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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What will be in Inland Revenue’s Briefing to Incoming Minister? The challenges ahead for the new Minister of Revenue.

  • What will be in Inland Revenue’s Briefing to Incoming Minister? The challenges ahead for the new Minister of Revenue.
  • The small business cashflow scheme is extended
  • Should people working from home pay higher taxes?


Last week, David Parker was sworn in as the new Minister of Revenue. As part of his transition into his role, Inland Revenue will have prepared a Briefing to Incoming Minister, which introduces him to his portfolio, his role and the department. As the briefing to Stuart Nash in 2017 explained,

This document “sets the scene” to the work we do and how we can support you and outlines the strategic context of our work…As Minister of Revenue, you are accountable for the overall working of New Zealand’s tax system for Inland Revenue as a government department and for protecting the integrity of the tax system. You are also responsible for policy, direction and priorities and decisions on Inland Revenue overall budget.

We are here to help you support you, carry out your ministerial functions and servicing the aims and objects objectives you set. We do this by advising you on policy and strategy, implementing government policy and carrying out day to day functions of the department.

So that’s the top-level view setting out what the respective roles are. And then the document will run through what’s going on within the department and its key priorities. The 2017 briefing to Stuart Nash was rather internally focused, it talked extensively about Inland Revenue Business Transformation programme.

Three years on that’s now largely complete. Although those who listen to last week’s podcast will know that we there are some issues emerging there. So whether that is brought to the minister’s attention, we’ll know in due course when the briefing is released.

But certainly, I would expect other bodies, such as the Chartered Accountants of Australia and New Zealand who, as is traditional, are writing to the Minister of Revenue to say “Congratulations, here are a few things we think you need to look at”, I’m sure they will be raising that point with the new Minister.

Labour’s tax priorities

Now, the document will then talk about what is the immediate government’s priorities, as officials will have read Labour’s manifesto and seen what directions they need to take on tax. So the first cab off the rank will be raising the top tax rate from 33 to 39% on incomes over $180,000. Now, that will require a tax bill, but that’s a relatively straightforward matter and it’s planned to be pushed through before Christmas.

Now, the other policy objective outlined in Labour’s manifesto was work on a digital services tax. And so we can expect Inland Revenue to carry on doing more work on that. This is an interesting space around the world. It seems that governments are hoping that the OECD can come to a resolution on international taxation by mid-2021, but they’re enormously complicated tax issues to work through. And there’s politics involved. And although the United States gets singled out for its lack of cooperation on that matter, they’re not the only country which is raising objections to the OECD’s proposals

What is happening is that instead of waiting for the OECD, some countries such as the United Kingdom and India have jumped the gun and introduced a digital services tax. So that’s something that David Parker and Inland Revenue would consider. I don’t think, as I’ve said previously, they will move forward on it, but I suspect they will do a lot of policy work to have it ready.  They could then implement it if they feel that nothing significant is going to happen with the OECD.

Other pressing matters

But there will be other matters that Inland Revenue and David Parker will need to look at. There’s a tax bill that was going through Parliament before the election. This is the Taxation (Annual Rates for 2021, Feasibility Expenditure and Remedial Matters) Bill. Now that bill will be reactivated and reintroduced into Parliament. The intention would be that it will complete its select committee processes and be enacted some time in March or April next year.

The bill includes an item which has picked up some attention relating to something called purchase price allocation. This is where parties to the sale and purchase of assets can allocate the sale price between them for tax purposes. Now, Inland Revenue has estimated that at the moment, differing allocations of prices between buyers and sellers could mean that the government is going to lose out on over $150 million dollars of revenue between 2021 and 2024.

What’s been happening is some sellers and buyers have been picking differing values for individual parts of the businesses and taking the most advantageous tax position.  This means that the seller and the buyer can probably report very different values for the same items. Now, this has been going on for some time. Inland Revenue has been raising some concerns about it, and the bill is designed to try to tackle that.

There’s a report in Stuff written by Thomas Coughlan, which gives an example where the buyer and seller between them managed to reduce their tax bill by $7 million.

So that’s one of the matters on the agenda for the new minister. It’s worth pointing out that some of what goes on around that price purchase price allocation is driven by the fact we don’t have a capital gains tax.

