One of the unseen revolutions in international tax over the last decade has been the adoption of the automatic exchange of financial account information. Also known as the Common Reporting Standards https://www.ird.govt.nz/crs this was developed by the Organisation of Economic Cooperation and Development, the OECD, in conjunction with G20 countries. It requires the automatic exchange of information on financial accounts – which is bank accounts, other investments held by taxpayers outside their jurisdiction. Financial institutions are required to provide information on such accounts to their respective tax authority which then sends that information to the jurisdiction in which that taxpayer is resident.
This project began in 2017. For the latest year, the tax authorities from 111 jurisdictions have automatically been exchanging information on financial accounts. And as I said, it’s a very broad range of investments, not just bank accounts. It’s all forms of investments. By and large, the public is pretty unaware of what’s happening here even though the numbers are significant.
€130 billion in tax interest and penalties so far
According to the latest peer reviewfrom the OECD, information from over 134 million financial accounts was exchanged automatically in 2023, and that covered total assets of almost €12 trillion. As a result, over €130 billion in tax interest and penalties have been raised by the jurisdictions through various voluntary disclosure programmes and other offshore compliance programmes.
Now the interesting thing here is that as a consequence of the introduction of the CRS, financial investments held in international finance centres or tax havens have decreased by 20% since the introduction of CRS in 2017. That’s a significant change. It means investments are moving into jurisdictions where they will be taxed. Over the long term that’s going to be quite significant for increased tax revenue around the world.
The full OECD report, which also discusses methodologies, runs to 248 pages, but the bulk of what people will be interested in is covered in the first chapter. Table 1.1. gives a summary of how many jurisdictions have been exchanging information, starting in 2018. According to the latest report the time of this report, 118 jurisdictions including New Zealand have started exchanging information.
Now the interesting thing to notice is the steady growth in the number of partners to which data has been sent. For example, the tax haven Anguilla in 2017 sent data to four countries but by 2023, it’s up to 67. The Cayman Islands, another key tax have sent data to 83 jurisdictions.
CRS and New Zealand
New Zealand began swapping data in 2018 when it sent information to 55 partners. For the latest year that’s grown to 83. Based on the early data exchanges Inland Revenue began a review programme in late 2019 which was then interrupted by COVID. However, it has now resumed its review programme, and I have one case at the moment which involves the taxpayer making the relevant disclosures after Inland Revenue enquiries based on data received through CRS. They won’t be the only one.
I was rather amused to see that Russia began exchanging data in 2018 when it sent data to 50 jurisdictions. But for the last three years no data is available. Wonder what’s happened there.
By the way the United States is not part of the CRS. That’s because it has something called the Foreign Account Tax Compliance Act, which basically was the model on which the current global CRS was built, and so it reports data separately.
How much data is Inland Revenue sharing?
I’ve tried unsuccessfully to obtain more detailed information on the data exchanges using the Official Information Act (the data exchanges are outside the OIA because of international treaty obligations which is fair enough). Notwithstanding this the impression I have is there are some huge numbers involved.
You have been warned…
What people should be aware of is that there’s a massive amount of data being circulated by tax authorities around the world right now. Many people may be oblivious to what’s going on. The likelihood is if you have an overseas financial account and you haven’t declared it for whatever reason, then it is quite likely that you will soon be asked a few questions about that by Inland Revenue.
Speaking about Inland Revenue, earlier this year they asked for consultation on their proposed long-term insight briefing (LITB). To quickly recap, LITBs are
“…future focused think pieces that government departments produce every three years. They provide information on long term trends, risks and opportunities that could affect New Zealand in the future, and policy options for responding to these matters. Their purpose is to help us collectively think about and plan for the future. They are developed independently of ministers and are not current policy.”
Back in August Inland Revenue proposed that its next long term insight briefing will explore what would be a suitable structure of the tax system for the future, and invited submissions by early October.
Inland Revenue has now published a summary of those submissions. In total, there were 35 submissions from 12 groups and 23 individuals. Most submissions were generally supportive of the topic. The rest, either suggested something completely different or were either ambivalent about it or did not actually specify whether they supported the project or not.
Seven themes in feedback
Inland Revenue’s picked out seven themes that came through from those submissions. Firstly, the fiscal pressures arising from superannuation and healthcare are a key trend and that’s one of the reasons behind Inland Revenue wanting to do a long term insight briefing on this topic. Most agreed with that, but several also added the question of increasing fiscal pressures arising from climate change.
My belief is its climate change that’s going to be the trigger point around changes to the tax system because that’s happening right now. And as damage from the floods grows and costs and insurers look increasingly wary about insurance, people will be looking to the Government for support.
The second theme was keeping flexibility in the tax system. In its submission EY commented
“We agree improvements to system flexibility should be the focus for this LTIB. In particular, working through options for system integrity in the context of tax rate increases is in our view, important.”
The devil is in the detail
A third theme was the analysis needs to consider policy design details and looking at first principles. Chartered Accountants of Australia and New Zealand made the comment that “Sometimes it is the detail that can make things unworkable. The framework should consider the merits of expanded tax bases with different design parameters”.
Another theme – and this is something I think I would endorse – the analysis needs to consider the tax and transfer system interaction. There were a few submissions pushing very strongly on that point.
A fifth theme proposed considering corrective taxes. The Young International Fiscal Association Network suggested that environmental taxes would fit well with Inland Revenue’s proposed topic because of the long term environmental trends.
The impact of technology
Another theme was the question of technological change and how that will affect the sustainability of tax bases. Earlier this year an IMF report on the impact of artificial intelligence suggested changes to tax systems could be needed.
Some submitters emphasised that it was important to consider how the tax system impacts a wider range of social outcomes. These included Doctor Andrew Coleman who was broadly in support of what was in the proposed LTIB. He suggested that they need to look at a wider range of retirement savings reforms, which would be no surprise to anyone who listened to the podcast with Gareth Vaughan and myself earlier this year. Several other submissions suggested how tax system could support productivity.
Finally, there were suggestions about considering progressive consumption taxes, which hasn’t really been looked at in any detail in New Zealand.
