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An Employment Court case reveals Inland Revenue’s extensive use of contractors

An Employment Court case reveals Inland Revenue’s extensive use of contractors

8 Jun, 2021 | The Week in Tax

  • An Employment Court case reveals Inland Revenue’s extensive use of contractors
  • Is Google taking the Government for a ride?
  • A warning about the new bright-line test

Transcript

The chances are that if you ring Inland Revenue, your call will be answered by a contractor. Inland Revenue, as part of its Business Transformation programme, has been making increasing use of contractors and its use of contractors has led to a recently decided case in the Employment Court.

The Public Service Association took the case against Inland Revenue asking for more than 1,000 labour hire workers to be reclassified as direct employees of Inland Revenue. It took the case in the name of eight workers engaged by a labour hire company, Madison. And these people were mostly engaged to work as call centre staff at Inland Revenue.

Now, the case was decided by a full bench of the Employment Court, and it will be a very significant Employment Court decision. The decision itself, as published, runs to 82 pages. But what caught my eye about it was how much it revealed about the extent to which Inland Revenue is using contractors. As it transpired, Inland Revenue won the case. The court unanimously held that the labour hire workers were indeed employees of Madison and not of Inland Revenue.

But I doubt whether that’s going to be the last we hear of it, given the scale of what’s going on and the involvement of the Public Service Association. And I suspect this case will be appealed up through, the Court of Appeal and maybe ultimately to the Supreme Court. Hence probably why there was a full bench put on it of judges in the first place and the extremely extensive, and if you’re an employment lawyer, no doubt very interesting legal arguments engaged.

But the reason why the PSA took the case was, as the National Secretary of the PSA, Kerry Davies, pointed out, the scale of contractors being used was new. Inland Revenue, like many government agencies, if not all of them, I would expect, does use temporary staff from time to time. And you can look back and you can see that there’s been the use of contractors. For example, if I look back for the year ended 30 June 2015, contractors engaged by Inland Revenue cost a total of $45.3 million in that year.

But what’s been going on with this one hire company, Madison, is quite extraordinary. The eight plaintiffs who were supported in the case by the PSA, had worked in various Inland Revenue offices for periods between seven and 15 months, and they were amongst a total of 1,233 workers hired out to Inland Revenue by Madison starting in 2018. Now, to put that number in context, at 30 June 2017, Inland Revenue’s headcount was 5,519. As of 30 June 2020, its headcount is 4,831. So 1,233 temporary employees represents a very significant number of staff, getting on for almost a quarter.

Not all were engaged the same time. But we do know that under one of the agreements (what they call work orders) In October 2018, Madison agreed to provide 382 client service officers, as well as another 83 client service assistants.

Now the obvious attraction for Inland Revenue in this was some cost reductions. For example, a contractor supplied by Madison would be paid $20.00 an hour compared with an Inland Revenue employee of $23.94. If the Madison worker gained competency, that’s after a test which was taken usually after 12 weeks or so, they could go up to $22.50. Just for the record, Madison billed Inland Revenue over $40 million over two years. And it paid on average $29.25 per hour for a Madison worker who had gained competency and $26.00 per hour, exclusive of GST, if they hadn’t.

All this is of great interest to me and my other tax agents because we have been experiencing a great deal of difficulty getting through to Inland Revenue and working with them under the new system. I’m also very curious as to where the benefits are flowing through on Business Transformation.

To give you an example, a lot of systems have been automated, but there’s a great deal of inflexibility built into the system. Every tax agent I know, like myself, has encountered an issue where we directed a client to make a payment for a specific tax year, say, the 2019 income tax year, only to find Inland Revenue’s system had redirected that to another period. That then means that we have to pick up the phone, try and get through on a dedicated agent line – which has been cut back – and sort out the mess. Every tax agent I’ve spoken to has reported the same issue.

Therefore, the competency with which Inland Revenue approaches of its staff and the level of training they used is of great import to us as tax agents. We handle the more complex clients who also happen to bring in some significant amounts of tax revenue. So that’s why I’ve looked very closely at this case and am very interested to see how it played out.

And I was very surprised by the numbers I encountered. I then decided to take a closer look at exactly what Inland Revenue has been doing in terms of its personnel costs. Looking at its annual reports covering the six-year period ending 30 June 2020 – that is the year ended 30 June 2015, just before Business Transformation started – through to 30 June 2020.

The numbers are revealing about what has been going on in terms of Inland Revenue staff levels and its personnel costs. On 30 June 2015, Inland Revenue had 5,820 employees, 98% of which were permanent. As of 30 June 2020, the headcount was now 4,831, a reduction of nearly a thousand. But the number of permanent employees had fallen to 84%, indicating quite a marked degree of temporary contracting going on.