And that’s going to be a growing issue for the government despite its declaration it’s not going to introduce a capital gains tax because having increased the top tax rate for individuals to 39%, there’s an 11 percentage point differential between the top rate for individuals and the company tax rate. That presents opportunities to try and convert income into capital. This is something Inland Revenue was already concerned about when the gap between the two rates was only five percentage points.

It’s a worldwide issue. I see that the UK Treasury’s Office of Tax Simplification has suggested to the UK government, that it should consider aligning capital gains tax rates more closely with income tax rates.

Currently, capital gains tax rates in the UK top out at 28%, but the top personal tax rate is 45% so you it’s quite a gap.  So the Office of Tax Simplification is suggesting change to discourage taxpayers from trying to disguise income as capital. That’s something that’s always going on in our tax system where if you don’t tax capital gains, the temptation is for people who can to shift assets into the non-taxed category. So those pressures will be there all the time.

And as we highlighted last week, the Department itself seems to have problems with its staff, with low morale. That, again, is something that needs to be addressed. So, David Parker and the new Parliamentary Under-secretary for Revenue, Dr Deborah Russell, will have plenty on their plates as they get into their role.

Doling out interest-free loans…

Moving on, this week, the Government announced changes to the Small Business Cash Flow scheme.

As promised, it has decided to extend the applications for the loan scheme from 31st of December this year, for a further three years, right through to 31 December 2023. The amounts that can be applied for will remain unchanged.

The other couple of changes are potentially a little bit more significant. Currently, no interest is charged if the loan is repaid within one year.  That interest free period will be increased to two years. At the moment the loan can only be used for core operating costs They’re going to broaden this so the loan can be used, for example, on capital expenditure.

Now, all this is really welcome stuff, and it’s a precursor to a more permanent regime, which I would hope has higher lending limits, because as we’ve talked previously, a lot of small businesses are undercapitalised. There was that Inland Revenue report that suggested $10,000 dollars was the point above which taxpayers basically gave up trying to pay tax debt, which suggests that there are some very undercapitalised businesses.

… and then expecting banks to lend more to SMEs

More broadly speaking, the government needs to be putting pressure on the banks to lend more to smaller businesses. I understand that in reports filed with the Australian Stock Exchange about customer engagement and support for banks, small businesses are highly unfavourable in their commentary about the banks’ lending practises. So there’s opportunities in that space.

And the Business Finance Guarantee Scheme, which was intended to help in this space, didn’t actually take off to the degree it could. It was quickly overtaken by the lending on the Small Business Cash Flow scheme. Small businesses are very, very important to the whole economy and enabling them to secure steady finance is a matter for the broader economy, which needs to be addressed.

Taxing working from home

And finally, from the “Maybe not quite such a good idea, but you know what they’re trying to do” ideas box, Deutsche Bank researchers have called for what they call a 5% ‘privilege tax’ on people choosing to work from home. The money would be recycled through to low-income staff.

This is actually come out of a major report Deutsche Bank prepared on rebuilding after Covid-19.  The idea behind the thinking is to compensate for the money that people working from home aren’t spending on lunch breaks. Therefore employees who choose to work from home should pay an extra tax.

The idea is that the tax that could be generated from this should be redistributed to low income workers who cannot carry out their jobs remotely, such as nurses, factory workers and in some cases, retail workers.

Now, the estimate is that a 5% tax could raise US$49 billion a year in the US, €20 billion Euros in Germany and £7 billion in the UK.  The idea won’t go very far, but it’s an example the lateral thinking is starting to happen around the tax base. I think everything is being shaken up and so a decision that may have been taken years ago  that these are the tax settings and we’re not going to change them has to be revisited in the wake of Covid-19 because that’s changed everything.

For example, I think the Government with the pressure of the housing market, might be reflecting on whether, in fact, it was such a good idea to say no capital gains tax for the future.

And on that note, that’s it for this week. Thank you for listening. I’m Terry Baucher and you can find this podcast on my Website or wherever you get your podcasts, please send me your feedback and tell your friends and clients until next week, Ka kite āno.

After the election what next in tax for the Labour Government? Who will be the Minister of Revenue?

  • After the election what next in tax for the Labour Government? Who will be the Minister of Revenue?
  • A future role for green taxes
  • Problems with Inland Revenue’s online functions


So now we know the election results and the morning after the election result, I got an enquiry from a US based tax website asking what’s going to happen? And in particular, how will the Labour Government be able to manage the issue around no capital gains tax and no wealth tax?