How Inland Revenue will proceed
Following this feedback Inland Revenue has said the LTIB will discuss the arguments for lower taxes on savings and the question of the tax treatment of retirement savings as part of a discussion about social security taxes. This is an interesting development because as the consultation noted generally, most jurisdictions have social security taxes which represent somewhere around 25% of total tax revenue. Whereas we don’t have them at all. This was a point Dr Coleman made in the podcast so it’s good to see Inland Revenue will be looking at that.
No to considering financial transaction taxes
As part of managing the whole scope of the LTIB Inland Revenue believes it “could reduce the discussion of some tax bases are less likely to be subject of significant public discussion such as financial transaction taxes.” This makes sense. Financial transaction taxes or Tobin Taxes are something that pop up in discussions about tax reform. I’m ambivalent about whether in fact they will achieve what people make out for them. I think they would add complexity and they would drive all sorts of different behaviour.
They’re not going to do a full review of the interaction of the tax and transfer system. And to be fair to Inland Revenue, I think that would be an entire long-term insight briefing of itself. But their chapter on consumption taxes discussed using transfers to offset GST rate increase somewhat similar to what Andrew Paynter proposed last week. (Just to repeat Andrew’s proposal is his alone and does not reflect any Inland Revenue policy). According to Inland Revenue the tax regimes chapters “will largely focus on how to make our main tax bases more flexible to rate changes, including considering options to support system coherence and integrity.”
Providing an analytical base
In summary Inland Revenue’s intention
“…is to provide an analytical base to provide further consideration of these issues in the future. For example, our focus on tax bases is on understanding the relative costs of taxing different underlying factors and what the overlaps and differences are in those tax bases. Our focus on tax regimes is on exploring how to make our tax based main tax bases more flexible to rate changes without undermining equity or efficiency goals.”
All of this seems perfectly reasonable to me.
From here there will be a future opportunity to provide feedback when Inland Revenue releases a draft of its briefing for public consultation in early 2025. It will then be finalised and given to Parliament in mid-to-late 2025.
Sir Roger Douglas’s radical proposals
Inland Revenue have also published all the submissions, from those who gave permission to do so, adding up to 175 pages of submissions, from individuals and organisations alike. It’s interesting to dip in and see what is being suggested on the topics. Sir Roger Douglas was one of the submitters and as you might expect, the old warrior is still looking for something radical.
Part of his proposal is a tax-free threshold of $62,000. But the trade-off is most of that gets put into retirement and health accounts. With the proposed retirement account, he’s probably reflecting the thinking of Andrew Coleman about the need for the current generation to start saving in earnest because of the various pressures coming towards us. Can’t say I agree fully with Sir Roger’s proposal but full marks for boldness.
Feedback on Andrew Paynter’s proposal
And finally, this week, to pick up a little bit from last week’s podcast with Andrew Paynter and his proposal to increase GST by 2.5% points to 17.5%, but then with a rebate for low- and middle-income earners. The transcript has been very well read and generated a phenomenal number of comments, over 150 at last count, and I thank all the readers and commenters for that.
What about the self-employed?
One commenter asked a question which we didn’t cover off during the podcast; how would Andrew’s proposal apply to the self-employed? The answer is it would use something similar to the provisional tax system. A person’s income would be uplifted from last year and if you’re in the range then you qualify for the proposed payments.
Last week Tax Management New Zealand and the Young International Fiscal Association network ran a joint presentation for the two winners, Andrew and Matthew to come and present their proposals. If you recall, Matthew proposed expanding the withholding tax regime to contractors. Andrew and Matthew both made excellent presentations to a very engaged crowd, and I can see why the judges had a difficult time splitting the pair. So well done again.
Left-to-right Matthew Seddon, Terry Baucher and Andrew Paynter
And on that note, that’s all for this week, I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day.
more on Inland Revenue’s crackdown on student loan debt
and why we might need to pay more tax
At an event for the Young International Fiscal Association, the Revenue Minister, Simon Watts announced the Government’s Tax and Social Policy Work Programme. These work programmes are a working document updated frequently so that after a change of government they reflect the new government’s priorities in tax policy and social policy areas.
According to the speech made by the Revenue Minister, the work programme under the current government is designed to support rebuilding of the economy and improve fiscal sustainability by simplifying tax, reducing compliance costs and addressing integrity risks.
There are six areas of priorities going forward: economic growth and productivity, modernising the tax system, social policy, the integrity of the tax system, strengthening international connections and other agency work.
Out with the old, in with the new
It’s interesting to have a look at what changes have been made since the programme was last officially updated back in 2021-22.
There under the Labour Government, there were 10 work streams of tax policy and related policy matters some of which overlap with the updated programme. Social policy integrity of the tax system, maintaining the tax system were all part of the 2021-2022 work programme and they’ll be part of every work programme going forward.
On the other hand, the COVID-19 response and the taxation of residential investment property were two major areas back in 2021-22 which are no longer there. As is well known the current government when it came in repealed all the work in relation to changes to the taxation of residential investment property.
Tax policy changes already happening
Drilling into the latest workstreams, some of them are already underway such as improvements to employee share schemes, implementation of the Crypto-asset Reporting Framework, simplification of the Approved Issuer Levy reporting including allowing retrospective registration and changes to inward pension transfers. All these are in the current tax bill before the House.
The other interesting things they’ve added in here, which we’ll watch with some interest, are exploring compliance cost reductions, including improving tax compliance with small businesses. Now you recall last week in my review of Inland Revenue’s annual report one of the areas Inland Revenue felt that business transformation hadn’t delivered as much as had been hoped for, was in reducing compliance costs for small businesses.
I totally support what Inland Revenue are doing, but the issue that they’ve run up against is that sometimes it has to accept the trade-off between good tax policy and the risk of tax seepage around the margins. If a policy allows a deduction or other benefit for taxpayers such as SMEs that meet certain criteria, you get certain deductions, Inland Revenue is always concerned about people exploiting that. The question that arises is does the wish to reduce compliance costs outweigh the risk that some of those measures might be abused?
A place where talent wants to live?
An interesting one that caught my eye was their plan to review the Foreign Investment Fund rules. This is something that was mentioned in passing by the Minister of Revenue at the recent New Zealand Law Society Tax Conference. This looks to address the issues raised by the report The place where talent does not want to live in relation to the problems the Foreign Investment Fund regime causes for investors migrating here.