Now total personnel costs for Inland Revenue, including contractors, for June 2015 were $463.7 million. In the year to June 2020 that had gone up to $547.8 million. Now, that is a surprise, given that over the same period, as I’ve just pointed out, the headcount at Inland Revenue has fallen by a thousand. And by the way, these numbers do not include the contractors engaged in relation to the Business Transformation project, which is about another $70 million annually.

in June 2015 year, the contractors and consultants cost Inland Revenue $45.3 million. In the year to June 2020 that had risen to $111.5 million. That was actually down from the peak year of June 2019 when it was $136.8 million. Interestingly, Inland Revenue personnel costs for June 2020 at $436.3 million are little changed from June 2015, when they were $418.4 million.  But what’s important is if you look at the total personnel contracting costs. In June 2020 year, more than 20% of those costs represent contractors.

Summary contracting & personnel costs six years ended 30 June 2020

2015 2016 2017 2018 2019 2020
$ mln $ mln $ mln $ mln $ mln $ mln
Contractors & consultants 45.3 77.2 106.5 124.2 136.8 111.5
Salaries & wages 388.3 399.8 399.0 391.0 389.8 384.9
Other personnel costs 30.1 26.8 19.3 29.9 33.3 51.4
——————————– ——– ——– ——– ——– ——– ——–
Total personnel costs $463.7 $503.8 $524.8 $545.1 $559.9 $547.8
Percentage costs contracting 9.8% 15.3% 20.3% 22.8% 24.4% 20.4%
Percentage of staff permanent 98% 97% 95% 89% 87% 84%
Headcount 5,820 5,789 5,519 5,250 5,009 4,831

(Source Inland Revenue Annual Reports)

And by the way, over this six-year period, Inland Revenue has paid out more than $47 million in termination benefits. In the year to June 2020, it was $19.3 million and the year to June 2018 it was another $21 million.

There are a number of things that really concern me about what’s gone on here. Inland Revenue does not seem to be showing significant improvements in cost efficiencies. It has a great reliance on temporary contractors beyond what you might expect for a short period. As I said at the beginning, use of contractors by Inland Revenue is not unusual. But here it seems to have become very, very significant.

And so that raises for me questions about whether, in fact, the Business Transformation programme is delivering what it should be or was intended to. And then there is the question that despite engaging all these temporary contractors in the call centres, Inland Revenue has been diverting resources from other parts to handle calls.

You will recall when I spoke with Andrea Black last year we talked about how the funding of investigations had fallen, the hours spent on investigations had fallen, and we knew that many investigation staff, who are very, very experienced, had been diverted to handle calls on the main call lines.

Now, interestingly, in the recently announced Budget Appropriations for 2021/22, the funding for investigations and management of debt and unfiled tax returns collectively were cut by $15.9 million going forward. However, the appropriation for processing costs has gone up by $10.4 million or 8% to $138 million. Now, again, this is a question which Andrea raised during our podcast. ‘Wait a minute, with this new system, should we not be seeing reduction in processing costs?’ But instead, we’re seeing increasing processing costs.

So overall, although Inland Revenue won this case in the Employment Court, I think it has opened a can of potentially very interesting issues as to its use of contractors, and whether Business Transformation is delivering what it says it’s supposed to be delivering.

So, I think we’ll hear more on that in the coming weeks. I have no doubt that some questions will be raised around this at various levels. Certainly, the PSA will continue to pursue the case now.

Act now or wait for the OECD?

Moving on, last week I talked about how the Minister of Revenue David Parker had climbed into Google in particular over its tax practices. Now, it so happens this week, Google New Zealand’s results for the year ended 31 December 2020 were released.

The data contained in there prompted one accountancy expert, Dr Victoria Plekhanova, to say that she considered that the government at present may be giving to big tech companies like Google and Facebook, a free ride on tax while it’s waiting to see whether a coordinated OECD process we mentioned before, will bring a new order into the tax international tax regime.

Dr Plekhanova noted that the service fee paid by Google New Zealand to related parties offshore had increased from $511.4 million in 2019 to $517.1 million in 2020. Google reported revenue in New Zealand of $43.8 million, which was up from $36.2 million in 2019, and that its net profit for the year was $7.8 million, slightly down on last year’s $8.12 million. In the end, it would be paying about $3.3 million in taxes, which was roughly the same as in 2019.

But as Dr Plekhanova pointed out, there’s this significant amount of service fees going offshore, which is one of the matters that I’m sure Minister Parker is well aware of.

The other thing that caught my eye as well in this is that there’s an amount due to related parties, which as of 31 December 2020, amounted to just over $78 million. And curiously, it’s not like Google doesn’t pay income tax it also pays a fairly significant amount of GST it appears. There’s GST payable as of December of $8.5 million. Assuming it files GST returns monthly, which it should do, based on its turnover, that would point to maybe a total of $100 million of GST being payable annually, which is good. But that’s probably being paid by businesses who will be claiming an input tax credit, so maybe there’s no net revenue gain there.

Whatever it is, Dr Plekhanova made the argument that this is why digital services tax has become more attractive to various countries. India, for example, has a 6% equalisation levy and has recently imposed a further digital services tax, which drew the ire of the United States. Although India’s response has pretty much been well, if you want to get access to 1.4 billion customers, this is how it’s going to be. India is big enough to be able to tell the tech companies you play by our rules or else, but New Zealand can’t.

