The benefits of tax pooling, with TMNZ’s CEO Matt Edwards

The benefits of tax pooling, with TMNZ’s CEO Matt Edwards

  • Talking provisional tax

My guest this week is Matt Edwards, the CEO of tax pooling company Tax Management New Zealand (TMNZ). Morena Matt, welcome to the podcast.

Matt
Good morning, Terry. Thanks for having me this morning.

TB
Not at all, our pleasure. Now you’ve just celebrated your first year as CEO of TMNZ, but you have a quite an interesting background. Prior to joining TMNZ what were you doing and what insights did you gain from?

A 12-month OE which lasted 20 years

Matt
So it’s an interesting story, Terry. I was born in New Zealand and went to university in New Zealand and after I thought I I’d had had enough of small-town Wellington, which is where I grew up I got on an aeroplane and went over to the UK for a 12-month getaway I suppose you’d call it, and 20 years later I I came back, which is which is how it panned out.

I spent the majority of my career involved in what we call Fintech, so that’s basically the intersection of financial services and technology. During the time I was in the UK, I built a couple of fintech businesses, the biggest one was a marketing services business actually that connected financial advisors to customers. So that was a very fun journey and that was going back, gosh, we started that business in 2010, I think.

So that was a little while ago now. And this was when Internet and Internet services were not brand new but still emerging a little bit. So, we were kind of on the cutting edge of that.

I sold that business to private equity five years later or so and then I got involved in running and developing portfolio businesses for private equity. The last business I was involved in, in the UK was actually a life insurance business. We were reimagining the way life insurance is bought and sold and consumed by the end user.

So, yes, most of that time has been spent taking technology and putting it into legacy businesses and seeing how we can make those businesses more efficient. So now I’m finding myself involved in tax and tax pooling, which is arguably a legacy business, having been around for 20 years.

TB
Yes, that’s the surprising thing about tax pooling. It seems relatively recent, but it’s now over 20 years old. Your career is interesting because you’re not coming from a tax background. On the other hand, TMNZ’s founder Ian Kuperus and its previous CEO, Chris Cunniffe both worked at Inland Revenue. But you’re coming with a different perspective, so I’d be interested to hear more about that and how you build on this legacy system. But just as a quick recap, what is tax pooling and how does it work?

What is tax pooling?

Matt
What it fundamentally is, when you when you boil it down, it’s a pool of tax sitting within Inland Revenue that has obviously been paid in at particular day. It’s used for provisional tax payments, and what that pool allows us to do is essentially in very simple terms, move tax payments around.

So, if your business has overpaid on a provisional tax payment and another business that’s underpaid on that payment, we’re able to essentially swap those payments around. So, what that means is the business that has overpaid benefits from a slightly higher use of money interest rate on that. And the business that has underpaid avoids some penalties and use of money interest for the gap between the dates they’ve paid, and that pool is significant.

From a TMNZ point of view, our pool can be as high as $10 billion and there’s other competitors in the market that do tax pooling as well.  So you’re talking about a significant amount of tax that operates under the pool. Well into the multiple billions of dollars, so that’s at a very high-level what tax pooling is or how it works. Once you get into the detail, it becomes some more complex obviously.

TB
But just to clarify for listeners, you don’t actually hold that money, you and all the other tax pooling companies do not have $10 billion sitting in your bank accounts or accounts, and Inland Revenue gets notified that those payments are going across so they can see your balances and who has made payments.

Matt
Yeah, that’s right. It operates under a trust arrangement, so TMNZ or other tax poolers don’t actually physically touch any of those funds. They go via a trust arrangement and then they go into the Inland Revenue pool. So no, unfortunately we don’t have $10 billion on our balance sheet, although that would be lovely if we did.

TB
Indeed.  Actually, a key point about it is, if you’ve paid into a tax pooling account, one of the other advantages is you can withdraw those funds at any time. You do not need Inland Revenue’s permission to withdraw the funds, so that gives a bit of flexibility.

The benefits of tax pooling

Matt
Yes, while the money sits in the pool effectively you can think of that as quasi liquidity for the business. It can be withdrawn at any time and the interesting thing about it is there’s no cost implication other than perhaps a very minor bit of administration from a business to use the pool, whether they require tax pool and products on the end of that or not.

This is interesting because when you look into the market, you’d expect when you look at tax pooling that every single business in New Zealand would make all their tax payments via the tax pool, because there’s no downside. The interesting thing about it is for an industry that’s been around for 20 years. there are still thousands of businesses out there that are not using tax pooling and we’re not paying their tax via the via the pool, which is quite surprising when you consider that there’s absolutely no downside for a for a business to use it.

But you you’re quite right, you can pull that money back out of the pool at any time, and there’s various mechanisms for doing that. But if needs be, yes it can be drawn back down out of the pool.

TB
Yes that is true. This sounds so completely strange. Why would we do that? And I think there’s always inertia. Well, you know, the old accounting matter, what did we do last year? Look at what we did last year, and we’ll do it again this year.

TMNZ was the original tax pooling company, but you have several competitors in there. Still from what you’re just saying, the market is not saturated so to speak, there’s plenty of scope.

So why doesn’t everyone use tax pooling?

Matt
No, and what’s interesting about the tax pooling industry is when you explore the stakeholders that are involved – you’ve got your taxpayer, obviously you’ve got your tax filing company, which in my instance is TMNZ and you’ve got your accounting services, and you’ve got Inland Revenue – there’s absolutely no downside to any of those stakeholders in the process.

So, everybody is a winner, and I think you’re right, Terry. I think It’s inertia. “Hey, we’ve never done this. We’ve never paid through the tax pool. Why would we do this?”

It’s nuanced to sort of understand why would I do this? I have a tax bill. I  pay that to Inland Revenue. That’s how it works. And I think the other challenge you have is quite often from an advisor if they’ve not been engaged to a level where they’re able to provide advice on using tax pooling or an efficient way of operating tax payment, they’re probably not telling their client that.

So it is an inertia thing and it’s really interesting because  in my experience, typically by the time a business model gets to 20 years old, you know you’ve reached the top of the bell curve. At the moment, the market is not saturated and you’d expect that most people who it’s applicable to would be using it. And it’s just simply not the case with tax pooling. There’s still many, many businesses out there that aren’t using it. From my point of view, that’s super exciting, because it means there’s a great deal of market out there that’s to be captured.

Using tax pooling beyond provisional tax

TB
Yes, indeed. Now primarily tax pooling developed around provisional and terminal tax, particularly. And as you said, the key thing to understand is this arbitrage between the use of money interest Inland Revenue will charge and late payment penalties which I think frankly is a little rude

But if you’re charging 9.89% interest on overdue debt, then for the largest taxpayers such as the banks or the New Zealand Superannuation Fund their cost of funds is way below 9.89% and so they have the real problem of saying “we underpay our tax, we get crippling interest, but if we overpay our tax, we have no access to the funds.”

So, those taxpayers are very keen users and probably in every sense of the word, your biggest customers. But tax pooling has developed beyond provisional and terminal tax, hasn’t it? You can actually use it for other taxes, including GST for example. In what circumstances can you use tax pooling for those other taxes?

Matt
If you’ve got funds in the tax pool you can use those funds to pay any of your standard corporate taxes that typically wouldn’t be used to pay a social tax. But in a business context you can use pool funds to pay any kind of tax.

So, if you’ve got $100,000 sitting in the pool then you can use this to make a GST payment. Having said that, you can’t take advantage as you described it of the arbitrage or the advantage and penalties and interest payments with other tax types.

So, if you’ve missed a GST payment and you’re incurring a penalty and interest against that, then tax pooling and won’t help you in that situation unless it’s a reassessment.