Another interesting one is reviewing the thin capitalisation rules for infrastructure. That’s almost certainly tied up to the desire to have public/private partnerships help build infrastructure in the country. What it would almost certainly mean is that the current thin capitalisation rules (which basically limit interest deductions for international multi-nationals, which have more than 60% debt asset ratio) would almost certainly be relaxed.
In terms of other agency work Inland Revenue is considering, is an improved information sharing agreement with the Ministry of Business and Innovation and Employment, student loans, the question of final year fees free and overseas based borrower settings, the highly topical Treaty of Waitangi settlement, Local Water Done Well and supporting the all-of-Government response to organised crime. (Organised crime often represents tax evasion so it will always fall in the ambit of Inland Revenue).
Changes to the taxation of the Super Fund?
A big work programme, probably in terms of modernising the tax system, would be exempting the New Zealand Superannuation Fund from income tax. This would be quite significant as the New Zealand Superannuation Fund probably contributes $1 billion a year in company income tax. On the other hand, the Government will probably then be able to dial back completely its contributions to the scheme. In other words, the fund would now be expected to be self-funding going forward, which is quite possible now it’s reached a near critical mass of at least $70 billion in value.
The document’s fairly light on detail, just a one pager, but it gives you an insight as to where the priorities are right now. There are no real big surprises and we’ll watch and bring developments as these policies mature and are brought to fruition.
Student loan debt – Inland Revenue ups the ante
Moving on, last week I talked at some length about Inland Revenue’s actions around the collection of student loan debt and it so happened that yesterday Inland Revenue’s Marketing and Communications Group Manager Andrew Stott appeared on RNZ’s 9:00am to Noon with Catherine Ryan. They discussed what Inland Revenue is doing with its extra $116 million of funding over the next four years. This Includes an additional $4 million for recovering overdue student loan debt.
Quite a lot of interesting commentary came out of this interview. One of the first surprises was that many young people going overseas don’t know that their student loan debt, once they leave the country, starts to accrue interest. Therefore, they get behind surprisingly quickly. As is known, only 29% of overseas based borrowers are making repayments at the moment, and the student loan debt is now up to $2.37 billion, $2.2 billion of which is owed by overseas borrowers. A substantial number of whom are based in Australia.
So that’s now obviously a focus both operationally and in the latest work programme. I’m particularly interested to know more about what is planned in the overseas based borrower settings. What does Inland Revenue consider it needs to improve its ability to collect debt under the student loan scheme?
Inland Revenue has been allocated $4 million in funding to get cracking on recovering debt and it’s expected to produce a four to one return this year, which is expected to rise to eight to one next year. It will meet those targets pretty comfortably I’d say. Apparently in the first quarter of its new financial year – 1st July to 30th September this year it’s already collected $60 million in overdue debt up 50% from last year.
A surprising statistic
I guess the big surprise that came out of the interview was when Mr. Stott noticed that most of the debt is owed by people in their 40s or 50s who had never got round to repaying Inland Revenue. These people had been much younger when they went overseas with student loan debt which then accumulated as interest and penalties were added. This does beg the question that if people went overseas in their 20s and we’re now chasing them in their 40s and 50s, what was Inland Revenue doing in between?
As I said in last week’s podcast, relying on late payment and interest charges for enforcement just doesn’t work. We know from research in other areas when a person’s debt blows out (and probably the threshold is as low as $10,000), people will put their head in the sand and not take action because the matter feels too big to manage. Mr Stott mentioned that there’s several debts running into tens of thousands. I have seen one where it’s over $100,000. The average debt owed is about $17,000, but it’s the old overseas debtors, obviously larger debts, that Inland Revenue is going to be targeting.
As part of this it is talking to anyone who returns to New Zealand who has a debt of at least $1,000. They can now identify such persons thanks to the information sharing that goes on between New Zealand Customs and Inland Revenue.
Inland Revenue also have the ability to detain/prevent someone from leaving until they have a conversation about payment of debt. According to Mr Stott the group being targeted are those who have persistently not engaged with Inland Revenue. They have not responded to Inland Revenue at all. They’ve simply just said now go away, I’m not going to talk to you and ignored them. They will be fined and will find themselves having an extra stay at the airport just prior to departure.
Deducting debts from overseas salaries?
Inland Revenue has the ability to issue deduction notices requiring amounts to be withheld from payments to Inland Revenue debtors. (According to an Official Information Act response I got from Inland Revenue, it issued over 42,000 such notices in the year ended 30th June 2024).
Mr Stott was asked whether it could do the same in Australia? Can Inland Revenue ask the Australian Tax Office (ATO) to issue the equivalent to a deduction notice so that an employee working in Australia has part of their salary deducted to pay student loan debt. The answer is yes it can, but it’s not easily done. It’s termed a “garnishee order” in Australia and requires a court order. Consequently, Inland Revenue hasn’t really used such orders.
It seems to me that is something Inland Revenue really will need to look at closely, because if you’ve got 70% non-compliance and you’ve got an estimated 900,000 student loan debtors in Australia, it would be worthwhile establishing a process to enable garnishee orders to happen more frequently.
It may be that they have to ask the ATO to amend legislation, which would delay everything. But it would appear that they have the tools already, so it will be interesting to see if that’s employed more frequently.
Increased audit activity
The other thing Inland Revenue has ramped up is audit activities. It has apparently already launched 2,000 audits in the first quarter of its new financial year. This is up 50% on the previous year. Incidentally, 10% of those, are targeting the largest companies in the in the country.
As previously mentioned, Inland Revenue have recently targeted bottle stores and the construction industry. The next group of people that they’re going to be talking to now are vape stores, nail salons and hairdressers. Because in all cases they suspect cash income is not being declared, so these businesses will be the subject of unannounced visits.
The focus in Inland Revenue now is on enforcement and debt collection and there are more signs of it. So, I’ll repeat what I’ve said previously. If you have debt with Inland Revenue approach them to discuss it. You will find that if you take proactive action, it will be reasonable in most cases, unless you have a history of non-payment In which case good luck. Taking proactive action is the best approach, because tax debt is something you simply can’t put your head in the sand and hope it goes away. It won’t. Inland Revenue has got many more resources now, and the net is closing.
