Inland Revenue guidance on the deductibility for income tax purposes of costs incurred due to COVID-19

Inland Revenue guidance on the deductibility for income tax purposes of costs incurred due to COVID-19

  • Inland Revenue guidance on the deductibility for income tax purposes of costs incurred due to COVID-19
  • Inland Revenue releases an issues paper on the future of tax administration in a digital world
  • The tax perils of not taking advice before migrating.


We’re now in the third year of the pandemic which over the past two-and a-bit years has resulted in an enormous amount of upheaval, both socially and for businesses. Plenty of unusual situations have arisen as a result, and the tax treatment of those situations needs clarification.

Inland Revenue has therefore released some draft guidance for consultation on the tax deductibility of costs which have specifically arisen because of COVID-19. What the paper notes is that businesses have suffered significant disruption as a result of the pandemic, and many have had to incur additional costs that would normally be regarded as unusual or abnormal, which have only arisen because of the pandemic. In addition, businesses are continuing to incur holding costs such as interest and depreciation for assets which they can’t use at the moment, either because of COVID-19 restrictions or because they’ve temporarily downsized the business.

This paper is designed to give guidance around the income tax deductibility of expenditure in those circumstances. It looks at a number of particular situations that obviously Inland Revenue have seen or have been asked to advise on. For example, what about the costs of bringing employees into New Zealand or retaining teams who are unable to work? What about providing accommodation to keep teams housed together in a bubble during a particular set of COVID-19 restrictions?

Other scenarios include what’s the tax deductibility of giving employees vouchers or incentive payments? And then what about redundancy payments – are they deductible if they were a result of COVID-19? What about costs of terminating contracts and related legal fees?

Repairs and maintenance and depreciation on assets and equipment that aren’t being used because of the pandemic – are they deductible? And then premises costs such as lease break fees and other costs such as keeping people appropriately distanced in a workplace. As you can see, there’s a lot of scenarios considered in the paper.

The general rule for deductibility is in Section DA 1 of the Income Tax Act. For a cost to be deductible there must be a nexus between the cost and the person’s income earning process. Now that’s always a matter of fact and degree and what must be kept in mind is that the cost to be deductible doesn’t need to be linked to a particular item of income and the income doesn’t need to be produced in the same year as the cost was incurred. The cost must be incurred in general terms as part of the business’s income earning operations. That means you can take longer term objectives about why you’re incurring expenditure.

The paper then matches these basic principles to the scenarios that I set out before with a series of good examples. These scenarios involve a hotel chain, a café, a construction company, a tourism business, and an office. I recommend reading the paper if you’ve encountered some of these unusual situations. Consultation, as I said, is open now and continues until 31st March.

Incidentally, talking about consultation, submissions close at the end of this month on an Inland Revenue consultation regarding charities and donee organisations. I covered this consultation in early December and the question of the charitable status of a few organisations has been in the news lately. So, here’s your opportunity to make submissions to Inland Revenue.

Tax in a digital world

Moving on, in my first podcast of the year, I suggested that Inland Revenue will be looking to move forward the process of tax administration now it’s completed its Business Transformation. And I recommended looking at a paper prepared by Business New Zealand on the future of tax administration.

Inland Revenue has now released an official issues paper on tax administration in a digital world. And this, I think, is a very important development for tax administration and for tax agents and intermediaries, or anyone involved in the tax system. As the paper outlines, businesses are moving online, and this is shaping Inland Revenue’s thinking about the future world in which the tax system will operate.

The paper runs to 25 pages and there is a lot to consider so I could rabbit on for quite some time. It picks up many of the principles or ideas that were set out by the Business New Zealand paper, but probably at a higher level. Inland Revenue believes that there are four pillars that set out the core framework for tax administration and social policy administration to function well. That is fairness and integrity, efficiency and effectiveness. And the paper discusses what is the impact of technology on all of those.

As Inland Revenue sees it, key features of the digital world are likely to be businesses operating in a digital ecosystem. That is, connected digitally to their suppliers and customers. The Administration of tax and social policy payments will be integrated to broader economic systems.  That means, for example, individuals or businesses can use a common digital identity across a range of services. That is something I think that’s happened with COVID-19. The pandemic will accelerate that trend because it just makes life so much easier for everybody. You’re not having to deal with providing repeat information to different agencies.