Tax pooling and reassessments

Matt
So under a reassessment (assuming that you’ve acted reasonably and responsibly, and you’ve filed your tax returns appropriately) because there’s been a mistake made, there’s a calculation error, an advice error –  in that instance you can use tax pooling to mitigate what those penalties and interest payments would be under the under the reassessment situation. But generally speaking, the tax pooling regime is focused on income tax or provisional tax payments.

TB
I’m just talking about reassessments; that’s quite an important thing because that’s happening all the time. For example, Inland Revenue just recently trumpeted how it has raised over $900 million through reassessments. That’s where it really comes in handy, and you’ve got tax going back for quite some time

Matt
The truth is we’ve got tax going back to 2007/2008 and the tax pool, which is a fascinating thing, when you think about it, should fall into a reassessment situation going back considerable amounts of time when you consider the interest implications over the course of seven or eight years. This could be significant in those situations.

TMNZ’s unique selling proposition

Matt
The big USP we have being the incumbent is because we have tax going back that far. It’s highly likely that we can do something should you fall into that kind of reassessment situation and that interest is compounding on what’s owed. Over time, it’s obviously becoming a big number.

These are obviously not everyday instances, but when they do occur, they can have significant impacts on savings for the businesses involved.

TB
Can you put that in context back in 2007/8?  I think use of money interest rates reached a peak of 14.24%. So, if you’ve got something from there, you’ve been a very naughty boy. But as you say the savings would amount to tens of thousands of dollars.

A surprising fact about TMNZ’s customers

Matt
Yes, they can be hundreds of thousands of dollars depending on the circumstances.

That’s also what’s interesting, Terry. You may have been a naughty boy or a naughty girl of course. But you know, I reviewed the stats on reassessments and when you look at it, and don’t quote me directly on it, but 65% of reassessments through Inland  Revenue come from technical mistakes. They don’t come from someone trying to game the system or not pay their tax.

A better way to put that is, it’s compliant taxpayers that have made a mistake. Either because of the advice they’ve been provided, or they’ve simply made a mistake.

In that situation, where you’ve got a compliant taxpayer, a mistake has been made that goes back a number of years, which has a large implication from a cost point of view on that business. It’s brilliant, then, to be able to save some money across it because they really don’t deserve to be aggressively penalised in that situation, I suppose.

TB
Just quickly about compliant taxpayers, that’s 65% estimate figures out in my experience. Tax is complicated and I’m perennially advising clients on the question of how our Foreign Investment Fund regime operates, it is really quite an alien concept to people who come from Britain, for example, where there is a capital gains tax regime or the United States.

The Inland Revenue has the ability to charge shortfall penalties as well as interest. But typically, in my experience, if you come forward and said “oops, my bad”  only use of money interest will be payable, which is when you come in and mitigate that.

But I’ve yet to encounter many instances where shortfall penalties have also been thrown in there, and it leads on to what you’re seeing from Inland Revenue at the moment.

So obviously you get to deal with a lot of reassessments.  Are you aware from Inland Revenue has the scale of those reassessments increased in the past few years?

Matt
Bearing in mind that I’ve only been looking at it for the for the last 12 months, I don’t have a deep amount of data to look back into. Personally, I think the challenge for Inland Revenue now is growing tax debt.

The reason tax debt is growing is when you look at the cycle we’ve been through over the last five years –  with COVID in particular that introduces a situation where businesses really don’t know what’s going to happen. There’s nothing you can compare that that to.

Inland Revenue’s post-COVID approach

Matt
A huge amount of money then went into the economy to obviously booster  the COVID situation which gave businesses a boom period. Really there were low interest rates and a huge amount of money sloshing around the economy.

We’ve gone straight from that to a very high-interest rate period – which let’s be honest – we haven’t experienced for decades, really. When you look at that run on very low interest rates for a long time, when you look at what those businesses have done, they’ve had COVID and then they’ve gone through this real boom period. Then it’s suddenly gone down.  That’s impacted businesses, but of course they still have tax to pay from previous years.

The tax debt is growing, and I think the interesting challenge from Inland Revenue’s point of view is yes, they’ve been very clear both directly in the media and with our communications that they are in the market to collect more tax. They’re going to do more assessments. They are doing more reassessments, but they’re also juggling that against the fact that businesses are going through tough times now.

So, the challenge for them is determining between a business that’s just not being responsible, not paying their tax, and will never be able to pay their tax, and a viable business that’s just going through a difficult period and actually needs  support through that period. And to be quite honest with you, with what I see, I think they have been and continue to be very good at trying to support those businesses to get them compliant again, to pay the tax and basically for it not to be a business ending event for them.

When you look at government expenditure and tax debt, or when you have a look at the budget that’s about to come out, there’s a big incentive to collect tax. I think that that IR’s approach is pragmatic Is probably what I would say there.

TB
I totally agree with all of that. And just to repeat a point we often make on the podcast, if you get into trouble with Inland Revenue, talk to them. You’d be surprised at how reasonable they are prepared to be. Unless, as you say, the taxpayer has been grossly irresponsible.

Matt
And I think you can separate those two categories relatively easily. But it’s surprising how many businesses are still reluctant to want to interact directly with Inland Revenue. If a number shows up on the phone, it’s Inland Revenue or it’s unknown and the reaction is “I’m not going to take that call.”

The interesting thing is though, if the number shows up on the phone and it’s TMNZ or a tax pooling solution, then the incentive to take that call and actually deal with the problem grows.

We can all play a part in this that delivers an outcome that’s best for everyone. So I think the days of super aggressive Inland Revenue – and you know some of the stories we heard in the past – those days have gone. But nevertheless, I think business owners still enjoy that friendly face of dealing with someone who isn’t ringing from Inland Revenue.

The impact of Inland Revenue’s Business Transformation

TB
Yes, absolutely. COVID is a very interesting thing because looking back over this, I talked to your predecessor, Chris Cunniffe,  five years ago in December 2019. Time flies but in that time, we’ve had two big events. The first being COVID, which we just talked about and clearly that’s having an impact.

But the other thing that was just happening when I last spoke to Chris in December 2019 was Inland Revenue’s Business Transformation programme. And that was, as  you know, a huge project that was carried out and came in on time and under budget. How has Business Transformation played out from your perspective?

Matt
Obviously, my perspective is slightly different coming in after that project was completed, I think Inland Revenue has done an incredible job of digital transformation when you frame that up under the context of the complexity that they’re dealing with and the legacy nature of tax collection.  I think when you look at Inland Revenue they’ve done a great job with that.

But I think from my perspective, what’s very interesting with my interactions with them, they’re still extremely open minded and extremely motivated to continue to make their function, which is tax collection, essentially more and more efficient. And what’s super interesting about that is they very much see this now as an ecosystem place.

How do we make the tax system more efficient for everyone? And when you look at where the technology is going and our ability to connect directly with Inland Revenue and their ability to connect directly with us from a technology point of view, there is the potential to make the function of collecting tax easier, more efficient, less burdensome and costly for business.

The potential there is still significant and that excites me because that’s really what I do and what I enjoy doing. But what probably excites me more is Inland Revenue’s openness to actually pushing this further and further. And the fact that they accept that it is an ecosystem, especially from a technology point of view.

And if we work together on that, we can really make a more efficient system. Although the transformation project itself may be over, we continue to work with them on what I would argue is pretty exciting stuff from a technical point of view.

Liaising with Inland Revenue

TB
This is where your experience in the fintech sector is absolutely crucial. You’re touching on that you would have regular contact with Inland Revenue. You’d actually be meeting the senior officials there and talking these matters through as well, because there’s a specifically dedicated unit within Inland Revenue that manages tax pooling. But apart from the people there, you’re also meeting the senior honchos.

Matt
Yes.

TB
And how frequent are those meetings, and what insights have you gained?