My correspondent also asked some questions about what’s going to happen in the international tax space, referencing comments I made last week about the OECD’s new Pillar One and Pillar Two proposals and progress on international taxation.

Labour when campaigning, promised an increase in the top tax rate 39% on income over $180,000. So, one of the first orders of business will be a tax bill to have that in place from the start of the new tax year on 1st of April.

Labour was a little less conclusive about what it was going to do over the trust tax rate. My view would be that it must rise from 33% to 39% as a “base integrity” measure. Otherwise, companies and individuals will use the opportunity to move income which could be taxed at 39% into trusts where it will be taxed at 33%.

There’s also going to be an incentive for companies to hold on to profits and reduce the amount of dividends distributed, given an unchanged company tax rate of 28%. And obviously shareholders will not be keen on paying an extra 11 percentage points if the distribution is received. This actually is a matter Inland Revenue is already concerned about, given the existing gap between the company rate of 28% and the top personal rate of 33%. And that problem is going to be exacerbated when the top tax rate rises to 39%.

Therefore, one of the big orders of business for Inland Revenue and the new government is what are they going to do about addressing that particular issue? So, watch this space. There could be some stronger use of existing anti-avoidance mechanisms or maybe a specific measure is brought in.

The US correspondent did ask if the government would be able to stick to its promise not to implement either a wealth tax or capital gains tax. I fully expect that will be the case. The Prime Minister has made her reputation on sticking to her word, and although she and Grant Robertson probably feel their hands are very much tied on the matter, that will remain the case.

Other options

It doesn’t mean that there aren’t other opportunities to raise revenue. The Tax Working Group considered the possibility of applying the risk-free rate of return method to residential investment property, similar in the way that the Foreign Investment Fund regime’s fair dividend rate applies to overseas investments.

I expect to see Inland Revenue get extra funding to tackle the cash economy, where estimates of the amount of tax currently being evaded each year range between $850 million and $1 billion. I’ve mentioned it before, and I think Inland Revenue will also be looking also at the question of fringe benefit tax on work related vehicles.

I also see that the Reserve Bank governor has started to talk about loan-to-value ratios coming into place. That is something that I raised recently in a column as possibly one of the only ways left to tackling the rapidly rising house prices. A related tax measure could be the application of the thin capitalisation regime.

Last week I talked about the taxation of multinationals and it is quite possible that we might see the digital services tax move forward, if nothing more than just to keep pressure up on this matter. It would be a big step for the government to take as they do like to move in lockstep with the Australians who aren’t doing anything on this. But if they’re having to wait to see progress, it might be that just simply pushing it forward to have it ready to go at a moment’s notice would be the option to take.

Also interesting to note in this week’s developments, is the antitrust action taken by the US government against Google which references the outcome of the rather damning report recently issued by the US House of Representatives.

Ex IR staff now tax minister candidate

Finally, it will be interesting to see whether Stuart Nash continues as revenue minister or a new minister is appointed. If Stuart Nash moves on, an obvious candidate would be my co-author, Dr. Deborah Russell, who is ex Inland Revenue and has been the most recent chair of the Finance and Expenditure Committee. Interestingly, one of the new Labour MPs, Barbara Edmonds, who won the Mana electorate, is also ex Inland Revenue and was seconded from Inland Revenue to work in the Minister of Revenue’s office. We should know next to by this time next week who’s going to be the Minister of Revenue.

By that time, incidentally we should also see Inland Revenue’s annual report. It will be interesting to see what’s being presented to the Minister.

Green taxes

Moving on, the Green Party’s campaigning for a wealth tax drew a lot of attention and has got pundits talking as to how much of a factor it might have been in Labour’s huge win. But putting aside the wealth tax green taxation is a matter which is going to become very, very important over the next 10 years.

Now, at the moment, jurisdictions all around the world are quite rightly reluctant to move quickly on introducing new for fear of damaging a recovery from Covid-19. However, that’s not to say that green taxes don’t have a role going forward. And another paper released a couple of weeks ago from the OECD looks at green budgeting and tax policy tools to support a green recovery.

