5 Apr, 2019 | The Week in Tax
Terry Baucher summarises the top 3 stories from this week in tax.
- Criticisms of TWG proposals on CGT
- Finance and Expenditure committee hear submissions about online GST and loss ringfencing
- It’s terminal tax time
Podcast Transcript
Kia ora!
It’s Friday, the 5th of April. Welcome to The Week in Tax!
I’m Terry Baucher, a long-time tax nerd and director of Baucher Consulting Limited – a tax consultancy whose aim is to bring better tax stories for you and a better tax system for all.
This week in tax:
- We look at more criticisms of the Tax Working Group’s proposals on capital gains tax;
- The Finance and Expenditure Committee hears submissions on a new tax bill or online GST and loss ringfencing; and
- Finally, it’s terminal tax time!
We will be hearing a lot over the next few weeks and months until the election about capital gains tax. The government will be enhancing later this month its answers to the recommendations made by the Tax Working Group.
In the meantime, there’s plenty of speculation flying about and already groups such as the Taxpayers’ Union and a new group Tax Justice Aotearoa are busy trying and putting their spin on proposals. Taxpayers’ Union is against; the Tax Justice Aotearoa is in favour.
In the meantime, a businessman, Troy Bowker – a former tax consultant and ex-colleague of mine, by the way, from my days at Ernst and Young – wrote in this week’s New Zealand Herald, taking aim at the statistics behind the Tax Working Group’s proposals. He took issue with the household income survey prepared for 2014/15 and thought that the data used was inaccurate on that and then formed a basis of criticism of trying to base the CGT on the data drawn from that.
Now, what Troy didn’t address that is also in the Tax Working Group is a pattern of what happens in capital gains tax in other jurisdictions. What other jurisdictions have found is, the wealthier the individuals involved, the bigger the proportion of income is derived from capital gains.
For example, the Tax Working Group cited Canada and America as examples. But, when Deborah Russell and I were researching Tax and Fairness – our excellent book is still available – in Chapter 5, we looked at this issue and we saw statistics from America, but also looked at Australia and the UK. The pattern was pretty much the same. The wealthier the individual, the more likely the greater proportion of income they would derive from capital gains.
For example, in Australia, in the 2013/14 Australian tax year, 1,205 taxpayers derived over Australian $4.1b in capital gains. That was 30 percent of all capital gains reported in the Australian tax returns.
For the year ended 31st December 2014 in America, in the top 0.1 percent of taxpayers reported 34 percent of all capital gains.
Finally, in the UK, in the same period, the year ended the 2014/15 year, 48 percent of all capital gains were reported by the 17.9 percent of taxpayers who earned more than £100,000 that year.
The pattern is quite clear even if some criticism could be directed at how the survey was conducted and then used by the Tax Working Group. The packing is the same around the world. The greater the wealth of the individuals concerned, the greater the percentage of income is reported that represents capital gains. This will run and run, and it basically will go backwards and forwards.
But bear in mind the old adage – “There are three kinds of lies: lies, damn lies, and statistics.”
This can be used both ways. But, statistically, the survey is relatively sound. Her 8,000 responses which I understand by statistics standards is good, and the pattern across those jurisdictions which have capital gains and are providing analysis show the same. The wealthier the individuals involved the greater the proportion of capital gains they report, and this was at the heart of the Tax and Fairness argument that the Tax Working Group brought forward in introducing a capital gains tax.
Just as an aside, the Inland Revenue doesn’t provide a lot of great detailed statistics. That was something the Tax Working Group did recommend should happen going forward. I would certainly wish to see this for two reasons – one, being a tax nerd, it’s always interesting to see what these things could do but; two, it also puts pressure or reminds taxpayers of where they should be and which sectors are paying tax and whether businesses are doing as well as they should be doing.
Inland Revenue did look at a proposal in this space about surveys and matching to income across various sectors, but that program appears to have been put on hold while Inland Revenue gets on with its business transformation programme.
This week, on Wednesday, the Finance and Expenditure Select Committee at Parliament heard submissions on the new tax bill relating to the introduction of online GST and loss ringfencing.
It’d be fair to say that neither of these measures are popular with the parties affected, but one criticism that seems to be constant looking at the submissions is how rushed the legislation is.