Matt
Yes, we speak to the most senior officials and Inland Revenue on a regular basis. There are probably two angles that takes. One is more from a framework point of view. How can we take tax pooling and actually enhance what that’s doing for business and enhance what it’s doing for Inland Revenue?

Although I won’t go into details of that now, we’ve got some pretty interesting stuff that we’re working with now. To use tax pooling I suppose to try and help businesses through this period. I would argue that that touches closer to policy. So we speak to them regularly from a policy point of view which is very interesting.

And then we have a totally other side of the equation where we’re talking to them specifically about the technology the digital side. So, there’s two tranches there and you’re quite right, it’s quite interesting you know, without naming names, the people we speak to are the top people at Inland Rrevenue. So there’s good communication channels there, direct access and they’re very open to that, which means we can do cool stuff.

Comparisons with the UK

TB
How does that compare with your experience in the UK? Did you have, or need to have such interactions with HM Revenue and Customs?

Matt
No, that’s very interesting. The chances of sitting down with the executive team at HRMC in the UK and discussing this stuff from the UK context would be very, very unlikely. So, one of the cool things about New Zealand is that I can pick up the phone and speak to the Commissioner of Inland Revenue if I need to. It also means that we can do cool stuff. So that’s completely different to the environment that you had in the UK.

So yes, it’s a real upside that New Zealand has right. As a smaller country we all sort of quasi know each other which is quite an interesting difference between things in the UK and New Zealand.

TB
Yes. Mind you, I think I’d take a call if I knew that person was holding $10 billion in tax.

Matt
Well, that’s probably not the way we sell it, but yes, I know.

Looking ahead

TB
You’ve now had 12 months under the under the hood looking around, and you’ve come from this background and clearly you’ve got things in progress. Without revealing any state secrets or anything, what improvements or changes do you think you you’d like to see?

Matt
It’s an interesting perspective. Obviously I’ve come into this with completely different eyes to the people that have traditionally been running tax pooling. You know Chris and I’m sure you’ve met Ian before; you know these guys are very experienced career tax people.

I’ve come in from completely the other angle. The big challenge that I’ve thrown down is, as I said earlier in our conversation, why are all businesses not using tax pooling? Even if that is simply just paying their tax into the tax pool and then transferring that tax to Inland Revenue.

There really is no reason that all businesses shouldn’t be doing that. The fact is, when you look at it, I roughly think, 40 or 50% of New Zealand business still don’t use tax pooling in in any way.

It’s also probably worth saying that I’m agnostic as to whether they use TMNZ or another tax pooling company from a high level. I just want every business to use tax pooling because of the benefits.

So when I ask myself “well, how do I address that challenge?” This gets into the strategy off running the business. How do I help all businesses to use tax pooling. When you stand back and look at it there’s inertia in a lot of instances to actually using tax pooling.

Some of that’s technology, some of it’s a reliance on a tax advisor or an accountant being able to advise on how your business can use it. And you know there’s two things there as well. That advisor needs to be able to charge for their advice, obviously. But they also need to have the knowledge themselves, and it’s quite interesting when you look into the market. I think of tax pooling all day, so I assume everyone understands it to the level that I do.

Making tax pooling accessible

Matt
That’s simply not true, even within the accounting fraternity. So the real challenge is how do we make this accessible and simple to all New Zealand businesses so they can all use it.

Now if we want to look for an analogy, if you consider a credit card, a mortgage, an overdraft facility or a bank account or insurance. Most people don’t understand the intricacies that go on behind providing those financial services. Almost nobody is going to read their hundred-page mortgage contract from end to end and analyse every point in that although maybe perhaps they should,

I don’t think we’ve got to that stage with tax pooling. From my point of view, it’s a case of how can we bring this product to market in an easy-to-understand way,  where you don’t need to understand it, just like you don’t need to understand the intricacies of how a credit agreement behind a credit card actually works.

I think at the moment that’s the piece that’s missing. How do I make it easier for an advisor to take tax pooling to their client? How do I make it easier for a client to understand how tax pooling works? How do we make this more transactional? Probably what I’m saying is,  I think if we can answer that question, I think we’ll rapidly see higher adoption through New Zealand businesses using tax pooling and obviously there can only be a win for business and for Inland Revenue.

Tax pooling an essential cash flow tool

TB
I totally agree with that and to reiterate here, because of the flexibility tax pooling provides, it is an essential cash flow tool.

Matt
It is and interestingly, when you get into it, and this is I guess, where we diverge between the way I think about it and the way I view the industry, and the way perhaps the tax advisor would view the industry, this is our cash flow smoothing tool, that’s essentially what it is.

You can almost dismiss the tax element to a level and say, “hey, you’ve got an obligation to pay money at a certain date that’s not aligning perfectly with your business model.” And let’s be honest, if you look at provisional tax payments, they’re set up under a model where you pay three times a year. There you go. Your business matches that. The reality is that there’s businesses out there that in extreme circumstances make all their revenue within two weeks. That sort of pay tax model versus the reality of your business model.

The chances of those aligning perfectly are quite slim, so it isn’t really about tax from that point of view, it’s about cash flow smoothing.

So, if you have an obligation and I can say to you, “ Terry, you can simply pay X amount per month and your obligation is settled. Or pay nothing for this quarter or pay nothing for next quarter depending on what you need.”

So that is the real USP. Save money on use of money interest, save money on penalties. These things are fundamental to what we’re doing. But at the end of the day, this this is a cash flow smoothing tool and it’s a source in certain instances of capital for business or capital at a rate that’s in most circumstances, especially in SME, that’s significantly cheaper than the cost of accessing other types of capital.

TB
That’s a really significant point. How our provisional tax filing dates developed is a whole other story but the long and the short of it, it was driven very much by the big end of town and that that’s they wanted the payments to align.

Matt
Yes.

TB
And fair enough for you are paying 80-90% of the tax. That’s not an unreasonable suggestion to make. The thing is, you’re only 10% of the businesses and the rest of us are all in this position.

Like you said, there are businesses that have two weeks to make their money and then there are businesses where things go quiet and suddenly, ”oh, January, I’ve been on holiday. Oh, I’ve got a provisional tax payment.”

I’d be interested to know if you see a lot of requests around the January 15th payment, the provisional tax and GST is quite a quite a thump.

The problems with paying tax in January and how TMNZ can help

Matt
For want of a better example let’s pick an industry. Let’s assume you’re in retail and Christmas is an important time for you. So ,you’ve just gone through that Christmas period and done a lot of trading. You’ve got a big GST payment coming up and then you’ve also got a provisional tax date sitting there. So in January it’s rough times, right?

Business has been falling through the floor because you’re through Christmas and suddenly you’ve got these two big tax payments coming, or May 7 could be another example of this.

So this is where the creativity and the ease of access is important. You’ve got GST and you’ve got a provisional tax payment owing on the back of that. So pay your GST that’s important. Always pay your GST because, and fair enough to GST, as a tax you’ve collected it’s not your money essentially, it’s Inland Revenues.

TB
Always pay your GST, folks.

Matt
Finance your provisional tax The rate that you pay on net finance for most businesses apart from the very top end of town is going to be significantly less than what you can use in your overdraft or short-term funding facility or however you’re funding your business. There’s a way we can smooth out that that cash flow quite significantly, and can do it at a rate that’s very, very competitive. From a business cash flow perspective, it’s perfect, instead of exiting all of that cash out of your business at one time. You remain a compliant taxpayer; and you pay a rate on that that’s very competitive compared to the other cost of capital.

But one of one of the frustrating things about the industry is what I’ve just described there. If we go out into the street and ask how many people are aware of this, the gulf is big and the number of businesses sitting out there that will using an overdraft facility that they could be paying 12/13/14/15% interest, to do this is significant.