The OECD also notes that carbon pricing is going to be important because it will encourage low carbon investment and consumption choices. And it regards carbon pricing as “a key tool for a successful recovery”. In particular, what it thinks is important about carbon pricing, such as our emissions trading scheme, is that it raises the cost of carbon intensive assets and therefore will steer investment and consumption towards greener, low carbon alternatives. And then ultimately, of course, carbon pricing can help restore public finances by bringing in tax revenues.

Although I think looking at the future role of green taxes, that’s something further down the path. And that, by the way, was also a conclusion of the Tax Working Group. It saw that there was a future in environmental taxation, but the actual tax tools had to be developed first, and that meant it didn’t see an immediate revenue gain from environmental taxation. But longer term, these would become more important.

The paper has some eye watering numbers in it. For example, it references the European Coronavirus Recovery Fund, which is worth over one trillion euros over the course of the six years between 2021 and 2027. And of that, €300 billion is specifically earmarked for green projects.

On carbon pricing, the OECD research shows that 97% of energy related carbon emissions from advanced and emerging economies, which would include New Zealand, are not taxed at a level that’s compatible with decarbonisation, according to the Paris Agreement. And there are some 70% of emissions that are entirely untaxed. That’s a hugely controversial matter here, obviously, because of our agricultural emissions.

So, what I think we will see coming from the new government going forward is, for example, a feebate scheme, which involved rebates for purchase of electric vehicles to replace fossil fuel vehicles. That was one of the projects that New Zealand First put the kibosh on. We’ll probably see that come back up on the table very quickly. And we also expect to see some other moves on this matter.

But I expect although there will be steps in environmental taxation, these will be rather cautious to begin with, for the reason I say said a few minutes ago. No government would want to increase taxation too quickly during the early stages of a recovery from the Colvard pandemic.

The IR stumbles with its ‘think big’ project

And finally, Inland Revenue’s online functions have been experiencing technical issues all week. Now, this is unusual because this time of year is not usually a time of peak demand. This is between early May and late June, when it is dealing with the wash up from the previous tax year. So, what’s going on at the moment? We don’t know but it’s certainly not a demand related area.

Now, of course, this touches on Inland Revenue’s very controversial $1.5 billion Business Transformation project. That has been a controversial project for a number of reasons. Firstly, the sheer size of it. I know that local IT providers resented being shut out of this project. One provider at a 2014 tax conference pointed out that they had successfully built and implemented a GST system for the Bahamas in barely six months. They could not understand why Inland Revenue was spending the amount of money it was on the overall Business Transformation project.

Actually, that point also touches on something which several submitters made to the Small Business Council. And that is small businesses often felt shut out of government contracts because of the complicated procurement process involved. And one thing I’d like to see from the new government going forward is making it much, much easier for small businesses to bid for government contracts. And that also applies to local government.  The amount of spending across local and central government runs to tens of billions of dollars.  The risk around simpler procurement policies for, say, projects of up to, say $5 million or so are actually statistically insignificant. So that’s something I’d like to see the government move on.

Inland Revenue’s outsourcing to an American company for the upgrade project didn’t go down well with the local tech industry. And again, outsourcing overseas is something the government would need to be careful about moving forward.

‘Transformation’ gets tax community offside

Inland Revenue’s Business Transformation didn’t seem to factor in its relationship with tax agents. Although the actual transformation is largely successful from Inland Revenue’s viewpoint, it hasn’t gone down well in the tax agent community. I had a client complain to me that he had recently received a call from Inland Revenue which basically said you don’t need a tax agent anymore because we can help you manage your tax. His comment was, “I really felt I was being sold something”.

We’ve complained about that unsolicited call and we’re not the only tax agency to have had clients receive such calls.  But so far, our complaints don’t appear to have been heard.

Now, Inland Revenue has a very proper role to call clients and taxpayers who are behind on filing or tax payments. But what many tax agents have experienced is calls are made directly to their clients which are not related to these matters at all. And that is something that I think has gone on for too long and needs to be addressed. So that’s one of the headaches the incoming Minister of Revenue, will need to pick up on.

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

The Government extends the Small Business Cashflow Loan Scheme;

  • The Government extends the Small Business Cashflow Loan Scheme
  • ACC levies are frozen until 2022; and
  • Inland Revenue explains the taxation of overseas investment properties.


At the start of the week, the Government announced that it was extending the Small Business Cashflow Scheme until the end of the year. Under the scheme, small businesses can apply for a loan of up to $100,000 which is interest free if repaid within the first year and then subject to interest at 3% thereafter.