So, the issue for us is whether the government is going to wait on the OECD rules coming in on a global minimum tax, which we talked about before, and agreeing a new basis for taxation or it decides to push forward with a digital services tax. I imagine that seeing Google’s latest results may well prompt Mr Parker to move up the progress of a digital services tax.

Bright-line fish hook

And finally this week, there’s a warning from the Chartered Accountants Australia and New Zealand’s head of tax, John Cuthbertson, about an issue with the revised bright-line test.

What he’s pointing out is that the changes are not just in the extension of the period to 10 years, but the revised rules will now explain how long homeowners can stay away from the main home before the bright-line test kicks in.

Under the new rules, as proposed, they are able to be away from the family home for a continuous period of up to a year. However, for some people, if they’re seconded overseas or have a longer secondment down country, that might not be long enough. It may mean that if they sell within the 10-year period, they could find that some part of any capital gain could be taxed.

We’re expecting a discussion document on these property tax changes very shortly. But as I’ve said beforehand, and this is another example, we know these rules are going to be complex. And this is why I’ve raised the argument that maybe we should be starting to think differently, adopting a completely different approach to the taxation of investment property. Anyway, when the new discussion document on these property tax changes emerges, we’ll look at it in detail.

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

This week the Minister of Revenue is not happy with Google

This week the Minister of Revenue is not happy with Google

1 Jun, 2021 | The Week in Tax

  • This week the Minister of Revenue is not happy with Google
  • How many ACC lump sums may be over-taxed
  • Inland Revenue updates the square metre rate for home offices

Transcript

Last week, on the same day as the Budget, Newsroom carried a story about Google and its taxation practises and the Minister of Revenue, David Parker’s views on that. And it was surprisingly blunt. He was, as the article put it, somewhat scathing of Google’s reticence to pay more tax.

The head of Google in New Zealand, Caroline Rainsford, had given an interview to Newsroom, which coincided with the Budget, and it outlined how Google has been pushing back against the nascent plans by the government to set in place its own digital services tax. This is conditional on whether the OECD cannot reach agreement on a unified approach to taxation.

Anyway, Rainsford said that basically, although Google is for the OECD development of a simpler and unified tax system, it’s not encouraging a unilateral approach here. In other words, please don’t tax us more, but we’ll be happy to look to see about what’s happening with this international tax initiative.

Google’s parent company Alphabet reported new net profit of equivalent of US$48 bln for the year ended 31 December 2020. And that makes it the eighth most profitable company in the world.

But the Minister of Revenue, David Parker, returned fire on this. And he noted that Google New Zealand paid $3.6 million in income tax in the year to December 2019, based on a profit of $10.6 million and revenues of $36.2 million. Apparently, similar numbers can be expected for the year ended 31 December 2020, when they’re reported shortly.

The thing which appears to have got Mr Parker’s goat is that Google’s estimated ad revenue in the country is close to $800 million, he told Newsroom;

“They could voluntarily pay some tax on the profits taken out of New Zealand already, but they’ve obviously not done that. That revenue used to be earned by media companies. Media companies would have paid tax on it. And other media companies suffer competitive disadvantage competing against Google when Google does not pay a fair amount of tax. It’s not fair and something has to change. And Google is the biggest.”

He points out the ad revenue which are being delivered in New Zealand are not being reported within the New Zealand tax net.

This is an issue we’ve talked about beforehand all around the world. And one solution that governments have put forward, pending some form of international agreement on, it is a digital services tax. That is rumoured to be in the order of maybe three percent is one number that’s been outlined. And estimates of how much it might raise, maybe between $30 and $50 million.

But I think the Minister’s point about the amount of revenue that Google is taking out the country and how that might have played in the New Zealand media companies that earned it, is a valid one. Even if it were the DST of $30 to $50 mlnn, that’s still nowhere near what would be the income tax on $800 million of revenue. So this issue is clearly one that Mr. Parker is paying particular attention to. And obviously, given Caroline Rainsford’s comments on that, Google is slightly concerned about the matter.

We don’t know how much other digital companies such as Facebook, LinkedIn and Twitter take out of New Zealand through digital advertising. Google is clearly the biggest. It’s thought overall including Google’s $800 million there could be as much as one billion dollars of ad revenue going offshore. So the government will be looking at that.

It will be encouraged, no doubt, by the announcement from the US Department of Treasury this week that it is in favour of a global minimum tax rate, and it has suggested that it should be at least 15%. The US Treasury has said that 15% is a floor and discussions should be continued to be ambitious and push that rate higher – 21% is a number that’s been raised previously. But the US Treasury’s view is

“a global minimum corporate tax rate would ensure the global economy thrives based on a more level playing field in the taxation of multinational corporations and would spur innovation, growth and prosperity while improving fairness for middle class and working people”.

And no doubt Minister Parker will say amen to that.

On the other side though, the UK is the only country in the G7 which hasn’t signed up to this multilateral deal that’s being put together by the OECD. And Boris Johnson’s Government has been described as “lukewarm and evasive” on the matter. I think lukewarm and evasive is something that plenty of people have said about Boris Johnson, the latest of which being his former special adviser, Dominic Cummings, last night. But the UK also has long standing cultural or actual colonial links to many of the tax havens which are at the heart of the whole issue.

