Inland Revenue does not consider removal of commercial buildings depreciation “to be a fair and efficient way of raising revenue”.
New 12% online Gaming Duty still leaves $500 million gap in the Government’s tax package.
It’s been a busy week in tax, beginning on Sunday when the Associate Minister of Finance, David Seymour, announced that interest deductions for residential properties would be restored to 80% deductibility from 1st April.
There had been a proposal under the Coalition Agreement for the present 50% deductibility in in the current tax year to increase to 60% with backdated effect, but that has now been dropped. The Minister also confirmed interest on residential investment property will become fully deductible with effect from 1st April 2025, in line with the Coalition Agreement.
Interest deductibility “Yeah, Nah”
The announcement reignited a long running debate over the fairness of the measure restricting interest deductibility. The crux of the argument against it being that businesses are allowed to deduct their costs when deriving income, and the change made to restrict interest deductibility by the last government was contrary to standard business and tax practice.
But when you consider this point keep in mind that under the Income Tax Act, expenses are deductible to the extent to which they are incurred in deriving gross income or to the extent they’re incurred in the course of carrying on a business deriving accessible income.
“The extent to which” is the key phrase and the argument around non deductibility revolves around the fact that the economic return for landlords comprises of fully taxable rental income, and a capital gain which is largely tax free. But legislation generally has ignored this point of possible apportionment between what is taxable income and non-taxable capital income. This leads on to the never-ending debate as to whether we should tax capital gains. And so the argument of deductibility is just another continuation of this question.
It’s also worth noting that businesses with overseas owners are subject to the thin capitalisation regime. This also restricts interest deductions where the New Zealand company’s debt to asset ratio exceeds 60%. Now this measure also contradicts standard tax and business practice, but it’s part of many jurisdictions around the world as a means of countering the risk of excessive interest charges transfer pricing money out of the country. In other words, there are arguments for and against restricting interest deductibility.
Improving the position of renters
On Thursday, the Minister of Revenue released an Amendment Paper for the current tax bill along with five Regulatory Impact Statements two of which covered the restoration of interest deductibility and the reduction of the bright-line test period to two years. There was some interesting commentary by Treasury in both impact statements noting:
“Rental affordability is a significant issue in New Zealand. Based on Household Economic Survey data for the year ended June 2022, a quarter of renting households were spending over 40% of their disposable income on rent housing, and rents have risen faster than mortgage payments. Renters also have higher rates of reporting housing issues like dampness, mould and heating.”
Treasury, Inland Revenue and the Ministry of Housing and Urban Development all agreed that restoring interest deductibility should have a long-term effect of putting downward pressure on rents, but ‘should’ is doing a lot of work in this space. Other measures are going to be needed to improve rental affordability.
But restoring interest deductibility has the benefits of simplifying matters. Restricting deductibility was an imperfect measure, with a great deal of complexity and arguably went too far in the other direction of apportioning expenses relating to the split between taxable and non-taxable income.
Trustee tax rate increase to 39% confirmed subject to $10,000 exemption
The announcement on interest deductibility was followed on Monday by the Finance and Expenditure Committee (the FEC) reporting back on the Taxation (Annual Rates for 2023-24, Multinational Tax and Remedial Matters) Bill. There’s a great deal of interest around this Bill as it included the proposed increase in the trustee tax rate to 39%.
As had been hinted by Finance Minister Nicola Willis a couple of weeks back, there is going to be a de-minimis introduced for trusts with trustee income (undistributed income) of $10,000 or less. Such trusts will continue to have the 33% trustee rate apply to trustee income. However, for all trusts where the trustee income exceeds $10,000, a flat rate of 39% will apply. Therefore, if there’s $10,000 of trustee income the 33% rate applies but if it’s $10,001 the new 39% rate will apply on everything. It’s not the first $10,000 is taxed at 33% and the excess at 39%. It’s an all or nothing.
The FEC justified introducing the de-minimis exemption on the basis that the information it had received was that the compliance costs for many trusts were in the region of between $750 and $1,000 per annum. Therefore, the potential $600 benefit of a $10,000 threshold would be swallowed up by compliance costs, which is a fair point. But the reaction among my colleagues and myself is that the $10,000 threshold, although welcome is too low because, by the FEC’s own logic, something closer to $25,000 could easily have been justified.
It’s worth noting that the compliance costs for trusts have increased substantially in the last couple of years. Firstly, following the Trusts Act 2019 coming into force. And then secondly, Inland Revenue’s greater disclosure requirement for the March 2022 year onwards. By the way, we have seen nothing about those greater disclosure requirements being dialled back by Inland Revenue now there is the 39% tax rate in place. Back in 2021 part of the argument for not increasing the trustee rate to 39% at the same time as the individual tax rate went to 39% was to allow Inland Revenue to gather data on whether there was substantial amount of potential income sheltering through trusts. That theory seems to have been ditched for the moment.
Energy Consumer and deceased estates remain at 33%
Separately the FEC confirmed that the trustee rate for energy consumer trusts would remain at 33%. It also made changes to the treatment of deceased estates following submissions. A flat rate of 33%, will apply to all deceased estates rather than the deceased persons personal tax rate as originally proposed. More importantly, the trustee rate of 33% will now apply for the year of the person’s death and three subsequent income years. That was in the in the wake of many submissions pointing out that deceased estates typically don’t get wound up inside 12 months. These changes are welcome.
The Bill also covered off a number of amendments to other key topics, including the introduction of the global anti base erosion rules, the taxation of backdated lump sum payments for ACC and social welfare, rollover relief in respect of bright-line property disposals and relief under the bright-line tests for people affected by the Nelson floods.
Those global anti avoidance rules will take effect in two parts, the so-called income inclusion rule with effect from 1st January 2025 and then the ‘domestic income inclusion rule from 1st January 2026. This is a little later than the rest of the OECD and the intention is to give the affected multinational enterprise entities (those with consolidated revenue above €750 million per annum) time to get ready.
Inland Revenue recommended against removing building depreciation
On Thursday the Minister of Revenue published an Amendment Paper containing details of the proposals regarding the restoration of interest deductibility for residential investment properties, replacing the current five and ten year bright-line tests with a two year bright-line test period, removing the ability to depreciate commercial buildings and introducing a new Casino Gaming Duty. The Amendment Paper was accompanied by a detailed commentary . and, as I mentioned earlier, the relevant Regulatory Impact Statements. Now as usual, these Regulatory Impact Statements (RIS) contain some interesting reading.
The ability to depreciate commercial buildings is being removed in order to help pay for the Coalition Government’s tax package. However, in the relevant RIS Inland Revenue recommended recommends retaining the status quo and that “the Government reconsider introducing commercial and industrial building depreciation when fiscal conditions allow.”