Why we might need to pay more tax
Finally, earlier in the week, I was one of several commentators Susan Edmunds of RNZ spoke to for a story on why we might need to pay more tax. Her story picked up the recent speech by the Treasury’s chief economic adviser Dominick Stephens which noted that the country appears to be running a fiscal deficit of 2.4% of GDP – that’s about $10 billion – and the pressure that’s building on demographic change, the ageing population, and rising healthcare costs. The article also referenced, Treasury’s 2021 Statement on the long term fiscal position He Tirohanga Mokopuna. I repeated that I think it is a matter of when, not if, the tax take has to rise when you put all these factors together.
It’s also worth noting that the recent UK budget I covered a couple of weeks back increased taxes. Subsequently, the Financial Times had a very interesting graphic noting that tax burdens as a percentage of GDP for the last 50 years are at all-time highs in 14 of the 20 countries highlighted.
The pressure on tax revenues is a global problem, so we are not alone in trying to deal with these issues.
I think the break point, so to speak, will be the increasing cost of dealing with the damage as a result of extreme weather events. And I note that last week the Helen Clark Foundation released a report on the question of climate change and insurance premiums. My personal view is we need to get moving on this sooner rather than later, because that will help ease the transition.
Other jurisdictions we compare ourselves with, such as Australia and the UK, have a 45% top rate. And of course, in Europe the rates are much higher, still around 50% or so. I remain firmly committed to the broad-based low-rate approach, which means if we do broaden the base, we can hold tax rates down below these levels.
More tax, or less costs?
There was a nice to and fro in the comments on the LinkedIn post I put up with one commenter noting that we also need to reduce costs. Managing our expenses is part of what we have to do here, but if we’re talking about 2.4% of GDP, I think the pressures are too great for such a big gap to be easily closed just by better enforcement and cost management.
University of Auckland Professor in Economics Robert McCullough, thinks that this tax debate will define the next election in terms of “if we’ve got these expectations, how are we going to pay for everything?”
We shall see. And as always, we will bring you developments as they happen.
And on that note, that’s all for this week, I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day.
the winners of this year’s Tax Policy Charitable Trust Scholarship are announced.
A preview of next week’s United Kingdom Budget.
Inland Revenue regularly releases Official Information Act requests that it has answered. One from last month was in relation to the amount of overseas income reported by individuals. My attention was first drawn to this OIA by Robyn Walker of Deloitte (thanks Robyn) who like me, and many other professionals were quite surprised when we saw the number of people reporting Foreign Investment Fund (FIF) income.
Is there under-reporting?
According to Inland Revenue, which only really started gathering exact data on this in the 2023 income year, 18,140 individuals reported a total of $190.9 million of FIF income for that year.
When you consider that based on the latest Census 28% of the population of New Zealand were born outside the country, it seems to me that the amount of overseas income being reported, and in particular in relation to FIF income, is probably below what we would expect to see. And that’s what caught Robyn’s eye. One or two other advisors have made the same comment.
It could be because we deal in this space, there’s a bit of an echo chamber effect because we will regularly advise on these matters. If we’re dealing with a fairly high proportion of overseas migrants, and our practise Baucher Consulting does, then it’s natural we might think there is a broader scale of overseas investments generally.
But the number seems incredibly low in relation to the FIF income being reported, and also generally speaking, when you think about the number of overseas persons declaring overseas income.
A question of non-compliance
The issue therefore arises as to whether in fact we have non-compliance happening. I raised my concerns about this with Jenny Ruth of Good Returns. In our practice we regularly encounter clients coming to us who have realised that they have not been compliant with the Foreign Investment Fund regime. In some cases, they’ve come to us on another matter and in the course of discussions, it’s emerged that they have not been compliant. At any one time we are usually filing disclosures and bringing tax returns up to date.
Complexity and non-compliance
In my view this possible level of non-compliance speaks to the complexity of the Foreign Investment Fund regime. It’s not a capital gains tax, it operates as a quasi-wealth tax. That’s how I describe it to taxpayers and whenever I’m speaking to overseas advisors on the matter.
Old habits die hard
The FIF regime is not intuitive and I’m often dealing with people who come from overseas jurisdictions which have capital gains tax. They’re aware that where there’s a disposal there is a tax point that’s triggered. This may seem strange to say, but I’ve found in my practise that people’s tax habits developed in their country of origin take long to die even after many years in New Zealand.
Now, coincidentally, just to give some idea of the complexities involved in the FIF regime, Inland Revenue has just released a draft interpretation statement for consultation on the income tax issues involved in using the cost method to determine FIF income.
The Cost Method and the FIF regime
Those who have investments within the regime will be familiar that a fair dividend rate of 5% will apply to the value of your Foreign Investment Fund interest as of the start of the tax year. The alternative is to look at the total realised and unrealised gains of your portfolio including dividends over the year and report that instead, if that’s the lower amount. Incidentally that option way is not available for KiwiSaver funds or for the New Zealand Super Fund which is why it’s regularly one of the largest taxpayers in the country.
But what happens if your FIF interest is unlisted? The cost method generally applies when an investor is holding shares in an unlisted overseas company. And so this interpretation statement explains when that cost method may be applied and how it operates. As is now common, there are lots of examples and flow charts which explain the process. But the fact that there’s an interpretation statement on this matter which has set out and explains when you can or cannot use it the methodology, speaks to the complexity of the regime, and also the compliance costs involved in this.
The cost regime is generally to be used when the values of shares are not readily available. As part of that it will require the taxpayers to find and obtain an initial market value of the overseas stock, so they have a base cost for the purposes of the FIF calculations. It’s possible in some circumstances to use the net asset value of the accounts, usually if those accounts are audited.
Practical problems with the FIF regime
But as can be seen when people are required to obtain independent valuations this means additional compliance costs in what is already quite an involved regime. The other reason why the FIF regime causes consternation amongst taxpayers is the tax liability is not based on cash flows. A tax liability arises under the FIF regime even if the company in question is a growth company and not paying any dividends. Earlier this year I discussed a reportThe place where talent does not want to live, about the issues the FIF regime creates for startup companies and New Zealand resident investors.
All of this just underlines the complexities of the FIF regime. As I told Jenny Ruth of Good Returns, whenever I hear someone arguing “Oh well, capital gains tax is very complicated” I immediately think, ‘Well, they’ve clearly never dealt with the Foreign Investment Fund or financial arrangements regimes.’