So we’ve got an interesting combination of factors going on here. Minister Parker is clearly looking at the whole Google and digital taxation matter and is obviously happy to push ahead by applying pressure and maybe push ahead with the implementation of a digital services tax. Which, by the way, the Tax Working Group said might be something to have in place if an international agreement could not be made.

On the other hand, there’s some progress on this by the US Treasury throwing its weight behind a global minimum tax. But then we have the pushback from the UK, or rather, we should say the UK not making a decision. And then there’s been pushback, as I mentioned earlier, from the likes of Ireland with its 12.5% corporate income tax. So it’s internationally the biggest thing that’s going on in tax right now. And it’s a question of just watch this space and see what develops.

Heads the IRD wins, tails the taxpayer loses

Now, moving on, a few weeks back, I discussed a case brought in the Taxation Review Authority against the Commissioner of Inland Revenue contesting the tax treatment of a lump sum paid to a claimant by ACC.

The payment was for weekly compensation for the period from the date she was injured on 22 April 2014 to 17 September 2017. And the taxpayer contended that the payment should be treated for tax purposes as having been derived on an accruals basis and spread over the income years to which the payment related, rather than being taxed in the year in which it was received. As is the current practice.

And this, as I mentioned at the time, is a longstanding issue I have been aware of. And it can mean for claimants that they receive a lump sum, and instead of being taxed at an average rate of 17.5%, they find the lump sum taxed at 33% or even potentially now at 39%. So, it’s an issue I think needs looking at.

I subsequently made an Official Information Act request to ACC about the number of such payments for backdated weekly compensation. ACC replied this week, and it made for some interesting reading. In the year to June 2017, the number of such claimants was 1,187. They received on average $42,482. The median amount, by the way, was $21,643. The maximum was $650,000.

And for 2018 similar sort of numbers – 1,172 claimants, 2019 saw 1,283, and in the year to June 2020 it was 1,466, who received on average $42,505. The median there was $21,146, but the maximum was an eye watering $1,180,000.

There’s a consistent trend there, and enough people in the system and big enough numbers for Inland Revenue Policy and the Minister of Revenue to have a look at that. We do some averaging, for example, it has been pointed out to me, in farming cases we average some of the income because of droughts. So, spreading income over several years in which it relates is not unknown to the tax system and our financial arrangements regime actually operates on that principle.

I propose to send these numbers off to Inland Revenue Policy and to the Minister of Revenue’s office. I’ll keep you posted as to how things develop from there.

Square metre rate up +4.7%

And finally this week, the square metre rate for the year ended 31 March 2021 has been set by Inland Revenue at $44.75 per square metre. That’s up from $42.75 per square metre for the year ended 31 March 2020.

Now, although this sounds quite a technical thing, it relates to the calculation of home office expenses and Inland Revenue’s square metre rate option provides a simplified process. Which means that taxpayers don’t have to keep detailed records of utility costs, contents, insurance, Internet on their private residence, and then have to apportion these costs between business and private use. Instead, they simply apply the rate to the area of the house that is used for business purposes.

It’s a nice, simplified process, something I think we should see more of in the system to try and simplify the process for clients. I think Inland Revenue would have the information or would be able to dig out some of the information for this expense, maybe by an analysis of GST returns. By the way, premises costs such as mortgage interest rates and rent, still have to be claimed based on the business proportion of the actual expenditure incurred by the taxpayer.

This is a sort of throw away measure it seems, but one that actually affects quite a lot of people. And as I said, I think we should see more of this setting rates, giving maybe a standard deduction for people, just to simplify the system.

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

Small Businesses and tax compliance, PAYE for employees of overseas companies

Small Businesses and tax compliance, PAYE for employees of overseas companies

12 Apr, 2021 | The Week in Tax

  • Small Businesses and tax compliance, PAYE for employees of overseas companies
  • Managing fringe benefit tax
  • A global minimum corporate tax rate?

Transcript

Friday was Small Business Day. If you spent money with a participating small business and posted your interchange on social media, you and the business could have won a share of $200,000 dollars. Now, this is part of an initiative underlining the importance of small businesses in the New Zealand economy.

MBIE defines a small business as one with fewer than 20 employees. And according to Stats New Zealand, there are approximately 530,000 small businesses in New Zealand meeting that definition. They represent 97% of all firms, account for 28% of employment and just over a quarter of New Zealand’s GDP.

So they’re very important to the economy, but most importantly, also for the community. When small businesses move out, the community suffers. So this sort of initiative and the work we were doing during my time with the Small Business Council is important for the economy.

However, when it comes to the tax system there’s actually very few concessions for small businesses. That is part of a deliberate policy, which generally I and most tax experts support, of minimising special exemptions and in doing so, focusing on the basics. And by minimising removing special exemptions, you eliminate the opportunities for people to try and rort the system.

But that comes at a cost for small businesses of greater compliance costs. Compliance costs will always fall heavily on small businesses because they are generally quite under-resourced to deal with this matter.