The scheme is targeted at small businesses and according to statistics, around 80% of the firms that have applied for it have between one and five employees with just over 90% of all applicants having 10 or fewer staff. In total, as of July 3rd , 90,485 businesses had applied for just over $1.51 billion of loans since 12th  May. The average value of those loans is about $16,700.

Extending the loan scheme is a very good move, in my opinion. It fills a hole that the Business Finance Guarantee Scheme seems unable to reach at this point. Small businesses need cash flow and have struggled with getting funding from banks, it appears. So,the Government enabling applications to continue to be made right up until 31st December is a good move.

As I’ve said previously, I think a permanent iteration of this scheme should be under consideration once we get through the pandemic. We’ll have plenty of data to examine as to who took up the loan and were able to comply with the repayment terms, and those that in fact shouldn’t have because the business was never going to pull through. We’ll then be able to factor in this data in designing a permanent successor.

The ACC levy freeze

Moving on, the Government has now announced it is going to freeze ACC levies at the current levels until 2022.

Normally these would be up for review in 2021. But instead, the Government has decided to defer any review of the levies until 2022. So that means that the levies for the employers and earners will stay the same until 31st March 2022, and motor vehicle levies will remain as they are until 30th June 2022.

For employees that means the ACC earners levy that they will be paying stays at $1.39 (including GST) per hundred dollars of liable earnings. For employers, the average levy rate is $0.67 (excluding GST) per hundred dollars of liable earning, up to the maximum threshold which is currently $130,911 per year.

And in the motor vehicle account, the average levy per vehicle will be frozen at $113.94 (excluding GST). So, all of that will come as a welcome relief for car owners, employees and employers alike.

Tax on foreign investment properties

Meanwhile, Inland Revenue has issued an Interpretation Statement on the tax issues arising from the ownership of foreign residential investment property.

And that’s been accompanied by an Interpretation Statement on how the financial arrangements rules would apply to foreign currency loans used to purchase foreign residential rental property.  It’s very good to finally see some official guidance in a single comprehensible document in relation to these two topics, particularly in the case of the application of the financial arrangements’ rules.

What the Interpretation Statement relating to ownership of foreign residential investment property does is set out all the basic rules as to what would be expected. It reminds every New Zealand tax resident that you are required to return income on a global basis.  This means even if you are returning income in relation to an investment property in the jurisdiction in which it’s situated, you still have to report it for New Zealand tax purposes, although you will be given a tax credit for any overseas tax credits paid in relation to that property.

It also has a reminder that the way New Zealand calculates rental investment income may not be the same as in the other jurisdiction. So you have to make sure that when calculating income for New Zealand tax purposes, you apply New Zealand rules. In other words, it’s not going to be sufficient to simply take what was been reported for, say, Australian or American purposes and convert that into New Zealand dollars and include that in your tax return. There may be one or two subtle distinctions in there, which you need to account for.

The other point it makes is one which is not terribly welcome, and that is if a New Zealand tax resident has an overseas investment property which has a mortgage in an overseas currency against it, then they are responsible for deducting non-resident withholding tax on the interest paid to the overseas lender.

Now, that is the law. But whether the law should actually be applied that way is a moot point, because my view is that when non-resident withholding tax rules were introduced way back in the 1980s, this was not the type of transaction they were meant to cover. And the result is there’s a fair amount of additional compliance for taxpayers in in managing and reporting their withholding tax obligations.

And it’s a question if Inland Revenue wants these rules to be applied, I think it should be looking at the limits for reporting and how frequently people should report.  Asking people to report monthly is a bit of a recipe for slip ups.

There is the alternative of using the Approved Issuer Levy, which is a flat 2% on interest payments. But again, the reporting limits around that should be considered. And you’re actually talking about relatively small amounts so again, you come back to the point, is the compliance burden imposed actually justifiable?  (These rules apply even if the interest is paid out of an offshore bank account.)

The second Interpretation Statement relates to the application of the financial arrangements’ rules to foreign currency loans, which may be used to purchase foreign residential rental property. This is a horrendously complicated issue which I’ve spoken about before. So it’s actually good to get the official word on the matter.

To give you an idea of just how complicated this topic is, the Interpretation Statement relating to financial arrangements runs to 19 pages. It includes a detailed example of how the rules apply to calculate the exchange rate movement in a year. The example also covers what happens when an overseas currency mortgage matures, and we have a ‘base price adjustment’ or wash up calculation. This example runs to five pages.