When you think of the implications of that, in New Zealand we need economic growth. We’ve got a structure of problems in the country; we need to invest money into New Zealand. There’s a massive piece of capital that potentially goes back into the market that grows that business. The business gets bigger and employs more people, who pay more tax in the long run, so it’s a real win/win situation. That’s what excites me about it. It’s not necessarily about the provisional tax payment element of it, it’s about what this can actually do for New Zealand business.

What are the potential savings?

TB
Alright. That sounds fantastic and I totally agree with that strategy. It’s sometimes a difficult sell because you’re up against inertia. But potentially what sort of savings could we be seeing by adopting that approach?

Matt
It’s greatly circumstantial, Terry, obviously, so it’s very difficult to say “hey, X is the savings.”  So you can’t really take it from that point of view. If you consider a very basic situation, “ hey, look, I’ve fallen behind an income tax, I’ve got some income tax owing, and I want a solution for that.”

Depending on the amount of tax, you could be saving anywhere between 15 or 25% on what the cost implication would be if you choose not to use tax pooling. If, as we discussed earlier, you’re looking at a long-term reassessment situation then, obviously those savings could be considerably and materially higher. You know you may be getting into 30 or even 40% saving on what it’s  otherwise going to cost you.

The other thing as well that’s worth pointing out when we talk about savings is you’ll save money, and you know  I’m a businessman. And if I save a dollar, I think that that’s a job well done.

Saving money and staying compliant

Matt
So the savings will always be there. But I think the other thing that we shouldn’t lose sight over is that you also remain a compliant taxpayer. That’s a thing that we don’t focus on enough. So you save money, and you remain  a compliant taxpayer. I think that’s an important thing for the business, and I also think it’s a very important thing for the people advising that business to ensure that they remain in that category.

TB
I couldn’t agree more with you on that point. Often, I’ve come across situations where I’ve explained to clients “Well, this is the scenario, and this is the tax due.”  We’re not tactical magicians who wave a wand and the tax bill goes away. It doesn’t. What we’re often doing is  we’re mitigating the impact, explaining and bringing taxpayers up to date. More frequently than people might realise, I’m told “Well, that’s just a huge load off my mind.” People want to be compliant and they’re worried if they’re not compliant. When they hear A – we can make you compliant and B – this is nowhere near as bad as you thought it was, there’s a huge relief you can see, and the strain lifts. Particularly in the SME sector, where it’s bloody tough.

Matt
And you know, let’s be honest about it, you’re involved in tax every day. I’m involved in tax every day.  So we think that the whole world revolves around tax, and of course, doesn’t.

But you know, particularly in SME land, the people running those businesses, they want to focus on running their businesses. And providing whatever goods or services those businesses provide at the highest level that that they can. And that’s what they should be doing.

Access to expertise

Matt
They shouldn’t be sitting at home at night worrying about death and taxes as you say. And you know, to be able to provide a service to them that takes them  away from that, I think it’s tremendously valuable.  And the other thing, I don’t want to plug TMNZ services too much, I think it is worth the mention that ( I don’t count myself among these people) but the people we have working at TMNZ are tax experts. So often what looks like a very complex and very difficult situation can be worked through to a very advantageous outcome for the taxpayer or for the business owners.

That’s another thing that you get as a periphery benefit of using the tax pooling regime – you get access to those skills and that knowledge as part of the service, which again I think is something that along with remaining compliant, shouldn’t be lost sight of when we when we actually look at the service that we provide.

TB
Yes, you’re dealing with provisional tax regime, and even for an experienced practitioners like myself, we’re always thinking “wait, what? Oh, hang on, that’s over $60,000. Oops.”  It’s fantastic to be able to talk to your team and they’ll come back and show different ways of dealing with the issue.

That seems a good place to leave it there. This has been a very enjoyable and very insightful conversation. Thank you so much for taking the time to join us. Any final thoughts?

Matt
No, it’s been my pleasure, Terry. Thank you for having me on. I know that my point of view is going to probably be quite a different to what you’re used to on the tax podcast. So, thank you for giving me the opportunity. It’s also been very fun from my point of view as well.

TB
Excellent. That’s been great. Well, my guest today has been Matt Edwards, CEO of tax pooling company Tax Management New Zealand.

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.

Provisional tax is due so watch out for changes to the use of money interest rates and rules

Provisional tax is due so watch out for changes to the use of money interest rates and rules

  • Provisional tax is due so watch out for changes to the use of money interest rates and rules
  • Is it time for a residential land value tax?
  • More on the looming shortfall in the National Land Transport Fund

Transcript

The first instalment of Provisional tax for the March 2023 income year is due on Monday. Now, as most people know, if provisional tax is not paid on time, late payment penalties and use of money interest will apply. The interest rate on underpaid tax will increase from Tuesday 30th August from 7.28% to 7.96%. On the face of it, there’s a lot of incentive to make sure your payment is made on time. The rate, incidentally, for overpaid tax which has been zero for quite some time now, will rise to 1.22%.

There’s been consistent tweaking of the use of money interest rules to try and make it easier for businesses, particularly smaller businesses. The rules are different where the provisional tax exceeds $60,000 for the year.

And the last changes in 2017 were designed so that if taxpayers made the payments they were required to make, then use of money interest would not apply until terminal tax date, which for most taxpayers is 7th February following the end of the tax year in question, or the following 7th April if they are on a tax agent’s listing.

The requirement was that they had to make the payment in full and on time, and this actually led to a few problems because taxpayers sometimes missed their payments by one or two days or even might be out by $10 or so. What has emerged since 2017 is that the number of taxpayers who unintentionally paid short or late was underestimated by Inland Revenue at the time the changes were brought in. Consequently, a large number of taxpayers had to pay use of money interest and late payment penalties.

What Inland Revenue have determined is “in these circumstances, the application of use of money, interest and late payment penalties is not proportionate to the offence committed.” It considers it is “appropriate” to allow taxpayers to retain the safe harbour concession for use of money interest even if they miss a payment. So, the interest rules have been changed rules again with effect from the start of the current tax year.

What the change means is you won’t suffer use of any interest if you miss a payment or there’s a short fall on your tax payment. You won’t be charged 7.96% on the underpaid tax until your terminal tax payment date. However, late payment penalties will still apply. These are 1% of the underpayment immediately and a further 4% if the tax has still not been seven days later for a maximum 5% penalty. (Inland Revenue has now done away with the monthly 1% late payment penalty on top of the initial penalties).

It’s been pointed out to me that there’s probably an opportunity for someone to play a few games and arbitrage their funds by accepting the late payment penalty charge but avoiding the high use of money interest charge. No doubt some taxpayers will do that.

We don’t actually know how much use of money interest the Inland Revenue charges, but pretty substantial amounts are involved. We know, for example, that Covid-19 related interest write offs over a two-year period amounted to $104 million. At a rough guess taxpayers could be paying $100 million or more in use of money interest annually. Measures that help them relieve that charge ought to be to be welcomed.

The case for a residential land value tax

Moving on, last week I discussed the report on housing from the Housing Technical Working Group, a combination of the Treasury, Ministry of Housing and Urban Development and the Reserve Bank of New Zealand. The report raised the question of the role our tax settings may have played in house price inflation. This generated quite a bit of interest and commentary and thank you to everyone who contributed.

But as I said last week, the issue around how our tax settings work in relation to property isn’t going to go away. It’s an issue that sooner or later has to be grasped. And this week, Bernard Hickey who has an excellent Substack, The Kaka, did a very detailed post on the whole question of our lack of training and productivity, our need for substantial numbers of. migrant workers and how that intersected with the under taxation of residential land.