Now as I said currently our tax system generally makes no concessions for small businesses. However, there is one such example which does apply, and that is the shareholder-employee regime. Under this regime a shareholder who is also an employee of a company can instead of having their salary taxed through pay as you earn, opt to pay provisional tax. Their taxable income can then be determined after the end of the tax year.

It’s a very flexible regime, but it doesn’t always fit well with the general scheme of the Income Tax Act. And I think Inland Revenue may be thinking in terms of such businesses should actually be in the look through company regime. The problem is these special regimes add complexity.

The tax loss carryback regime, which is temporarily in place for the 2020 and 2021 income years, proved unworkable for shareholder employees. They’d already taken profits out of the business by way of a salary. So if the company had a loss in either of those later years and tried carrying it back, it had no income to offset against the loss. So, it was of no use to shareholders employees.

When other tax practitioners and I were discussing a permanent iteration of the current loss carryback regime with Inland Revenue policy a huge stumbling block was the question of the treatment of shareholder employees. In fact, it proved unworkable in the end. And last month the Minister of Revenue revealed a permanent iteration of the scheme is not going to be implemented.

In my view one of the side effects of not having specific small business regimes, is that Inland Revenue policymakers don’t pay enough attention to what’s going on in the small business sector, and that means compliance costs creep up for the sector as issues are not addressed. And in the last week, we’ve had a couple of good examples of how this has played out.

Covid-19 has revealed, a number of things that should have been addressed in relation to employer employee relationships, but for whatever reason had been parked as there was always something more interesting to work on. These strains have started to come through recently.

There was a story in the Herald (paywalled) about a very common thing, Kiwis coming back to New Zealand, but continuing to work for overseas based employers. And what’s happening is that a number of these are potentially facing double taxation, hopefully temporarily, and they understandably are confused about how much they own to which government.

One key concern is if an employee of an overseas employer is in New Zealand for more than 183 days, then technically the employer will need to start accounting for pay as you earn. However, in the meantime, that overseas jurisdiction may still be applying its equivalent of pay as you earn to the employee’s earnings. So there’s a risk of double taxation risk.

And one of the other problems is with foreign tax credits. Technically, under double tax agreements employment is taxable only in the jurisdiction in which it’s being exercised. So as the Herald article pointed out, in a worst case scenario, what can happen is that someone working in New Zealand for an overseas employer may have earned $100,000 dollars and paid UK pay as you earn, but won’t get any credit for it in New Zealand. Inland Revenue’s view is “Well, you’ve earned $100,000. This is the tax bill, pay it.” Meantime, the problem that particular employee faces is that he or she have to then go and get the overpaid UK tax refunded. And of course, that can take some time.

And it may also involve getting assistance through what we call the mutual agreement procedures between Inland Revenue here and the UK’s HM Revenue & Customs.  All this takes a lot of time and a lot of stress. It’s a very good example of how the system is evolved, where it really isn’t terribly flexible, and issues arise. One answer is to put people into the Provisional tax regime. Another one is for such employees of overseas companies to register themselves for pay as you earn or what they call an IR56 taxpayer.

Now just to clarify, we’re assuming that the employees of the overseas company, is just an employee, and we’re not dealing with the issues of that employee having sufficient authority to create what we call a permanent establishment, which is a whole other raft of issues, but are not relevant to this particular discussion.

Issues are starting to emerge where the IRS is expecting the US employer to deduct the US equivalent of pay as you earn. Meanwhile Inland Revenue here wants its cut and although the double tax agreement will give most taxing rights to New Zealand the IRS is very cumbersome in moving to say to the US employer, “Oh, yes, that’s now foreign sourced income so you no longer need to deduct tax.”

And then there’s the other issue I mentioned that the overseas company, could be treated as an employer and required to deduct PAYE in New Zealand. Now, fortunately, in that respect, Inland Revenue has a draft operational statement, which was released for consultation last year which deals with this issue of non-resident employers’ obligations to deduct pay as you earn, pay FBT and deduct employer superannuation contribution tax. The deadline for comments closed on it on 1st September so we ought to be seeing it fairly soon in final form.

And basically, Inland Revenue is saying an overseas employer isn’t going to need to apply PAYE so long as the employee’s presence does not create a permanent establishment or as the operational statement has it, “a sufficient presence.” So that’s a good solution. But I think this illustrates the problems with small businesses overseas and here of dealing with issues around tax systems that weren’t designed with such matters and are slow to respond.

And that leads on to a second related point, the question of fringe benefit tax and the new 39% tax rate, which came into effect on 1st April. As a consequence of the change in the tax rate, a new flat rate of FBT of 63.93% applies to non-cash employee benefits such as discounted goods and services and private use of company cars. But that only applies in in reality to employees earning more than $180,000, which is only 2% of earners.

But the FBT system expects employers to pay using a single rate which prior to 1st April was 49.25%. And so the increase to 63.93% represents a substantial burden. Now, it’s possible to work around that and not use the flat FBT rate by filing quarterly FBT returns and calculating FBT on an attributed basis, i.e. for each employee.

So, yes, that’s a solution, but it leads back to my point at the start of this podcast, it adds to complexity of the tax system and also increases the burden of compliance with small businesses. So I think the point has been reached in our system that going forward, Inland Revenue really should have a hard think about the fringe benefit tax compliance costs for small businesses.