The legislation for this tax bill – which, if you give it its full title, is the Taxation Annual Rates for 2019/20, GST Offshore Supplier Registration, and Remedial Matters Bill – was introduced just before Christmas. It is for the loss ringfencing provisions meant to take effect from the start of the 2019/20 tax year which was on the 1st April – and, by the way, happy new tax year to everyone! – and, for the GST, 1st of October this year.
Now, as was pointed out, that’s a pretty rushed timetable. Although Inland Revenue as part of the generic tax policy process had released discussion documents on both topics, the timetable has been still pretty compressed. The discussion document for the loss ringfencing was introduced at the end of March 2018 and yet we are supposed to have that legislation enforced a year later.
But, as was pointed out, actually, for some cases, the legislation has a retrospective effect in that the so-called early balance date taxpayers’ people who start therefore are able to adjust their tax to adopt a different balance date of 31st March. Those with the 31st October 2019 balance date, their 2019 tax year started on 1st of November. They’re already within the regime, yet the legislation which puts them in the regime loss ringfencing hadn’t even been introduced to Parliament at that stage.
This is something that’s attracted a great deal of criticism in the process with just about all these submitters talking, and live submissions I have seen made this point, and the submitters speaking on Wednesday to the Select Committee by video can submit by the live stream as well. The loss ringfencing legislation is a particularly poorly drafted piece of legislation.
If you want to have an idea of just how poorly drafted it is, have a look at NSA Taxation’s submission on their website (https://www.nsatax.co.nz/wp-content/uploads/2019/02/Submission.pdf) They really climb into it. The returns introduced which have never been used in the tax act before are poorly defined. It’s not great drafting, and rushed legislation never looks good. Inevitably, what happens – and we see this still with the Look-Through Company regime – it really is often a case of enact in haste, amend at leisure.
We’ll see plenty more on this as it goes by.
One interesting comment quite a few people made this submission on the loss ringfencing was that, if given the government is considering capital gains tax proposals, are these measures really needed and should they be rushing straight through when further legislation which could have effect inside two years will be required. It’s a fair point.
The other point that was made by several submitters – myself included – is that the initial proposals in the discussion document suggested phasing this in over two to three years, and that was something that Treasury and the Ministry of Business, Innovation, and Employment suggested.
The Inland Revenue overruled that when they put this legislation forward for loss ringfencing. Why they did that? Inland Revenue, to be honest at times, is a little bit of a law unto itself, if I put it like that. They cited concerns about setting precedent, but that seems overstated in my view. I also, as a matter of fact, consider that the loss ringfencing rules address the symptoms, not the cause.
A better approach would be to look at restricting interest deductions either by expanding the interest deduction restriction rules in the mixed-use assets’ regime or through the thin capitalisation regime extending that which is something that some other submitters have made.
There is also, way back into the early 1990s, the losses from what we call specified activities which included residential property letting will limit which could be offset against other income was limited to just $10,000. That legislation could easily be reinstated if Parliament wanted to actually get something on the books which was actually workable rather than the rather messy legislation we have at present.
The Australian budget came and went this week. There were some changes. It’s a typical election year budget. The Australian election is due next month, but there’s not much to say about it at this stage because the tax cuts for mostly low-income and small businesses are proposed in the budget, but they’re, of course, really contingent on the Liberal-National Coalition getting back into government.
At this stage, it’s wait-and- see as to what exactly will come out of the Australian budget.
Finally, it’s terminal tax payment time for New Zealand taxpayers with a 31st March 2018 balance date. Terminal tax is due on the 7th of April which is effectively going to be next Monday, the 8th of April.
Just a reminder here that, if you are struggling with cashflow or you’re looking at an interest bill because you didn’t pay enough provisional tax, always look to consider making use of tax pooling companies such as Tax Management NZ (https://www.tmnz.co.nz/). We use those for our clients, and it saves thousands of thousands of dollars for our clients, so that’s something to keep in mind.
Also, today is the end of the UK income tax year which, for individuals, runs from the 6th April to the 5th April. Why? Lost in the midst of time. But I can tell you that, back in the 1990s, a suggestion was made to a precursor to HM Revenue and Customs that maybe it should become 31st March. Companies, by the way, can choose 31st March balance date.
