Higher interest rates on unpaid tax

Higher interest rates on unpaid tax

  • Higher interest rates on unpaid tax
  • Extended reporting requirements for trusts
  • The potential New Zealand tax implications of a British political scandal

The Official Cash Rate was increased last week, but Inland Revenue seems to have pre-empted the effects of an increase as two weeks ago it announced that the interest rate for use of money interest on unpaid tax and for the prescribed rate of interest for fringe benefit tax purposes would increase from 10th May.

The use of money interest rate on unpaid tax will rise from 7% to 7.28%, and the prescribed rate of interest for fringe benefit tax purposes will rise from 4.5% to 4.7%, with effect from the quarter beginning 1st July 2022. The use of money interest rate for overpaid tax remains at zero.

With the final provisional tax payment for the March 2022 income year coming up on 9th May, it’s a good time to ensure that your Provisional Tax payments are as accurate as possible to minimise the effect of this use of money interest. That’s particularly true where a taxpayer’s residual income tax for the year is expected to exceed $60,000. So right now, advisers like myself are looking at this situation and making sure clients are getting ready to make the payments they need to minimise any potential interest charge.

As we’ve discussed previously tax pooling is a useful tool in dealing with tax payments. And right now, people are making use of tax pooling not only to get ready for the Provisional Tax payment coming up, but we’re also wrapping up the final tax payments due for the year ended 31 March 2021. There will be people who haven’t paid sufficient tax for the year and could be looking at substantial use of money interest and maybe even related late payment penalties.

This is therefore a good time to make use of tax pooling intermediaries. Typically, the deadline for making a request to use tax pooling is 76 days after the terminal tax date for the relevant taxpayer. If the taxpayer has a 31 March balance date and is linked to a tax agent, that is typically 7th of April, which means that sometime in mid-June is the final date for payment. If they’re not linked to a tax agent the terminal tax due date was on 7th February and therefore they’ve only got a few days left to make that payment using tax pooling.

What’s happened is that in the wake of the Omicron wave, Inland Revenue have used the discretion that was given to them when the pandemic broke out to extend the deadline for the time in which a request for making tax pooling can be made.

That time has now been extended to the earlier of 183 days after a terminal tax date or 30th September this year.

There are a few conditions. The contract must be put in place with the tax pooling intermediary on or before 21st June. Furthermore in the period between July 2021 and February 2022, the so-called affected period, the taxpayer’s business must have experienced a significant decline in actual predicted revenue as a result of the pandemic. This meant they were unable to either satisfy their existing commercial contract with tax pooling intermediary or weren’t able to enter into one, or they’ve had difficulties finding the tax return because either they or their tax advisor was sick with COVID.

Now this is a good use of the discretion available to Inland Revenue. But remember, it is COVID 19 related. So if you just happen to have been caught off guard and didn’t make your payments on time, you’re not going to get this additional extension of time. Tax pooling is a very useful tool which you should make use if you can.

But if you can’t, talk to Inland Revenue and make them aware that you have issues. You’ll find that they are more approachable in this than people might expect and can be quite fair so long as you come to the table with a reasonable offer.

Trust compliance just got more expensive

Moving on, we’re now starting to prepare tax returns for the year ended 31 March 2022. And for this year, the required reporting requirements for domestic trusts have been greatly increased following a legislative change last year.

In connection with that, Inland Revenue has released Operational Statement OS22/02, setting out the new reporting requirements for domestic trusts. These reporting requirements were introduced to gather further information from trustees so Inland Revenue can “gain an insight into whether the top personal tax rate of 39% is working effectively and to provide better information and understand and monitor the use of trust structures and entities by trustees”. It’s what we call an integrity measure.

There is a hook in that the legislation is also retrospective as it enables Inland Revenue to request information going back as far as the start of the 2014-15 income year.