Bernard’s post pulled together a lot of conclusions I’d reached during my time in the Government’s Small Business Council between 2018 and 2019. I grew quite concerned at the lack of training, particularly among small businesses and the extensive need for migrant workers coming in. What is well established is that Aotearoa-New Zealand has the highest use of temporary migrant labour in the OECD and simultaneously it also has one of the highest diasporas in the OECD. In other words, our skilled people are moving overseas and we’re bringing in relatively low skilled people and this is causing a whole number of tensions.

As Bernard notes we really need to rethink the matter of how we deal with this approach because this long term, it is not economically prosperous for us all. As he concluded:

“All roads were always going to lead back to changing those investment incentives through a new tax that gives the Government the resources to invest in productivity-enhancing physical and social infrastructure. That tax would also radically change the incentives for businesses and individual investors….

In my view, a Capital Gains Tax would be too politically toxic, complicated and slow to break the log jam. The case for a residential land value tax, a much simpler, faster and more politically possible option is a simple and very-low-rate infrastructure levy or tax on residentially-zoned land values that is calculated annually from land value measures in council-maintained databases.”

This, by the way, is very similar to what Susan St John and I have been promoting for some time, the Fair Economic Return, and we and Bernard are coming at it from pretty much the same place.

Bernard then puts some detailed numbers around this. He estimates a 0.5% tax on residential land values would raise an extra $6 billion and effectively increase the Government’s tax take from 30% of GDP to 32% of GDP. Bernard also considers the revenue raised from such a tax should be

“hypothecated into a housing and climate infrastructure fund jointly administered on a region-by-region basis by central Government and councils, with the aim of using those funds to achieve affordable housing and net zero transport and housing emissions by 2050. affordable housing in net zero transport and housing emissions by 2050.”

I support this approach. We’ve just seen the flood damage in Nelson which is after about $80 to $85 million of damage from last year’s flooding. This year’s event is even bigger, and the damage is estimated to be well over $100 million. We could also be looking at similar events on a regular basis.  Those sums are way too big for homeowners and local councils to manage by themselves. Central government is going to have to get involved.

Climate change is happening right now. It is no longer something in the distance and we need to start addressing those changes. Local councils cannot afford to be incurring $100 million in repairs each year. That is simply not sustainable. Bear in mind the chief executive of the country’s largest insurer has recently said premiums in higher risk areas will become incredibly expensive to the fact they become unaffordable.

A whole number of issues are starting to coalesce around climate change and around the taxation of capital. These will force a change on how we approach our current taxation system. What Bernard is proposing ties in with the Fair Economic Return Susan St John and I are promoting. In our view it is a fairer approach as it widens our tax base and as Bernard points out, starts to remove distortions to how we currently approach investment.

A $1 bln shortfall

Also related to the question of climate change, there was a report in the Herald this week about the Ministry of Transport’s forecast that the National Land Transport Fund is likely to have a shortfall of $926 million over the next three years. The shortfall is mainly as a result of the Government’s decision to cut fuel taxes and road user charges. However, there’s also a decline in driving going on as well, which may be related to the pandemic. Those figures were prepared in April and didn’t take into account the extension of the cuts to January. This shortfall will be made up out of general taxation.

The Government has taken a short-term decision to help the cost of living, but inadvertently it points to something that’s fundamentally flawed about how the National Land Transport Fund is presently funded. The reliance on fuel taxes encourages more driving which until we get to a fully electric vehicle fleet, that is not helpful, as transport emissions are one of the biggest chunks of our carbon emissions.

Transport is also one of the areas where we probably can do something quite quickly with the right incentives to encourage switching away from using internal combustion engines to hybrids and electric vehicles obviously, public transport, walking, cycling, scooters. All those alternatives are available now in the urban environment and could make a huge difference.

This is another area where governments have kicked the can down the road, but now they need to address the issue of how we fund the National Land Transport Fund because it’s how the maintenance of our roads is funded. We have to devise a new means of funding it, probably as readers have suggested higher road user charges on all vehicles including electric vehicles.  Here’s another example of change in our tax system being driven by a number of factors, including the climate.

Refugee evacuation

Finally, I mentioned earlier my time on the Government’s Small Business Council in 2018-19. Our chair was Tenby Powell who is a Colonel in the New Zealand Army. He is currently in Ukraine delivering humanitarian aid and helping to evacuate people from the most dangerous areas in the Russian occupied South and East of the country.  Tenby has established Kiwi K.A.R.E. (Kiwi Aid & Refugee Evacuation) to fund this aid. Here’s a link to the funding page for Kiwi K.A.R.E.

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

Until next time kia pai te wiki, have a great week!

Inland Revenue gets ready for tax filing season

Inland Revenue gets ready for tax filing season

  • Inland Revenue gets ready for tax filing season and puts recipients of COVID-19 support payments under the microscope
  • Insights into the composition of the Top 0.1%

Transcript

Inland Revenue is currently gearing up to begin processing 31st March 2022 year-end tax returns and personal tax summaries. Starting later this month it will be issuing automatic income tax assessments for most New Zealanders. But in preparation for that it has been giving updates to tax intermediaries on particular matters of interest. And a couple of notifications in the latest release caught my eye.

Firstly, there is form IR833 bright-line residential property sale information return which is required to be completed whenever a transaction which is subject to the bright-line test has taken place during the tax year. What Inland Revenue is saying is the form will pop up in a client’s return if it thinks the client has made a bright-line sale. And it will also pre-populate the information on the form, including the title number, address, date of purchase and date of sale.

This illustrates something we’ve spoken about many times, the level of information that’s available to Inland Revenue. It’s actually very good, in my view, that Inland Revenue is proactively putting in this information and saying, “Well, we know this.” I am aware that a few tax agent colleagues have had some very interesting discussions with clients where this notification has popped up and it’s the first the accountant or tax agent has heard about the matter.

As of last income year, all portfolio investment entity (PIE) income must be included in individual income tax return. Inland Revenue will pre-populate returns with the relevant data but not all returns will contain all the PIE information until after the PIE reconciliation returns and filed on or before 16th May.

In the meantime, Inland Revenue has reminded tax agents about this and advised not to file March 2022 tax returns either through Inland Revenue’s myIR or other tax return software until after that date unless you know for certain that the client is not a KiwiSaver member and does not have any other PIE income. That’s something to keep in mind because I’m sure some tax agents will be under pressure from clients who think that they are due a refund but haven’t factored PIE income into the equation.

What’s also going into tax returns is details of payments received under the Wage Subsidy Scheme, Leave Support Scheme and Short-Term Absence Payments. All these are what are termed reportable income. Consequently, tax returns will be required to be filed by recipients and there is going to be an information request in relation to these as part of the tax returns. Yet again, this is another example of how MSD and Inland Revenue shared the relevant information.

Inland Revenue administers the highly successful Small Business Cashflow Scheme which gave out loans to small businesses at the start of the pandemic. The initial two-year interest free period is now expiring for some businesses so repayments will be required to start shortly.

Talking about COVID-19 support, the numbers involved were quite extraordinary: apparently MSD has so far paid out $19.28 billion in the various subsidies and leave support payments. And Inland Revenue has paid out another $3.95 billion including Resurgence Support Payments and COVID-19 Support Payments.

The Resurgence Support and COVID Support payments were paid to businesses to help them pay business costs and therefore GST output tax is required to be returned on those receipts. Where the funds are used on relevant expenditure GST input tax credits may be claimed.

Inland Revenue has started checking that those who claimed the support payments were entitled to do so and assuming they passed that hurdle, they then applied the expenditure as was intended, i.e. business expenses. And I’m hearing stories from tax agents of very thorough investigations combing through the bank accounts of the businesses and individuals who received these payments. Some have resulted in “Please explain” enquiries coming back where  apparently personal expenditure has been identified such as in one case where an EFTPOS payment for  McDonald’s was identified.