Tax administration processes are going to become embedded into business systems that businesses are using. In other words, they’ll use systems that fit their business rather than tax obligations. And then, this is a key one, digital processes will enable data to flow in real time.

This is a point I keep coming back to – the amount of data that’s flying around and Inland Revenue’s access to that data, is increasing all the time. And the speed with which that data is being received and processed is also accelerating. Which means, as I’ve said repeatedly, there are fewer and fewer places to hide from Inland Revenue.

And so this paper looks at what that future might look like and it sets out some frameworks, and sets the scene in the shift to digital.  There’s a very important chapter for tax agents, intermediaries and other people who work with Inland Revenue about how it sees these relationships developing.  The paper considers the issue of data, how it’s collected, how it’s shared and what statistical data is to be made available on an anonymous basis.

You will know at the moment there’s a lot of controversy going on regarding a high wealth project where Inland Revenue is asking a group of about 400 New Zealanders for detailed information about their wealth. In my view, one of the weaknesses in the New Zealand system for some time has been that we haven’t actually collated a lot of data when we file tax returns. And so compared with other jurisdictions we don’t really have good data on many parts of economic wealth. That project, controversial as it is, addresses this issue. In the future because data can be found and supplied more easily, I think the data requests from agencies and particularly from Inland Revenue will increase.

There’s also talk about publishing debt data. In other words, if someone’s been a bad boy – and by the way, it is invariably boys in my experience – Inland Revenue may share that data and may develop a number of tools for enforcement.

Then the final chapter talks about general simplification process, how tax laws are written, simplifying the tax year end position and payments around the tax system.

The issues of data sharing and data protection are very, very important. In my view Inland Revenue does have a good reputation and processes for not leaking data, and its data is secure.  But as it changes its role to interact more with intermediaries such as tax agents, there’s an obvious risk of leakage.

The paper therefore suggests the current process by which a person can become a tax agent needs to change. Actually within the tax agent industry I think there is a recognition that does need to change even if that reflects a certain amount, you might say of self-interest by the professional bodies. It is quite true and not an apocryphal story that a prisoner registered as a tax agent with Inland Revenue when he was in jail. He was able to do so because he had 10 clients who had to file tax returns.

If data is now going to be shared more freely and Inland Revenue is not directly controlling so much of the process, it needs to be certain that the people it’s granting access to its systems or data are trustworthy. So that’s a big issue to consider. As I said, the paper is a fascinating one. It’s a big topic, but it’s only 25 pages, and an easy read.  Submissions are now open and continue until 31st March.

The tax consequences of emigrating

And finally, this week, according to the latest statistics New Zealand figures, more people continue to leave New Zealand on a permanent long-term basis than are arriving long term.  In 2021, there was a net annual loss of three 3,915 people. Now at the risk of sounding like a broken record, one thing I regularly encounter is this issue of people migrating offshore, usually to Australia, sometimes to Britain or America, and overseas migrants from other countries coming to New Zealand.

It is quite astonishing the number of people who move overseas without looking through and considering all the tax implications of their move. In particular, if they are a trustee of a trust. As I have recounted a number of times, particularly in relation to Australia, the consequences of becoming resident in Australia can be quite disastrous. But I still keep encountering this issue. In fact, at the moment I’ve got three cases on the go involving variations on that theme.

So just a reminder to anyone who’s thinking about moving to Australia or moving overseas. Just remember to get tax advice before you go. You may be missing an opportunity. You may also be giving yourself a significant tax headache, which nobody wants.

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.

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

Terry looks at what’s ahead in the world of tax this year and finds some big issues.

  • Terry Baucher looks at what’s ahead in the world of tax this year and finds some big issues
  • some lingering from the past
  • and some new ones to be grappled with


2022 is only four weeks old, but as was the case last year and in 2020, COVID-19, this time in the form of the Omicron variant, will dominate the news and fiscal policy.

