Tax News

A tax law change could be of major benefit to Kiwis with Australian superannuation funds

29 Jun, 2020 | The Week in Tax

  • A tax law change could be of major benefit to Kiwis with Australian superannuation funds
  • Rethinking the taxation of redundancy
  • Google’s 2019 results highlight the difficulties of taxing the digital giants

Transcript

This week, a seemingly arcane tax change could be of major benefit to Kiwis who have Australian superannuation funds, rethinking the taxation of redundancy and Google’s 2019 results highlight the difficulties of taxing the digital giants.

Right now, New Zealand citizens or New Zealand permanent residents are the only people who can get into the country. And as the news headlines over the past couple of weeks have shown, testing at the border has become incredibly important in ensuring that COVID-19 does not gain another foothold in the country.

What you are also seeing is a significant rise in the number of Kiwis wanting to return to New Zealand. There are approximately one million Kiwis around the world, including nearly 600,000 in Australia. And the way the pandemic has been handled so far has made many expatriate Kiwis look at returning to New Zealand.

And a significant number of those may come from Australia. Now Australia has compulsory superannuation under which you and your employer are required to make contributions to a superannuation scheme.  Unlike KiwiSaver, where you can only ever have one KiwiSaver scheme, it’s quite possible to have a number of Australian superannuation schemes. And what sometimes happens is that people lose contact with their superannuation schemes or vice versa.

Under Australian law, after a while unclaimed superannuation money is required to be repaid to the Australian Tax Office. This could affect Kiwis who have returned to New Zealand but have lost their records relating to an Australian superannuation scheme. After a while the Australian scheme must pay the funds in that scheme to the Australian Tax Office as unclaimed superannuation money.

All this sounds a little arcane, but there are absolutely billions and billions of dollars invested in these schemes (A$2.7 trillion as of the end of the March 2020 quarter), and the amount of unclaimed superannuation money can be quite significant.

Since 2013, New Zealand and Australia have had a Trans-Tasman Savings Portability Agreement in place to mainly encourage or rather remove barriers to workers freely moving across the Tasman.

So the potentially significant amounts involved and the Trans-Tasman superannuation agreement are the reasoning behind a measure in the recent the introduced The Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill introduced a few weeks back.

The bill has a provision which is to allow the direct transfer of New Zealanders’ Australian unclaimed superannuation money from the Australian Tax Office into a KiwiSaver scheme.

This is a measure to get around the issue that once the Australian superannuation scheme deems the funds lost, it’s impossible under Australian legislation for Kiwis to get their money out.

Another handy thing to keep in mind, is that unlike the tax treatment of other foreign superannuation schemes, if you have an Australian superannuation scheme and you transfer it into a KiwiSaver scheme, you will not be taxed, even if that transfer happens more than four years after your return to New Zealand.

So, this is a measure which is favourable for those who have Australian superannuation schemes and may have forgotten what they’ve got and now want to bring the funds across. They can do so tax free into a KiwiSaver scheme. As I said this seems a little bit arcane, but it occurs to me given the numbers of returning New Zealanders we’re likely to see, this could become quite important over the next few years.

Taxing redundancy payments

Moving on, a few weeks back, I was talking to Newshub’s Madison Reidy about the taxation of redundancy payments.  At present, redundancy payments are simply treated as ordinary pay and taxed at the normal rates, which means that for someone receiving a substantial redundancy payment much of it will be taxed at the top rate of 33%. I suggested this was something that needed to be looked at.

Based on an article in the Herald this week it seems that the Minister of Revenue, Stuart Nash, has received correspondence on the matter and is asking officials to look into it, which is encouraging to see.

The problem is given the circumstances we’re in right, now this sort of thing ought to be dealt with quite urgently. Maybe if we’re going to move forward with changes, it would be opportune to include some form of measure in the tax bill I mentioned earlier, which is going through Parliament right now.

One thing to think about regarding redundancy payments, is because they’re treated as ordinary pay, that means if you have a student loan 12% of the payment will be deducted. If you’re in a KiwiSaver scheme, then a further 3% at a minimum will be deducted and to your KiwiSaver scheme, fortunately, ACC does not apply.

There’s an additional bite to this for those who might receive a payment of over $30,000 before tax.  This group of people are not eligible for the COVID-19 income relief payment. This is the special relief benefit for anyone who’s lost a job because of COVID-19 between 1 March and 30 October 2020.  Such persons are entitled to a weekly benefit payment of $490 if they were working for more than 30 hours.  The payment is untaxed and is nearly double the payment someone would normally receive who is unemployed.  Fortunately, MSD has lifted its requirement for someone to spend all their redundancy before they can apply for the job seeker payment of $250 a week.