This is yet another warning for those who applied for COVID support payments they either weren’t entitled to or misapplied the payments that they may find themselves under the gun from Inland Revenue. So far Inland Revenue have decided to proceed with 15 criminal charges and court proceedings are already underway for seven. In addition, as a result of investigations and some self-reviews the repayments made to date to MSD are over $794 million. ,

All of this is a timely reminder that with things calming down a little bit and so coming back to a stability, Inland Revenue is now applying itself back to its core business activities of investigations and reviews. Expect to see more news of these reviews and I think we may see one or two interesting cases emerge.

What Parker means

Moving on, last week’s speech by the Minster of Revenue David Parker quite predictably caused a stir and there was plenty of politicking over whether or not the proposal would lead to the introduction of wealth tax at some point and whether the Prime Minister would stand by her comments it wasn’t going to happen, the usual politicking etc. etc.

Subsequently, last Sunday I appeared together with Jenée Tibshraeny of www.interest.co.nz  on TVNZ Q&A to discuss the implications of Mr. Parker’s speech. Off-air Jenée made a point echoed by several colleagues commenting on a LinkedIn post that the Tax Principles Act, if enacted, would work both ways. It wasn’t just a tool for saying, “Well, we need to introduce a particular type of tax.” It could equally stop a government introducing changes because it contradicted the agreed principles.

It’s a very valid point and it’s actually one of the sources of disagreement with the introduction of the 39% tax rate, because it affects the integrity of the tax system and the idea of administrative efficiency. Furthermore, it could apply to the measures relating to personal services, income attribution, which also I discussed last week. The argument here is that these rules would breach potential principles of horizontal equity, in that people earning similar amounts, may pay different rates of tax because of variations in the tax treatment.

Under the microscope

Other interesting insights have emerged in the wake of the speech. The Revenue Minister pointed to the lack of information about the high wealth individuals which prompted the research project into high wealth individuals would have caused some controversy. And earlier this week journalist Thomas Coughlan in the New Zealand Herald commented on an interesting briefing note about the project he’d obtained under the Official Information Act.

The briefing note looked into the representativeness of the wealth project population, and whether the high wealth research project population effectively represented the 0.1% of the wealth distribution of the population and the economic sectors they operated.

The note explains that the group that was selected for the project was based on

…environmental scanning undertaken by Inland Revenue over the past 20 plus years. This environmental scanning involved monitoring large transactions or other indications that individuals had significant wealth holdings using both public information and the department’s tax data. …

The briefing notes the selection is non-random and it is not expected to be representative of the population of all high wealth individuals. It is therefore quite possible that there may be high wealth individuals missing from the group “and there is no way to definitively state that the selected group is representative of the top 0.1% of the wealth distribution.”

Having included that caveat, the note had some interesting analysis of what they had found so far. And it had a diagram comparing the share of GDP and employment to the main activities of high wealth individuals on the basis that you could reasonably expect the share of the industries represented by the individuals to be broadly similar to the spread of industries and activities in the New Zealand economy.

But it turns out that wasn’t the case. And in particular, relative to employment and GDP shares, the property and primary sectors are disproportionately represented in this project. The number of high wealth individuals in the primary sector is approximately 15%, even though the sector represents less than 10% of GDP. In relation to the property sector the proportion of high wealth individuals is 25%, compared with approximately 15% of GDP.

However, as the briefing note commented, there are clear reasons why there is this discrepancy there are certain activities (investment, property ownership) that would be expected to have greater involvement by those accumulate significant wealth….”

Incidentally, the primary sector and particularly the property sector, are sectors where existing tax rules such as the Bright-line test and the associated person rules work already to tax capital transactions. So that’s another reason why Inland Revenue may have better data on this particular group of wealthy individuals than others that work in the service economy.

Anyway, it will be interesting to see what further insights emerge from this high wealth research project. Meantime, no doubt the debate over how that data may be applied and the question of the taxation of capital and wealth will continue to rage, particularly in the run up to next year’s election.

Getting ready for tax filing season

And lastly this week, the final instalment of Provisional tax for those with a 31st March year-end is due on Monday. The key point here is taxpayers whose residual income tax liability for the year is expected to exceed $60,000, should ensure that they pay sufficient provisional tax to cover that total liability for the year. Otherwise, use of money interest, which is increasing to 7.28%, will start accruing together with potential late payment penalties.

As always, if taxpayers are struggling to meet payments in full, then either contact Inland Revenue to let them know and start to arrange an instalment plan. You will find that they are generally cooperative on this. Alternatively, consider making use of tax pooling to mitigate the potential use of money, interest and late payment penalties.

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

Until next time kia pai te wiki, have a great week!

Highlights from the ATAINZ spring workshop including provisional tax payments holding up, home office expenditure allowances.

  • Highlights from the ATAINZ spring workshop including provisional tax payments holding up, home office expenditure allowances.
  • Inland Revenue is chasing cryptoasset investors.
  • How to design and implement a wealth tax.

Transcript

Late last week, I was one of the presenters at the Accountants and Tax Agents Institute of New Zealand’s Spring Mini Conference. As you’d expect, the programme was dominated by the impact of Covid-19 and its implications for accountants and tax agents. It was an excellent mini conference and there were plenty of very useful insights from the presenters and also from the audience and participants. Here are a few of the highlights which stood out for me

From what Chris Cuniffe of Tax Management New Zealand is seeing, outside of the very obviously hard hit sectors such as tourism and hospitality, business seems to be holding up well, judging by the tax take. During the first lockdown, the final tax payments for the year ended 31 March 2020 year were due on the 7th of May. Now, by that stage, Inland Revenue had made it clear that it was using new provisions to enable it to waive the application of use of money interest if tax was paid late. So Chris Cunniffe thought there would be a huge take-up of that opportunity.

But in fact, what they saw was about $2.8 billion of provisional tax paid on the due date through the tax pools. According to Inland Revenue statistics, it has about $163 million of tax that would have been payable on the 7th of May under instalment. That is, the person contacted Inland Revenue saying “Hey, we’re not going to make this payment, can we arrange to pay it in instalments?”

That $163 million represents about five per cent of the total tax payable on the due date. And that’s actually really encouraging because it means businesses had the money, their profitability was relatively unaffected, and they were prepared to meet their liabilities. Given that the tax year end was 31st March, is what you would expect to see because the full impact of Covid-19 had not been felt by that date.

For most businesses the first instalment of provisional tax for the current year to March 2021 was due on 28th August. And there was only about a five per cent fall in the tax paid comparing what was paid on in August 2020 with what was paid in the previous year.

Remarkably, 55% of all depositors with TMNZ paid more tax this year, with only 42% paying less tax than the previous year. So that was actually really encouraging when you consider that the June quarter was when GDP fell 12.2%, the tax take holding up as well as it did seems to be an encouraging factor.

Generally speaking though, most people thought the real acid test for how businesses are tracking along will be the second instalment of provisional tax, which is due on the 15th of January. Which of course is terrible timing in the middle of a holiday period. So that will be interesting to see how well businesses have held up then.

Insolvency issues

Derek Ah Sam of insolvency practitioners Rogers Reidy thought the real wave of insolvencies hasn’t really got underway yet. But what was intriguing to hear was that despite Inland Revenue’s Business Transformation programme, it seems that a fair number of companies going into liquidation still owe several years of PAYE and GST. And this is surprising to me because Inland Revenue systems really ought to be picking this up much, much sooner. We used to see this quite a bit several years ago, but with Business Transformation, they’re supposed to be across this much sooner and taking action earlier. If that is not happening, then there’s something else going on at Inland Revenue that we don’t know which the Minister of Revenue should be perhaps asking a few questions about.