Complexity leads to non-compliance?
Anyway, the upshot of all of this is there’s probably a considerable amount of non-compliance happening in in relation to reporting of FIF income. And Inland Revenue are now cracking down on this by making use of the information now available to them under the Common Reporting Standards on the Automatic Exchange of Information.
Now this is an OECD information sharing initiative which started in 2017. Inland Revenue which started a compliance project in late 2019 using this data. But then Covid turned up so that project had to be parked but it has now been reinitiated. As a result, I’ve recently taken on clients contacted by Inland Revenue advising it has received information under the Common Reporting Standards. The clients have been asked for an explanation about their apparent non-disclosure of overseas income and ‘invited’ to make the relevant income disclosures.
Keep in mind also that in the May Budget Inland Revenue was given $116 million over the next four years for investigation activity. The upshot is we’re probably going to see a lot more disclosures about FIF income when we’re looking at the numbers for the 2025 year.
In the meantime, I urge readers and listeners to consider their position and check with their tax advisor if they think they may have investments within the Foreign Investment Fund regime and have not made the disclosures they should have.
And the winners are…
Now moving on, the winners of this year’s Tax Policy Charitable Scholarship were announced in Wellington on Tuesday night. The Tax Policy Charitable Trust was established by Tax Management New Zealand and its founder Ian Kuperus to encourage future tax policy leaders and support leading tax policy thinking in Aotearoa New Zealand. Three of this year’s finalists, Matthew Handford, Claudia Siriwardena and Matthew Seddon have appeared on the podcast over the past few months discussing their proposals.
The format for Tuesday night was that the four finalists, having already prepared a 4000-word final submission, would then present their proposals to a judging panel and the audience, as part of a Q&A.
The judging panel consisted of Joanne Hodge, who’s a former tax partner at Bell Gully and a member of the last Tax Working group. Professor Craig Elliffe Professor of Law at the University of Auckland and another member of the last Tax Working Group. Nick Clark, Senior Fellow of Economics and Advocacy at the New Zealand Initiative and Chris Cunniffe, Strategic Advisor of Tax Management New Zealand. A pretty daunting panel to be frank.
According to Chris Cunniffe “the quality of the presentations on Tuesday night was exceptionally good” and in the end the judges were unable to separate Matthew Seddon and Andrew Paynter.
Winners Andrew Paynter (left) and Matthew Seddon (right) with the judging panel
Matthew’s proposal, is to extend withholding taxes to payments received by independent contractors.
Andrew works as a policy adviser in Inland Revenue. His proposal is to increase the GST rate to 17.5% and introduce a GST refund tax credit for lower and middle income individuals. This would be a means tested individualised credit and would be paid at a flat rate to all qualifying tax resident individuals under a particular income threshold. It’s a fascinating proposal and I’ve reached out to Andrew about appearing on the podcast in the near future.
In the meantime, congratulations to the winners Andrew and Matthew and also to the runners up Claudia and Matthew Handford. Don’t be surprised if you see something popping up in legislation in the near future involving one or more of these proposals. They were all of a very high standard this year, so well done everyone.
UK Budget preview
And finally this week, a brief preview of next week’s UK budget. The new Labour government has been in office now for three months and it’s finally getting around to announcing its first budget. That is part of what they call the Autumn budget statement.
The UK has two budget statements a year, but this one is going to be quite significant because there’s a lot of noise and chatter around tax changes. A quite significant part of my practice at the moment is advising New Zealanders going to the UK, and migrants coming here, and the tax implications involved.
I’m therefore watching this budget with some interest because we know there are going to be two proposals, the final details of which will come out, which will have an impact for quite a number of people. Firstly the so-called foreign income and gains exemption, which is the UK equivalent of our transitional resident’s exemption. This was first announced by the Conservatives in their Spring budget in March this year, but then the General Election happened so full details of the proposals were not released.
Related to that, and this is surprisingly important for a large number of people, are changes to the domicile regime also announced by the Conservatives. At present domicile is incredibly important for determining a person’s liability for UK inheritance tax, which is payable at 40% above net assets over £325,000. It appears the UK will move to a more residence-based regime, but we don’t yet know the details.
I’m therefore watching this with great interest and there are bound to be other measures which are likely to affect New Zealanders going to the UK, or the UK migrants moving here. We’ll therefore keep you abreast of developments in next week’s podcast.
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 please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day.
Last week I joined Gareth Vaughan of interest.co.nz for a joint podcast with Andrew Coleman. He’s a New Zealand economist who has worked in academia and for the government, including Reserve Bank, Treasury and the Productivity Commission. In the last few months, he’s written a 13 part series for Interest looking at how we currently fund New Zealand Superannuation and what alternatives we should be considering.
Why we’re talking about more tax – the rising cost of New Zealand Superannuation
As I’ve mentioned previously, part of what’s driving the debate around whether New Zealand should have a capital gains tax is when you consider the government’s long term fiscal position, the conclusion you reach is that something radical will have to happen: either benefits will have to be reduced significantly, or taxes will have to be increased. If we’re increasing taxes, how are we going to go about that? That, by the way, is the subject of Inland Revenue’s long-term insights briefing consultation on which is going on at the moment.
(He Tirohanga Mokopuna 2021, Treasury)
Coleman has written extensively about the issue of funding New Zealand Superannuation and in the podcast he went through the issues behind why he wrote the series and what alternatives he proposes. It was very informative, and I highly recommend listening to the full podcast. Here are a few key takeaways.
New Zealand’s unique approach to funding superannuation
Firstly, the way New Zealand currently funds New Zealand Superannuation is very unique in that it is entirely funded out of current taxation. That means the current cost of New Zealand Superannuation, over $20 billion a year before tax, is being paid out of current taxation. This is unusual by world standards, because most other countries in the OECD adopt some form of Social Security tax to pay for their public superannuation. In Britain they have National Insurance Contributions, in America, they have Social Security. Throughout most of the EU you will see Social Security taxes in place. Apart from us, only Denmark in the OECD has no Social Security taxes. Other countries use social security taxes to pre-fund superannuation; people pay social security taxes which are then drawn down when they reach retirement age. We fund everything out of current taxation.