Tax responses to the pandemic

What exactly the Government’s fiscal response to Omicron will be is not yet clear. There’s no mention so far of a new round of Resurgence Support Payments or a general wage subsidy. And now, since we’ve moved into the red traffic light setting as of midnight on 23rd January, there’s concern many employees will soon be unable to work because they’re either sick or self-isolating from Omicron.

So what support is available? Well, at the moment it’s just the Leave Support Scheme or the Short-Term Absence Payment scheme. These have replaced the wage subsidy. The Leave Support Scheme is a payment for when a person or a dependent is required to self-isolate due to Covid-19 either because they’ve been exposed to it, or they’re considered high risk if they were to contract it. The Short-Term Absence Payment, on the other hand, is designed to help employees who are self-isolating while they’re awaiting the result of a Covid-19 test. In order to be eligible for the Leave Support Scheme the Short-Term Absence Payment the employee needs to be unable to work from home.

The Leave Support Scheme is paid at a rate of $600 a week for full time workers, those doing more than 20 hours a week, and $359 a week for part time workers, i.e. less than 20 hours a week. The rules around these payments are set out in the Covid-19 guidelines, and for the moment, that’s all that’s available. And by the way, both payments are administered by the Ministry of Social Development and will be made regardless of the financial position of the employer.

Industries such as hospitality, tourism and the performing arts sector have all been hit hard and will be affected by the move to the red traffic light system. But at present, nothing in the form of an updated Resurgence Support Payment or something new has been mentioned.

Any response to this issue is clearly a matter of politics although it will have a fiscal impact. Bernard Hickey, the economic commentator and journalist, has put together an analysis of the impact of the Covid-19 support to date and who has benefited from that, and the numbers are quite eye watering. In his daily newsletter, he says that the government’s interventions to print $58 billion through the Reserve Bank and give $20 billion in cash to business owners helped make owners of homes and businesses $952 billion richer since December 2019. This is one of the greatest transfers of wealth New Zealand has ever seen. It’s also highlighted the pressure on those at the other end of the scale. The poorest New Zealanders now owe $400 million more to MSD and need twice as many food parcels as they did before Covid-19.

Now as I said most of this is political, and we’ll see if the optics of such huge changes will affect how the next form of fiscal support will be designed. Will it be as generous, or, as many people have said, should the funds be going directly to employees and those infected rather than through their employer?

Taxation of capital

More importantly, the never-ending issue of the question of the taxation of capital will re-emerge on this. We’ve already had discussions with one or two other people in the policy space around what we think could be happening in the year ahead and the question of inequality and taxation of capital has popped up again. Although it seems incredible to think the last election wasn’t so long ago, there’s an election next year, and I imagine there would start to be some jockeying around positioning for that.

So Omicron and Covid-19 and God forbid, any further variants, will play out on the economy. What type of support the Government gives and how it funds it will have tax implications. It might be, for example, the Government might have a look again at whether it allows the carry back of tax losses. They were going to push ahead with, a permanent scheme, but dropped it for fiscal costs. They may have a think again because the fiscal cost might not be so great as expected or feared, and can actually be concentrated on sectors which are getting hit hard anyway. So that’s something to look out for.  So, watch this space and we’ll bring you news of developments throughout this year as they happen.

International tax reform

The next area I think we will see, and again repeating a theme from last year, will international tax reform and following through with the implementation of the agreement on the taxation of the largest multinationals and the digital tech giants. This year the detail of that agreement is to be worked out. The OECD released last week the transfer pricing guidelines for multinational enterprises and tax administrations for 2022.

140 odd jurisdictions have committed to the reforms of digital taxation and will be working on making sure that it meets these pretty ambitious deadline to be in place by the end of the year, so we’ll see a string of developments in that field.

How our tax system is run

And finally, on the domestic front, the issue which I think will dominate is what next for Inland Revenue now it’s completed its Business Transformation? Basically this is about how the tax system is run. Now, this may sound like a dry topic, but there’s already been quite a bit of manoeuvring around what is the future of tax administration.

On this, I would recommend reading a paper prepared by Business New Zealand in conjunction with tax experts (some of whom included members of the Tax Working Group, such as Robin Oliver) on the future of tax administration. I understand sometime soon we’ll see a Government Green Paper on tax administration, which would explore what tax administration could look like in future and how to make best use of Inland Revenue’s completed Business Transformation project.