Citing its last Long-Term Insights Briefing Inland Revenue noted that in paragraphs 19 and 20 of the RIS, that under some assumptions made by the OECD:
“…New Zealand was likely to have had the highest hurdle rate of return for investment in and industrial buildings for the 38 countries in the OECD. This was when New Zealand allowed 2% depreciation on these buildings. Denying depreciation deductions will drive up these hurdle rates of returns even higher and make New Zealand a less attractive location for investment.
This tax distortion does not only impact building owners. To the extent the additional cost is passed on and there is less investment, it also impacts any business that needs to use a building and the customers of such a business. It thereby negatively impacts productivity more generally.”
Inland Revenue conclude in paragraph 32 of the RIS:
“We do not consider the removal of building depreciation to be a fair and efficient way of raising revenue. We are particularly concerned about the efficiency impacts which will make New Zealand even more of an outlier in pushing up cost of capital for commercial and industrial buildings. We therefore recommend retention of the status quo. We note this RIS is not evaluating the merits of the Government’s tax package as a whole.”
So, why is the Coalition Government withdrawing building depreciation? Because doing so is worth $2.31 billion over four years which was understood before the election. Even so it’s fairly interesting and unusual to see such a blunt assessment.
A new Gaming Duty
National’s Election policy included a new online gaming duty which was expected to raise something like $700 million over a four-year period. I was one of the those who was a bit sceptical about the revenue forecast. And it transpires that the numbers were indeed a bit optimistic.
What is now being proposed is a new 12% gaming duty for online offshore casino websites and this is in addition to GST, which is already payable when gambling on offshore sites. This new duty would be in line with how some other countries tax offshore casino websites. It’s estimated to collect $35 million of additional tax revenue in the forthcoming year ended 30th June 2025 and expected to grow by 5% each subsequent year. This still leaves a gap of about $500 million over four-years in the original revenue forecasts.
The Budget in May is becoming more and more interesting for finding out how the Government will follow through on its commitment to increase personal income tax thresholds. Even though they won’t compensate for the effect of inflation since 2010 those threshold adjustments come at a substantial cost. I could see that further cost reductions may be imposed further down the track. Those are political matters which we’ll have to wait and see how they work out.
Foreshadowing a capital gains tax?
Some commentary in the bright-line RIS raised the prospect of a capital gains tax. Treasury, for example, proposed a 20-year bright-line test or longer as it
“…would capture more capital gains, thereby improving the fairness of the tax system and supporting more sustainable house prices.”
Inland Revenue meantime felt the 10-year bright-line test was not an efficient way of taxing capital income before adding “If the government wanted to tax the income, it would be preferable to have a tax on these gains, irrespective of when the assets were sold.” It’s interesting to see Treasury and Inland Revenue raising the bogeyman of a capital gains tax to address funding and fairness issues within the tax system.
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.
“As-salamu alaykum. Peace be upon you and peace be upon all of us.”
What connects Pillar One and Pillar Two with the collapse of Newshub?
New draft Inland Revenue guidance on employee share schemes.
Today (Monday) I was (virtually) at the Accountants and Tax Agents Institute of New Zealand (ATAINZ) annual conference which, like last week’s International Fiscal Association, (IFA) Conference, was opened by the Minister of Revenue, the Honourable Simon Watts. The Minister repeated much of what he had said to the IFA conference about supporting the Generic Tax Policy Process, his wish for simplification in the tax system and improving compliance being a main driver. As the focus at the IFA conference is very much on tax policy his comments were very welcome.
By contrast, at the ATAINZ conference, the focus is slightly different because the audience there was comprised of tax agents, and we’re more focused on operational matters. So, when it came to Question Time, there were quite a number of questions around operational aspects of Inland Revenue. One of the first questions that was asked was what was going to happen with the trustee tax rate, which you may recall is proposed to rise to 39% under a bill presently before the Finance and Expenditure Committee.
Now we’re expecting to hear back from that fairly soon, but during the week the Minister of Finance, Nicola Willis, hinted that some form of carve-out might be happening, in that the 39% trustee tax rate might not apply to all trusts. So naturally, some questions were directed at the Minister seeking clarification on this point.
He wasn’t able to give more guidance, simply saying that we will have to wait until the Finance and Expenditure Committee reports back, which is expected next week. The Minister got told it is a rather frustrating scenario because we’ve got the run up to the end of the tax year on 31st March, and we will be wanting to plan payments for dividends and other distributions in before then. Unfortunately, the issue remains a bit of a grey area for the moment.
More trusts file tax returns in New Zealand than in the United Kingdom
There’s a couple of statistics that highlight the scale of this issue.According to Inland Revenue for the 2022 income year (typically the year ended 31st March 2022), the number of trusts and estates which filed a tax return totalled 237,226. That’s actually a decrease of more than 19,000 from the prior year.
It so happens that I came across statistics from the UK’s HM Revenue and Customs about the number of trust tax returns that are filed there. And according to the equivalent tax year to 5th April 2022, HMRC received 141,500 returns.
Just pause and think about that. In absolute terms, more trust and estate tax returns are filed in New Zealand than in the UK, despite the UK, with its population of some 67,000,000 being almost 13 times greater than here. So actually, on a per capita basis, it would point to the fact, for every trust tax return that’s filed in the UK, there would appear to be close to 21 filed here. The tax rate for trusts is therefore a big issue in relative and absolute terms and that’s why the tax community and trust community are really keen to get this matter resolved as quickly as possible.
What evidence is available points to the fact that for most trusts – once you include the associated families and beneficiaries that are in there – their income would not exceed $180,000, the threshold at which the 39% top tax rate kicks in. But there is a small and significant group, about 11% according to Inland Revenue, that do receive a very large amount of income. So that’s something we’d like to see resolved soon and hope it’s in time for us to get clients advised and ready for the new tax year changes.
Interestingly, on the other comments the minister made to both the IFA and the ATAINZ conferences about Inland Revenues regulatory stewardship review of fringe Benefit Tax which it did in 2022, it’s clear that there is likely to be a focus on this issue from Inland Revenue on greater audit activity. This is something promoted under the Coalition agreement. What extra resources Inland Revenue is going to have and the full direction that it’s going to take going forward are probably only going to become clearer after the Budget on 30th May. Which, as the Minister pointed out, was not that far off in reality.
How the end of Newshub and the OCED international tax deal are connected
The news that Newshub’s operations will end with effect from 30th June was a big shock to the media community. As someone who has occasionally appeared on various Newshub programmes, my sympathies go out to all those affected. And I do hope that some means is found to keep the operation going, although it has to be said, it’s very doubtful at this point. I’ve always found in all my dealings with journalists of whichever organisation, they have always been incredibly professional, and I’ve appreciated that. And so, as I said, this is not a great day for journalism, and has also been pointed out, it’s not actually a great day for democracy as a whole.
