inland Revenue under the Official Information Act about how many requests for information were made between it and the Chinese tax authorities during the year ended 31 December 2018. The official response was
“The information above is refused because making the information available would likely prejudice the international relations of the New Zealand Government. It would also likely prejudice the entrusting of information to the New Zealand Government on a basis of confidence by the tax agency of the People’s Republic of China.”
Incidentally I asked a similar question in relation to the double tax agreements with Australia and the UK, and the information was supplied. Talking with a journalist who often deals with OIAs being declined, he was quite impressed because he hadn’t had an OIA declined on those grounds.
But international relations aside, the key point people should be aware of is that Inland Revenue has wide information gathering powers, and that includes being able to talk to other tax agencies and overseas. And in this case, that was probably pretty fatal for the taxpayer’s chances in this case. You have been warned.
The economic tax take in a pandemic
Speaking of international tax, the OECD earlier this week released its Revenue Statistics 2021, which showed the initial impact of COVID 19 on tax revenues within the 30 odd countries of the OECD.
On average tax revenues represented 33.5% of GDP in the 2020 calendar year, which is 0.1 percentage points of GDP up relative to 2019. But of course, this is against the backdrop of the impact of the pandemic which resulted in widespread falls in nominal tax revenues and nominal GDP. And that’s why the tax take relative to GDP rose because in most countries, GDP fell by more than nominal tax revenues.
As typically with OECD reports there’s heaps of interesting data that you can dive into. For example, in 2020, Denmark has the highest tax to GDP ratio of 46.5%, whereas Mexico, at 17.9%, has the lowest tax to GDP ratio. Overall, in 2020 for the 36 countries that were measured, the ratio of tax to GDP rose in 20 and fell in 16.
The largest ratio increase was in Spain, which went up 1.9 percentage points, apparently because of a large increase in social security contributions. But the largest fall, on the other hand, was Ireland, which fell 1.7 percentage points. And that was because its GST revenues fell quite substantially following a temporary reduction in GST rates as part of its response to the pandemic.
Where does New Zealand feature in all of this? Well, its ratio provisionally rose to 32.2% of GDP, which is up 0.7 percentage points from 31.5% in 2019. By the way, the tax to GDP ratio is also shown for the year 2000. Back then the ratio was 32.5% and New Zealand since then has pretty much tracked around that thirty-to-thirty two percent of GDP ratio since then. Incidentally, Denmark’s has actually been pretty stable over the same period. Its tax to GDP ratio back in 2000 was 46.9%. The average across the OECD back in 2000 was 32.9% and in 2020, it’s 33.5%. So, you can see stability across the tax take for quite some time.
The report has a breakdown between tax types and interestingly, corporate income taxes in New Zealand at 12.4% of total tax revenue in 2019 is significantly above the 9.6% average across the OECD. Similarly, GST at 30.3% is well above the 20.3% average in the rest of the OECD. (Chile incidentally collects 39.9% of its tax revenue from GST, which is the highest in the OECD. As always there’s plenty to dig into in these OECD reports.
From FIRST to START
And finally, this week, Inland Revenue has finally switched off its old FIRST computer system, as it’s now practically completed its Business Transformation programme. The total cost of this Business Transformation has come in at just under $1.5 billion, which is less than the $1.7 billion that was originally budgeted, including the leeway for contingencies.
So that has rightly drawn some praise from various sectors for managing that transition. I think you can look back at the Novopay scandal as to see how these things can go wrong. Consequently, the Inland Revenue had to make regular reports to the Cabinet about its progress.
And one of the effects for Inland Revenue of the programme and which was part of its business case, is that its workforce has gone from 5,662 in June 2016 to under 4,000 now, a quite significant change. My understanding is that back in 2016 under the old system, a significant number of processers were employed simply to re-enter everything into the system so it could actually be used.
Regular listeners to the podcast will know I’ve not always been entirely complimentary about what’s going on with Business Transformation. There have been some issues for tax agents and we’re still working through some teething problems. Generally, I think when the Business Transformation programme was being designed and implemented, the role of tax agents was not well considered. We tax agents are actually the biggest single users of the system and perhaps having tax agents involved earlier on might have made it a more user-friendly experience from our end.
However, it has to be said that this programme was much needed. FIRST was introduced in 1989, I think, and it was really showing its age. And fortunately for all of us Inland Revenue had Business Transformation well advanced when the pandemic arrived. Inland Revenue officials have told me none of assisting the Ministry of Social Development with the wage subsidy scheme, implementing the small business cashflow loan scheme and the ongoing resurgence support payment scheme could have happened under the old FIRST system.
I know the local IT sector was very unhappy at the start of the project at being shut out of the process, although some local providers have got involved as it developed. At a conference in 2014 which was a precursor to the start of Business Transformation it got bit spicy as local software providers climbed into Inland Revenue over their decision to use Accenture and other offshore companies to lead the project.
Local software providers made two points. Firstly, they had the capability and expertise. One announced it had designed and implemented Bermuda’s GST system within six months. The view was the expertise was already in the country.
But secondly, and this is a point which I think has to be kept in mind on a broader economic framework, if software companies are trying to export, but they’re not winning government contracts, that makes it a harder sell for them. That was a point which I also heard when I was on the Small Business Council.
Anyway, congratulations to Inland Revenue for migrating fully across to the new START platform. It’s onwards and upwards from here and although there will always be some teething problems, we’re working through these. So that was a welcome completion of a project.
Well, that’s it for this week. Next week, it will be my final podcast of the year. I’ll be looking back on the big stories for the year. Until then, I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening (and reading) and please send me your feedback and tell your friends and clients. Until next week kia pai te wiki, have a great week!