These rules are essentially incomprehensible to a layperson. They’re not even well-known among tax agents and advisers. So although it is fantastic to get very clear guidance on how the rules would apply, together with a really clear example of the exact operation, the bigger issue is whether it is reasonable to impose such complicated rules on what is for a layperson a very simple transaction as they see it.

The financial arrangements rules have been around since the mid-1980s. They were never designed to deal with the lay person but were really targeted at companies and financial institutions holding significant amounts of financial instruments such as bonds, overseas currency and swap-arrangements. Applying the rules to a lay person is technically correct, but the practicalities have yet to be worked out.

Of course, one of the effects of the financial arrangements rules is this peculiar position that the exchange gain on the repayment of the mortgage will be taxable. But for New Zealand tax purposes, the sale of the property to which it relates may not be taxable because for example it’s outside the bright line test, or it’s deemed to be an investment property and therefore held on capital account.

The thing to keep in mind is in many of the jurisdictions that these investment properties are situated, such as America, Australia and the United Kingdom there is a capital gains tax and it applies to non-residents. That’s a point that I think is often overlooked by investors looking to hold properties in those countries.

One other point comes up here which isn’t exactly clear, and that is if you have an exchange rate movement in a year, which results in a loss that is deductible for the purposes of the rental income calculation, assuming that you have rental income. However, the loss is not separately deductible, although the financial arrangements regime is a separate regime within the Income Tax Act, the Interpretation Statement does seem to imply that assuming the loss meets the deductibility criteria it is also subject to the loss ring-fencing rules. So that’s something to keep in mind and I’ll try and clarify that point with Inland Revenue.

Well, that’s it for this week. I’m Terry Baucher, and you can find this podcast on 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.

The Small Business Cash Flow Scheme

  • The Small Business Cash Flow Scheme
  • Inland Revenue’s guidance on the sharing economy
  • Employees claiming home office expenditure


With the move to Alert Level Two, there’s some level of normality being restored, and most businesses are now able to operate. But for many, the COVID-19 pandemic represents a major hit to their business and cash flow.

So, one of the measures that they probably welcome is the most recent one announced by the Government, the Small Business Cash Flow scheme (which wasn’t actually included in the Budget estimates and hasn’t yet been costed formally).

Now, this scheme had a rather chequered start when the legislation enabling it was accidentally released and then passed by Parliament ahead of time. But now the details have been fleshed out and it has been up and running since May 12th. For one month until June 12th businesses with 50 or fewer full-time equivalent employees can apply for a loan.

Eligible businesses and organisations can then get a one-off loan with the maximum amount being $10,000 plus $1,800 per full-time equivalent employee. There’s an annual interest rate of 3%, but no interest will be charged if the loan is fully repaid within one year.

Now, the scheme is being administered by Inland Revenue, which seems odd because it’s not its core business. But if you think that it already administers the student loan scheme, then giving it the responsibility to manage the Small Business Cash Flow is not unreasonable.

The scheme was put together very quickly when it became apparent that the business finance guarantee scheme arranged with the banks under which the Government underwrote 80% of the risk was not delivering funding to small businesses quickly enough.

It is already – in terms of demand – a huge success. By Friday of the first week of its launch more than 33,000 business had applied for a loan, and 31,000 loans had been approved. So far, just under $600 million dollars has been approved for lending. There are about 400,000 businesses in New Zealand with 50 or fewer full-time equivalent staff who are eligible. So the Government is looking at a potentially horrendous amount of borrowing.

If you work through the Inland Revenue website, you’ll see the calculation of the loan is tied to the wage subsidy scheme. In fact, you can apply for the loan, even if you haven’t applied for a wage subsidy. The reference to the wage subsidy scheme is there just simply to provide a rough and ready calculator of the amount that’s available.

Under the terms and conditions, the loan must be repaid within five years and the interest rate is 3%. But if you are late with an agreed repayment, use of money interest, which is now 7%, will apply in addition. So effectively there’s a 10% rate for late payments.

As I said, the scheme is open until 12th of June. It’s looks like it’s going to have a huge take up.