Now one of the many excellent sessions at last week’s IFA Conference was an American perspective on Pillar One digital services tax and Pillar Two, the proposed international tax agreements, which have been under negotiation for some time. The taxation of the tech giants such as Facebook and Google is a key part of Pillar One and Pillar Two, and that’s the connection with the collapse of Newshub.
Newshub is no longer financially viable according to its owners, Warner Brothers, because of collapsing advertising revenues. A couple of days after the Newshub announcement, its competitor TVNZ reported an operating loss of $4.6 million for the six months to 31st December 2023. TVNZ noted that its advertising revenue fell from $171.3 million in the six months to December 2022 to $146.8 million in the six months to December 2023, against a background of rising costs.
So where is that advertising going? Well, most of it is going offshore. From what we can pick out from the financial statements of Google and Facebook New Zealand for the year ended 31 December 2022, it would appear that close to $1.1 billion during those years was paid to offshore affiliates in so-called service fees. Now that’s a substantial amount of money, and those transactions are entirely legitimate under the present tax rules. But it has to be said, even if 10% of that $1.1 billion were to stay in New Zealand, it would be a significant boost to the industry. And arguably the difference between Newshub’s operations continuing and being closed.
The offshore advertising and the service fees and the whole issue around the taxation of tech companies, point to the pressure building on the tech companies because New Zealand is not alone on this. Over in Australia Meta, the owner of Facebook, has said it’s no longer going to go through with the deal to pay news companies who were providing content on its websites.
The presentation at the IFA Conference kept coming back to a key point that I’ve always believed, which is tax is inherently political. The French were one of the first drivers of change in this space but obviously the American companies, which would be the most affected, pushed back by putting pressure on the American government to respond. And so even though the Generic Tax Policy Process tries to depoliticise tax policy as much as possible, ultimately governments are elected with certain political objectives, and those will often trump best tax policy, and that’s just a fact of life.
A digital services tax to help media?
The whole question of the impact on democracy and journalism of Newshub’s closure is beyond this podcast. But the pressure will now mount on the Coalition Government to consider what steps it can do to help the media. On the other hand, the Public Interest Journalism Fund was highly controversial.
Does that mean that there may need to be a change in tax policy to perhaps try and claw back some of the revenues going offshore through, for example, a digital services tax which is controversial and hated by the tech companies? Does the Government press hard for a resolution to Pillar One and Pillar Two? Or does Newshub just get shut down and we have to live with the consequences of that? Whatever, pressure will be building for the Government to take some form of action. Watch this space to see whether any such action results in amended tax policy.
Inland Revenue consultation on employee share schemes
Moving on to more routine matters, Inland Revenue has released several draft consultations on employee share schemes. The taxation of employee share schemes underwent major reforms in 2018. Subsequently, there’s been a number of questions to Inland Revenue about how the law applies in certain scenarios and how it interacts with other regimes such as PAYE and FBT.
Inland Revenue has therefore released six items – five draft interpretation statements and one draft Questions We’ve Been Asked, each focusing on a specific aspect of employee share schemes. This has been done rather than producing one single interpretation statement, so that people can more easily focus on the topic of particular interest to them. Alongside this, Inland Revenue has produced a four-page reading guide briefly summarising what each interpretation statement/QWBA addresses.
This is slightly unusual but it’s an indication of the complexity involved. Employee share schemes are used by a lot of companies and particularly small growth companies in the growth phase where they don’t have cash but want to attract and keep key employees as they expand until the ultimate goal, whether it’s ultimately a share market listing or perhaps a sale to a larger company.
The first interpretation statement is one of the more important ones, as it considers what represents an employee share scheme. The critical issue is when does the share scheme taxing date arise? That’s often a critical issue because one of the things about share schemes which causes difficulties is if there’s a mismatch between when the tax is due, but when cash might be available for the person who’s being taxed to actually pay the tax due. In fact, another of the drafts looks at the questions about an employer’s PAYE, student loan and KiwiSaver obligations where an employer wants to fund the tax cost on an ESS benefit provided in shares.
Another important draft reviews what happens with the ACC, PAYE and KiwiSaver obligations, when the employee share scheme benefit is paid in cash rather than shares. The draft concludes cash-settled ESS benefit is an “extra pay” under the general definition of extra pay and therefore a PAYE income payment, regardless of whether an employer elects to withhold PAYE in respect of the benefit.
Of the other draft consultation items, topics covered include what deductions are allowable for employers in respect of employee share schemes, and what is the treatment of dividends that are paid on shares held by a trustee for an employee share scheme.
Overall, this is very useful guidance and I do like Inland Revenue’s approach of issuing separate interpretation statements rather than consolidating all the items in a single item which would be close to 150 pages. Consultation is open until 26th April.
Thanks Chris
And finally, this week, Chris Cunniffe, CEO of Tax Management New Zealand (TMNZ) for 12 years, has just stepped down from his role. He made a brief presentation at the ATAINZ conference, explaining it coincided with the 44th anniversary of the start of his tax career at Inland Revenue. We’ve worked with Chris and his team at TMNZ for many years, helping our clients save tens of thousands of dollars. Chris has also been a past guest on the podcast. We wish him all the very best for the future.
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.
A suggestion for the new Minister of Revenue about tax simplification; and
What tax tattoo would you have?
The International Fiscal Association (IFA) tax conference is one of the premier tax conferences in the year as it is attended by most of the very senior tax specialists in the country together with senior Inland Revenue officials. Somehow, they also let me in as well.
The primary focus is on tax policy, and the conference is held under Chatham House rules, which means that comments that are made by officials cannot be directly attributed. Notwithstanding this you still get an indication of where officials’ thinking might be heading.
This year’s conference had a particularly interesting agenda covering topics ranging from, the use of trusts, international GST, the treatment of embedded royalties, limited partnerships, to a US perspective on the OECD’s international tax agreement process. It concluded with what was probably the highlight of the whole conference ‘What makes a tax good system?’ which we’ll discuss later.
Introducing Simon Watts
Traditionally the conference is opened by the Minister of Revenue the Honourable Simon Watts. A qualified paramedic, he had once worked at Inland Revenue as an intern before he moved on to later became a tax consultant with one of the Big Four firms. Coincidentally, the Commissioner of Inland Revenue Peter Mersi was also attending his first IFA conference. It was therefore interesting to see how they interacted, and they both explained to the audience how they felt they were progressing.