Leaving aside the separate issue of how well FBT is being complied with, particularly in relation to work related vehicle, it does involve a fair amount of compliance for small businesses. The FBT regime dates from the mid-80s and I think it’s time for a rethink. In the 1980s it was probably a sensible approach that the employer paid FBT. Maybe now with better procedures in place, what should happen is that the employer calculates the value of the fringe benefit and that amount is then included as part of an employee’s salary and taxed at the relevant rate. This would immediately deal with the issue of applying this new 63.93%rate.

But that’s something that needs to be considered, perhaps as part a whole package of looking at compliance for small businesses. And I understand there is something in the works on that which we will be watching with great interest and report back on when we hear something in due course.

And finally this week, we’ve talked in the past about the international tax regime striving to try with the digital economy and each tax jurisdiction trying to find an appropriate level of taxation relative to a company’s economic activity in a country. The focus is on the GAFA, as they call Google, Apple, Facebook and Amazon.

Here in New Zealand these companies pay very little tax. Facebook does not publish financial statements in New Zealand, and Google’s accounts to December 2019 show that its revenue in New Zealand was  $36.2 million. And it finished up, paying $3.6 million in income tax. That was actually an increase in from the 2018 year, where it paid around $400,000. But Google’s revenue from New Zealand is considerably more than $36 million.

And what’s happening here is replicated all around the world. So the OECD has been looking at this in conjunction with the G20 group of nations. This is part of a shift to try and stop the aggressive use of tax havens to minimise multinationals’ corporate tax bills. And this past week after a meeting of G20 finance ministers there appears to have been a breakthrough in that they are now exploring the equivalent of a global minimum tax on corporate profits.

What’s encouraging about this is that the US Treasury Secretary Janet Yellen, initiated the proposal, and this is a rapid, significant change from the Trump administration. There will be pushback on this, obviously, because certain jurisdictions and Ireland has been mentioned as one who already have a fairly low tax rate, concerned that their current 12.5% corporate tax rate may rise.

And obviously, tax havens will be looking at this with some unease. But my personal view is that the days of the tax havens are numbered because of the double impact of the Global Financial Crisis and Covid-19 anyway. It remains to be seen how well this will develop, but it is an encouraging sign. It might not actually make a great deal of difference to the New Zealand Government’s books, but it will certainly be a step forward in the right direction. As always, we will bring you developments as they happen.

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

Government announces a new business loss continuity rule

8 Mar, 2021 | The Week in Tax

  • Government announces a new business loss continuity rule
  • US drops ‘safe harbour’ demand as progress made on new international tax framework
  • UK Budget has inheritance tax and capital gains tax implications for Kiwis and includes surprise Corporation Tax increase

Transcript

At last week’s International Fiscal Association conference, Revenue Minister David Parker announced that the Government would be proceeding with a new business continuity test to enable tax losses to be carried forward. The general rule is that for tax losses to be carried forward, at least 49% of the shareholding in the company must remain the same between the date the losses arise and when the losses are to be used.

Now, this is regarded as one of the most stringent loss continuity tests in the world, and it has been seen as an impediment for businesses trying to obtain capital in order to innovate and grow their growth.

Companies in their early stages may rack up a lot of losses, but if they want to attract capital and investors shareholding changes may mean a loss of accumulated tax losses. So there’s been pressure for some time to think about easing these restrictions and adding a what we call business continuity test.

The Government announced as part of its initial Covid-19 response last year that they wanted to have a new regime in place. And work has been going on in the background since April last year. They’re now saying that the legislation will be introduced later this month in a supplementary order paper for the tax bill currently going before Parliament, the Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill.

The idea is a similar business test will now be able to apply, and even if the 49% threshold might have been breached, the company may continue to carry its losses forward after a change in ownership as long as the underlying business continues. Now, similar tests apply in Britain and in Australia, and the Australian test has been used for the purposes of designing our legislation.

The principle is that losses will be carried forward unless there’s a major change in the nature of the company’s business activities.

In determining this, you’d look at the assets used and other relevant factors, such as business processes, users, suppliers, market supply to and the type of product or services supplied.

There is an expectation that the test will run for the time from the ownership change, which brought about a 49% breach of shareholding continuity, as we call it, until the earliest of the end of the income year in which tax losses are utilised or at the end of the income year, five years after the ownership change. This is subject to one or two exceptions as well as a specific anti avoidance measure to prevent possible manipulation of the rule.

The rule would appear to be retrospectively applicable from the start of the current tax year or 1st April, 2020 for most businesses. But that’s not absolutely specifically spelt out, but is implied by the commentary we’ve received. We’ll know for sure when we see the final legislation in the next week or so.

This is a very positive measure. It’s been one that businesses have been asking for for some time, particularly those in their high growth tech sector, where they rack up a lot of losses during  development before switching to substantial profitability. But they’ve been unable to attract or had difficulty attracting investors because of the existing loss continuity rules.