The Operational Statement is a pretty detailed document, setting out over 48 pages the obligations involved. There’s a very useful flow chart on page 6 setting out what trusts will be caught under the provision and required to make the relevant disclosure disclosures. The basic rule is that all trustees of a trust, other than a non-active complying trust, who derive assessable income for tax year must file a tax return and therefore will be subject to the reporting requirements.

Non-active complying trusts are not required to file tax returns. These are trusts receiving minimal income under $200 a year in interest, no deductions other than reasonable professional fees to administer the trust and minimal administration costs, such as bank fees totalling less than $200 for the year. Such trusts are not required to file tax return.

The trustees also need to file a declaration that it is a non-active complying trust, it’s not enough to be not required to file a tax return, it must also file this declaration.  The types of trusts covered by this exemption are ones which may hold a bank account earning some interest. More generally, their principal asset is the family home and the beneficiaries are living in that place and are responsible for meeting the ongoing expenses.

For those trusts required to comply there’s a fair bit of detail involved. But fortunately, there is an option for what they call Simplified Reporting Trusts. These are trusts which derive assessable income of less than $100,000 or deductible expenditure, which is also less than $100,000 and the total assets within the trust at the end of the income year are under $5 million. Such trusts can use cash basis accounting and aren’t subject to the full accrual reporting requirements set out by the Operational Statement.

In addition to preparing detailed financial statements, there are several other requirements that the trustees are expected to provide to Inland Revenue. These include details of each settlor of the trust and each settlement made on the trust together with details of beneficiaries and distributions made to beneficiaries. The trustees must also provide details of who holds the power of appointment within the trust.

All this expands greatly the amount of reporting that trusts have to do now. And although typically you do see financial statements prepared for most trusts that do have to file tax returns, these requirements extend those reporting obligations. And I daresay many trustees aren’t going to be too happy about the increased costs that will come out of that.

And of course, we have this potential issue now, that Inland Revenue may request information going back as far as the start of the year ended 31 March 2015.  There’s a fair bit of controversy around this measure which would certainly mean a lot more work for advisors and trustees.

A very British scandal that risks Kiwis

Now, over in the UK, the Chancellor of the Exchequer Rishi Sunak, the equivalent of Finance Minister Grant Robertson, is embroiled in a political scandal after it emerged that his wife, Akshata Murty, has been claiming non-domiciled status for UK tax purposes.

Non-domicile status means that a person’s foreign income and capital gains are generally not subject to UK income tax and capital gains tax unless they happen to be remitted to the UK. It so happens that Ms Murty’s father is the billionaire owner of an Indian IT company, and it’s estimated that she may have saved up to £20 million of UK income tax on dividends from her father’s company. Needless to say, it’s not a great look for Mr Sunak as the person responsible for managing the finances of the UK to find himself in that position.

But Ms Murty’s status as what is called a non-dom is actually quite common. Most New Zealanders living and working in the UK would qualify as non-doms and may be able to make use of this special status. The exemption is pretty generous. In fact, according to a University of Warwick research study, more than one in five top earning bankers in the UK has benefited from claiming non-dom status.  Apparently a sizeable share of those earning more than £125,000 per annum have non-dom status. For example, one in six top earning sports and film stars living in the UK have claimed non-dom status.  As these persons have got an average income of more than £2 million pounds per year it’s a pretty significant benefit.

Now what New Zealand advisers need to be watching out for is misunderstanding the complexity of these rules.  It used to be the general rule that a non-dom’s income was not taxed in the UK if it wasn’t remitted to the UK. The opportunity was for New Zealand trusts to make distributions of income to UK resident beneficiaries, but never actually remit that income to the UK. Instead it stayed in a New Zealand bank account or some other non UK bank account and therefore wasn’t subject to UK tax rates, which could be as high as 45%. It also meant that the income distributed wasn’t taxed at the trustee rate of 33%, so it was a very nice, tax-efficient system.