The other thing Derek noted is in relation to the question of commercial landlords who have not been required, as in Australia, to provide some form relief for their tenants. Actually, in Australia, I think there’s some provisions preventing eviction notices being issued. What Derek is seeing is that commercial landlords are taking much harder line on tenants in arrears. And they seem to be particularly targeting food outlets that have already been hit hard by Covid-19 and probably long term are not sustainable. So it appears some landlords are going to apply pressure now and get rid of them. That seems to be something that’s happening there. Again, we’ll see more as the year goes on.

Wage subsidy ethics

Tristan Dean of Hayes Knight, then ran us through the professional ethics issues to be addressed when a client takes up a wage subsidy which they’re either not entitled to or don’t apply it as prescribed. That was highly relevant given the issue popped up in the second leaders debate on Wednesday night. And it provoked an interesting discussion around that, which no doubt won’t be the last time we hear about that.

Home office safe haven

And finally, from the floor when we were discussing the question of home office allowances, the overwhelming reaction was that Inland Revenue safe haven of $15 per week was well short of the mark, with most people suggesting somewhere between $40 and $50 per week being much more realistic representation of the costs involved using the formulas available to people under the Income Tax Act.

That’s something that I’ve seen pop up in commentary or from some of the comments to articles when I’ve discussed this question. The present determination Inland Revenue issued was a temporary one. Maybe when a permanent one comes out we can get an increase of the available amount to say something closer to that $40 mark.

Moving on, a couple of weeks back, I mentioned that Inland Revenue has issued up updated guidance on the taxation of cryptoassets. It now seems that it’s decided to apply much more pressure on this industry and investors, because this week it emerged that it has been asking companies that deal with cryptoassets to hand over customer details.

Now, as people are probably quite aware, the cryptocurrency and cryptoassets world is quite libertarian in its philosophy. So this probably came as a huge shock to investors and the companies themselves – that Inland Revenue could not only demand the information, but there was nothing they could do to stop Inland Revenue’s action.

A couple of years back the information gathering powers of Inland Revenue contained in the Tax Administration Act 1994 were increased and new sections giving them wider powers of search and entry were given to them.

Inland Revenue’s extensive powers are well known within tax and professional community. And pretty much our response is when a client asks, “Can they really do this?” is “Yes, you’re just going to take your lumps on this”. And so, the cryptoassets community is not the first to find out just how extensive Inland Revenue powers are, and they won’t be the last. And if they’re feeling very unhappy about it, they’re not alone in that.

I would think that this could work out quite profitably for Inland Revenue. If taxpayers have been thinking “Well, the web servers are offshore, we don’t really need to comply with this as all takes place in the darker reaches of the Internet and outside the reach of Inland Revenue”. You’re not. And other tax jurisdictions are also taking a close look at a cryptoassets. So you’ve been warned. It will be interesting to see what comes of this and how much revenue Inland Revenue raise as a result of their actions.

A wealth tax template

And finally, the Green Party’s wealth tax has been in the news again as we get closer to the election date. There’s been a reigniting of the whole question of the taxation of capital.

Without getting into too much detail, one of the arguments advanced against a wealth tax is that it would be complicated to implement. And undoubtedly, there are quite a lot of complexities to be addressed, most notably around valuations, but it’s not impossible. In fact, we already have a de facto wealth tax in operation. And we’ve had it since April 2007 when the revamped Foreign Investor Fund regime with the fair dividend rate was introduced.

For those who are not familiar with the Foreign Investor Fund regime it applies to overseas stocks and shares (but not bonds because they are subject to a different regime).  Basically, taxpayers are assessed on the lesser of the notional gain over the tax year, together with the actual receipts from sales and dividends in that year, or the 5% fair dividend rate applied to the value of the investments at the start of the income year. For KiwiSaver funds and companies, the 5% fair dividend rate is automatically applied. They don’t have the alternative of the actual gains and losses during the year.

Now, as you might expect, I have to explain the foreign investment fund rules to overseas clients. And they’ve conceptually struggled with it, because it’s not a capital gains tax. But once it’s  reframed in the idea of a flat wealth tax, they get it very quickly. And that’s basically how I explain it to overseas investors. Effectively the 5% fair dividend rate is a wealth tax. And if your tax rate is 33%, you’re talking about a 1.67% effective wealth tax.

Now, the foreign investment fund regime is easy to apply where you have publicly listed securities, but the regime has a whole set of rules that people normally don’t see, which relate to unlisted securities. So much of the work that you’d expect to see when you’re addressing a wealth tax has actually already been done and is part of the Income Tax Act.

So if you were introducing a wealth tax your starting point would be to expand the Foreign Investment Fund rules across more asset classes and tweak the fair dividend rate to whatever rate of tax you wish to levy on the assets.

In short, it’s complicated, but not quite as insurmountable as people make out. And of course, when you hear people saying, “Oh, it’s too complicated”, a cynic like myself is always wondering just how much they’re arguing that out of self-interest.

And on that bombshell, that’s it for this week. I’m Terry Baucher. And you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening. And please send me your feedback and tell your friends and clients. Hei konei ra!

COVID-19 related measures for tax losses and AirBnBs

  • COVID-19 related measures for tax losses and AirBnBs
  • National releases its small business policy
  • Is a capital gains tax back on the agenda?

Transcript

Friday was the due date for the first instalment of Provisional ax for the year ending 31st March 2021, Provisional tax is going to be payable by anyone whose net tax for this year will exceed $5,000.

Now in the past, we’ve covered the ability to use tax pooling to give more flexibility about payments of tax, and that’s going to be particularly important for the current tax year, given our ongoing uncertainties arising from the COVID-19 pandemic. My recommendation to clients at this moment is to adopt a conservative approach. Look at paying the first instalment of tax due today but keep watching your progress and how your turnover is going. And if matters move into a tax loss position as a downturn comes through soon, then we will take steps to mitigate or deal with the next two instalments of Provisional tax.

But what if you already know you’ve got losses this year and it’s not likely to get much better for the current year? Say you’re a restauranteur or you’re in the tourism business. These are two sectors which are very clearly hit hard by the pandemic and the various lockdown measures.

Well, one of the measures introduced as part of the government’s response to the pandemic was the ability to carry tax losses back. Under this measure, if you have a tax loss for the 2020 or 2021 income years, you can carry those losses back one year. And the idea is that if you carried back to a profitable year this will mean you have overpaid tax in the prior year, and that tax can be released to help smooth your time through this ongoing pandemic.

And for most larger companies the tax loss carry-back regime is pretty straightforward. Carry back the loss one year, get a tax refund at 28% percent, and then you’ve got funds, which you can either use to meet other bills you may be behind on, or bring it forward and apply it against your current tax year liabilities such as GST or PAYE, depending on how dire the situation might be.

But one of the problems that’s emerged with the tax loss carry back rules affects a lot of smaller companies where their shareholder is also an employee. And under the rules that apply to these companies, these companies can pay out their profits to a shareholder-employee who is then responsible for the tax.

For example, say a company makes a profit of $100,000.  Instead of paying tax at 28% it instead distributes it as a salary to a shareholder-employee and he or she is taxed on it at their relevant marginal rates. For someone on $100,000 with no other income, that roughly works out to about $24,000. So, there’s a tax benefit to shareholder-employees because of the gradual increase in tax rates for individuals.

But the problem that’s emerged wasn’t really addressed in the current legislation. What do you do if you carry a loss back for a company with a shareholder employee? The carried back loss is not much used to that particular company because they’ve already reduced their profit to nil by distributing it to the shareholder-employee.

And by the way, I note there was a Radio New Zealand report noting that about $2 billion dollars in wage subsidies has been paid to companies that do not appear to have paid any company income tax. It’s highly likely many of those companies have shareholder employees and it is the shareholder employee who has paid the tax using the mechanism I just explained where the whole or substantial amount of the company’s profit is paid out to the shareholder-employee.