Allied to that, and a matter that makes our tax system unique, is that most other jurisdictions operate what’s called an exempt, exempt tax (EET) approach to private retirement savings. That is a person gets some form of tax deduction for making a contribution to a private superannuation savings scheme. The superannuation schemes are not taxed, but when you withdraw funds on retirement age you pay tax at that point. On the other hand, since 1989 we have adopted the complete opposite approach (TTE). We don’t give a deduction for contributions to superannuation schemes such as Kiwisaver, which are subject to the ordinary rules. However, withdrawals are tax exempt.
Point of order Prime Minister…
Just as an aside, I note that one of the Prime Minister’s comebacks to questions around capital gains tax was that if introduced it would apply to KiwiSaver. (Actually, when the last Tax Working Group proposed a CGT, they didn’t actually seem to think to go there). The PM’s comment glossed over the fact that KiwiSaver funds are subject to tax. If they’ve invested in bonds, these are subject to the foreign financial arrangement regime. If they’ve invested in overseas stocks, those are taxed under the Foreign Investment Fund which because the 5% fair dividend rate automatically applies, is a quasi-wealth tax.
Time for social security taxes?
That point of order aside, Coleman’s key point remains that our treatment of private superannuation schemes and funding of public superannuation is quite unique by world standards. So how are we going to meet the growing cost of superannuation? He suggested that maybe we should look seriously at Social Security taxes.
A Capital Gains Tax won’t be enough
Gareth and I raised the question of alternative taxes, such as a capital gains tax and Coleman made the point that the likely cost of New Zealand Superannuation scheme is going to rise towards somewhere around 8-9% of GDP. Hence the need to be thinking about how to fund that cost. Capital gains taxes don’t generally raise that much, typically, somewhere between one and two percent of GDP. That still leaves a funding gap of between 6-8 percent of GDP. It’s very doubtful a wealth tax, by the way, would make that gap up. In his view, the inexorable conclusion is that Social Security taxes are going to be needed to fill the gap.
How the 1989 changes helped distort the housing market
We also had a very interesting discussion about how the changes in 1989, which by removing the incentives for private savings, drove investment into residential property. He published his research on the matter in 2017, just at the same time that myself and the Honourable Deborah Russell, published Tax and Fairness. Separately we had reached the same conclusion, that the 1989 changes to the savings regime had driven people to start over-investing in housing.
Time for KiwiSaver 2.1
Coleman calls his answer to funding New Zealand Superannuation KiwiSaver 2.1 It would be a compulsory savings regime, but it would be for younger taxpayers, basically those under the age of 40 who were not old enough to vote back in 1997, when a referendum on a question of a compulsory superannuation savings scheme was overwhelmingly rejected.
Coleman’s argument is that younger taxpayers are currently funding what they want and need, such as health, education and transport. But they’re also having to fund the superannuation of older taxpayers, who voted for the current system which benefits them. KiwiSaver 2.1 as a compulsory superannuation savings scheme would be a transition to a fairer system which would include some form of social security tax. The idea would be to be gradually building up savings in a similar way to Australia, which, although it doesn’t have significant social security taxes, does have a compulsory savings scheme. There would be this transitional period, as the older workforce aged out, but all new younger workers would be part of the new KiwiSaver 2.1.
Taxing older, wealthier superannuitants
As part of the transition Coleman sees it requiring more taxes from older persons, which is where our discussion got to talking about capital gains taxes and wealth taxes. He’s not a particularly big fan of wealth taxes. But he sees a capital gains tax having an efficiency aspect to it, which means it should be part of the tax system.
Incidentally, one suggestion I have seen about taxing superannuitants involves applying a separate tax rate to persons receiving New Zealand Superannuation. This would be a way of clawing back payments from those who have other means without going down the route of the deeply unpopular means testing that happened in the early 1990s.
I thoroughly recommend listening to the podcast. Coleman’s analysis highlights the need to keep in context why we’re having this discussion about capital gains and wealth taxes and that’s to do with everyone realising that we have to address the rising cost of funding New Zealand Superannuation and related healthcare costs for the elderly. These issues are not going to go away because the demographics are inexorable, contrary to what politicians might hope as they repeatedly kick the can down the road.
Tax deduction notices
Moving on, Inland Revenue makes great use of tax deduction notices as a debt collection tool. These enable it to require a third party to make deductions from payments due to a taxpayer with an outstanding tax liability. The power is contained in section 157 of the Tax Administration Act 1994, or related provisions of the Child Support and Student Loans Acts. I once saw a notice where a supplier to someone with tax debt was told to withhold 100% of any payment that was going to be made to the person in default.
Inland Revenue typically issues thousands of deduction notices each year.
Deduction Notice issued to:
FYE 30 June 2020
FYE 30 June 2021
Total
Bank
5,222
7,388
12,610
Employer
21,333
43,535
64,868
Total
26,555
50,923
77,479
(Figures obtained under the Official Information Act)
I think it’s appropriate Inland Revenue has the power to issue deduction notices. My concern, however, is I’ve seen them issued for under $1,000 of tax debt which in my view is an inappropriate use for what is a fairly small sum of tax debt under $1,000. When a deduction notice is issued to an employer in such circumstances this essentially notifies the employer that the relevant employee is behind on their taxes.
Are these notices breaches of privacy?
In my view, a deduction notice in this situation represents a breach of privacy and employers really do not need to know about relatively small sums of tax debt owed by an employee. Instead, and I will propose this in my submission on the draft, I believe Inland Revenue should make greater use of tailored tax codes to collect the unpaid tax from an employee. The employer still has the responsibility for deducting the tax through PAYE but now all they know is the tax code has changed. They don’t know the reasons why. This preserves the privacy of the person who has been the subject of the tax deduction.
I think this is important. I discussed this issue with a previous Privacy Commissioner, and he was of the view that, yes, it seemed like a breach of privacy. But as he noted, he couldn’t really do much about it because Inland Revenue had the legislative power to issue the notices. Still just because Inland Revenue can doesn’t mean it should, and I think there are opportunities for improving matters. Looking at the UK, it’s common practice for HM Revenue & Customs to use adjusted PAYE codes to collect arrears of tax. Submissions are open until 15th November.
How many anonymous tip-offs does Inland Revenue typically receive each year?