The response was that changing the year end from 5th April to 31st March would cause confusion which is bureaucratic speak for “well, we really can’t be bothered,” but it does reflect on the current state of British politics that, if managing a change from 5th April to 31st March was deemed confusing, it’s more wonder Brexit has been a huge headache.
That’s The Week in Tax!
I’m Terry Baucher. Please pass this broadcast around to your friends.
In the meantime, have a great week!
Ka kite anō!
22 Mar, 2019 | The Week in Tax
- What might a possible digital services tax look like?
- What to do before the tax year end on 31 March 2019
- Inland Revenue’s latest instalment of its ongoing $1.5 billion business transformation.
Podcast Transcript
Kia ora!
It’s Friday, the 22nd of March. Welcome to This Week in Tax!
I’m Terry Baucher. I’m a long-time tax nerd and director of Baucher Consulting Limited – a tax consultancy whose aim is to bring better tax stories for you and a better tax system for everyone.
This week in tax, we’ll take a longer look at how a possible digital services tax might look; we’ll give you a heads up on what you need to do before the tax year ends on the 31st of March; and look ahead to the Inland Revenue’s latest instalment of its ongoing $1.5b business transformation program.
Events this week in New Zealand have been dominated by the terrorist atrocity in Christchurch. In the wake of that, quite a few people – myself included – took a long look at what exactly the digital companies such as Facebook; Google, owner of YouTube; Twitter; Reddit; and Instagram had actually done in reaction the atrocity.
The worst part of it was it was livestreamed. In the wake of that, pressure has gone on to those companies. Westpac, for example, is one of many, many companies that has withdrawn its advertising from social media.
Writing for The Spinoff, I suggested that another alternative would be to take out the good old-fashioned tax hammer and use a digital services tax. This is a tax that is applied to the digital revenues of one of these digital companies.
I suggested, for starters, the rate of 20 percent could be applied, retrospectively, with effect from 1:30 pm on Friday, the 15th of March, just before the attack on the Al Noor Mosque began.
Digital services taxes are actually a growing trend around the world. The UK has announced one in November. In March, just two weeks ago, France was the latest country to join India, Italy, and the UK in introducing or proposing a digital services tax or DST.
France has followed other trends by suggesting that it would be about 3 percent of the digital revenues that could be identified in that country. Inland Revenue here could identify that by simply asking, using its powers under the Tax Administration Act, to ask all companies to provide details of how much they have paid to the various digital companies over a period of time, but it’s estimated notwithstanding that Google may have about $600m of the $1b annual online advertising in New Zealand.
Everyone is rattling the sabre on this. The hesitation about implementing it is because of the ongoing Organisation of Economic Co-operation and Development’s base erosion and profit shifting plan which is designed to try and give a coherent approach to taxing the digital companies, but that is an OECD multilateral negotiation, and these things take time – like many multi-headed trade negotiations. I think that the controversial Trans-Pacific Partnership trade agreement took all of ten years to negotiate.
Even though this space is moving quite fast in tax terms, it could still be another three or four years before there’s any international agreement. The fly in the ointment is that the US is a party to that OECD.
Guess who provides large amounts of funding to congressmen in the United States Congress? The digital companies. They are not going to lie down about this, so relying on action from the OECD is unlikely to produce quick results. Hence, other jurisdictions – France being the latest – will look at digital services tax.
I suspect that, if Facebook and the rest continue to drag their heels on this, unilateral action will become the norm. In that space, New Zealand should be positioning ourselves which is something the tax working group suggested and, just last month in February, the government said that it was going to move that way ahead. It’s more of a warning shot. We haven’t seen any concrete proposals on that. We haven’t seen a discussion document. But I would say, “Watch this space.”
As I said in my piece with The Spinoff, if you want to change the behaviour of the digital services companies so that they take down vile and objectionable material as quickly and as soon as possible, then you hit them in their pockets. A hefty digital services tax concentrates their minds wonderfully.
Moving on, the end of the New Zealand tax year for most people is just a few days away. Here are a few tips for getting yourself organised beforehand. Critically, many of these are pretty routine such as, if you’ve got stock, write it down to a fair market value now; otherwise, you’re going to be taxed on the value of the stock at the 31st of March. The same goes in professional services such as work-in-progress. Either bill it or write it off before the 31st of March.