However, the rules have been subject to a number of changes in past years, as political pressure has built on the question of whether these non-doms should get such generous tax treatment. I’ve seen a number of cases where advisers have continued to apply what they think the rules are, unaware that there have been significant changes to the use of non-dom rules and the remittance basis.  They have therefore inadvertently created tax liabilities for not only for the UK resident beneficiary, but potentially also for the trust.

The UK has introduced a register of trusts and in some cases, New Zealand trusts may be required to be part of that register. Along with UK inheritance tax this is one of these ticking time bombs where there is a lot of people who don’t know what they don’t know and could be in for an unpleasant shock.

It’s also fairly highly likely in the wake of this political scandal that there may be more changes to come to the non-dom exemption so trustees with beneficiaries resident in the UK, should be very careful about making distributions to such beneficiaries in the mistaken belief they are trying to exploit a rule which has been amended.  Generally speaking, the use of trusts in the UK and in particular distributions from foreign trusts to UK tax residents is a real minefield and great care is required to avoid potentially serious tax consequences.

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

Until next time, kia kaha, stay strong.

The latest lockdown developments

The latest lockdown developments

  • The latest lockdown developments
  • What to do if you can’t pay provisional tax or GST
  • The perils of making payments to overseas beneficiaries
  • Reflections on the late Sir Michael Cullen


We’re now into our second week of lockdown and the full range of government support packages such as the Wage Subsidy and Resurgence Support schemes are now open for applications.  As of Wednesday night, 128,000 wage subsidy applications had been made and almost $500 million paid out. Other tax agents are reporting turnarounds as quick as four hours between an application being filed and payment being received.

Lockdown has had a knock-on effect for Inland Revenue staffing because it is responsible for managing the Resurgence Support payments, and since they opened on Tuesday morning Inland Revenue says it’s already received more than 95,000 requests and has already approved 70,000, with distributions totalling $130 million already made to over 40,000 applicants. In addition, Inland Revenue is also working alongside the Ministry of Social Development in checking and signing off on Wage Subsidy applications.

Consequently, Inland Revenue’s call centres are pretty overloaded at the moment because staff have been directed to help in those areas. The dedicated tax agent hotline has been closed down and we’ve been encouraged to use the messaging through the myIR function, and a colleague has reported that he’s had excellent service using that.

Just as an aside, I deal with other tax agencies around the world. And although it’s easy to take a lot of pot shots at Inland Revenue, to borrow a phrase, “We don’t know how lucky we are”. I recently finally received a reply from the United States Internal Revenue Service to a letter that I had sent 19 months previously. HM Revenue and Customs in the UK is an exercise in great patience in trying to deal with them online. In fact, their systems make it impossible to set up an online account from New Zealand. So you may be experiencing frustrations in getting through to Inland Revenue, but rest assured, you could be a lot worse off.

To quickly recap, there are a range of support packages now available at Levels Three and Four including the Wage Subsidy Scheme, the Resurgence Support Payment, which is also available at Level Two, the Leave Support Scheme, Short-Term Absence Payments, the Small Business Cashflow Loan Scheme and Business Debt Hibernation. All those are available now as we discussed in last week’s podcast.

Now, it so happens that the first instalment of Provisional tax for the year ended 31 March 2022 for those on a March balance state is due on Monday, and GST for the period ended 31 July is also due on the same date.

Inland Revenue have advised they are of course, open to assisting with payment plans if you are unable to make payments in full for either Provisional tax or GST.    We’ve said this many times before the key is to get in contact with Inland Revenue as quickly as possible. Now as I said, you may be experiencing some difficulties getting through on the phones, but the myIR function works extremely well and actually Inland Revenue are encouraging its use. The key point is to get in touch with them straight away. Let them know that you are experiencing cashflow issues and you want to set up an instalment arrangement.

Now in those circumstances you also need to set out whether or not your business has been adversely affected by Covid-19.  Get in front of Inland Revenue as quickly as possible is always the best approach now for businesses that have been hit by Covid-19 (That would be the hospitality sector and large parts of the retail sector as well).