Across the ditch the Australian Tax Office (ATO) revealed this week that in the past five years it has received over 250,000 tip offs about potential tax evasion. According to ATO assistant commissioner Tony Golding “We get on average over 3500 tip-offs a month from people who know or suspect tax evasion or shadow economy behaviour.” The ATO believes there is about A$16 billion in stolen, unpaid tax each year.
By comparison, according to Inland Revenue it receives about 7,000 anonymous tip-offs each year. These are important sources of information even if sometimes the tip-offs are malicious and stem from toxic relationship or business breakdowns or partnership breakdowns. Regardless of this issue Inland Revenue will follow up (the ATO says 90% of tip-offs lead to further investigation.
How many audits is Inland Revenue undertaking?
On the issue of audits and my thanks to regular listener and reader, Robyn Walker of Deloitte for reminding me, Inland Revenue publishes Official Information Act responses and there are often some very interesting releases. One of the latest OIAs relates to the number of audit cases carried out on businesses between 2019 and 2023.
It’s interesting to see the impact of Covid and the quite marked drop-off in audits for those employing fewer than 50 employees.
There’s also data on the number of shortfall penalties applied as a result of audit. Now shortfall penalties enable Inland Revenue to impose penalties of up to 150% of the tax involved where tax evasion has happened although the more common range of penalties is 20%. Again, the somewhat sparse data makes for interesting reading.
That’s all for this week. Next week, we’ll be taking a deep dive into Inland Revenue with a look at its annual report.
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 please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day.
This week the ninth edition of the OECD’s Tax Policy Reforms was released. This is an annual publication that provides comparative information on tax reforms across countries and tracks policy developments over time. This edition covers tax reforms in 2023 for the 90 member jurisdictions of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting.
Reversing the trend
It’s a fascinating document which tracks trends of what’s happening around the tax world at both a macro and micro level. The report has three parts: a macroeconomic background, then a tax revenue context, and then part three is the guts of the report with details of tax policy reforms around the world.
There is an enormous amount in here to consider and the executive summary lays out the ‘balancing act’ issues pretty clearly.
“Policymakers are tasked with raising additional domestic resources while simultaneously extending or enhancing tax relief to alleviate the cost-of-living crisis… On the one hand, governments further protected and broadened their domestic tax bases, increased rates, or phased out existing tax relief. On the other hand, reforms also kept or expanded personal income tax relief to households, temporary VAT [GST] reductions, or cuts to environmentally related excise taxes.”
A key observation for 2023 was a trend towards reversing the responses to the COVID-19 pandemic. Instead, as the report notes “2023 has seen a relative decrease in rate cuts and base narrowing measures in in favour of rate increases and base broadening initiatives across most tax types.”
“A notable shift”
This includes “A notable shift occurred in the taxation of business, where the trend in corporate income tax rate cuts seems to have halted with far more jurisdictions implementing rate increases than decreases for the first time since the first edition of the Tax Policy Reforms report in 2015.”
This is a pretty significant change. I think actually when you consider last week’s speech by Dominick Stephens of Treasury, it was setting out the context for why having got over the crisis of responding to the pandemic, countries are realising they’ve got to deal with the demographic issues of ageing populations and funding superannuation.
Climate considerations
Beyond these concerns, there is the immediate impact of climate change and its growing effects. The executive summary picks up on this issue:
“Climate considerations are also increasingly influencing the design and use of tax incentives, with more jurisdictions implementing generous base narrowing measures to promote clean investments and facilitate the transition towards less carbon intensive capital.”
And on that point, I hope all the listeners and readers down in Dunedin and Otago are safe and well at the moment.
Paying for superannuation
The other thing picked up is that in referencing that point I made a few minutes ago about population ageing. There has been a growing trend amongst countries to increase Social Security contribution taxes. Alongside Australia, and to a lesser extent Denmark, we are unique in that we don’t have social security contributions. However, elsewhere in the OECD social security contributions raise increasingly significant amounts of revenue.
The report begins with a macroeconomic background. It notes that for the OECD as a whole in 2023 government debt rose by about nine percentage points, reaching 113% of GDP. For context, New Zealand’s debt-to-GDP ratio is just over 50%.
As the macroeconomic summary notes after generally decreasing in 2022 Government deficits increased again in 2023 following the energy crisis triggered by the war in Ukraine. Consequently,
“As debts and interest rates increased, interest payments have started to rise as a share of GDP. Even so, in 2023 they mostly remained below the average over 2010 to 2019, except notably for Australia, Hungary, New Zealand, the United Kingdom, and the United States.”
In short, we definitely have issues to deal with in terms of debt management and rising costs.
Responding to growing deficits
The report then notes that responses to growing deficits have been to start at increasing taxes. In general tax revenue terms,
“From 2020 to 2021, the tax-to-GDP ratio rose in 85 economies with available data for 2021, fell in 38, and stayed the same in one. In more than half of these economies, the change in the tax-to-GDP ratio was under one percentage point, whereas 22 economies saw shifts greater than two percentage points in their tax-to-GDP ratio.”
Denmark saw the most significant drop of 5.5 percentage points, with New Zealand’s tax-to-GDP ratio falling by three-quarters of a percentage point, well above the OECD average fall of .147 percentage points. (Norway’s dramatic corporate income tax take increase of 8.775% is the result of “extraordinary profits in the energy sector”.)
Composition of tax base
With regards to the composition of tax, 18 OECD countries (including New Zealand) primarily generate their revenues from income taxes, including both corporate and personal taxes. Ten OECD countries relied most heavily on Social Security contributions, and another 10 derived the majority of the revenues from consumption taxes, including VAT, (GST). Notably, taxes on property and payroll taxes contributed less significantly to the overall tax revenue mix in OECD countries during 2021.
Drilling into the detail
Part 3, of the report looks at the detail of the tax policy reforms adopted during 2023. This part has an introduction, then looks at five separate categories of taxes beginning with personal income tax and Social Security contributions, followed by corporate income tax and other corporate taxes, taxes on goods and services, environmentally related taxes and finally taxes on property.
As I mentioned previously, there was “a marked increase in the number of jurisdictions that broadened their Social Security contribution bases and raised rates”. Generally speaking, for high income countries personal income tax and social security contributions represent 49% of total tax revenue. Across the OECD personal income tax represented 24% and social security contributions 26% on average.