Another typical thing to do is look at your fixed assets. Some people write the ones that have been scrapped which have been on the books and have not been cleared off the books or are no longer really effective. Or perhaps think about bringing forward some expenditure because you can always write off up to $500 on an asset – as long as you don’t buy too many of them at the same time.
This year in particular, for residential rental property owners, we are about to see the introduction of loss ring-fencing from the 1st of April. Now, to be quite frank, the legislation is to be a bit of a dog’s breakfast at this stage, but it is supposed to come into effect from the 1st of April. From that date onwards, losses incurred by residential property owners will not be available for offset against other income.
The thing to do before the 31st of March is to maximise your deductions so that you can utilise any available loss offsets this year. A particular point people should look at would be repairs and maintenance. Don’t put off repairs and maintenance until next week or two weeks’ time. Get the deduction now. Get it done now. Not only that, you’ll also earn the gratitude of your tenants.
Other things to think about as well that are very important before the 31st of March is for directors in companies to check that their shareholder current account or directors current account is not overdrawn. Otherwise, you are going to attract an interest charge of 5.9 percent from the IRD.
Finally, look to file your tax return before the 31st of March because, if you don’t, you give the IRD of a year in which to look back at your affairs if you’ve made any errors.
Looking ahead, Inland Revenue is about to release – in mid to late April – its next part of its business transformation program. This is a $1.5b overhaul of its computer system and of how Inland Revenue operates.
A computer system called First which it has been using was introduced in the early 1990s and has somehow managed to clunk along for 25 years. It’s been long overdue for replacement. This is probably five years late based on what I’ve seen.
But, anyway, Inland Revenue is moving on this and it’s now about to make the biggest step forward yet with what is called Release 3 which affects all individuals on “pay as you earn”. This is the one where the Inland Revenue have been advertising that people will be starting to get automatic refunds or an automatic square-up at the end of the year. It’s a big initiative.
What’s going to happen is that Inland Revenue will shut down on the afternoon of Thursday, the 18th of April, the day before Good Friday. It will reopen on the morning after ANZAC Day, Friday, the 26th of April. During that time, it will overhaul and transfer across the millions of records it has, run some live tests, finish some final live tests of its program, and then open for business on the 26th of April.
From that point onwards, people who are on “pay as you earn” will be automatically sent a square-up at the end of the year, and this will involve most people. More than one million people will get refunds, but about another 150,000 will get tax payments for the first time ever. These refunds will vary. Some may be as little as $10.00. Others could be quite significant because of the effect of working several jobs and being overtaxed through secondary tax.
Also, it’s important in this space that secondary tax which is applied where people are working two or more jobs now affects at least 600,000 New Zealanders. The idea is that Inland Revenue, together with something called “payday filing” where employees report online any pay on the day that they pay it. Inland Revenue will use this new information and its new super computer system to accurately calculate what a person’s tax liability is basically live each year.
I actually spoke to 95bFM about that earlier today on the matter.
This is going to make a big difference for a lot of people. It should put, for a lot of people, $5.00 to $10.00 more in their back pockets, and it means that they will not need to wait for until the end of the tax year before they can get their refunds. It puts the tax refund companies out of business. Most of the 30 or so of those companies have folded their tents, while a few have adapted their business model.
I would encourage people to practice patience on this. Although it’s a huge change, don’t be expecting that you’re going to be getting your refund on the 26th of April. It won’t work as quickly as that. Inland Revenue will work through their system and it probably will take about 10 to 12 weeks before they’ve worked through the approximately two million records they expect to be doing so.
But it is a big step forward, and it will be interesting to see how it pans out. They actually expect something like 1.8 million calls to them between the end of March and the end of June – basically, over a three-month period. We shall see how they cope with that. They have taken on extra people and they’ve reconfigured their systems for this, but it’s going to put a lot of stress on the system, so I’d urge people to be patient.
We’ll be watching as tax agents because this will affect us and there’s keen interest because, if it doesn’t go well, we’ll be the first people to see it.
That’s been The Week in Tax.
I’m Terry Baucher and you can find this podcast on my website – www.baucher.tax – or wherever you get your podcasts.
Please send me your feedback, tell your friends and clients, and have a good week!
Until next time, ka kite anō!