And it does raise an interesting point that given the difficulties small businesses have had accessing financing from banks – despite the Government agreeing to underwrite 80% of the risk – this scheme was still needed. And the question arises that once everything settles down and we return to business as normal, whenever that is, whether there is a role for a similar type of scheme to exist for small businesses in the future. In America, the Small Business Administration runs a hugely successful small business loan scheme. Something I think the policy advisers at MBIE should be considering is maybe a permanent iteration of this scheme.

How Inland Revenue is coping

Moving on, Inland Revenue has continued to operate as best as possible through the pandemic. Its call centres have been very hard hit with having to deal with the effects of social distancing. Quite apart from that, Inland Revenue has found itself with additional responsibilities in the aforementioned Small Business Cash Flow Scheme and also assisting the Ministry of Social Development in administering the wage subsidy scheme.  What happens is the MSD calls Inland Revenue to confirm details regarding the applying business’s tax affairs. And once those are confirmed, the wage subsidy is then approved or declined as appropriate.

As a result, Inland Revenue has stopped answering the phones on its dedicated line for tax agents and its call centres have, as I mentioned, reduced staffing because of social distancing measures. But it has been responding very, very quickly using its online features and particularly its myIR feature.

Inland Revenue’s recommendation is if you want to make contact, the best way is through the online myIR service. And furthermore, if you get a response from Inland Revenue, you can actually reply to that response. Previously, replying to IR used to trigger a new response and a new inquiry. So there’s a lot of favourable stuff happening in the background with Inland Revenue.

Inland Revenue has also been upgrading its website as part of its Business Transformation programme. It is splitting off the technical matters such as tax policy and legislation, Tax Information Bulletins, the various formal determinations, interpretation, statements  and other technical documents that it issues.

Inland Revenue’s main website actually makes really clear reading, and it’s been adding explanations of various areas of interest where it will be focusing its attention.

Tax and the sharing economy

One of the features it has recently added is a section on the sharing economy. The sharing economy is described “as any economic activity through a digital platform such as a website or an app where people share assets or services for a fee.”

The various sharing-apps it discusses are obviously the ride sharing or sometimes called ride sourcing, such as Uber, Zoomy or Ola.

Then there’s short stay accommodation, including renting a room or a whole house unit. So that’s Airbnb, Bookabach or Holiday Houses. Then there’s sharing assets, for example cars, caravans or motor homes. And those who come through platforms such as Yourdrive, Mighway, Parkable, MyCarYourRental and Sharedspace.

Finally there’s people who in the gig economy are using platforms such as Pocket Jobs, Fiverr, Air Tasker, WeDo, Askatasker, Deliveroo and Mad Paws. Very creative names there.

All these platforms are covered by the sharing economy and they’re all subject to income tax, and GST if the value of your services exceeds $60,000 in any 12-month period.

Inland Revenue’s website sets out what is fairly standard guidance as to how it expects the rules to apply.

What it also sets out is what are not considered part of the sharing economy, and that includes online selling or classifieds such as Trade Me or eBay, cryptocurrency exchanges which are dealt with completely separately, and peer to peer financing or crowdfunding. Now these still have income tax and GST obligations, but slightly different rules apply.

As I said, this guidance from Inland Revenue is really clear in setting out the rules. There should be no reason for people not complying.

As Inland Revenue gets back to a normal, what I expect will happen is that its investigators and staff will basically be told to kick over every rock around to see what’s under there.  So you can expect a tightening of the rules and increased examination of the cash economy, using cash to avoid tax.

Ride-sharing apps, by their nature are outside the cash economy. But I think one of the things Inland Revenue will be doing is sending requests to the ride sharing app platforms asking for details of who in New Zealand is using the respective platform.

In summary, the rules are set out there very clearly. And behind them is the unspoken threat that Inland Revenue will be looking at this sector as things return to normality.

More on home office expense claims

And finally, we recently discussed the treatment of Home Office expenditure.

It so happened I was interviewed for the Cooking the Books podcast of the New Zealand Herald about this matter this week. There was an unfortunate misstatement in the article, which initially suggested that people would be entitled to a $15 per week tax refund.

That is not correct. An employee can’t claim a deduction for home office expenditure, but they can apply to their employer for reimbursement. And Inland Revenue has issued a temporary determination valid until September, under which payments of up to $15 per week can be made to an employee and they will be treated as exempt income for the employee. If you have any questions, as always, you know where we are.

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