Here about 40% of all tax revenue comes from personal income tax. That’s one of the higher proportions around. Around the globe there was a bit of tinkering around personal income tax reforms mainly targeting lower income earners. This is an area where I think we need to focus any future reforms.
We have just (partly) adjusted thresholds for inflation and interestingly, I see that during 2023 quite a few jurisdictions did increase thresholds for inflation. For example, Austria updated its automatic inflation adjustment mechanism to counteract inflation, pushing workers into higher brackets. Meanwhile Australia increased its threshold for its Medicare levy to ensure low income households continue to be exempt, given that inflation has led to higher normal wages.
Corporate income tax rates are on the rise
Substantially more corporate income tax rate increases and decreases were announced or legislated by jurisdictions in 2023. Six jurisdictions increased their corporate tax,four of those did so by at least two percentage points. Türkiye increased all its corporate tax rates by five percentage points.
Whenever there are discussions about reforming our tax system, the issue of reducing our corporate tax rates will come up. With a 28% rate we are at the higher end of the corporate tax rate scale. There is potentially some scope, but as economist Cameron Bagrie has noted any such decrease needs to be part of a broader range of changes.
An example of such a change was the introduction of a general capital gains tax by Malaysia for all companies, limited liability partnerships, cooperatives and trusts from 2024.
Picking out of the details something which I know businesses here would look at with a certain amount of envy is more generous depreciation allowances. The UK, for example, has permanent full expensing for main rate capital assets as it’s called and a 50% first year allowance for special rate assets. Australia has also increased its thresholds for effectively fully expensing items for small businesses. Around the world there’s a whole range of incentives for R&D and environmental initiatives.
We have just limited the limits for residential interest deductions but it’s interesting to see that Italy abolished its allowance for corporate equity provision. Meantime Canada has new restrictions on net interest and financing expenditure claimed by companies and trusts.
Taxes on goods and services (VAT/GST)
In the VAT/GST space, in terms of revenue from taxes on goods, although we have one of the most comprehensive GST systems in the world, New Zealand was only twelfth in the OECD for the percentage of tax revenue from goods and services as a percentage of total tax revenues. GST raises just over 30% of total tax revenue here, whereas Chile raises over 50%. This is quite interesting given how comprehensive our GST system is. It might mean that there is scope to expand the the rates of GST further. (Six countries including Estonia, Switzerland and Türkiye did so in 2023). But any government doing so should do so as part of a total tax switch package.
We discussed GST registration thresholds a couple of weeks back. During 2023 seven countries increased or planned to increase their VAT registration threshold. I was very interested to discover that Ireland has a split VAT registration threshold treatment: the registration threshold for the sale of goods is €80,000. But for the provision of services, it’s €40,000. I’ve not seen this split before. Meanwhile Brazil is undertaking the introduction of VAT/GST, which is a huge step forward.
A stable tax policy or just less tax activism?
There’s a lot to consider in this report more than can be easily covered here. Overall, it’s incredibly interesting to see what’s going on around the world. Many of the reforms discussed here involve threshold adjustments but there are plenty of new exemptions and incentives introduced. We generally don’t get into this space, that’s possibly a reflection of a very stable tax policy environment, but also perhaps a less activist philosophy by New Zealand governments which hope market incentives will work. Whatever, the approaches it’s interesting to see what’s going on around the world and I recommend having a look at this very interesting report.
ACC crackdown
Moving on, ACC has been in the news when it emerged that it has been chasing thousands of New Zealanders for levies on income they earned while working overseas.
According to the RNZ report, ACC sent 4,300 Levy invoices for the 2023 tax year to New Zealand tax residents who had declared foreign employment or service income in their tax return. The issue is that the person was often overseas at the time the income was earned and in some cases the the person has probably incorrectly reported the income in their return.
It’s an interesting issue and coincidentally, it so happens that I’ve just come across a couple of similar instances. My initial view is there seems to a bit of a mismatch between the relevant income tax legislation and the legislation within the Accident Compensation Act 2001. Watch this space on this one because I’m not sure the matter is entirely as cut and dried as ACC considers.
Inland Revenue responds to social media criticisms
A couple of weeks back, we covered criticism of Inland Revenue for providing the details of hundreds and thousands of taxpayers to social media platforms. It had done so as part of various marketing campaigns targeting people who owed taxes and Student Loan debt in particular.
Inland Revenue has now responded by putting up a dedicated page on its website, referring to customer audience lists.
In its words “social media is just one channel we use to reach customers. It is very effective at reaching people where they are.” As I said in the podcast Inland Revenue’s dilemma is it has to go to where the people are which is on the social media websites. In order to reach out to them it’s going to have to provide certain data. To reassure people the new page explains how it uses custom audience lists and what data is provided.
They do upload a list of identifiers such as name and e-mail addresses, which is then ‘hashed’ within Inland Revenue’s browser before being uploaded to the social media platform. This is where I think the tech specialists have raised concerns that the hash technique is not as secure as Inland Revenue thinks.
Australia – the Lucky Country again
And finally, an interesting story from Australia about tax refunds. A research team at the Australian National University’s Tax and Transfer Policy Institute discovered a “striking” number of returns generating round number refunds (basically any digit ending in zero). The unit examined 27 years of de-identified individual tax files and found far more refunds of exactly $1,000 than of $999 or $995.
The unit concluded these returns are more likely to be driven by efforts to evade and minimise tax and are costly for the Australian Tax Office to audit such as work related expense deductions. Unlike New Zealanders, Australians can claim deductions on their tax returns. Somewhat concerning to me as a professional is that zeros in tax returns prepared by agents were twice as common as those prepared by taxpayers.
What this article is driving at is that some of the complexity of the Australian system results in the system getting gamed. Back in February you may recall Tracey Lloyd, Service Leader, Compliance Strategy and Innovation at Inland Revenue was a guest on the podcast. Based on our discussion and my own observation I would have confidence that Inland Revenue would not get caught out the same way thanks to the Business Transformation programme. As Tracy recounted, Inland Revenue can track live changes and they can see people just trying to square the return off to what they regard as an acceptable number.
Anyway, it’s an interesting story. It shows the differences between our tax system and that of Australia, but it does seem a little rich that not only can you earn more in Australia, but you get bigger refunds.
And on that note, that’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā. Have a great day.