The Minister began by reiterating his commitment and that of the Government, to the Generic Tax Policy Process, GTPP, the open consultative process that has been a keystone of New Zealand tax policy for almost 30 years. He was aware that the business community and the tax community had become a little concerned that there was not enough certainty in the tax system as projects were being developed. In particular, he referenced the design of a wealth tax that was undertaken by the last Government but never followed through.
He wants to make sure that there is a strong degree of certainty within the tax system, so he supports the GTPP. Notwithstanding that, there will be times such as around the Budget policy process where the GTPP will be sidelined, and consultation will only begin in earnest when the budget measures are announced.
It’s also clear, he’s been getting himself up to speed very quickly. He referenced the long-term insights briefing, the Inland Revenue prepared in 2022 on the impact of tax on foreign investment and productivity. He also referenced the regulatory stewardship review of fringe benefit tax (FBT). Following on the Minister’s remarks and comments made by the Commissioner of Inland Revenue, I think we could expect to see more action following up the FBT stewardship review maybe in terms of greater enforcement but also in terms of simplification of the tax and compliance.
The Coalition Government’s is still under development, but the focus will be on tax simplification and reducing compliance costs. That’s not unexpected, and from what officials are saying, they’re all very heavily invested at the moment in working on those areas and meeting the pressures of the Government’s 100-day programme.
Bright-line test and commercial building depreciation changes confirmed
He confirmed that the bright-line test period will revert to two years with effect from 1st July 2024. From that date sales of bright-line property will not be taxed under the bright-line test, if the property has been held for two or more years. (Other tax rules may still apply). He also confirmed that commercial building depreciation will no longer be available from the start of the 2024-25 tax year.
The timing of the withdrawal of commercial building depreciation is possibly going to be controversial. The Minister confirmed it would be from the start of the 2024-25 tax year. For most taxpayers, that is 1st April 2024 so it’s a future impact. However, for what we call early balance, date payers such as those with a 31st December 2023 balance date their new tax year started on 1st January. Therefore, from that date they can longer claim depreciation on commercial buildings.
That I think is slightly controversial in that there’s a retrospective effect to it, obviously, and it may mean some tweaking around provisional tax payments. But the policy has been outlined previously. We’ll see the relevant legislation and more detail in due course maybe around the time of the budget policy process announcement towards the end of March.
(Interestingly, the issue of 39% rate for trustees didn’t actually come up in discussions with either the Minister of Revenue or the Commissioner of Inland Revenue). Apparently, the Finance Minister’s wish for a 6.5% reduction of costs is still on the table although the effect of this may be counter-balanced by the increased funding for audit activities.
The Minister came across as someone wanting to listen. He also holds the Climate Change portfolio, and he sees quite an overlap with Revenue because they’re both seen as financial portfolios. He mentioned that a lot of emphasis is developing in the climate change area around climate finance, which apparently is going to be a focus at this year’s COP 29 Conference, which will be held in Azerbaijan.
I had the impression he’s already across a lot of aspects of the portfolio and from comments from the Commissioner and others, he’s following up on past Inland Revenue asking if “we’ve done this, where are we with it? Let’s move it forward” which is good to hear.
The uses of trusts – trouble ahead?
Trust specialist Vicki Ammundsen regaled the audience with often hilarious tales of some of more extreme situations she’s encountered in her role as a trust lawyer and as a trustee. But amidst all the laughs, a serious point was made time and again: trusts are mostly established and used for non-tax reasons. However, they are not always administered well and in some cases she felt many people had set up trusts for the wrong reasons or completely incorrect reasons and had failed to understand how they would operate.
She also thought there was probably very pretty widespread, if accidental non-compliance with the impact of overseas resident trustees and the treatment of distributions to overseas resident beneficiaries. Her comments echo my own view on what’s happening in the trust space. I would also agree with Vicky that we’re likely to see more and more trusts wound up as people realise that something that was possibly useful 30 years ago is no longer relevant, and in fact the same objectives can now be achieved by holding assets outside trust.
One point she raised, which I found very relevant in relation to some decisions coming out of the Jersey Tax Court which ruled trustees should not be equalising distributions to beneficiaries to account for asymmetric tax treatment. This may arise when one beneficiary may get a distribution which is tax free in their jurisdiction, but another one has to pay tax on a similar distribution, because they live in a different tax jurisdiction. The Jersey Court’s view is that beneficiaries make a choice to live overseas, and other beneficiaries should not be indirectly affected by that. It’s an interesting point to make because issues around distributions to overseas beneficiary is something that’s going to be coming more to the fore in the future. Right now it’s an area I’m receiving more enquiries around.
Embedded royalties and the PepsiCo case, an Australian precedent?
“Embedded royalties” might sound strange, but this Australian decision is potentially very significant. To cut a very long story short, PepsiCo the American soft drinks company signed an exclusive bottling agreement with an Australian company Schweppes Australia Pty Limited. Under the agreement Schweppes Australia would make payments for concentrate which it would then turn into soft drinks such as “Pepsi”, “Mountain Dew” and “Gatorade”.
The Australian Tax Office (the ATO), which has always had a reputation for being pretty aggressive in the transfer pricing space, decided to take a case against PepsiCo on the basis that some part of those payments represented an embedded royalty. That portion was therefore subject to the Australian equivalent of non-resident withholding tax even though the payments by Schweppes Australia were actually made to another Australian company, which was a subsidiary of PepsCo. Last November the equivalent of the High Court ruled in favour of the ATO.
It’s a very interesting case, but the key point which emerged in the session was that the overlap between Australian and New Zealand legislation was strong enough that maybe Inland Revenue here might be tempted to take a similar case. (There was another aspect about Australia’s Diverted Profits Tax that’s not relevant here). The decision has been appealed and it’s thought likely PepsiCo might choose to settle. But it’s interesting to see what happens in Australia because we do tend to watch closely what’s happening with the ATO and transfer pricing.
Tax system oversight – the Australian experience
Speaking of the ATO, one big difference between New Zealand and Australia is that there are more bodies involved in tax oversight of the system in Australia. There’s the Australian Board of Taxation and then there is the Inspector General of Taxation, who also is the Tax Ombudsman for Australia.
The current Inspector General of taxation and Taxation Ombudsman for Australia, Karen Payne, presented on how these two bodies were created and what had been the experience so far. This is a particularly interesting topic for myself because I wrote a paper for the last tax working group on the issues around a tax ombudsman.
She also referenced the American experience with their Taxpayers Advocate Service raising the question whether such an independent office also be an advocate for taxpayers. This could partly resolve the disparity in powers and resources between the tax authority and the ordinary taxpayer. As Karen Payne noted, many of the clients of the partners at the conference are big enough and ugly enough to look after themselves in a dispute. But the general public isn’t, so that’s a question that comes through when considering the role of a taxpayer Ombudsman/advocate.