So the tax loss carry back rules don’t work too well for small micro businesses that use a shareholder-employee mechanism. And it’s something we’ll need to be looked at if there is a permanent iteration of these rules, which I believe should happen.

But it’s also why the small business sector and accountants have not looked on this particular measure with a great deal of enthusiasm yet. Because of those complexities how do we deal with these tax losses that are brought back? Do you rewrite the whole position in the prior year? And then what does that do for other matters that are related to that person’s income, such as social assistance, ACC earner levies?  The amount of ACC you may claim if you have an accident is dependent on your salary as a shareholder-employee.

So, there’s a lot of complicated issues to work through. But the tax loss mechanism is there. It works very well for companies which don’t have shareholder-employees and individuals trading for themselves or trusts can use the loss carryback rules in either the 2020 or 2021 income years.

Converting from short-term to long-term rental accommodation.

Moving on, Airbnbs in the tourism sector will also have been hit very hard by the pandemic and the collapse in overseas tourism and the substantial decline in domestic tourism. So what has happened is some of these Airbnbs have reversed a trend that was developing, and have moved back into providing longer term residential accommodation.

As always, there’s a tax consequence to that and for GST purposes it means that if the GST activity is stopped, then the person is required to de-register for GST. Part of the de-registration process will mean a deemed supply of the goods that were brought into the business. You’re deemed to have sold them and pay GST output tax on the way out. And if you’ve claimed a big input tax credit for, say, a whole property, moving it over to Airbnb, that means that you could have a substantial output tax payable on de-registration, as it’s done at a market value.

Now, under the GST Act, there is a provision that where someone is no longer carrying on a taxable activity they are obliged to let the Commissioner of Inland Revenue know within 21 days of their taxable activity ceasing, and then that registration must be cancelled unless there are reasonable grounds to think the taxable activity will be carried on within 12 months. So, this could apply if you think that within 12 months-time, we could be back up and running again.

What Inland Revenue has done is extended this twelve-month period to 18 months through a special COVID-19 determination which has just been issued and this will apply until 30th September 2021. So you now have 18 months, a lot more flexibility about whether you’re going to resume your Airbnb activities or drop out of the picture completely.

Just a caveat though – if you are currently using a property for residential accommodation, but you anticipate going back to making taxable supplies in Airbnb, you have to do what’s called a change in use calculation.  This is basically an apportionment of the value of the property brought into the GST net over the expected time it’s being used for taxable activities. A little bit complicated, but you produce one of those calculations as part of your GST returns.

Political tax policy

Yesterday National released its small business tax policy.  In terms of tax rates it has come straight out and said it does not plan on increasing taxes or introducing any new taxes.

Other than tax rates, National’s tax policy has a number of other measures. Firstly, they’re going to lift the threshold for the purchase of new capital investment from $5,000 to $150,000 per asset. That is you can take a complete deduction for an asset costing up to $150,000. Now apparently this only applies to “productive assets” so there’s a question as to what that might mean.  It’s a temporary two-year change. Something similar has been done overseas.

And it’s a good idea although it is a question, of course, of what will and won’t meet the definition of ‘productive’. But you could see some fairly substantial plant and machinery being purchased and as a means of getting investment into productivity in the economy it’s a measure to be to be welcomed.

It would also have an impact on the Government’s cash flow, by the way, because it would drop quite a lot of people out of the provisional tax requirements. So the Government’s income, so to speak, was will be reduced temporarily before these payments will then come in at terminal tax time. I think $25,000 is too generous, $10,000 is probably manageable. Still it’s a measure in the right direction.

Next, they want to raise the GST threshold from $60,000 to $75,000. Big tick for that, the GST threshold hasn’t been increased since 1 April 2009. So it’s well overdue and on an inflation basis $75,000 is about right.

Businesses will be allowed to write off an asset once its depreciated value falls below $3,000 as opposed to continuing to depreciate it until its tax value reaches zero. Really good measure here. Should be done straightaway regardless of who’s in power.  Keeping a track of all these assets when they’ve fallen below that threshold is hard and causes needless complexity. So I like that a lot.

I also like this next one – change the timing of the second Provisional Tax payment for those with a 31 March balance date from 15th January to 28th February. That’s really quite sensible. It’s bizarre it’s in the middle of January when we’re all supposedly on holiday and it’s not a great time for cash flow. February makes a bit more sense.

Ensure the use of money interest rates charged by Inland Revenue more properly reflect appropriate credit rates. So right now, if you overpay your tax Inland Revenue will pay nothing. National are saying, well, we want something that’s a little bit more realistic than that. It’s not a bad move and it certainly would be popular with small businesses, but it’s rather based on an assumption that taxpayers would be using Inland Revenue as a bit of a bank. They won’t.  A better option in this case would be tax pooling which takes care of a lot of those issues.

Increase the threshold to obtain a GST tax invoice from $50 to $500. A very generous upper limit there. I’m not sure I’d go as high as that, but that $50 threshold below which you don’t need to have a full GST invoice with all the required details on it has not been changed since 28th September 1993. So an increase in the threshold is welcome. I’d say $150 might be a better option.

Implement a business continuity test rather than an ownership test for carry-forward of tax losses. Moves in this space are already happening but the measure is to be welcomed.

Next and also welcome, review depreciation rates for investments in energy efficiency and safety equipment. That’s not a bad idea. And then consolidate the number of depreciation rates to reduce  administration costs. That’s another big tick from me on that, because there are so many different rates and there’s options to probably get it wrong more often than right. And the level of micro detail required probably isn’t really appropriate for small businesses.

So those measures I think are mostly all welcome. And frankly, they’re sort of pretty much apolitical. Whoever is in power should be adopting almost all of those proposals.

Just a matter of time?

And finally, talking of parties’ tax policies, the Greens released as part of their tax policy, a proposal for a wealth tax to apply on net wealth over $1 million. Earlier this week, former legal practitioner, Human Rights Commissioner and retired Family Court Judge Graeme MacCormick picked up on the Green Party’s proposal when he wrote about the question of a wealth tax. He suggested a one percent levy on net assets of more than $10 million per person.

He also argued that it was time for the wealthy to step up and help out in this the crisis. He was sceptical of the idea of the trickle-down effect, that wealth trickles down and dissipates out through the country. He was of the view that basically we’ve got 30 years to show that hasn’t happened.

One of the interesting points he raised was that New Zealand not only doesn’t have a comprehensive capital gains tax, it also doesn’t have an estate tax or a gift tax nor a wealth tax. It’s highly unusual in the OECD for one jurisdiction to be not have at least one of those taxes applying on a comprehensive level. Some have capital gains tax and no wealth tax or estate tax. Others have a wealth tax, but no capital gains tax and some like the UK and the US, have capital gains taxes and estate and gift taxes.

The position varies across the OECD, but New Zealand is pretty unique in not having either a comprehensive capital gains tax, estate tax, gift duty or wealth tax.

Wealth taxes have fallen out of favour in the past few years, but they’re back on the agenda because, as I discussed with Radio New Zealand panel and Patrick Smellie of Business Desk, the pandemic and Thomas Piketty has opened the door on that.

And I was very interested to see this week that former Reserve Bank governor Dr Alan Bollard said in his presentation to the New Zealand CFO summit that, like it or not, given the scale of the borrowing the Government has had to engage in, capital gains tax may be an unpalatable option for governments to consider as they want to pay down the debt.

So this matter of capital taxation hasn’t gone away. We’ll hear more from other politicians no doubt, Labour and New Zealand First have still to release their tax policies. But we’ve still got another seven weeks to go to the election so there’s plenty of time for discussion on that.

Well, that’s it for this week. Thank you for listening. I’m Terry Baucher and this has been The Week in Tax. Please send me your feedback and tell your friends and clients until next week. Ka kite āno.