What Business New Zealand and its working group have done, is put together a roadmap including a series of revised tax principles applicable for tax administration. This is talking about the delivery of tax policy and administration, not about actual tax policy settings, per se.

One of the things that’s stands out from this paper is that Business New Zealand, and from my initial discussions with Inland Revenue on the topic, see Inland Revenue moving more to focus on system management and partnering and assisting a wide range of participants in the tax system other than taxpayers themselves. This is a bit of a change in the whole approach. Inland Revenue is no longer adopted a top down “It’s my way or the highway” around how tax is administered and delivered.

The paper sets out seven tax administration principles. Firstly, “The purpose of ongoing reform is to reduce the risks and costs for all participants in the tax system and improve national wellbeing”. Nothing too controversial about that, totally agree.

Secondly, “The tax system is built to assist those who voluntarily comply, with robust enforcement for those who do not.”

I wholeheartedly agree with that. Voluntary compliance is undermined if Inland Revenue does not throw the book at those who are not complying.

One of the issues raised in this paper and which has been picked up in other papers on tax administration I’ve seen from around the world, is that sometimes this means tax authorities have to take an approach to a particular sector or area of enforcement where it might not necessarily see there’s a lot of money in it for them. For example, the fringe benefit tax issue around the infamous twin cab Ute. Inland Revenue has said, “Well, yeah, we think there’s an issue there, but we don’t know whether it’s worth our while”. Under this tax administration principle, it’s, “No, you really do need to look at that, there are wider integrity issues as to why you should do so”.

Three. “Everyone understands their rights and obligations through clear, unambiguous legislation and guidance.”

Very strong support of that principle. And as we talked about last year, one of the pressures that’s coming into the tax system is we’re getting less clear legislation and guidance. This is because the Government is doing things a little bit ad hoc as it responds to pressures, inevitable pressures sometimes, but the tax policy process has not been as robust as it could have been.

And there are two obvious example to talk about here. Firstly, the interest deduction rules and secondly, the proposals to ask high wealth individuals to provide more details about their assets and how they’re held. Both those policies have been done one would argue, a little bit on the hoof, and this certainly caused pushback as a result.

Following through on this, the fourth principle is “Tax rules are designed and administered in a way which reduces compliance and administration costs.” And again, everyone can get behind this. Business NZ paper points out this is something that’s actually much more important for small businesses and microbusinesses where the costs fall heaviest on them, and often they don’t have the tools in terms of the resources to manage their tax liabilities.

The fifth principle is “Tax policy proposals are critically evaluated against the ability to automate outcomes.” Very straightforward. No issues there.

Sixthly, “A well-functioning tax system recognises the role and importance of intermediaries.” Now, regular listeners of the podcast will know that sometimes as tax agents, we felt unhappy about how Inland Revenue had interacted with us and about how the Business Transformation process was implemented.

And what this paper points out is intermediaries such as tax agents and other software designers are incredibly important to the tax system going forward. To be fair to Inland Revenue, that seems to be also coming through on what I’m hearing from them. A very important change there and a welcome one, too.

And finally, “Taxpayers and intermediaries are held responsible only for matters within their knowledge or control.” This is a fair point setting some boundaries so that taxpayers are not held accountable for errors beyond their control or knowledge.  This might happen because sometimes information wasn’t available or can never be made available to a taxpayer or an intermediary. At present the tax system can come down hard on the reporting person because they should have known, when in fact they may not have done or could not have done.

The paper suggests for example that Inland Revenue which has better knowledge should be responsible for advising taxpayers and intermediaries of incorrect tax rates and tax codes.  So this is an issue of increasing fairness in the tax system.

Now I understand that Inland Revenue is going to produce a Green Paper for discussion and is considering holding a symposium later this year to discuss these matters. Although it sounds like an arcane topic it’s certainly, going to be quite an important issue for the year going forward. And as always, we will bring you developments as they happen.

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 send me your feedback and tell your friends and clients. Until next time, kia pai te wiki, have a great week.