Karen Payne also referenced the fact that in certain certain circumstances the Australian Commissioner of Taxation has the power to take some remedial actions, in other words say, “We got this wrong and here’s how we wish to remedy it”. She noted that the Australian Commissioner of Taxation has exercised this power that seven times. On the other hand, even though the Commissioner of Inland Revenue here has a similar power, it’s never been exercised. Overall, a very interesting session on what oversight should be in place and the issues involved in setting up that oversight.
International GST, Aotearoa New Zealand leading the way?
On international GST policy, a couple of interesting notes that came out of that one, was that generally speaking in New Zealand has been a world leader in this GST space. We have one of the broadest GSTs in the world which because of much broader reach represents 30% of the total tax revenue. This is above most other countries with GST or Value Added Tax (VAT) system where it generally represents about 20% of the overall tax take.
Around the world, the average VAT/GST rate is 19.2%, whereas ours is lower at 15%. Our GST is a classic example of a very popular topic, the broad based, low rate (BBLR) approach to taxation, where a broader tax makes lower tax rates possible which just about every tax practitioner, including myself, will endorse.
Economics and the environment
We had an economic update from Michael Firth of the New Zealand Superannuation Fund. Several interesting snippets came out of session including that barely 10% of the total funds of the Super Fund are currently invested in New Zealand. Of greater importance when looking ahead to consider the impact of climate change on GDP, the outlook isn’t particularly good. In fact, every forecast seems to make previous ones look over-optimistic even if the best policy response is adopted and we do everything to lower emissions by 2050. The climate change implications around tax policy are how we’re going to fund dealing with the physical effects of climate change.
Alternative tax raising options
Michael Firth’s session led into a very interesting presentation from Young IFA about alternative options for raising revenue. The Young IFA presentation referenced the Treasury Briefing to Incoming Minister, which shows that core expenses are rising and unless changes are made, there’s going to be a growing and unsustainable deficit, the cost of which will be borne by younger generations, hence their particular interest on the topic.
Young IFA deliberately excluded capital gains tax but looked at three areas, windfall profits and a wealth tax. By OECD measurements our environmental taxes are at the the lower end of the scale, but how you define environmental taxes is elastic so once Road User Charges and Fuel Excise Duties are included, we are nearer to the OECD average.
In any case many environmental taxes are mostly behavioural in that they are levied with the aim of changing behaviour so that less of that particular activity happens. This means so they’re not actually long term sustainable because if they work as they should then revenue should decline over time.
Young IFA discussed the suggestion made in 2021 by the Parliamentary Commissioner for the Environment for a departure tax which reflects the environmental cost of flying internationally. Essentially three bands would apply, Australia and the Pacific Islands, Asia and long-haul flights to the US, Europe etc., The Parliamentary Commission for the Environment suggested it could raise about $400 million annually, based on a similar approach taken by UK passenger duty. However, $400 million although welcome still isn’t a game changer.
Windfall taxes?
What about a windfall profits tax? These target profits caused by extraordinary events. But they’re temporary, retrospective in effect and intended to correct behaviour. They’ve been used internationally the UK has had a long running bank surcharge to pay for the Global Financial Crisis bailouts.
When Treasury considered a windfall profits tax it estimated a 1.4% surcharge would raise about $230 million per annum rising to close to $700 million based on a 4.2% rate. However, forecasting can go awry when the UK recently introduced a windfall tax on the fossil fuel sector that only raised about 60% of what was expected.
Wealth tax? No thanks
On wealth taxes it would be fair to say that the audience and to be fair, the Young IFA presenters themselves, were not sold on the idea, because of the complexity, whether it would raise much revenue and concerns about capital flight. The work of Thomas Piketty around wealth taxes is often cited, but as someone from the floor noted he suggests a wealth tax should be applied on a global basis. This would then deal with the question of capital flight. As Young IFA pointed out when Norway recently raised its wealth taxes, there was some capital flight with some rich Norwegians moving overseas in response.
Although Young IFA and the audience were not sold on the merits of a wealth tax, I think it will still be raised as option because questions about wealth inequality will keep coming up and politicians being politicians see the appeal in an apparently simple solution to the problem.
What makes a good tax system?
The conference ended with a panel discussion on what makes a good system. The panellists were three of the most experienced tax practitioners in the country: Rob McLeod, Robin Oliver and Geof Nightingale. Rob chaired the 2001 McLeod Review, whilst Robin as a Deputy Commissioner at Inland Revenue worked with both the McLeod Review and the 2009-10 Victoria University of Wellington Tax Review before being a member of the Sir Michael Cullen chaired Tax Working Group. Geof Nightingale was a member of both the Victoria University of Wellington Tax Review and the Cullen Tax Working Group.
As you would expect with such a fantastic panel, it was a very lively session which deserves a whole podcast for itself. We had quotes from Dylan Thomas “Do not go gentle into that cold dark night (of bad tax policy)” and also Hunter S Thompson ‘Never turn your back on fear. It should always be in front of you, like a thing that might have to be killed.’
Rob, Robin and Geof expressed varying degrees of confidence in the New Zealand tax system although acknowledging it was under some strain. All three noted the primary purpose of a tax system was to raise money for the government at the lowest practical economic cost.
There was less unanimity around whether income redistribution really was a key role for a tax system. To some this was a distraction from good tax policy as it leads to distortions but to another panellist it was an inevitable part of modern tax systems. Determining the right level of government expenditure was important, at around 30% of GDP the present system raised sufficient funds but above that level the pressure would mount.
All three were mostly positive that the present system could raise the desired revenue but noted there isn’t a lot of low-lying fruit around. Rob McLeod referenced his time working in Australia and the complexities of the capital gains tax. He also mentioned in passing the work done on the Risk-free Rate of Return method as a possible alternative means of taxing housing. Time and again each emphasised the focus should be on keeping the tax policy process and objectives as clear as possible.
Unsurprisingly, all three favoured the BBLR broad-based low-rate approach. They recognised that divergence from this principle is causing strain in the system now. 30 years ago, the company, trustee and top individual tax rates were aligned at 33%. Now this disparity between 28% for a company and Portfolio Investment Entities and 39% for individuals was causing strain. Overall, it was a great ending to an excellent conference all round.
A suggestion for simplifying the tax system and reduce compliance
Moving on, as previously noted, the Minister of Revenue said the Government was committed to simplification. And the limited partners session raised an issue about whether the various withholding tax rules apply to a limited partnership. The policy intent might be that it shouldn’t happen, but there’s an argument it technically should. Either way some clarification would be useful. (Apparently a draft consultation on various limited partnership tax issues is happening at the moment).