Nevertheless, the current tax treatment of redundancy needs to change urgently. But it can only be done by a statutory amendment. So, it would be good to see Inland Revenue and the Minister of Revenue moving quickly on this to make a change to help those who are going to lose their jobs or have lost their jobs in the past few months.

Taxing Google

Google New Zealand not so long ago released its financial statements for the year ended 31 December 2019. These show that its income tax bill has risen to $2.4 million.

Now, Google’s 2019 accounts were the first ones prepared as part of its more transparent country by country reporting. The accounts showed that its New Zealand revenue had increased significantly since previous years to $36 million with a pre-tax profit of just over $10.6 million.

What the accounts also show is the difficulty of taxing the digital giants and how little revenue will come through for income tax purposes. According to the accounts the pre-tax profit of $10.6 million represents the value of sales less the direct costs of sales for its advertisements and cloud services. And tucked away in the financial statements, was a note that well over $500 million was paid in service fees to related offshore parties.

And this shows the problem with the digital economy.  Because so much is now driven off intellectual property, and New Zealand is at the tail end of the world in Google’s case we don’t create much intellectual property. Our right to tax is therefore quite limited.

This is not a problem unique to New Zealand. All around the globe countries are grappling with this question that Google and Facebook are piling up billions of dollars in earnings, but not much income tax is being paid in the relevant jurisdiction.

To deal with this matter the OECD has been working on a coordinated approach. The problem is, in the last week or so, that it’s hit a big hurdle with the US Treasury Secretary, Steve Mnuchin, withdrawing the US from the negotiations.  Presently the United States and Europe are at pistols drawn stage, arguing over the question of digital taxation, and Mnuchin and the US pulled out of talks in the last week. This is not good for the whole global economy, and it’s not good for moves to try and get a fairer share of the enormous revenues Google and other digital companies generate.

The Tax Working Group recommended going along with the OECD approach. But it also said that we should have a digital services tax ready to go if negotiations do not go well. We’ve also been watching what the Australians are doing and for the moment they have backed off a digital services tax. But over in Europe, then Britain, which needs a trade deal with the United States, has actually introduced a digital services tax. The French have got one up and running and the Germans are talking about one, too.

So international tensions are building on this and it’ll be interesting to see what the Government decides to do over the next few months as this plays out. But as part of the general upheaval in the tax world going forward we’re going to be seeing this development with the US pulling out of the talks with Europe is not a good one. We’ll monitor developments as they happen, but for the moment it looks like tensions will continue to escalate.

Well, that’s it for this week.  Next week, I’ll be joined by Josh Taylor of tax pooling company Tax Traders. We’ll be discussing how tax pooling was able to help businesses’ cash flows in the past few months.

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

A controversial extra relief for the newly unemployed

2 Jun, 2020 | The Week in Tax

  • A controversial extra relief for the newly unemployed
  • Are redundancy payments overtaxed; and
  • Record numbers apply for instalment arrangements with Inland Revenue.

Transcript

According to a Statistics New Zealand report this week, job numbers dropped by a record 37,500 in April. This is the worst fall in employment on record. So naturally, the Government is still under pressure to ameliorate the impact of these job losses.

And its latest measure is a special relief payment beginning on 8th of June. From that date, anyone who has lost their job since March 1st because of the Covid-19 pandemic will be paid $490 a week for anyone who lost full time work and $250 per week for losing part time work. These payments will last for up to 12 weeks and will not be taxed.

Now, the scheme announced is similar to the Job Loss Cover payment introduced by the National Government in the wake of the Canterbury earthquakes in 2010 and 2011.  It also has a number of similarities to the ReStart package for workers who lost their jobs in the Global Financial Crisis in 2008. So these are undoubtedly welcome measures for those affected.

The controversy has arisen because beneficiary advocates have pointed out it appears to discriminate against the existing unemployed people. Furthermore, the fact that the payment that is being received of $490 dollars per week is almost double the $250 a week (after tax) that someone on the current Job Seeker payment would receive, implicitly acknowledges that the current level of benefits being paid is too low. This is a point that was made by the Welfare Expert Advisory Group report last year, which actually recommended benefits be increased at a cost of over $5 billion.

One of the other features, which beneficiary advocates might question, is that people who qualify for this payment but have partners who are still working may still be eligible for the payment so long as their partner is earning under $2,000 per week. Anyone who’s been involved with the existing treatment of beneficiaries will know that there are often very harsh cases coming into play where a couple’s income is aggregated, and that benefits are often struck down because a person has formed a relationship or is deemed to have formed a relationship during the period.

So the gap between the generosity of this new measure and the existing rules is quite marked and has drawn criticism.  How that will play out is largely a political matter. But it points to something that I’ve talked about previously –  we do need to look at our welfare settings and particularly the interaction with the tax system.