Inland Revenue will be prepared to remit use of money interest on late payments. It’s got specific provisions in the Tax Administration Act to enable that. According to information it sent to tax agents overnight, Inland Revenue has remitted more than $17 million of use of money interest for over 96,000 taxpayers and suppressed another $71 million for another 21,000 taxpayers who have set up a current payment arrangement.  So Inland Revenue is prepared to be accommodating for businesses in difficulties. But as always, it’s a question of communication.

Quite apart from trying to allow special arrangements will be made for those affected by the lockdowns, Inland Revenue message is still to continue to file tax returns on time and make tax payments on the due date. But as I repeated earlier, if you are experiencing issues on this, get in touch with it.

Now, there’s been plenty of debate about when and how we will open up to the world after our vaccination programme has been completed. And it’s worth noting that there are about one million Kiwis living overseas at the moment. It is the second largest diaspora in the OECD after Ireland as a percentage of population.

And one of the things I regularly advise on is the implications of making payments to and from members of this diaspora. This week alone, I had three such enquiries and they often involve trust distributions. The plan is that the trustees here want to help a family member overseas, for example a student at university, and they naturally look to see, well what can we do by way of distribution from a trust to help.

The key tax issue here to watch out for though, is that the overseas tax treatment of distributions from trusts is often radically different from what happens here. And although that sounds an obvious thing to say, you would be surprised at the number of times that I’ve been asked to assist or deal with issues involving distributions that have been made without properly considering the tax consequences for the recipient in their particular jurisdiction.

The UK tax treatment is particularly complex because the UK has a habit of adding patches upon patches to legislation to deal with issues rather than do a fundamental rethink. And there is a very real risk that a distribution of what is apparently a tax-free capital gain here will actually represent a fully taxable capital gain for UK tax purposes.

So, if there are any trustees considering distributions to overseas beneficiaries, you must seek advice before doing so. If not, you either run the risk of the distribution being taxed as income, which can be up to 45% in the UK or as a capital gain, which is 28%. So get advice before making any payments.

And finally, this week, a few reflections on the former Finance Minister and chair of the last Tax Working Group, Sir Michael Cullen, who died last Friday.

Alongside Sir Roger Douglas. Sir Michael ranks as one of the most influential finance ministers of the past 40 years. His legacy includes KiwiSaver, the New Zealand Superannuation Fund and Working for Families. There was also the establishment of Kiwibank during his time as finance minister. Equally importantly, he ran a very stable set of books during his time, and he attracted a lot of criticism for it. But the result was the Government’s books were so solid that it has enabled us to manage the triple crises of the Global Financial Crisis, the Canterbury earthquakes and now Covid-19 in much better shape than most other jurisdictions in the world. And that is probably one reason why politicians of all sides have praised him on his passing.

I did get to engage with Sir Michael professionally in 2018 when I prepared and presented a paper on the possibility of a tax advocate to the Tax Working Group. He chaired the discussion briskly and with humour. Something that has come out from discussions with several former Treasury and Inland Revenue officials, they’ve all spoken warmly of their time working with him and his dry wit was a factor

When he presented the final Tax Working Group report in February 2019, much of the noise and discussion was around its recommendation for a capital gains tax. But he spent quite some time during his presentation talking about the need for environmental taxation to help address climate change. And in doing so, he clearly remembered the bitter experience of the abrupt changes made during the Fourth Labour Government because he repeatedly stressed the need if changes to environmental taxation were to be made, then the impact on those most affected by those changes would need to be managed very carefully. He was clearly talking about farmers and to a lesser extent the transport sector.

Right to the very end he was always engaged in public policy, and he continued to have a big interest in tax policy. His reflections on what needs to happen around environmental taxation were wise words and should be heeded by the Government and future governments of whatever hue. He will be sorely missed.

That’s it for today, I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts.  Thank you for listening and please send me your feedback and tell your friends and clients. Until next week ka kite āno!