This got me thinking about another area where I think simplification would be helpful, the question of non-resident withholding tax on interest payments made by New Zealand tax residents to an overseas bank in respect of interest payable on an overseas investment property. Those interest payments might be made from a UK bank account to the relevant UK bank lender. However, because they’re being made by a New Zealand resident taxpayer to a non resident, the UK bank lender, then non-resident withholding tax should be deducted. (Worth noting the UK lender’s terms will not accept having tax deducted from the payment which must be grossed up for this purpose).
Theoretically this is the correct treatment, but it involves an enormous amount of compliance and I think there’s also a massive amount of non-compliance because the policy is both unknown and seems counter-intuitive to a lay person. (It would be fun to see the Commissioner, or some MPs, try explaining to a person they must withhold tax on the interest payment they make from a UK bank account to another UK bank). This is an area where there’s a great deal of complexity and I don’t think the policy when the withholding tax rules were set up in the late 1980s was intended to catch such situations. (Separately, it’s another area where some thresholds have not been updated for inflation in some time). In summary it’s a ripe area for simplification. Over to you Minister.
What tax tattoo would you get?
And finally, what tax tattoo would you get? This was one of the less serious topics discussed at the IFA Conference and yes, alcohol was involved. For me, the winning suggestion was to tattoo Generic Tax Policy Process on one set of knuckles and BBLR Board Based Low Rate on the other, which puts a rather nice tax spin on Robert Mitchum’s sinister preacher in The Night of the Hunter.
That’s all for now. 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.
Inland Revenue guidance on the new 39% trustee rate
Briefing the Minister
Tax credits or threshold adjustments?
The Finance Minister signed off 2023 rather like a Shortland Street season finale, leaving us all guessing as to the exact extent of the proposed tax cut package and when it might apply. We were told at the Half Year Economic Fiscal Update Mini-Budget on 20th December we could expect more details shortly. But now it’s February and we’re no wiser. It now appears likely we’ll have to wait until the Budget in May for full details.
A 39% trustee tax rate?
On the other hand, the business of government carries on and we will know early next month whether the coalition government will proceed with increasing the trustee tax rate to 39%. That’s when the Finance and Expenditure Committee reports back on the Taxation (Annual Rates for 2023-24, Multinational Tax, and Remedial Matters) Bill. This is the annual tax bill currently before Parliament which proposed the increase to 39%. It must be passed by 31st March.
The FEC heard oral submissions last week, and I note that (previous podcast guest) John Cantin thinks it’s most likely that the tax rate will go ahead. This is even though such evidence as we’ve seen suggests that a 39% tax rate for trusts probably represents over taxation of many trusts once the wider family context is considered.
I tend to agree with John that the rate increase will go ahead, in part because it is a base protection measure as it aligns the trustee rate with the top individual tax rate. But also, the Government will probably be grateful for some additional revenue to counterbalance the lost revenue from the proposed tax threshold adjustments. That said, I know a number of submissions proposed that some sort of de minimis threshold is introduced, and the rate of 39% will only apply on the excess.
Inland Revenue’s view on tax planning for the new 39% rate
Meantime, and rather helpfully, Inland Revenue released last Friday some high-level guidance about how it might perceive taxpayer transactions and structural changes ahead of a rate change. General Article GA 24/01 proposed increase in the trustee tax rate to 39% has been released in response to requests since the rate was proposed for guidance on how Inland Revenue might perceive some transactions.
GA 24/01 contains several examples of possible transactions and how Inland Revenue would view the transaction. The first example is a company owned by a trust which changes its dividend paying policy. Inland Revenue considers a company is entitled to change its dividend paying policy and while taking into account the funding needs of shareholders and applicable tax rates, it “is unlikely without more (such as artificial or contrived features) to be tax avoidance.”
The example then notes Inland Revenue might have concerns if the company could pay a dividend by crediting shareholder current accounts, but “objectively has no real ability to pay those credit balances if it was to be liquidated.” In other words, the company tries to pay a dividend ahead of the trustee rate increase but doesn’t have the funds to pay the dividends in cash in full.
Another example is of a trustee choosing to wind up a trust. Again, GA 24/01 suggests such a step is “unlikely without more (such as artificial or contrived features) to be tax avoidance.” GA 24/01 also looks at the question of trustees investing in Portfolio Investment Entities instead of other available investment options. The advantage here is that the maximum rate applicable to Portfolio Investment Entities is 28% Again, Inland Revenue concludes such a step is unlikely without artificial or contrived features to be tax avoidance.
That said, Inland Revenue is going to continue to gather information on trusts and something it has said would be of concern to it is where income is allocated to a beneficiary taxed at a lower rate, and then instead of actually being paid out or being fully available to the beneficiary, is resettled back on the trust. In effect, the beneficiary has not benefited from the distribution.
The allocation of income to a beneficiary, where the beneficiary actually doesn’t know of an allocation or has no expectation of receiving the income together with replacing dividend income with loans “in an artificial manner”, are other alternatives which would concern Inland Revenue if there’s no real commercial reality behind the arrangement. And then artificially altering the timing, ie: bringing forward or deferring any taxable deductible payment, particularly it’s linked to existing contractual terms or practise for the date of payment.
These are just a number of scenarios which might play out. And clearly Inland Revenue’s watching. As I said, we really won’t know what the state of play will be until early next month when the FEC reports back, and when it does, we’ll let you know. But as I said, the expectation I have is we should see that tax rate increase.
The Tax Principles Act may be gone but its first draft report lives on
Moving on, one of the first things the coalition government did was repeal the controversial Tax Principles Act. Nevertheless, the draft report that was due to be produced under the Tax Principles Act has been proactively released and it makes for some interesting reading.
The report gives a background as to why it’s being prepared, its reporting obligations, and it explains what are the tax principles that were measured. These were included in the Act – efficiency, horizontal equity, vertical equity, revenue integrity, compliance and administration costs, flexibility and adaptability and certainty and predictability. Incidentally, a lack of certainty and predictability was one of the objections that was made about the Tax Principles Act because didn’t go through the full generic tax policy process.
Inland Revenue was required to assess the principles, against four measurements:
Income distribution and income tax paid;
Distribution of exemptions from tax and of lower rates of taxation;
Perceptions of integrity of the tax system, and
Compliance with the law by taxpayers.
The report has lots of interesting graphs including the taxable income distribution for individuals for the 2022 tax year which shows a wee spike around the $180,000 mark.
I think that’s rather revealing even if there are apparently only 4,000 individuals involved. But still for those taxpayers you may need to have a good explanation of what’s going on.
There’s a graph showing how average tax rates rise as income rises. This graph tops out at $300,000, by which point the average tax rate has risen to 32.3% for someone of that income.