The fiscal cost is actually quite modest. It’s estimated to be about $60 million per annum, which still does beg the question that perhaps this could have been addressed much sooner. It’s certainly been on the wish list for a lot of investors for some time and was a matter we raised on the Small Business Council.  It’s a good development and I imagine that it will be taken up with some enthusiasm.

The US changes its tune

Moving on, I’ve recently discussed the issues around the taxation of digital companies, particularly in relation to Facebook’s stoush with the Australian government. The OECD, as I mentioned in previous podcasts, has been working through what it called a new global framework and two options to this Pillar One and Pillar Two.

This week, there was a major development with the US Treasury Secretary, Janet Yellen, (the equivalent of the finance minister), telling G20 officials that Washington was going to drop the Trump administration’s proposal to allow some companies to opt out of the new global digital tax rules. And this was clearly seen as an impediment to getting these rules through. But the fact that these have now been dropped and that the US is no longer advocating for a safe harbour in relation to Pillar One is very important.

So that’s a very positive development. As I said, in relation to the Facebook and Australia stoush, some form of taxation probably would have been a better approach to the matter than what has been proposed by the Australian government.

UK Budget implications

And finally, on Wednesday night, our time, the UK Budget for 2021 was released. Now, this is of more importance to Kiwis than people might realise because of the global reach of UK capital gains tax and inheritance tax in particular.

To recap, anyone who owns property, commercial or residential in the UK is subject to capital gains tax on a disposal of that property.  So this would affect the some 300,000 Britons or people of British descent like myself who live here in New Zealand. But it also affects Kiwis who come back from their OE but have retained a property for whatever reason in the UK.

The other significant UK tax issue, which I’m seeing a lot more of, is Inheritance Tax. And this applies globally to anyone who has a UK domicile (which is a different concept from tax residency) or assets situated in the UK. Inheritance Tax applies at a rate of 40% on the value of an estate greater than £325,000 (what we call the Nil Rate Band).

But the UK budget has frozen the Inheritance Tax nil rate band at £325,000 right through until 2026. The annual capital gains allowance is also going to be frozen for a further five year period.

One of the things that is perhaps not really appreciated is anyone who is deemed to have a UK domicile are taxed for Inheritance Tax purposes on their global assets. And with the fall in the value of sterling to below two dollars to the pound, combined with the incredible rise in the value of New Zealand property, what I’m seeing is that people now have potentially significant Inheritance Tax issues. Property prices in the UK have not accelerated anywhere near to the fashion that has happened here. To give you an example, I came across this week a client with a London property valued in April 2015 at £775 ,000. Its current value is just £765,000 pounds. In other words, over six years it’s gone backwards. Compare that with what’s going on in the New Zealand market.

So there’s an increasing number of New Zealanders and Britons who have potentially Inheritance Tax liabilities. And they also will face capital gains tax if they decide to dispose of those properties.  One of the things that’s also increasingly coming into play will be the information sharing under the Common Reporting Standards and The Automatic Exchange of Information. This means the UK HM Revenue & Customs and Inland Revenue here will have a greater understanding of who owns property in which jurisdiction.

So, as I said, this British budget may seem far away, but it’s actually incredibly important to a significantly greater number of people than you might imagine.

There’s also one other thing that’s come into play, which has been a surprise to the tax community and that is the British Government have signalled an increase in the corporation tax rate from its current rate of 19% to 25% for businesses with net profit in excess of £250,000 from 1st of April 2023. That’s a very significant increase. The other thing that the British have also kept in place is what they call a diverted profits tax, of which remains at 6%. This is an anti-avoidance measure aimed at multinationals.

Incidentally if Grant Robertson and Treasury are looking for ideas the UK also has a bank corporation tax surcharge of 8%. This is something which if introduced here would probably be quite popular.

The proposed increase in corporation tax rates is a surprise. But I think this is something that’s gradually become inevitable.  In the wake of both the GFC and Covid-19, government budgets are so badly shot that they need to restore them with significant tax increases at some point. Whether any such increases flow through here to the extent of what’s just happened in the UK remains to be seen. But as always, we’ll keep you abreast of developments.

That’s it for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts.  Thank you for listening and please send me your feedback and tell your friends and clients. Until next week Ka kite ano!

Proposed changes to the late payment penalty regime for Child Support.

20 Jul, 2020 | The Week in Tax

  • Proposed changes to the late payment penalty regime for Child Support.
  • Millionaires want tax increases but the EU’s bite of Apple goes sour.
  • And last days to organise a tax pooling payment for the 2019 tax year

Transcript

Longtime readers, listeners of this podcast, will know that I am a long-standing critic of the late payment penalty regime which currently applies across various taxes. I see it as inefficient and not actually achieving very much.

But the worst late payment penalty regime is that which applies to Child Support payments, which is rather odd because the Government in this particular case is acting as an intermediary.

At present, if you pay Child Support late, there’s an initial penalty of 2% of the late paid amount immediately and then a further 8% of the late paid amount still outstanding eight days after the due date. So that’s a 10% straight up penalty. By contrast, if you are late paying tax, the initial late payment penalty is 5% if you haven’t paid it within eight days.