Unusually, these payments are not being taxed, whereas benefits are actually taxed. Now, the net effect is intended to be the same, but still it’s an interesting distinction. So whether it points to – as has been hinted at – there’s going to be some further changes and significant changes at that, in the benefits and welfare system remains to be seen.

For the moment, the important thing is for those who are directly affected now, this new payment will come as a relief for them as it’s intended to do so. And leaving aside the politics of it all, we shouldn’t be scapegoating those who’ve been unfortunate enough to be affected by the scale of the pandemic. Let’s look to try and improve the system for everyone, but don’t blame those who are caught up in it right now.

Speaking of redundancy, this week, I spoke to Madison Reidy of Newshub about the tax treatment of redundancy. Currently, redundancy is treated as a extra pay for tax purposes,  subject to pay as you earn and taxed at normal rates. That is, it’s fully taxable to the recipient. The PAYE that’s applied is based on the combined total of the redundancy and the annualised value of the PAYE paid to an employee in the previous four weeks.

Now, as Madison and I discussed, the tax treatment of redundancy is pretty harsh. Actually it’s harsh in two ways. Firstly because it’s taxed at a time when you may have to be reliant on it for an unknown period of time. The second point is that for some people the lump sum may be taxed at a higher average tax rate than would normally apply to them. This would be particularly true of lower income earners, say, earning around the $48-50,000 mark, where most of their income is being taxed at 17.5%. They may receive a redundancy payment which would be taxed at 33 percent. And the current system makes no concession for that.

It hasn’t always been the case. But our tax rules have been pretty hard on redundancy since 1992 when the rules were changed and redundancy became fully taxable. There was a period between 2006 and 2011 when a credit was given up to a maximum $3,600. But that was withdrawn in April 2013. Ironically, it was going to be withdrawn from April 2011, but then got extended for a further period to 1st of October 2011 following the Canterbury earthquakes.

But the treatment of redundancy seems harsh compared with what happens across the ditch in Australia, where the first A$10,638 dollars is tax free. And then A$5,320 dollars per year of service is also treated as tax free. So substantial payments can be received and, depending on the length of service, may not be taxed in Australia at all.  It does have to be redundancy. Accumulated leave and sick leave would be subject to tax in Australia. Over in Britain, the first £30,000 of redundancy is tax free.

It seems to me that we ought to be looking at this question of redundancy and whether, in fact, the rules are appropriate.  There’s going to be a lot of redundancy paid out over the next few months. We haven’t seen the full impact of the pandemic on employment yet. And therefore more people, sadly, will be losing their jobs. And at the moment, they’re going to get hit very hard with the tax on their redundancy and that’s going to cause some grievances.

As an aside, the treatment of lump sum payments under PAYE is a problem not just for redundancy. Retiring allowances are treated the same way. And most egregiously in my mind, are ACC payments. Sometimes people get in a dispute with ACC over the amount that’s due to them. When those disputes are resolved in their favour, then ACC may make several years of payments all at one go.  These are just simply treated as an extra pay and taxed as if it is the recipient’s normal income income.

What that might mean is say, for example, four years arrears at $20,000 a year or $80,000 might be taxed all at once,. The average tax rate which would apply on this payment is therefore much higher than would have applied if the person had received the payments when they should have done. This is a running sore in ACC, which again, governments have talked about changing but not followed through.

And finally, Inland Revenue is reporting a massive jump in the number of people applying to pay their tax off in instalments.

According to Inland Revenue, in March 2020, there are 104,443 payment instalment arrangements in place, compared with 41,014 in March 2019. The amount of tax that’s under instalment has gone from $659 million to $1.167 billion. I suspect this number will rise again in April.

Now Inland Revenue has been very proactive in accepting instalment arrangements, but it is a sign of the scale of what’s going on at the moment that so many more taxpayers are now under an instalment plan. It has doubled in one year. And possibly we may see it may have tripled once we see the April figures.

I’ve talked about instalment arrangements previously and what you need to do is get in front of Inland Revenue as quickly as possible. Explain what’s happening and give them a plan as to how you’re going to deal with it. Don’t put your head in the sand.

Just bear in mind that although at the moment Inland Revenue is being fairly generous about what is COVID-19 related or not, it may well take a second look at this. And that may mean that some people who were trying to set up instalment arrangements prior to the arrival of the virus may still be stuck with having to pay use of interest at 7% on the unpaid debt because it was a pre COVID-19 debt.

Whatever the case, the key thing in dealing with Inland Revenue is communication. Don’t put your head in the sand. Deal with the matter. You’ll find that at this stage, they’re responsive to requests.

Well, that’s it for this week. I’m Terry Baucher, and you can find this podcast on my www.baucher.tax  or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. Until next time, Kia Kaha, stay safe.