But what I thought was quite interesting were the graphs looking at the average tax rates from 2012 to 2022. In particular the graphs illustrated the effect of inflation combined with the non-adjustment of thresholds. That’s an issue I’ve talked about frequently and threshold adjustments we think will be at the core of the Government’s proposed tax relief package expected to be rolled out later this year.
The report notes between 2012 and 2017, the average tax rate for the most common regularly employed worker increased by 0.1 percentage points. Not too bad. But from 2017 to 2022 it increased by 1.2 percentage points. That’s quite a more significant example. Overall, in the period between 2012 and 2017 it rises from 14.9% to 15% and then rose between 2017 and 2022 to 16.2%.
This is the fiscal drag (or bracket creep) I discussed with Susan Edmunds of Stuff. It’s been an issue for quite some time. As wages rise faster, they drag persons on average incomes into a higher tax bracket. It will be interesting to see how the Government addresses it, and I’ll talk about that in a few minutes.
There’s plenty of other material to consider. There’s an interesting stat that the top decile of taxable income earners paid 44% of personal income tax. The report notes that the same group earned 33% of total income and suggests this is a better indicator of progressivity in the tax system than the fact that 44% of tax is paid by the top decile.
The arguments will rage around the progressivity and fairness, David Seymour of the Act Party for one has been talking about this area. Overall, there’s a lot to consider in the report. Interestingly, in the note to Cabinet regarding the repeal of the Tax Principles Act, the new Minister of Revenue Simon Watts suggested that much of this data could be made separately available, perhaps as part of Inland Revenue’s annual report. I hope we do see that, because for some time I’ve felt that the discussion around bracket creep, fiscal drag and thresholds has been sort of sidelined because governments have been not too keen to discuss it in great detail.
Briefing the Minister
Mentioning the new Minister of Revenue Simon Watts, another report released last Friday was the Briefing to the Incoming Minister. I think some of the data that’s been included in this draft report under the Tax Principles Act, would normally go into the Briefing for Incoming Minister.
What I found interesting in the Briefing was Inland Revenue’s discussion around where it’s at and the effect of the completion of the Business Transformation Programme which has allowed it to “deliver significant cost savings”. For example, the Briefing notes the amount of revenue collected for the year ended 30 June 2023 grew by 62.5% compared with the year ended 30 June 2016, the last full year before transformation began. Over the same period, the number of Inland Revenue full-time equivalents reduced by 29%.
There’s been a lot of talk about government cuts for the public sector, but I think the Briefing subtly, or not too subtly, you might say, raises a good question – if an organisation has managed to reduce its headcount by 29% and its funding is not tracked with inflation since 2017, which appears to be the measure for the basis of these public spending cuts, why would you add further cuts?
My view would be, and I think I wouldn’t be alone in thinking this amongst tax practitioners, is that Inland Revenue is under a bit of strain. We know it probably needs to boost its investigations efforts. So why it should be on the chopping block when it’s already done much of what any government would want it to do – more with less. But we’ll see how that plays out.
I thought the amount of commentary in the Briefing around the question of funding this point was quite interesting. It notes that for the year, to June 2024, the department gets about $800 million a year. And at October 31st 2023 its workforce was 4,231. Whereas back in June 2016 it was 5,662. And by the way, the report also notes the department has planned for taking a $13.9 million reduction for the year to June 2025, which was announced by the previous government in August 2023.
According to the Briefing funding would be running around about $700 million going forward, but then adds something the government should probably pay attention to.
“Our primary cost pressures in out years will be remuneration and inflationary cost pressures on technology as a service contracts, accommodation, leases and other operating costs. We are currently developing options for meeting these costs and we’ll report back to you on these matters.”
I know speaking as an employer and along with other colleagues, finding staff is difficult at the moment, so that puts pressure on salaries, obviously. And Inland Revenue is not immune to that because it needs to pay near market rates to attract good quality people, because as the gamekeeper, so to speak, it needs to match the poachers on the other side. Like so much in the year ahead it will be interesting to see how the Minister settles in and what happens with Inland Revenue’s funding.
The shape of things to come – tax credits or threshold adjustments?
And finally, coming back to what lies ahead, as I mentioned at the start, the Half Year Economic Forecast Update left us none the wiser as to the nature of the threshold adjustments, which we think are going to happen. In that gap. David Seymour of ACT has come forward and talked about the ACT policy, which is to simplify the tax rate structure down from the current five rates down to three, with a top rate of 33%. This is moving back to the rate structure which applied from 1989 through to 2008. Basically, until 1 April 2000 (when the 39% rate was introduced) there were two main rates with a tax credit adjustment for low-income earners.
David Seymour talked about tax credits similar to the existing Independent Earner Tax Credit. But as I told RNZ while the concept’s not uncommon, there’s still the issue we discussed earlier. What about adjustments for inflation and keeping the true value of that, otherwise lower rate/ lower income earners will face higher effective marginal tax rates.
There’s also a certain complexity with tax credits. The thing about applying thresholds across the board to everybody, it’s pretty straightforward. Whereas with tax credits, if there’s a claim process that’s involved, not everybody will claim that. It introduces a bit of complexity at the bottom end, which Inland Revenue’s Business Transformation was determined to do the opposite in order to try and make it as easier for most taxpayers to comply.
As mentioned, we have the independent earned tax credit, but it starts cutting out at $44,000 and then drops out at $48,000 once income crosses that threshold. We’ll have to wait to see what happens and in the meantime there will be plenty of debate ahead. We will bring all of those developments to you as usual.
In the meantime, that’s all for now. 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 United Nations Conference on Climate Change, COP 28, has just wrapped up in Dubai. The current Minister of Revenue, Simon Watts, is also the Minister of Climate Change so he attended the conference on behalf of the Government. There has been a lot of debate about how far COP28 has moved change forward although an agreement was finally reached on beginning a phase out of fossil fuels.
Now, coincidentally, or maybe not, as COP 28 was ongoing, the Climate Commission released its final advice to inform the Government’s plan to meet Aotearoa New Zealand’s greenhouse gas reduction goal for 2026–2030.
Briefly, the report says that the Government needs to take active steps to encourage change by removing barriers and supporting investment that cuts climate pollution. The Commission’s analysis is the country has made progress, but it is not on track to meet its climate goals for the end of this decade. In the Commission’s view, that means that we will be missing out on benefits like new jobs, a more resilient economy and healthier communities.
In all there are 27 recommendations which are focused on areas where the Commission sees there are critical gaps in action or where efforts need to be strengthened or accelerated. A couple of these are encouraging households and business to switch to electric vehicles and making it easier for more people to choose public or active transport. Key thing here which I think everybody would agree with, is sorting out the roles of the Emissions Trading Scheme and forests in achieving these objectives.