In addition to this initial penalty, incremental penalties are then applied.  These are 2% of the outstanding amount, including penalties, from one month after the due date for the next twelve months, and then 1% of the outstanding amount, again including penalties, each month thereafter from 13 months after the due date.

Now, the issue of Child Support is enormously emotional and attracts quite a great deal of heat whenever I raise the topic as no one seems entirely happy with how the regime operates.  As taxpayers, we ought to be very interested in this, even when not directly affected, because the late payment penalty regime for Child Support is hopelessly inefficient and in fact ineffective.

For example, as of January 2019, the Child Support debt was $2.2 billion dollars. Now of that, only $558 million was unpaid Child Support.  The other $1.6 billion dollars being penalties. During the year ended 31 March 2019, Inland Revenue wrote off $244 million of Child Support penalties. That was actually down from $594 million written off in the previous year.  Currently, Inland Revenue writes down 97% of Child Support penalty debt at initial recognition because it doesn’t expect to collect the debt. So, a very good question is why has Inland Revenue persisted with a regime that doesn’t work?  There’s never been a really satisfactory answer to that.

But at least this week the Government announced some changes to the late payment penalty regime. The proposal is that from 1st April 2021, incremental penalties – that is the subsequent 2 % for the first month for the first 12 months and then 1 % per month thereafter – will be abolished. This measure has been brought in as part of a supplementary order paper to an existing tax bill. It’s a welcome move.

But as you can tell from the numbers I’ve just cited, will it actually really change anything? The late payment penalty regime doesn’t seem to work to encouraging people to pay on time. And there’s still this anomaly that somehow Inland Revenue acting as an agency is entitled to charge twice the amount for late payment penalties, than it charges for people paying taxes late. That conceptually doesn’t make much sense to me.

As I said, there’s a lot of emotion around the Child Support regime so there’s never going to be an entirely satisfactory answer to the issue. But it is actually good to see some movement on a sore point.

Taxing the rich

Sir Stephen Tindall was one of 83 millionaires who signed a letter to governments around the world which concluded,

So please. Tax us. Tax us.  Tax us. It is the right choice. It is the only choice. Humanity is more important than our money.

This is part of a large and growing debate around the role of taxation and how much tax governments here and around the world are going to need over coming years.

The Greens have rolled out a proposal for higher income tax rates and a wealth tax. Speaking to Wallace Chapman and Radio New Zealand panel on Tuesday, I raised the issue of perhaps a capital gains tax or a wealth tax being on offer.

And a land tax was one of the other proposals that former Act MP Heather Roy suggested was an option. It’s one I think is certainly worth looking at, although it comes with quite a number of hooks in it, like any tax does, leaving aside the whole politics of the matter.

But interestingly, this whole question of tax reform is going to be very difficult. Apart from the politics of it as I noted, but also because for some governments, it’s going to mean significant changes to their tax system.

EU judges this week ruled that, no, that ruling was wrong and in fact, Ireland had not acted inappropriately. The European Commission had not succeeded in “showing to the requisite legal standard” that Apple had received an illegal economic advantage in Ireland.

Now Ireland, even though it was going to receive €14.3 billion, actually backed Apple in this case because they have a very low tax regime for corporates. The Irish corporate tax rate is 12.5% and Ireland wanted to keep it that way as a means of driving economic growth, very important in this pandemic world.

And so the situation shows that although on one side you have people saying, ‘You know, we’re going to need tax and we’re happy to pay more tax’, governments might not necessarily be keen to follow that lead.  And by the by, it’s often said here that we want to tax the multinationals more, but this case also showed how difficult that would be.

One of the counter-arguments that was advanced by Apple, which appears to have been successful, is that the Irish subsidiaries of Apple are not involved in creating the intellectual property behind Apple’s products, because those are all developed in California.  Therefore, the economic rationale for taxing the Irish subsidiaries more heavily didn’t exist. And that same argument would apply very much more down here.

So, there’s a lot going on in the international tax space and the OECD will continue to try and get a global consensus on the matter. But the American Treasury Secretary has torpedoed that move. And the American tech giants are obviously quite happy that nothing happens because they would be the main targets of any major changes.

Last days

And finally, a reminder that if you want to organise a tax pooling payment in relation to your tax for the 2019 income year, you have until next Tuesday 21st July to put that in place.

As part of its response to the Covid-19 pandemic, Inland Revenue extended the deadline for using tax pooling payments, effectively giving a further twelve months to pay the terminal tax for the March 2019 year.

And if you listen to the excellent podcasts I’ve had with Josh Taylor of Tax Traders and Chris Cunniffe of Tax Management New Zealand, on the use of tax pooling, you’ll know what a useful tool it is.

In order to qualify you have to have a tax pooling contract in place with a tax pooling intermediary such as Tax Management New Zealand or Tax Traders by 21st July. You must also show that in at least one month between January and July this year your business experienced or is expected to experience a significant decline (that is 30 % or more) in revenue as a result of COVID-19.

So, you’ve got a few days left to make use of tax pooling and set up a contract and payment schedule to pay your 2019 tax over time and by the extended terminal tax due date next April.

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

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