The paper, all 193 pages of it, does refer to tax being one of the tools to be used. For example,
“To support the transition to a low emissions economy, incentives need to be designed to overcome near-term capital constraints to businesses shifting their existing assets and processes to low emissions alternatives. To support this, the Government could explore amending components of the tax system (for example, adjusting depreciation schedules and rates for eligible projects).”
Overall, the Commission has no specific tax suggestions beyond such general suggestions.
Replacing the Ute Tax – a UK suggestion
As it happens, this week the Government repealed what it called the Ute tax and with it the current clean car discount scheme, which seems at odds with the report of the Climate Commission. In the Government’s Coalition Agreements, there was a proposal from ACT for “Work to replace fuel excise taxes with electronic road user charging for all vehicles, starting with electric vehicles.”
Now that also seems at first sight to be contrary to the Climate Commission’s recommendations for reducing emissions. But this week I came across a major report on the UK economy called “Ending stagnation. A new economic strategy for Britain”. This has been produced by The Economy 2030 Inquiry.
The TL:DR (too long: didn’t read) of this 293-page report is that Britain is in a far bigger mess than we might appreciate, and Brexit has done nothing to improve its position. The report has a whole heap of recommendations, including, inevitably, suggestions around changing the tax system which is what attracted my initial interest. I’m always interested to see what’s going on around the world and what goes on in Britain affects quite a large number of people here, either expat Brits or Kiwis who have family in the UK. I have several cases on the go at the moment involving UK New Zealand tax matters.
The report suggests one of the major challenges the UK economy faces is a transition to Net Zero. Which is also a challenge we face. As part of this the report makes the following suggestion:
“Our tax system also needs to keep pace with net zero transition. To ensure the burden of motoring taxes does not fall on poorer households yet to switch to electric vehicles, a 6 pence per mile charge (equivalent to fuel duty), should be introduced for [electric vehicles].”
Viewed in this context and stepping back from the emotions around the repeal of the Clean Car Discount, ACT’s proposal makes sense. Encouraging people to take up EVs is what we want to do long term. But that doesn’t mean those people should have a free pass indefinitely. EVs will soon be subject to road user charges which would be similar to this UK proposal. Therefore charging EVs some form of charge is not unreasonable.
My philosophy around environmental taxes is that the revenue from any such fund raising measures should not go into the general pool of taxation, but instead be ring fenced and applied for environmental measures. In this case my belief is those funds could be used to assist people to swap out older cars into newer cars. Those newer cars may still use fossil fuels, but they will be more fuel efficient, and that’s a worthwhile goal because it does reduce the motoring burden and emissions.
Time for a land tax and “mild increases” in tax revenues?
Incidentally the Economy2030 inquiry report specifically references our post 1984 economic transformation and how we dealt with the change involved in major economic reforms. Given Britain is pretty much in a huge hole and needs to change dramatically, the report looks at how we managed our transition post 1984. As part of that, a separate paper was prepared for the Inquiry by the former Reserve Bank of New Zealand Chair Arthur Grimes.
Incidentally, and in what’s becoming something of a trend for the new Government, Mr. Grimes’ paper makes suggestions contrary to the Government’s actions and intentions. Specifically, around tax breaks for owner-occupied rental housing, his report notes the current policies “increase wealth inequity.” He also believes a “mild increase in tax revenues will eventually be needed”. His suggestion is for “broadening the range of taxes to include a land tax, the most efficient and (vertically) equitable tax available to the Government, should be considered.” I can hear Raf Manji and the members of TOP cheering at this.
Anyway, there’s a lot to read in Arthur Grimes’ paper. I think it’s a good summary of what we went through and how our experience is relevant for other economies.
The deductibility of staff retention payments
Inland Revenue released an interesting Technical Decision Summary about payments made to retain key staff as part of a sale of a company. What happened was the company was being readied for sale and as part of this process the company entered into retention agreements with key staff. These were variations to their current employment agreements which entitled the key staff to bonus payments calculated by reference to their salaries.
And the idea was to incentivise these key employees to remain with the company to enable the ongoing smooth running of the company during the sale process. The payments were made prior to completion of the sale and were conditional on the employees remaining continuously employed by the company on the relevant payment dates.
The company in this case considered a portion of the retention payments were capital and therefore non-deductible because they were part of a capital transaction being the sale of the business. The case finished up before the Tax Counsel Office and its Adjudication Unit which decided that in fact the retention payments could be deductible in full as the capital limitation did not apply.
This is a very fact specific case which is often the case with Technical Decision Summaries. However, they do give insights into how Inland Revenue might approach a particular case. Bear in mind each is very heavily contingent on the facts. Nevertheless this is an interesting one which turned out to be a good result for the taxpayer.
HM Revenue & Customs One – ChatGPT Nil
On the other hand, it did not go well for one Mrs Harber over in the UK who in her appeal against various HM Revenue and Customs (HMRC) assessments used ChatGPT as part of her research.
She then presented these “cases” in evidence.
Unfortunately for Mrs Harber none of these cases were real, ChatGPT in its enthusiasm had just simply dreamed them up, and Mrs. Harber hadn’t realised this.
In fact, she asked the tribunal how it could be confident that the cases relied on by HMRC were genuine. The tribunal pointed out that HMRC had provided the full copy of each of those judgments and not merely simply a summary as she had done, and the judgments were also available on publicly accessible websites. Mrs. Harber had not been aware of those websites.
She obviously lost the case, but the Tribunal generally took her approach as more of misunderstanding her obligations so did not penalise over heavily in terms of costs, awards. But it is an interesting commentary on the perils of making use of ChatGPT and the need to have discernment.
WorkRide FBT exemption update
Last week I discussed the WorkRide Product Ruling Inland Revenue had issued which would give an FBT exemption to employers providing E scooters, E bikes and the like. I originally stated there’s a cost limit of $4,000.
Subsequently a couple of people contacted me and asked if that limit was correct. It’s not. I was actually referencing a submission I’d made to the Finance and Expenditure Committee proposing a FBT exemption. In fact, the limit will be set by regulation, but that limit has not yet been passed nearly nine months after the relevant legislation was passed. It’s expected by the way the limit will be higher than the $4,000 sum I mentioned. My apologies for the confusion.
What’s the character of the year?
Finally, what is the character of this year? It turns out that in Japan it is a tradition to decide the character (kanji) of the year in mid-December. Over in England, Professor Rita de la Feria the chair of tax law at the University of Leeds, heard from a student that the kanji for 2023 has just been announced and it is 税, or “tax”.
On that bombshell, that’s all for this week. Next week in our final podcast for 2023 we’ll be reporting on the Half Year Economic and Fiscal Update and the accompanying Mini-Budget.
Until then, 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.
